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(Mark one)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
For the transition period from: to
Commission File No. 001-37463
GLAUKOS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
33-0945406
(I.R.S. Employer Identification No.)
229 Avenida Fabricante
San Clemente, California
(Address of principal executive office)
92672
(Zip Code)
(949) 367-9600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share
(Title of each class)
New York Stock Exchange
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 ☐ No
☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. (See definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer ☒
Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act . ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2017, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of common stock held by non-affiliates of the
registrant, based on the closing sales price for the registrant’s common stock as reported on The New York Stock Exchange, was $1,268 million.
The number of shares of the Registrant’s common stock outstanding as of February 26, 2018 (latest practicable date) was 34,740,886 shares.
Portions of the Registrant's Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K
to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of the registrant's fiscal year
ended December 31, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
TABLE OF CONTENTS
Business.
PART I
Item 1.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2.
Item 3.
Item 4.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions and Director Independence.
Principal Accounting Fees and Services.
Exhibits, Financial Statement Schedules.
Form 10-K Summary
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We use Glaukos , our logo, iStent , iStent Inject , iStent Infinite , iStent SA , iStent Supra , iPrism , iDose , MIGS
and other marks as trademarks. This report contains references to our trademarks and service marks and to those belonging to
other entities. Solely for convenience, trademarks and trade names referred to in this report, including logos, artwork and other
visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will
not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and
trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a
relationship with, or endorsement or sponsorship of us by, any other entity.
References throughout this document to “we,” “us,” “our,” or “Glaukos” refer to Glaukos Corporation and its
consolidated subsidiaries.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Annual Report on Form 10-K contains forward‑looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These
statements are based on management’s beliefs and assumptions and on information currently available to management. Some of
the statements under Item 1 - “Business,” Item 1A - “Risk Factors,” Item 7 - “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K contain forward‑looking
statements. In some cases, you can identify forward‑looking statements by the following words: “may,” “will,” “could,” “would,”
“should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing”
or the negative of these terms or other comparable terminology, although not all forward‑looking statements contain these words.
These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity,
performance or achievements to be materially different from the information expressed or implied by these forward‑looking
statements. Although we believe that we have a reasonable basis for each forward‑looking statement contained in this report, we
caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the
future, about which we cannot be certain.
In addition, you should refer to the “Risk Factors” section of this report for a discussion of other important factors that
may cause actual results to differ materially from those expressed or implied by the forward‑looking statements. As a result of
these factors, we cannot assure you that the forward‑looking statements in this report will prove to be accurate. Furthermore, if
the forward‑looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in
these forward‑looking statements, you should not regard these statements as a representation or warranty by us or any other
person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly
update any forward‑looking statements, whether as a result of new information, future events or otherwise, except as required by
law.
This Annual Report on Form 10-K contains market data and industry forecasts that were obtained from industry
publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such
information. Although we believe that the industry publications on which the market and industry statements are based are
reliable and we are not aware of any misstatements regarding any market data or industry forecasts presented herein, we have not
independently verified any of the third party information. Statements in this Annual Report on Form 10-K regarding our market
position, market opportunity, market size and our general expectations involve risks and uncertainties and are subject to change
based on various factors, including those discussed under Item 1A - “Risk Factors” and Item 7 - “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
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ITEM 1. BUSINESS
Overview
PART I
We are an ophthalmic medical technology and pharmaceutical company focused on the development and
commercialization of surgical devices and sustained pharmaceutical therapies designed to treat glaucoma, one of the world’s
leading causes of blindness. We developed Micro‑Invasive Glaucoma Surgery (MIGS) to serve as an alternative to the traditional
glaucoma treatment and management paradigm. We launched the iStent , our first MIGS device, in the United States in July 2012
and we are developing additional products designed to treat a full range of glaucoma progression.
Glaucoma is a group of eye diseases characterized by progressive, irreversible and largely asymptomatic vision loss
caused by optic nerve damage which is most commonly associated with elevated levels of pressure within the eye, or intraocular
pressure. Elevated intraocular pressure often occurs when aqueous humor, the thin watery fluid that fills the front part of the eye,
is not circulating normally and draining properly. Glaucoma is a chronic condition that progresses slowly over long periods of
time and can have a devastating impact on a patient’s vision and quality of life.
Reducing intraocular pressure is the only proven treatment for glaucoma. Glaucoma has traditionally been treated
through a range of approaches that often require patients to use multiple types of prescription eye drops for the rest of their lives,
and sometimes undergo complex and invasive eye surgery. Unfortunately, these medications can be ineffective over time due to
patient noncompliance and other factors. Complex and invasive glaucoma surgical options are typically reserved for more
advanced glaucoma and have remained largely unchanged since the 1970’s.
We developed MIGS to address the shortcomings of traditional glaucoma treatment options. MIGS procedures involve
the insertion of a micro‑scale device or drug delivery system from within the eye’s anterior chamber through a small corneal
incision. Our MIGS devices are designed to reduce intraocular pressure by restoring the natural outflow pathways for aqueous
humor. Our MIGS drug delivery systems are designed to reduce intraocular pressure by continuously eluting a glaucoma drug
from within the eye, potentially providing sustained pharmaceutical therapy for extended periods of time.
Our iStent , a micro‑bypass stent that is designed to reduce intraocular pressure by restoring the natural physiologic
pathways for aqueous humor, was the first commercially available MIGS treatment solution. Approved by the United States
(U.S.) Food and Drug Administration (FDA) for insertion in combination with cataract surgery, the iStent procedure is currently
reimbursed by Medicare and all major national private payors. Our next product, the iStent Inject, includes two stents pre‑loaded
in an auto‑injection inserter that are also designed to lower intraocular pressure. The iStent Inject was commercially available in
2017 in certain European Union countries, Canada, Australia, Brazil and South Africa. In these markets, it is approved for use in
conjunction with cataract surgery or as a standalone procedure, even though reimbursement may not be available for all such
procedures. We are currently seeking FDA approval to market the iStent Inject in the U.S.
We are developing four additional iStent pipeline products: the iStent Inject (in the U.S.), the iStent SA, the iStent Infinite
and the iStent Supra . In an effort to obtain approval to market the iStent Inject in the U.S. in conjunction with cataract surgery,
we completed a U.S. investigational device exemption (IDE) pivotal trial and submitted a premarket approval application (PMA)
for the iStent Inject in 2017. The iStent SA is designed for use as a standalone glaucoma procedure. Similar to the iStent Inject ,
the iStent SA is a two-stent product that is slightly wider than the iStent Inject and uses a different auto‑injection inserter designed
for use in a standalone procedure. The iStent SA is currently being studied in a U.S. pivotal IDE study as a standalone treatment
for lowering intraocular pressure in pseudophakic glaucoma patients. We recently submitted an IDE application for the iStent
Infinite, which includes three stents pre-loaded in an auto-injection inserter and is intended to lower intraocular pressure in
refractory glaucoma patients. The iStent Supra is designed to access an alternative drainage space within the eye and is being
evaluated in a U.S. pivotal IDE trial. We completed enrollment for the U.S. pivotal IDE trial for the iStent Supra in 2017.
We are also pursuing regulatory approval of our first sustained pharmaceutical therapy using our iDose drug delivery
system. A U.S. investigational new drug (IND) Phase II study of our initial iDose platform product, iDose
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Travoprost , was completed in 2017 and we intend to commence U.S. Phase III clinical trials for this product in the first half of
2018. We are also conducting research and development (R&D) activities to explore other potential drugs that may benefit from
the use of the iDose drug delivery system. In addition, other proprietary R&D efforts are underway on early-stage technologies,
including, without limitation, an intraocular pressure sensor (IOP) system that is designed to capture and store a glaucoma
patient’s short-interval IOP measurements over extended periods of time, and transmit data to the patient’s physician in order to
enhance treatment decisions.
We have a commercial organization which includes a direct sales force in the United States and 16 other countries, as
well as distribution partners in regions of Europe, Asia Pacific, Latin America and other targeted international geographies.
Information about geographic revenue is set forth in Note 12 of our notes to consolidated financial statements included in Part II,
Item 8 of this Annual Report on Form 10-K.
Our net sales increased to $159.3 million in 2017 from $114.4 million in 2016 and $71.7 million in 2015, and we
incurred a net loss of $0.1 million for the year ended December 31, 2017, compared with net income of $4.5 million for the year
ended December 31, 2016, and a net loss of $38.3 million for the year ended December 31, 2015.
Glaucoma Treatment Overview and Limitations
Glaucoma
and
the
eye’s
drainage
system
Glaucoma is a group of eye diseases characterized by progressive, irreversible and largely asymptomatic vision loss in
which elevated levels of intraocular pressure are often associated with optic nerve damage. While some glaucoma patients do not
experience an increase in intraocular pressure, it is widely considered a major risk factor in glaucoma’s progression and reduction
in intraocular pressure is the only clinically proven treatment. Elevated intraocular pressure occurs when aqueous humor is not
circulating normally or properly draining from the front part of the eye. Normally, this fluid flows through the trabecular
meshwork, an area of spongy mesh‑like tissue in the eye located around the base of the cornea, and into Schlemm’s canal, a
circular channel in the eye that collects the aqueous humor and delivers it back into the bloodstream. This trabecular meshwork
pathway is also known as the conventional outflow pathway.
A second outflow pathway is located in the suprachoroidal space, which lies between the sclera and the choroid, where
we estimate 20% of the eye’s total aqueous humor outflow occurs. This pathway is also known as the unconventional or
uveoscleral pathway. The suprachoroidal space is characterized as an area of less venous resistance to aqueous humor outflow
than Schlemm’s canal.
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The following image depicts the blockage of aqueous humor outflow in an eye with open‑angle glaucoma.
Open‑angle glaucoma is the most common type of glaucoma. In open‑angle glaucoma, structures of the eye may appear
normal, but aqueous humor outflow through the trabecular meshwork and into Schlemm’s canal is reduced due to gradual
degeneration and obstruction causing a permanent and progressive loss of retinal cells and associated vision loss. Direct causes of
this blockage are unknown, but the disease is linked to age, ethnicity and hereditary factors. Loss of aqueous humor drainage
leads to increased resistance and thus a chronic, painless buildup of pressure in the eye.
Glaucoma is a progressive disease that can be categorized based by severity levels ranging from ocular hypertension (or
pre‑glaucoma) to severe glaucoma. An eye doctor usually diagnoses glaucoma as part of a comprehensive exam that includes
measuring intraocular pressure and corneal thickness, evaluating optic nerve damage and testing visual fields. Intraocular pressure
is measured in millimeters of mercury (mm Hg), with normal eye pressures ranging from 10 to 21 mm Hg. Glaucoma is typically
characterized by an intraocular pressure greater than 21 mm Hg.
Glaucoma
treatment
overview
The traditional treatment of glaucoma encompasses a variety of medication regimens, laser treatments and surgical
procedures to lower intraocular pressure.
Multiple clinical trials have shown that medications can reduce intraocular pressures to baseline targets that can
minimize vision loss. However, poor adherence to and lack of persistence with glaucoma medication regimens have been
documented in numerous independent studies, which often place the incidence of patient noncompliance up to or above 50%,
particularly in patients on two or more prescription eye drops. Even daily glaucoma single medication use has been associated
with noncompliance rates as high as 75%.
Because glaucoma progresses slowly and with few symptoms, patients often do not adhere to their medication regimens
as prescribed until the disease has progressed to the point of significant vision loss. As a result, despite the availability of
medication therapies to combat glaucoma, progressive visual loss and blindness still occur.
Laser treatments have been developed to provide an alternative to lifelong medication treatments. Typically performed
at an outpatient surgical center, these treatments involve the use of lasers to create changes in eye tissue and improve aqueous
humor outflow. Ophthalmic surgeons may perform laser procedures as an initial treatment or for patients who are noncompliant
with prescription eye drops or whose intraocular pressure is not well controlled by
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medications. According to Market Scope, selective laser trabeculoplasty (SLT) is the most frequently performed glaucoma laser
procedure in the United States. Although SLT can help to lower intraocular pressure, the procedure’s effectiveness often wears
off within one to five years according to the Glaucoma Research Foundation. While a second procedure can be performed, the
results of repeated laser surgeries are less predictable and less effective than those of the first surgery. Additionally, medication
therapy may still be required post‑treatment.
Where medication therapy and laser treatment are unsuccessful in managing glaucoma, invasive surgical procedures
such as trabeculectomies or implantation of tube shunts are performed, usually as outpatient procedures. In a trabeculectomy, the
surgeon cuts open the conjunctiva and sclera to create flaps, removes a plug of scleral tissue and sometimes a portion of the
trabecular meshwork to create an opening into the anterior chamber. The conjunctiva and scleral flaps are sutured back down and
a small blister, or bleb, is created between the conjunctiva and sclera. The surgery results in a new drainage channel that allows
increased outflow of aqueous humor into the bleb. While some patients experience significant reductions in intraocular pressure,
trabeculectomy failure rates can approach 50% according to published research. A common complication is scarring, which can
prevent fluid drainage from the eye and interfere with the proper function of the bleb. If the bleb doesn’t work properly, more
surgery may be needed. Among the other complications associated with trabeculectomies are blurred vision, bleeding in the eye,
bleb leaks, low intraocular pressure or hypotony, infection, persistent corneal edema, choroidal detachment and cataract
development. Implantations of tube shunts, devices that divert the aqueous humor from the anterior chamber, are generally
reserved for eyes in which a trabeculectomy has failed or has a poor likelihood of success. A tube shunt surgery is similar to a
trabeculectomy, except that the device’s tube is inserted through the scleral channel to maintain the channel and the device’s
reservoir end is placed deep under the conjunctiva to maintain the drainage space. While invasive glaucoma surgery often leads to
significant reductions in intraocular pressure, it is associated with high long‑term failure rates, long recovery times and significant
complication risks. Additionally, as with laser treatment, the effects may dissipate over time, requiring additional procedures, and
medication therapy may still be required post‑treatment.
We believe that because of the limitations of medications and laser treatments, and the morbidity associated with
invasive surgical therapies, a clear unmet medical need exists in the management of open‑angle glaucoma patients.
Our Products
We pioneered the development of MIGS in order to address the shortcomings of traditional pharmaceutical and surgical
options.
In contrast to invasive surgical approaches, MIGS procedures access the anterior chamber of the eye through small
corneal incisions or penetrations. MIGS devices are designed to reduce intraocular pressure by restoring the natural physiologic
pathways for aqueous humor outflow in a procedure that preserves more eye tissue and allows for faster recovery times and fewer
complications than invasive glaucoma surgical options.
iStent
trabecular
micro-bypass
stent
. We launched our first micro‑scale MIGS treatment solution, the iStent , in the
United States following FDA approval in June 2012. The iStent was the first FDA‑approved surgical device available for
insertion in conjunction with cataract surgery for the reduction of intraocular pressure in adult patients with mild‑to‑moderate
open‑angle glaucoma. The iStent is a micro‑bypass stent made of surgical‑grade non‑ferromagnetic titanium that is coated with
heparin and is 1.0 mm long and 0.33 mm wide. Packaged in a sterile, pre‑loaded configuration, the iStent is inserted through the
small corneal incision made during cataract surgery and placed into Schlemm’s canal. Once inserted, the iStent is designed to
improve aqueous humor outflow while fitting naturally within Schlemm’s canal. The ergonomic rail design protects and accesses
underlying collector channels while the iStent ’s three retention arches help ensure secure placement. The iStent is currently
approved in the U.S. only for insertion in conjunction with cataract surgery because this was the product usage in the U.S. IDE
clinical trial information that was included in the PMA. The iStent is commercially available in the U.S., certain European Union
countries, Brazil, Canada, Australia, Japan and other countries.
The image below left shows a gloved hand holding the pre‑loaded iStent inserter; the image below center is a magnified
view of the insertion tip and iStent device; the image below right shows an iStent on the tip of a finger (inside circle).
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The following series of graphics illustrates the effect of iStent in the eye: (left) after placement of the iStent , aqueous
humor outflow is restored; (right) close‑up illustration of iStent placement in Schlemm’s canal.
iStent
Inject
trabecular
micro‑‑bypass
stent
(Outside
of
the
U.S).
The iStent Inject, which includes two stents pre‑loaded
in an auto‑injection inserter, is also designed to lower intraocular pressure. Each iStent Inject stent is approximately one‑third the
size of the iStent and relies on a similar fluidic method of action to improve aqueous humor outflow into Schlemm’s canal.
Packaged in a two‑stent, pre-loaded, auto‑inject mechanism, the iStent Inject is designed to allow the surgeon to inject these
stents into multiple trabecular meshwork locations through a single corneal entry. The iStent Inject has been approved for
marketing in the European Union, Canada, Brazil, Australia and certain other countries, primarily in the Middle East. In these
markets, it is approved for use in conjunction with cataract surgery or as a standalone procedure. In 2017, the iStent Inject was
commercially available in certain European Union countries, Canada, Australia, Brazil and South Africa, even though
reimbursement may not be available for all such procedures.
The image below left is the iStent Inject injection system, pre‑loaded with two iStent Inject devices; the image below
center is a magnified view of two iStent Inject devices; the image below right shows two iStent Inject devices on a penny (inside
circle).
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Our Pipeline
We are developing five additional pipeline products: the iStent Inject (U.S.) , the iStent SA, the iStent Infinite, the iStent
Supra and iDose Travoprost .
iStent
Inject
trabecular
micro
bypass
stent
(in
the
U.S.).
We are seeking FDA approval to market the iStent Inject in the
U.S. We submitted a PMA application to the FDA at the end of 2017 after completing the U.S. pivotal IDE clinical trial to
evaluate the iStent Inject for the reduction of intraocular pressure in mild‑to‑moderate open‑angle glaucoma in combination with
cataract surgery.
iStent
SA
trabecular
micro-bypass
system.
The iStent SA is designed for use as a standalone glaucoma procedure.
Similar to the iStent Inject , the iStent SA is a two-stent product that is slightly wider than the iStent Inject and uses a different
auto‑injection inserter designed for use in a standalone procedure. The system allows the surgeon to inject stents into multiple
trabecular meshwork locations through a single corneal entry point and is designed to make its own self‑sealing corneal needle
penetration in order to achieve insertion without an incision. A U.S. pivotal IDE trial evaluating the iStent SA for the reduction of
intraocular pressure in pseudophakic mild-to-moderate open-angle glaucoma patients is currently underway. Pseudophakic refers
to patients who have previously undergone cataract surgery and no longer have a natural crystalline lens. We have not
commercialized the iStent SA.
iStent
Infinite
trabecular
micro-bypass
system.
Th e iStent Infinite is designed for use as a standalone procedure in
patients with refractory glaucoma (or on maximally tolerated topical glaucoma medications). The iStent Infinite c onsists of three
stents that are pre-loaded in an auto-injection system that allows the surgeon to inject stents across a span of five to six clock
hours of Schlemm’s canal. In early 2018, we submitted an IDE application seeking authorization to study the iStent Infinite in
order to seek regulatory clearance through a 510(k) pre-market submission. We have not commercialized the iStent Infinite.
The image below left is a magnified view of two iStent SA devices; the image below center is a magnified view of three iStent
Infinite devices; the image below right is a magnified view of the iStent Infinite inserter.
iStent
Supra
suprachoroidal
micro‑‑bypass
stent.
The iStent Supra is designed to reduce intraocular pressure by
accessing the suprachoroidal space in the eye, an area that we estimate is responsible for 20% of its total aqueous outflow.
Enrollment for the U.S. pivotal IDE trial for the iStent Supra used in conjunction with cataract surgery was completed in 2017
and the two-year follow-up will conclude in 2019. The iStent Supra device has been approved for
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marketing in the European Union and certain other countries, primarily in the Middle East. We have not commercialized the
iStent Supra .
The image below left is a magnified view of the iStent Supra ; the image below center illustrates the iStent Supra device
implanted into the suprachoroidal space of the eye; the image below right shows the iStent Supra device on the tip of a finger
(inside circle).
iDose.
The iDose drug delivery system is a targeted injectable implant that is based on our micro‑scale device-platform
designed to be pre‑loaded into a small gauge needle and injected into the eye via a self‑sealing corneal needle penetration, where
it is secured within the eye. Once secured in the eye, the iDose implant is designed to continuously deliver therapeutic levels of
medication from within the eye for extended periods of time. The titanium implant is similar in size to the Company’s other
proprietary MIGS devices. The implant is capped with a membrane that is designed for continuous controlled drug elution into
the anterior chamber. When depleted, the implant can be removed and replaced in a similar, subsequent procedure. Glaukos has
designed the product to be an alternative to chronic, daily prescription eye drop treatments, which may have high rates of patient
noncompliance and cause long‑term ocular surface damage to glaucomatous eyes.
In November 2015, the Company submitted an IND application to the FDA seeking authorization to study our initial
iDose platform product, iDose Travoprost , for investigational use in the reduction of elevated intraocular pressure in patients
with glaucoma. In December 2015, the FDA notified the Company that it was allowing the Phase II IND clinical trial to proceed.
In this Phase II clinical trial, the iDose Travoprost implant was filled with a special formulation of travoprost, a prostaglandin
analog used to reduce elevated intraocular pressure. In 2017, the Company completed the 154-patient, randomized, 12-week
masked Phase II clinical trial, which was designed to assess the safety and preliminary efficacy of two models of iDose
Travoprost with different travoprost elution rates compared to topical timolol maleate ophthalmic solution, 0.5% and conducted
an End-of-Phase II meeting with the FDA. The Company is currently making preparations to initiate Phase III IND clinical trials
for iDose Travoprost in the first half of 2018. We have not commercialized the iDose Travoprost.
The image below left is a magnified view of the iDose implant; the image below center is a close-up illustration of the
iDose implant placement in the eye; the image below right is a graphic illustrating the effect of iDose after implantation.
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Research & Development
Our research and development efforts are focused primarily on continuous improvement of our iStent devices, iDose
drug delivery systems, related injector systems and development of new innovations that are based on our proprietary MIGS
surgical and sustained pharmaceutical therapy platforms. Our research and development objectives are:
·
·
·
To advance glaucoma patient care through continuous improvement of our MIGS platforms by providing viable
MIGS alternatives to lifelong medication regimens and invasive surgical procedures for intraocular pressure
management;
To introduce micro‑scale injectable therapies—including our iStent Inject , iStent SA, iStent Supra, iStent Infinite
and iDose Travoprost pipeline products—that can be performed in minor surgical suites or in‑office settings with
topical anesthetic; and
To leverage our expertise in micro-scale design and continue to expand our core research and development
capabilities in order to identify and develop additional micro-invasive ophthalmic innovations that complement our
existing product offerings and address important unmet clinical needs.
As of December 31, 2017, our research and development team consisted of 132 employees. Our research and
development process is supported by multiple clinical trials and regulatory affairs activities. Our research and development
expenses were approximately $38.9 million, $29.2 million, and $25.0 million in the years ended December 31, 2017, 2016 and
2015, respectively. We expect our research and development expenditures to increase as we continue to devote significant
resources to clinical trials and regulatory approvals of our new products.
Sales and Marketing
In the United States, we sell our products through a direct sales organization that, as of December 31, 2017, consisted of
119 sales professionals, including regional business managers, sales directors, clinical relations personnel and reimbursement
specialists. Our sales organization is primarily responsible for training ophthalmic surgeons on the iStent procedure, helping these
physicians integrate the technology into their practices and providing resources to support reimbursement, while also identifying
and supporting investigational sites for clinical trials of our pipeline technologies. We continue to recruit experienced sales
professionals with extensive sales and/or clinical experience in ophthalmic medical technologies.
We invest significant time and expense to provide comprehensive training to our sales professionals so that they are
proficient in all aspects of our iStent technologies, including features and benefits, procedure techniques and reimbursement. In
addition, we provide technical education regarding the eye’s anatomy, glaucoma diagnosis, disease states and treatment, and
cataract surgery.
Outside the United States, we sell our products through direct sales organizations in 16 countries and a network of
distribution partners in other markets. As of December 31, 2017, our direct sales organization outside the United States consisted
of 87 sales professionals. We continually monitor our international sales progress and consider conversion to a direct sales
approach on a country‑by‑country basis, depending on our assessment of market conditions,
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net sales and profitability trends, reimbursement coding and coverage potential, and other factors. As of December 31, 2017, we
had agreements with approximately 18 distributor organizations. No single distributor accounted for more than 10% of our total
net sales for the years ended December 31, 2017, 2016 or 2015.
Our global sales efforts and promotional activities are currently aimed at ophthalmic surgeons and other eye care
professionals. Our primary customers include hospitals and ambulatory surgery centers (ASCs).
Reimbursement
United
States
reimbursement
Reimbursement for iStent procedures
There are three key aspects of reimbursement in the United States:
· Coding refers to distinct numeric and alphanumeric billing codes that are used by healthcare providers to report the
provision of medical procedures and the use of supplies for specific patients to payors. There are different categories
of Current Procedural Terminology (CPT) codes (Category I, II and III) based on the procedure or supply.
· Coverage refers to decisions made by individual payors as to whether or not to pay for a specific procedure and
related supplies and if so, under what conditions ( i.e. , for which specific diagnoses and clinical indications). Payors
typically base coverage decisions on reviews of the published medical literature.
·
Payment refers to the amount paid to providers for specific procedures and supplies. Payment is generally
determined for the specific billing code and, in addition, there may be separate numeric codes, under which the
billing code is classified, to establish a payment amount.
In 2008, in consultation with and with the approval of the American Academy of Ophthalmology, we applied for and
received a temporary Category III CPT code to describe insertion of devices such as the iStent using MIGS procedures.
Category III codes expire five years after the date they become effective. Prior to expiration, there are two options:
submit an application to convert to a Category I code; or submit an application for a five-year extension of Category III status.
CPT code 0191T, which describes the insertion of the iStent, as well as the iStent Inject, iStent SA, and iStent Infinite devices,
was first effective in 2008 and our most recent application for an additional extension was approved in early 2017 and expires on
December 31, 2023.
The iStent is approved by the FDA for reduction of intraocular pressure in adult patients with mild‑to‑moderate
open‑angle glaucoma undergoing cataract surgery who are currently treated with prescription eye drops. Based on data released
by Centers for Medicare & Medicaid Services (CMS) regarding total cataract surgery volume in the Medicare Fee for Service
program and data published by Market Scope, we estimate that Medicare pays for approximately 80% of all cataract surgeries
performed in the United States.
We estimate that 20% of patients who meet the FDA indication for iStent insertion are covered by private health
insurance companies and we have secured coverage policies for iStent insertion with all major national private payors.
iStent insertion in the United States is almost always performed in an outpatient setting and virtually all U.S. iStent sales
are to ASCs and hospital outpatient departments (HOPDs). National payment rates by Medicare to ASCs and HOPDs are
determined each year through a complex formula, which takes into account reported costs for each claim submitted. When two
procedures are performed in an ASC on the same patient on the same day ( e.g. , iStent insertion and cataract surgery), Medicare
reduces the payment of the lower‑paying procedure by 50%. The ASC facility payment for cataract surgery is generally lower
than the payment for iStent insertion. Therefore, when these two procedures are performed together in an ASC, the payment for
cataract surgery is reduced by 50%.
For iStent insertion and cataract procedures performed in HOPDs, the Medicare fee-for-service facility reimbursement is
a single, all‑inclusive payment. We estimate that approximately 25% of U.S. iStent procedures are
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currently performed in HOPDs and that a majority of these procedures are reimbursed through traditional Medicare
fee‑for‑service.
Physicians are paid separately from the facility for surgical procedures. Unlike the CPT code used to pay facilities for
iStent insertion, there is no published Medicare payment schedule at the national level for the physician payment, leaving the
amount of such payment to the discretion of the individual Medicare contractor. Recently, several Medicare contractors have
reduced the amount of the physician payment. One of the factors a surgeon evaluates when deciding whether to adopt or to
continue to perform procedures is whether or not payment for the procedure adequately covers the surgeon’s time. As with the
facility payment, the incremental payment the physician receives for inserting the iStent device in conjunction with cataract
surgery over and above what he or she would receive for performing cataract surgery alone plays a role in a surgeon’s decision to
adopt or to continue to use the technology.
Unlike Medicare, commercial payors do not publish fee schedules. In general, based on selected feedback from facilities
and surgeons, payments for iStent insertion from the commercial payors who cover the procedure are generally comparable to
local Medicare payments.
Reimbursement for future products
We have also filed and received approval of applications for CPT codes that describe our pipeline iStent devices. Our
application for a CPT code to describe insertion of the iStent Supra was approved by the American Medical Association (AMA),
in 2011 resulting in the creation of a Category III CPT code 0253T. Our application for another extension of the Category III
status of code 0253T was approved in early 2017 and expires on December 31, 2023. Our application for a CPT code to describe
the insertion of additional trabecular meshwork stents (as with the iStent Inject, iStent SA, and iStent Infinite procedures) was
approved by the AMA in early 2014 resulting in the creation of Category III CPT code 0376T. While this code was available
beginning on January 1, 2015 for the reporting of procedures in which more than one iStent is inserted in the same eye, it
currently does not result in any incremental facility or professional fee payment from Medicare. In addition, it is unclear whether
any other third‑party payor will provide reimbursement for the insertion of a second stent or that a professional fee payment for a
second stent will be adequate. Our application for an extension of the Category III status of code 0376T was approved in early
2017 and expires on December 31, 2023. We have not yet filed any applications for CPT codes that describe our iDose drug
delivery system.
Reimbursement
outside
the
United
States
Outside the United States, reimbursement levels vary significantly by country and by region within some countries.
Reimbursement is obtained from a variety of sources, including government-sponsored and private health insurance plans, and
combinations of both. Some countries require additional clinical data before granting or expanding coverage and reimbursement
for our products. In general, obtaining broad‑based reimbursement and adequate payment for new technologies is more difficult
in these markets than in the United States. Many countries require new medical technologies to not only be safe and effective, but
also to be able to demonstrate clinical benefits that outweigh the costs when compared to the standard of care.
In some countries, applications for reimbursement can be approved, but additional approvals or negotiations for payment
have to be obtained. For example, in France, our customers can obtain reimbursement from the government by obtaining a code
that describes iStent insertion. Certain customers, including hospitals, can obtain an incremental facility fee if the iStent were to
be included on the list of devices approved for pass-through payment. In 2013, our application for a code to describe iStent
insertion and our application to add the iStent to the list of devices approved for pass-through payment were denied. Following
publication of data on iStent Inject , we submitted new applications for both devices in 2014. In November 2015, the French
government approved the iStent application for reimbursement, but since the iStent has not been added to the list of devices
approved for pass-through payment, the incremental facility payment has never been paid. Thus, as in this situation, obtaining full
or even partial reimbursement can be difficult and time consuming and there can be no assurance that full or partial
reimbursement will be made even though our products have been approved for reimbursement at some level.
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In other countries, there are no codes that specifically describe the insertion of a trabecular stent or there is no
mechanism to provide incremental payment for the iStent when insertion is in conjunction with cataract surgery.
As in the United States, reimbursement decisions can change, resulting in the elimination or reduction of reimbursement
payments. For example, in Australia, the iStent and iStent Inject were initially included on the Department of Health’s (ADOH)
prosthesis listing, which provided for a separate reimbursement payment for these devices. Last year, the Australian government
began a comprehensive review of the approximately 5,600 items on the Medicare Benefits Schedule (MBS), including the
prosthesis listing, in an effort to ensure all MBS items were aligned with contemporary clinical evidence and practice and
improved health outcomes for patients. In connection with this review, the Company we were advised that effective May 1, 2017,
the iStent and iStent Inject would no longer be reimbursed under the current code. Following petitions by the Company, on May
4, 2017, the ADOH created a temporary MBS code for the implantation of iStent and iStent Inject . This temporary code is set to
expire on December 31, 2018. Concurrently, we submitted a request to the ADOH for the creation of permanent MBS code for
the implantation of iStent and iStent Injec t. The ADOH is considering the request for a new permanent MBS procedure code for
the implantation of iStent and iStent Inject . Recently, we received correspondence advising us that ADOH’s medical services
advisory committee has expressed written support for the inclusion of a permanent MBS code for implantation of iStent and iStent
Inject in conjunction with cataract surgery. The advisory committee did not, however, support at this time the inclusion of a
permanent code for a standalone procedure. Even though the ADOH has received the recommendations of the advisory
committee, it has yet to make a final decision on the Company’s application for the creation of a permanent code.
Competition
Until recently, our iStent was the only MIGS device approved for sale in the United States by the FDA. Thus, we had for
several years commercialized the iStent in the United States without any direct MIGS competitors. Alcon, Inc. (which acquired
Transcend Medical, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its CyPass
suprachoroidal implant, a competitive MIGS device, in 2016. The CyPass device is indicated for use in conjunction with cataract
surgery for the reduction of IOP in adult patients with mild to moderate primary open-angle glaucoma. Also in 2016, Allergan plc
®
(which acquired AqueSys, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its Xen
Glaucoma Treatment System for use in the U.S. The Xen device is indicated for the management of refractory glaucoma where
previous surgical treatment has failed or in patients with primary open angle glaucoma and pseudoexfoliative or pigmentary
glaucoma with open angles that are unresponsive to maximum tolerated medical therapy. We are aware of several other
companies, such as Santen Pharmaceutical Co., Ltd. (which recently acquired InnFocus, Inc., a MIGS competitor) and
Ivantis Inc., that are conducting FDA‑approved IDE clinical trials or have filed for regulatory approval of MIGS devices. If these
MIGS products or other products that may be developed receive regulatory approval, we will have additional direct MIGS
competitors. These new MIGS products could achieve greater commercial acceptance, demonstrate better safety or effectiveness,
clinical results, ease of use or lower costs than our iStent or our other products under development, which may reduce demand for
our primary product, the iStent , as well as for our products in development.
®
We also compete with the use of medication therapy for treating glaucoma and with manufacturers of medical devices
used in surgical therapy procedures for treating glaucoma, including Alcon, Inc., Johnson & Johnson (through its acquisition of
Abbott Medical Optics Inc.), Allergan plc, STAAR Surgical Company, Lumenis Ltd., NeoMedix, Inc., New World Medical, Inc.,
Iridex Corporation and Ellex Medical Lasers Limited. Alcon, Inc. and Johnson & Johnson (through its acquisition of Abbott
Medical Optics Inc.) are the leading manufacturers of aqueous shunts, and Alcon, Inc. also markets the EX‑PRESS Glaucoma
Filtration Device. Lumenis Ltd. is a leading manufacturer of selective laser trabeculoplasty equipment. Neomedix, Inc. markets
an electrosurgical device. New World Medical, Inc. offers a surgical device. Iridex Corporation offers laser systems. And, Ellex
Medical Lasers Limited markets a canaloplasty device that some physicians employ to lower intraocular pressure in glaucoma.
Many of our current and potential competitors (including MIGS competitors) are large publicly traded companies or
divisions of publicly‑traded companies and have several competitive advantages, including:
·
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greater financial and human resources for product development, sales and marketing and patent litigation;
significantly greater name recognition;
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·
·
·
longer operating histories;
established relationships with healthcare professionals, customers and third‑party payors;
additional lines of products and the ability to offer rebates or bundle products to offer higher discounts or incentives;
· more established sales and marketing programs and distribution networks; and
·
greater experience in conducting research and development, manufacturing, clinical trials, preparing regulatory
submissions and obtaining regulatory clearance or approval for drug and device products and marketing approved
products.
In addition to competing for market share for our products, we also compete against these companies for personnel,
including qualified sales representatives that are necessary to grow our business, as well as scientific and clinical personnel from
universities and research institutions that are important to our research and development efforts.
We believe the principal competitive factors in our market include:
·
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·
·
·
·
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improved outcomes for glaucoma;
acceptance by ophthalmic surgeons;
ease of use and reliability;
product price and availability of reimbursement;
technical leadership;
effective marketing and distribution; and
speed to market.
Facilities, Manufacturing and Distribution
Our corporate headquarters and our manufacturing operations are located in an approximately 86,000 square foot
campus in San Clemente, California which is comprised of two main buildings. This location serves as our sole manufacturing
location where we manufacture, inspect, package, release and ship nearly all of our final products. All of our headquarters‑based
employees, including our manufacturing and distribution employees, work at this campus. While these facilities are sufficient for
our current needs, we will require additional space as our business expands. Our international subsidiaries also lease facilities in
Australia, Brazil, Canada, Germany, Japan and the United Kingdom.
We manufacture, inspect, package and ship finished products from our San Clemente facility. We source components
used in our proprietary manufacturing process from outside vendors and we assemble them to produce iStent devices and
disposable insertion instruments. These components include both off‑the‑shelf materials and custom made parts. The iStent
device and some insertion instrument components are supplied by single vendors. While we believe that there are at least several
other vendors that could make any one of these items, we strive to maintain a minimum inventory of three to six months’ supply
to help mitigate any supply interruptions. We source the heparin used in our iStent heparin coating from one supplier. We
maintain a stock of several years’ worth of heparin material and have FDA approval to retest and extend the shelf life of the
material indefinitely for U.S. product.
We have received International Standards Organization (ISO) 13485 certification which includes design control
requirements. Our manufacturing processes have been validated as required by the FDA and other regulatory bodies. As a
medical device manufacturer, our manufacturing facility and the facilities of our critical suppliers are subject to periodic
inspection by the FDA and other regulatory agencies.
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Intellectual Property
The strength of our competitive position depends substantially upon our ability to obtain and enforce intellectual
property rights protecting our technology both domestically and internationally. We rely on a combination of intellectual property
rights, including patents, trademarks, service marks, copyrights, trade secrets and other similar intellectual property, as well as
customary contractual protections and security measures used to protect our proprietary, trade secret information.
In the aggregate, our intellectual property assets are of material importance to our business. We are significantly
dependent on our patent and other intellectual property rights and the failure to protect such rights or succeed in litigation could
negatively impact our ability to sell current or future products, or prohibit us from enforcing our patents or other intellectual
property rights against others. For additional information see “Risks Related to Our Intellectual Property.”
As of December 31, 2017, we owned or exclusively licensed in certain fields of use 158 issued patents and 87 pending
patent applications, including 64 U.S. patents and 32 U.S. patent applications. We may, from time to time, choose to acquire or
license additional patents and patent applications, or we may choose to abandon, sell, or license certain Company patents and
patent applications, depending on the needs of the Company. Our issued patents that protect our commercial products and current
product pipeline will expire between 2020 and 2034. While we have pursued and continue to pursue patent protection for our
existing and pipeline technologies in the U.S. and certain jurisdictions abroad, we do not know how many of our pending patent
applications will result in the issuance of patents or the extent to which the examination process could require us to narrow our
claims. In addition, any of our issued patents may be successfully challenged and invalidated or found to lack the scope necessary
to prevent a competitor from entering the marketplace.
The ophthalmology industry in which we operate has been subject to a large number of patent filings and patent
infringement litigation. Whether we infringe any patent claim owned by a third party will not be known with certainty unless and
until a court interprets the patent claim in the context of litigation. If an infringement allegation is made against us, we may seek
to invalidate the asserted patent claim and may allege non‑infringement of the asserted patent claim. Also, for business reasons,
we may take similar actions before any such infringement allegation is made. In order for us to invalidate a U.S. patent claim, we
would need to rebut the presumption of validity afforded to issued patents in the United States with clear and convincing evidence
of invalidity, which is a high burden of proof. Similar or greater effort and proof may be required to invalidate foreign patents
owned by third parties, including those owned by our competitors.
In some circumstances, we may rely on trade secrets to protect our technology. However, trade secrets can be difficult to
protect. We seek to protect our proprietary technology and manufacturing processes, in part, by confidentiality and invention
assignment agreements with employees and certain third-party service providers.
We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security
of our premises and physical and electronic security of our information technology systems. While we have confidence in these
individuals, organizations and systems, agreements or security measures may be breached and we may not have adequate
remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by
competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their
work for us, disputes may arise as to the rights in related or resulting know‑how and inventions.
Government Regulation
Our products and operations are subject to extensive and rigorous regulation by the FDA and other federal, state and
local authorities, as well as foreign regulatory authorities. The FDA regulates, among other things, the research, development,
testing, manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion and marketing, distribution, post
approval monitoring and reporting and import and export of medical devices (such as our iStent products), as well as combination
drug/device products (such as iDose ) in the United States to assure the safety and effectiveness of medical products for their
intended use. The Federal Trade Commission also regulates the advertising of
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our products. Further, we are subject to laws directed at preventing fraud and abuse, which subject our sales and marketing,
training and other practices to government scrutiny.
U.S.
government
regulation—medical
devices
Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in
the United States will require either a premarket notification to the FDA requesting permission for commercial distribution under
Section 510(k) of the Federal Food, Drug and Cosmetic Act (FDCA), also referred to as a 510(k) clearance, or approval from the
FDA of a PMA. Both the 510(k) clearance and PMA processes can be expensive, and lengthy, and require payment of significant
user fees, unless an exemption is available.
Device classification
Under the FDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on
the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances with
respect to safety and effectiveness.
Class I devices are those for which safety and effectiveness can be reasonably assured by adherence to a set of
regulations, referred to as General Controls, which require compliance with the applicable portions of the FDA’s Quality System
Regulation (QSR), facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful
and non‑misleading labeling and promotional materials. Some Class I devices, also called Class I reserved devices, also require
premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are
exempt from the premarket notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls, which can include
performance standards, guidelines and postmarket surveillance. Most Class II devices are subject to premarket review and
clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k)
premarket notification process. Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification,
demonstrating that the device is “substantially equivalent,” as defined in the statute, to either:
·
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a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of
1976 were enacted, or
another commercially available, similar device that was cleared through the 510(k) process.
To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and
either have the same technological characteristics as the predicate device or have different technological characteristics and not
raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support
substantial equivalence.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or
that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the
modification, could require a PMA application. If the FDA disagrees with a manufacturer’s determination regarding whether a
new premarket submission is required for the modification of an existing device, the FDA can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance or approval of a PMA application is obtained.
If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is
automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of
the PMA approval process, or seek reclassification of the device through the de novo process. Pursuant to amendments to the
statute in 2012, a manufacturer can also submit a petition for direct de novo review if the manufacturer is unable to identify an
appropriate predicate device and the new device or new use of the device presents a moderate or low risk.
Class III devices include devices deemed by the FDA to pose the greatest risk such as life‑supporting or life‑sustaining
devices, or implantable devices, in addition to those deemed not substantially equivalent following the
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510(k) process. These devices are subject to the PMA application process, which is generally more costly and time consuming
than the 510(k) process. Through the PMA application process, the applicant must submit data and information demonstrating
reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a
PMA application typically includes, but is not limited to, extensive technical information regarding device design and
development, pre‑clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the
clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the
FDA’s satisfaction reasonable assurance of the safety and effectiveness of the device for its intended use.
The investigational device process
In the United States, absent certain limited exceptions, human clinical trials intended to support medical device
clearance or approval require an IDE application. Some types of studies deemed to present “non‑significant risk” are deemed to
have an approved IDE once certain requirements are addressed and Institutional Review Board (IRB) approval is obtained. If the
device presents a “significant risk” to human health, as defined by the FDA, the sponsor must submit an IDE application to the
FDA and obtain IDE approval prior to commencing the human clinical trials. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the
testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of
subjects. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and
the study protocol and informed consent are approved by appropriate institutional review boards at the clinical trial sites. There
can be no assurance that submission of an IDE will result in the ability to commence clinical trials, and although the FDA’s
approval of an IDE allows clinical testing to go forward for a specified number of subjects, it does not bind the FDA to accept the
results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets its intended success criteria.
All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device
labeling, prohibit promotion and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors
and study investigators. Clinical trials must further comply with the FDA’s regulations for institutional review board approval and
for informed consent and other human subject protections. Required records and reports are subject to inspection by the FDA. The
results of clinical testing may be unfavorable, or, even if the intended safety and efficacy success criteria are achieved, may not be
considered sufficient for the FDA to grant marketing approval or clearance of a product. The commencement or completion of
any clinical trial may be delayed or halted or be inadequate to support approval of a PMA application for numerous reasons,
including, but not limited to, the following:
·
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the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical
trial on hold;
patients do not enroll in clinical trials at the rate expected;
patients do not comply with trial protocols;
patient follow‑up is not at the rate expected;
patients experience adverse events;
patients die during a clinical trial, even though their death may not be related to the products that are part of our
trial;
device malfunctions occur with unexpected frequency or potential adverse consequences;
institutional review boards and third‑party clinical investigators may delay or reject the trial protocol;
third‑party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule
or consistent with the clinical trial protocol, good clinical practices or other FDA requirements;
· we or third‑party organizations do not perform data collection, monitoring and analysis in a timely or accurate
manner or consistent with the clinical trial protocol or investigational or statistical plans;
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third‑party clinical investigators have significant financial interests related to us or our study such that the FDA
deems the study results unreliable, or we or investigators fail to disclose such interests;
regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to
undertake corrective action or suspend or terminate our clinical trials;
changes in government regulations or administrative actions;
the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; or
the FDA concludes that our trial design is inadequate to demonstrate safety and efficacy.
The PMA approval process
Following receipt of a PMA application, the FDA conducts an administrative review to determine whether the
application is sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the
FDA will accept the application for filing and begin the review. The FDA, by statute and by regulation, has 180 days to review a
filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During
this review period, the FDA may request additional information or clarification of information already provided, and the FDA
may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the
FDA. The FDA considers a PMA or PMA supplement to have been voluntarily withdrawn if an applicant fails to respond to an
FDA request for information ( e.g. , major deficiency letter) within a total of 360 days. Before approving or denying a PMA, an
FDA advisory committee may review the PMA at a public meeting and provide the FDA with the committee’s recommendation
on whether the FDA should approve the submission, approve it with specific conditions, or not approve it. Prior to approval of a
PMA, the FDA may conduct a bioresearch monitoring inspection of the clinical trial data and clinical trial sites and a QSR
inspection of the manufacturing facility and processes. Overall, the FDA review of a PMA application generally takes between
one and three years, but may take significantly longer. The FDA can delay, limit or deny approval of a PMA application for many
reasons, including:
·
·
·
·
the device may not be shown safe or effective to the FDA’s satisfaction;
the data from pre‑clinical studies and clinical trials may be insufficient to support approval;
the manufacturing process or facilities may not meet applicable requirements; and
changes in FDA approval policies or adoption of new regulations may require additional data.
If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, which
usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial
marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s
evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a
not approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA
approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the
PMA, or the PMA is withdrawn and resubmitted when the data are available. The PMA process can be expensive, uncertain and
lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved by the
FDA for marketing.
New PMA applications or PMA supplements may be required for modification to the manufacturing process, labeling,
device specifications, materials or design of a device that has been approved through the PMA process. PMA supplements often
require submission of the same type of information as an initial PMA application, except that the supplement is limited to
information needed to support any changes from the device covered by the approved PMA application and may or may not
require as extensive technical or clinical data or the convening of an advisory panel, depending on the nature of the proposed
change.
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In approving a PMA application, the FDA may also require some form of postmarket studies or postmarket surveillance,
whereby the applicant follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical
status of those patients when necessary to protect the public health or to provide additional safety and effectiveness data for the
device. FDA may also require postmarket surveillance for certain devices cleared under a 510(k) notification, such as implants or
life‑supporting or life‑sustaining devices used outside a device user facility. The FDA may also approve a PMA application with
other post‑approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things,
restrictions on labeling, promotion, sale, distribution and use.
The FDA approved the iStent PMA on June 25, 2012, for the indication for use in combination with cataract surgery for
the reduction of intraocular pressure in adult patients with mild‑to‑moderate open‑ angle glaucoma currently treated with
prescription eye drops. The FDA imposed conditions of approval, including three postmarket studies (two of which are now
completed), and a requirement that we implement a three‑part training program for physicians who will use the iStent device.
We are required to file new PMA applications or PMA supplement applications for significant modifications to the
manufacturing process, labeling and design of a device for which we have received approval through the PMA approval process.
Post‑approval requirements
After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These
include, but are not limited to:
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·
·
the registration and listing regulation, which requires manufacturers to register all manufacturing facilities and list
all medical devices placed into commercial distribution;
the QSR, which requires manufacturers, including third‑party manufacturers, to follow elaborate design, testing,
production, control, supplier/contractor selection, complaint handling, documentation and other quality assurance
procedures during the manufacturing process;
labeling regulations and unique device identification requirements;
advertising and promotion requirements;
restrictions on sale, distribution or use of a device;
PMA annual reporting requirements;
the FDA’s general prohibition against promoting products for unapproved or “off‑label” uses;
the Medical Device Reporting (MDR) regulation, which requires that manufacturers report to the FDA if their
device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely
cause or contribute to a death or serious injury if it were to reoccur;
· medical device correction and removal reporting regulations, which require that manufacturers report to the FDA
field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to
remedy a violation of the FDCA that may present a risk to health;
·
·
·
·
recall requirements, including a mandatory recall if there is a reasonable probability that the device would cause
serious adverse health consequences or death;
an order of repair, replacement or refund;
device tracking requirements; and
postapproval study and postmarket surveillance requirements.
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Our facilities, records and manufacturing processes are subject to periodic unscheduled inspections by the FDA. Failure
to comply with the applicable United States medical device regulatory requirements could result in, among other things, warning
letters, untitled letters, fines, injunctions, consent decrees, civil penalties, unanticipated expenditures, repairs, replacements,
refunds, recalls or seizures of products, operating restrictions, total or partial suspension of production, the FDA’s refusal to issue
certificates to foreign governments needed to export products for sale in other countries, the FDA’s refusal to grant future
premarket clearances or approvals, withdrawals or suspensions of current product clearances or approvals and criminal
prosecution.
U.S.
government
regulation—drug
delivery
implant
In the United States, the FDA regulates drugs and combination drug/device products under the FDCA and related
regulations. Drugs are also subject to other federal, state and local statutes and regulations, which along with the FDCA govern,
among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, advertising,
promotion and marketing, distribution, post‑approval monitoring and reporting, and import and export of pharmaceutical
products. Failure to comply with the applicable U.S. regulatory requirements at any time during the drug product development
process, approval process or post‑approval, may subject an applicant to administrative or judicial sanctions, including refusal by
the FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters
and other types of letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions,
fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties
brought by FDA and the Department of Justice, or other governmental entities. Any agency or judicial enforcement action could
have a material adverse effect on us.
The steps required before a drug may be approved for marketing in the United States generally include:
·
·
·
·
·
·
·
·
·
completion of preclinical laboratory tests and animal tests conducted in compliance with the FDA’s Good
Laboratory Practices;
the submission to the FDA of an IND which must become effective before human clinical trials commence in the
United States;
approval by an IRB at each clinical trial site before each trial may be initiated;
obtaining informed consent from the participants in a clinical trial;
performance of adequate and well‑controlled human clinical trials to establish the safety and efficacy of the product
for each intended use and conducted in accordance with Good Clinical Practices (GCP);
the submission to the FDA of an NDA seeking marketing authorization for the drug product;
satisfactory completion of an FDA pre‑approval inspection of the facility or facilities at which the product is
manufactured to assess compliance with FDA’s current Good Manufacturing Practices (cGMPs) to assure that the
facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;
satisfactory completion of a potential review by an FDA advisory committee, if applicable; and
FDA acceptance, review and approval of the NDA.
The investigational new drug process
An IND is a request for authorization from the FDA to administer an investigational drug to humans. Such authorization
must be obtained prior to administration to humans of any new drug or dosage form, including a new use of a previously
approved drug, that is not the subject of an approved NDA, except under limited circumstances.
To conduct a clinical study of an investigational new drug product, we are required to file an IND with the FDA. The
IND submission must include the general investigational plan and the protocol(s) for human studies, as well as results of animal
studies or other human studies, as appropriate, analytical data and any available data or literature to
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support the use of the investigational new drug. An IND must become effective before human clinical trials may begin. An IND
will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or
questions related to the proposed clinical trials as outlined in the IND. If the FDA raises questions, the IND may be placed on
clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or questions before clinical trials can
begin. Accordingly, submission of an IND may or may not result in the FDA allowing clinical trials to begin. A separate
submission to an existing IND must also be made for each successive clinical trial conducted during product development.
Clinical trials involve the administration of the investigational drug to patients under the supervision of qualified
investigators in accordance with GCPs. Clinical trials are conducted under protocols detailing, among other things, the objectives
of the study, how the study will be carried out, the parameters to be used in monitoring safety, and the efficacy criteria to be
evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the
IND. Additionally, approval must also be obtained from the IRB at each clinical site before the trials may be initiated. The IRB
will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. The
IRB must also monitor the trial until completed. Either FDA or an IRB may suspend or terminate an ongoing clinical trial at any
time for a variety of reasons, including safety concerns or lack of protection of patient rights. All participants in our clinical trials
must provide their informed consent in writing. In addition, there are requirements and industry guidelines that require the posting
of ongoing clinical trials on public registries and the disclosure of designated clinical trial results. The IRB must also review and
approve all clinical trial recruitment plans and materials.
The clinical investigation of an investigational drug product is generally divided into three phases. Although the phases
are usually conducted sequentially, they may overlap or be combined. The three phases of investigational new drug investigation
are as follows:
·
·
·
Phase I. Phase I includes the initial introduction of an investigational new drug into humans. Phase I clinical trials
are typically closely monitored and may be conducted in patients with the target disease or condition or healthy
volunteers. These studies are designed to evaluate the safety, dosage tolerance, metabolism and pharmacologic
actions of the investigational drug product in humans, the side effects associated with increasing doses, and if
possible, to gain early evidence on effectiveness. During Phase I clinical trials, sufficient information about the
investigational drug’s pharmacokinetics and pharmacological effects may be obtained to permit the design of
well‑controlled and scientifically valid Phase II clinical trials. The total number of participants included in Phase I
clinical trials varies, but is generally in the range of 20 to 80.
Phase II. Phase II includes the controlled clinical trials conducted to preliminarily evaluate the effectiveness of the
investigational drug for a particular indication in patients with the disease or condition under study, to determine
dosage tolerance and optimal dosage, and to identify possible adverse side effects and safety risks associated with
the drug product. Phase II clinical trials are typically well‑controlled, closely monitored, and conducted in a limited
patient population, usually involving no more than several hundred participants.
Phase III. Phase III clinical trials are generally controlled clinical trials conducted in an expanded patient population
generally at multiple clinical trial sites. They are performed after preliminary evidence suggesting effectiveness of
the drug product has been obtained and are intended to further evaluate dosage, clinical effectiveness and safety, to
establish the overall benefit‑risk profile of the investigational drug product, and to provide an adequate basis for
product approval and adequate information for product labeling. Phase III clinical trials usually involve several
hundred to several thousand participants. In most cases, the FDA requires two adequate and well‑controlled
Phase III clinical trials to demonstrate the efficacy of the drug. The FDA has the legal discretion to approve a drug
on the basis of a single well‑controlled clinical trial although this is less common and typically is subject to
significant restrictions.
The FDA’s primary objectives in reviewing an IND are to assure the safety and rights of patients and to help assure that
the quality of the investigation will be adequate to permit an evaluation of the drug’s effectiveness and safety. The decision to
terminate development of an investigational drug product may be made by either the FDA, an IRB or ethics committee, or by the
study sponsor for various reasons. Clinical trials may be overseen by an independent group
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of qualified experts organized by the trial sponsor, known as a data safety monitoring board or committee. Data safety monitoring
boards provide review blinded study data at designated check points for safety risks. Suspension or termination of development
during any phase of clinical trials can occur if it is determined that the participants or patients are being exposed to an
unacceptable risk to health. Other reasons for suspension or termination may include changes in business objectives or the
economic environment.
The NDA approval process
In order to obtain approval to market a drug product in the United States, a marketing application must be submitted to
the FDA that includes data to establish the safety and effectiveness of the new drug product for the proposed indication. The NDA
includes all relevant data available from pertinent preclinical and clinical trials, including negative or ambiguous results as well as
positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed
labeling, among other things. The NDA filing must also be accompanied by a substantial user fee, although there may be some
instances in which the user fee is waived.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based
on the agency’s threshold determination that it is sufficiently complete to permit substantive review. The FDA has substantial
discretion in the approval process and may refuse to accept any incomplete application. Incomplete applications must be
resubmitted with any deficiencies corrected and may be subject to an additional user fee.
Once the NDA has been accepted for filing, the FDA begins an in‑depth substantive review and sets a Prescription Drug
User Fee Act date that informs the applicant of the specific date by which the FDA intends to complete its review. The FDA has
agreed to certain performance goals in the review of NDAs through a two‑tiered classification system, Standard Review and
Priority Review. Priority Review designation is given to drugs that treat serious diseases or conditions that offer significant
improvements over existing therapies. The FDA endeavors to review applications subject to Standard Review within 10 to
12 months, whereas the FDA’s goal is to review Priority Review applications within six to eight months, depending on whether
the drug is a new molecular entity. The review process is often extended by FDA requests for additional information or
clarification. The FDA reviews NDAs to determine, among other things, whether the proposed product is safe and effective for its
intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s
identity, strength, quality and purity. Before approving an NDA, the FDA will review the proposed product labeling and may
request changes. FDA will also inspect the facilities at which the product is manufactured. The FDA will not approve the product
unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to
assure consistent production of the product within required specifications. In addition, before approving an NDA, the FDA will
typically inspect one or more clinical sites to assure compliance with GCP. If the FDA determines the application, manufacturing
process or manufacturing facilities are not acceptable, it will communicate the deficiencies to the applicant and often will request
additional testing or information, including new clinical trials. Even with the submission of additional information, the FDA
ultimately may decide that the application does not satisfy the regulatory standards for approval.
After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete
response letter which indicates that the review cycle for an application is complete but that the application is not ready for
approval. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional
testing (including clinical testing), or information, in order for the FDA to reconsider the application. Even with submission of
this additional information, the FDA may ultimately decide that an application does not satisfy the regulatory criteria for
approval. If, or when, the deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will
issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for
specific indications.
The clinical testing and drug approval process requires substantial time, effort and financial resources, and each may
take several years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at
all. Even if the FDA approves a product, the agency may limit the approved indications for use, impose prominent warnings, or
place other conditions on approval that could restrict the commercial application of the products, such as special risk management
measures through a Risk Evaluation and Mitigation Strategy. After
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approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional
labeling claims, are subject to further testing requirements and FDA review and pre-approval.
Section 505 of the FDCA describes three types of NDAs: (1) an application that contains full reports of investigations of
safety and effectiveness (section 505(b)(1)); (2) an application that contains full reports of investigations of safety and
effectiveness but where at least some of the information required for approval comes from studies not conducted by or for the
applicant and for which the applicant has not obtained a right of reference (section 505(b)(2)); and (3) an application that contains
information to show that the proposed product has the same active ingredient, dosage form, strength, route of administration,
labeling, quality, performance characteristics, and intended use, among other things, to a previously approved product
(section 505(j)).
Our iDose implant may be eligible for the Section 505(b)(2) application pathway if and when we are prepared to submit
an application for marketing to the FDA. Section 505(b)(2) expressly permits the FDA to rely, in approving an NDA, on data not
developed by the applicant. Thus, if a 505(b)(2) applicant can establish that reliance on the FDA’s previous findings of safety and
effectiveness is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new
product. We are pursuing a Section 505(b)(2) NDA regulatory strategy for our iDose implant which we expect will allow us to
rely in our NDA filing on certain nonclinical and clinical safety findings made by the FDA in previous approvals. For changes to
a previously approved drug product, an application may rely on the FDA’s finding of safety and effectiveness of the previously
approved drug, coupled with the information needed to support the change from the approved drug product. The additional
information could be new studies conducted by the applicant or published data. The FDA may approve the new product candidate
for all, or some, of the label indications for which the reference drug has been approved, as well as for any new indication sought
by the 505(b)(2) applicant.
The filing or approval of a Section 505(b)(2) application may be delayed due to patent or exclusivity protections
covering an approved product. Section 505(b)(2) applications must include patent certifications and must provide notice of certain
patent certifications to the NDA holder and patent owner. A Section 505(b)(2) application may be granted three years of Hatch-
Waxman data exclusivity if one or more of the clinical investigations, other than bioavailability/bioequivalence studies, was
essential to approval of the application and was conducted or sponsored by the applicant. Such exclusivity would cover only the
new condition of use that was supported by the clinical trials that were essential to approval.
Circumstances could change that may cause a Section 505(b)(2) application for our product to no longer be an
appropriate pathway. For example, if an equivalent drug product were approved before our application is submitted, the
applicable pathway for our drug product might be an Abbreviated New Drug Application (ANDA). An ANDA seeks approval of
a drug product that has the same active ingredient(s), dosage form, strength, route of administration, and conditions of use
(labeling) as a so‑called “reference listed drug” approved under an NDA with full supporting data to establish safety and
effectiveness. Limited exceptions exist to this ANDA sameness requirement, including certain limited variations approved by the
FDA through a special petition process. An ANDA must contain certifications relating to patents for the reference listed drug. An
ANDA also generally contains limited clinical data to demonstrate that the product covered by the ANDA is absorbed in the body
at the same rate and to the same extent as the reference listed drug, which is known as bioequivalence. In addition, the ANDA
must contain information regarding the manufacturing processes and facilities that will be used to ensure product quality, and
must contain certifications to patents listed with the FDA for the reference listed drug.
Post‑approval regulation
After regulatory approval of a drug or combination drug/device product is obtained under an NDA, we are required to
comply with pervasive and continuing regulation by the FDA, including, among other things, requirements relating to drug listing
and registration, recordkeeping, periodic reporting, product sampling and distribution, advertising, marketing and promotion and
reporting of adverse experiences with the product. For example, as a condition of approval of an NDA, the FDA may require
post‑marketing testing, including Phase IV clinical trials, and surveillance to further assess and monitor the product’s safety and
effectiveness after commercialization. In addition, the holder of an approved NDA would be required to report, among other
things, certain adverse events and production problems to the FDA, and to provide updated safety and efficacy information to the
FDA. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label, and
even if the FDA approves a product, it may
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limit the approved indications for use for the product or impose other conditions, including labeling or distribution restrictions or
other risk‑management mechanisms. For a combination drug/device product, such as our iDose implant, certain device reporting
requirements might also apply, such as MDR requirements and reports of corrections and removal.
Quality control and manufacturing procedures must continue to conform to cGMP after approval. In addition, medical
device quality system regulations would apply to the device component of a combination drug/device product, either all the QSR
regulations or particular QSR regulations supplementing the drug cGMP in accordance with FDA regulations in 21 C.F.R. Part 4.
The FDA periodically inspects manufacturing facilities to assess compliance with cGMP and QSR. In addition, changes to the
manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval
before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP or QSR and
impose reporting and documentation requirements upon us and any third‑party manufacturers that we may decide to use.
Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to
maintain compliance with cGMP, QSR, and other aspects of regulatory compliance.
After approval, most changes to the approved product, such as adding new indications or other labeling claims, as well
as some manufacturing and supplier changes, are subject to prior FDA review and approval of a new NDA or an NDA
supplement. An NDA supplement for a new indication typically requires clinical data and the FDA uses similar procedures in
reviewing NDA supplements as it does in reviewing NDAs. The manufacturer and/or sponsor under an approved NDA are also
subject to annual product and establishment user fees, as well as new application fees for certain supplemental applications.
Discovery of previously unknown problems with a product or the failure to comply with applicable requirements may
result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product
from the market or other voluntary, FDA‑initiated or judicial action that could delay or prohibit further marketing. Other potential
consequences include, among other things:
·
·
·
·
fines, warning letters or holds on post‑approval clinical trials;
refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or
revocation of product license approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling,
including the addition of new warnings and contraindications, and also may require the implementation of other risk management
measures and/or additional clinical studies. In addition, the FDA strictly regulates marketing, labeling, advertising and promotion
of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the
provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion
of off‑label uses, and a company that is found to have improperly promoted off‑label uses may be subject to significant liability.
New government requirements, including those resulting from new legislation, may be established, or the FDA’s
policies may change, which could delay or prevent regulatory approval of our products under development and/or could
significantly impact the requirements imposed on us after approval.
Available special regulatory procedures
Formal meetings
In the United States, there are different types of official meetings that may occur between us and the FDA. Each meeting
type is subject to different procedures. Conclusions and agreements from each of these meetings are captured in the official final
meeting minutes issued by the FDA.
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Advice from the FDA is typically provided based on questions concerning quality (chemistry, manufacturing and
controls testing), pre‑clinical testing and clinical studies, and pharmacovigilance plans and risk‑management programs. Advice is
not legally binding with regard to any future marketing application for the drug product.
To obtain binding commitments from the FDA on the design and size of clinical trials intended to form the primary basis
of an effectiveness claim for a new drug product, Special Protocol Assessment (SPA) procedures are available. Where the FDA
agrees to an SPA, the agreement may not be changed by either the sponsor or the FDA except if the sponsor and the FDA agree to
a change, or a senior FDA official determines that a substantial scientific issue essential to determining the safety or effectiveness
of the product was identified after the testing began. An SPA is not binding if new circumstances arise, and there is no guarantee
that a study will ultimately be adequate to support an approval even if the study is conducted according to the terms of an SPA.
Other
healthcare
laws
We are also subject to healthcare regulation and enforcement by the federal government and the states and foreign
governments in which we conduct our business. These laws include, without limitation, state and federal anti‑kickback, fraud and
abuse, false claims, and physician sunshine laws and regulations.
The federal Anti‑Kickback Statute prohibits, among other things, the offer, receipt, or payment of remuneration in
exchange for or to induce the use of products or services that are paid for in whole or part by Medicare, Medicaid or other federal
healthcare programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts,
and free or reduced price items and services. The government has enforced the Anti‑Kickback Statute to reach large settlements
with healthcare companies based on sham research or consulting and other financial arrangements with physicians. Further, a
person or entity does not need to have actual knowledge of the statute or specific intent to violate it. In addition, the government
may assert that a claim including items or services resulting from a violation of the federal Anti‑Kickback Statute constitutes a
false or fraudulent claim for purposes of the federal False Claims Act (FCA). Many states have similar laws that apply to their
state healthcare programs as well as private payors. Violations of the Anti‑Kickback Statute can result in exclusion from federal
healthcare programs and substantial civil and criminal penalties.
The FCA imposes civil liability on persons who, among other things, present or cause to be presented false or fraudulent
claims for payment by a federal healthcare program. The FCA has been used to prosecute persons submitting claims for payment
that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary.
Manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by,
for example, providing inaccurate billing or coding information to customers or promoting a product off‑label. Actions under the
FCA may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government.
Violations of the FCA can result in significant monetary penalties and treble damages. The federal government is using the FCA,
and the accompanying threat of significant liability, in its investigation and prosecution of device companies throughout the
country, for example, in connection with the promotion of products for unapproved uses and other improper sales and marketing
practices. The government has obtained multi‑million and multi‑billion dollar settlements under the FCA. In addition, companies
have been forced to implement extensive corrective action plans, and have often become subject to consent decrees or corporate
integrity agreements, severely restricting the manner in which they conduct their business.
In addition, there has been a trend of increased federal and state regulation of payments made to physicians and other
healthcare providers. The Affordable Care Act (ACA), among other things, imposed new annual reporting requirements on
certain device manufacturers for payments made by them to physicians and teaching hospitals, as well as certain ownership and
investment interests held by physicians and their immediate family members. Failure to submit required information may result in
civil monetary penalties of up to $1 million. Certain states also mandate implementation of commercial compliance programs
and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians.
The shifting commercial compliance environment and the need to build and maintain robust systems to comply with
different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company
may violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other
governmental regulations that apply to us, we may be subject to penalties, including, without limitation,
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civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in
federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business
and our financial results.
Regulation
outside
the
United
States
In addition to regulations in the United States, we are subject to a variety of regulations in other jurisdictions governing
clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we
must obtain authorization before commencing clinical trials or obtain marketing authorization or approval of a product under the
comparable regulatory authorities of countries outside the United States before we can commence clinical trials or marketing of
the product in those countries. The approval process varies from country to country and the time may be longer or shorter than
that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary greatly from country to country.
Other
Our operations and many of the products we manufacture or sell are subject to extensive regulation by numerous other
governmental agencies, both within and outside the United States. In the United States, apart from the agencies discussed above,
our facilities, operations, employees, products (their manufacture, sale, import and export) and services are regulated by
Environmental Protection Agency, the Occupational Health & Safety Administration, the Department of Labor, Customs and
Border Protection, the Department of Commerce, the Department of Treasury, the Department of Justice and others. Furthermore,
because we supply products and services to healthcare providers that are reimbursed by federally funded programs such as
Medicare, our activities are also subject to regulation by the Centers for Medicare and Medicaid Services and enforcement by the
Office of the Inspector General within the Department of Health and Human Services. We are also required to report payments
and other transfers of value to physicians and teaching hospitals, among others. State agencies also regulate our facilities,
operations, employees, products and services within their respective states. Government agencies outside the United States also
regulate public health, product registration, manufacturing, environmental conditions, labor, exports, imports and other aspects of
our global operations.
Employees
As of December 31, 2017, we had 387 employees, with 183 in sales and marketing, 132 in research and development,
clinical, regulatory and quality assurance, 44 in general and administrative, and 28 in manufacturing and distribution. We often
supplement our research and development and clinical, regulatory and quality assurance departments with independent
consultants on a project basis. We believe that our future success will depend in part on our continued ability to attract, hire and
retain qualified personnel. None of our employees is represented by a labor union. We consider our relationship with our
employees to be good.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available on our web site at
www.glaukos.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with, or furnishing
of these reports to, the Security and Exchange Commission (SEC). Any materials we file with the SEC are available at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. Additional information about the operation of the Public
Reference Room can also be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at
www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC, including us.
Item 1A. R isk Factors
The risks discussed below are not the only ones facing our business but do represent those risks that we believe are
material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial
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may also harm our business. Please read the cautionary notice regarding forward-looking statements under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related to Our Business
We
have
incurred
significant
losses
since
inception
and
there
can
be
no
guarantee
that
we
reach
or
sustain
profitability.
Since the Company’s inception in July 1998, we have incurred significant operating losses. For the fiscal year ended
December 31, 2017, we incurred a net loss of approximately $0.1 million and for the fiscal year ended December 31, 2016 we had
net income of $4.5 million. As of December 31, 2017, we had an accumulated deficit of approximately $192.2 million. Losses
have resulted principally from costs incurred in our clinical trial, research and development programs and from our general and
administrative expenses. Losses in the fiscal year ended December 31, 2017 were primarily attributable to our purchase of certain
IOP sensor system assets from DOSE Medical Corporation (DOSE), which resulted in a $5.3 million charge to in-process
research and development expense in April 2017. To date, we have financed our operations primarily through the sale of equity
securities, debt financing, and cash generated from net sales. We have devoted substantially all of our resources to the research
and development of our products, the commercial launch of the iStent , the development of our proprietary sales network, and the
assembly of a management team to build our business.
To implement our global business strategies we need to, among other things, further grow our global sales and marketing
infrastructure to increase global market acceptance of our products and any other products that receive FDA or equivalent foreign
approval, fund ongoing research and development activities, expand our manufacturing capabilities, and obtain regulatory
clearance or approval to commercialize our existing products in international markets or to commercialize those currently under
development in the United States and internationally. As a result, we expect our expenses to increase significantly as we pursue
these objectives. Our ability to sustain profitability is highly uncertain, especially given our limited commercial history selling our
products globally and an increasingly competitive landscape, which makes forecasting our sales more difficult. We will need to
generate significant additional net sales to maintain profitability. We cannot be sure that we will remain profitable for any
substantial period of time. Our failure to sustain profitability could have an adverse effect on the value of our common stock.
Substantially
all
of
our
net
sales
are
generated
from
sales
of
the
iStent,
which
has
an
increasingly
competitive
landscape,
and
we
are
completely
dependent
on
its
success.
If
competition
or
other
factors
slow
the
market
acceptance
or
usage
of
the
iStent
or
our
other
products
under
development,
our
business
will
suffer.
Our primary sales‑generating commercial product is the iStent , which we began selling in the United States in the third
quarter of 2012. We rely heavily upon sales in the United States, which comprised 88% and 92% of our net sales for the years
ended December 31 , 2017 and 2016, respectively. We expect to continue to derive a significant portion of our net sales from
sales of the iStent in the United States, even if we are successful in continuing to commercialize our iStent products outside the
United States, or receive necessary approvals to commercialize the iStent Inject, iStent SA, iStent Infinite, iStent Supra , iDose
Travoprost and the IOP Sensor System in the United States and other countries . Accordingly, our ability to generate net sales is
highly dependent on our ability to market and sell the iStent .
We developed MIGS to provide an alternative to the traditional glaucoma treatment and management paradigm. The
iStent is our first MIGS device and we are developing other products to treat glaucoma. MIGS and our MIGS devices may
experience a slowdown of market acceptance among eye care professionals, patients, healthcare payors and the medical
community. There are a number of other available therapies marketed for the treatment of glaucoma, including medication
therapies that are well established and are widely accepted by the medical community. There are also other MIGS devices that are
currently available in the United States and globally or are in development by third parties that have entered or could enter the
market and which may affect adoption of or demand for our products. For example, Alcon, Inc. (which acquired Transcend
Medical, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its CyPass suprachoroidal
implant, a competitive MIGS device, in 2016. The CyPass device is indicated for use in conjunction with cataract surgery for the
reduction of IOP in adult patients with mild to moderate primary open-angle glaucoma. Also in 2016, Allergan plc (which
acquired AqueSys, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its Xen
Glaucoma Treatment System, a
®
®
25
Table of Contents
competitive MIGS device, for use in the U.S. This Xen device is indicated for the management of refractory glaucoma, where
previous surgical treatment has failed or in patients with primary open angle glaucoma, and pseudoexfoliative or pigmentary
glaucoma with open angles that are unresponsive to maximum tolerated medical therapy. We are aware of several other
companies, including Santen Pharmaceutical Co., Ltd. (which recently acquired InnFocus, Inc., a MIGS competitor), Istar
Medical SA and Ivantis Inc. that are conducting FDA‑approved IDE clinical trials or have filed for regulatory approval of MIGS
devices. If these MIGS products, or other products that may be developed, receive regulatory approval, we will have additional
direct MIGS competitors. These new MIGS products could achieve greater commercial acceptance or demonstrate better safety or
effectiveness, clinical results, ease of use or lower costs than our iStent or other products under development, which may reduce
demand for our primary product, the iStent , as well as for our products in development.
Eye care professionals, patients, healthcare payors and the medical community globally may be slow or fail to adopt our
products for a variety of reasons, including, among others:
·
·
·
·
·
·
·
·
·
lack of experience with our products;
lack of availability of adequate coverage and reimbursement for hospitals, ambulatory surgery centers and
physicians;
our inability to convince key opinion leaders to provide recommendations regarding our products, or to convince
eye care professionals, patients and healthcare payors that our products are attractive alternatives to other products
and treatment solutions;
lack of evidence supporting cost benefits or cost‑effectiveness of our products over existing alternatives;
perception that our products are unproven, investigational or experimental;
the price of our products relative to competing treatment alternatives;
physician preference for competitive MIGS devices in the market;
liability risks generally associated with the use of new products and procedures; and
training required to use new products.
Our
growth
depends
on
our
ability
to
develop
and
commercialize
additional
products,
including,
our
pipeline
products
consisting
of
the
iStent
Inject,
the
iStent
SA,
the
iStent
Infinite,
the
iStent
Supra
and
the
iDose
Travoprost.
If
we
are
not
able
to
commercialize
additional
products,
including
any
or
each
of
such
pipeline
products,
in
a
timely
manner,
our
products
may
become
obsolete
over
time,
customers
may
not
buy
our
products,
our
net
sales
and
profitability
may
decline,
and
we
may
not
experience
growth
in
our
business.
Demand for our products may change in ways we may not anticipate due to:
·
·
·
·
·
·
changing coverage and reimbursement, coding and payments;
changing customer needs;
the introduction of new products and technologies;
evolving surgical practices;
evolving industry standards; and
other unforeseen reasons.
As a result, it is important that we continue to build a more complete product offering. Developing additional products is
expensive and time‑consuming, and could divert management’s attention away from expanding acceptance of the iStent and harm
our business. Even if we are successful in developing our additional pipeline products, including those currently in development,
the success of our new product offerings, if any, will depend on a variety of factors, including our ability to:
·
properly identify and anticipate customer needs;
26
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commercialize new products in a cost‑effective and timely manner;
·
· manufacture and deliver products in sufficient volumes on time;
·
·
·
·
·
·
·
obtain regulatory approval for new products;
receive adequate coverage and reimbursement for procedures performed with our products;
differentiate our offerings from competitors’ offerings;
achieve positive clinical outcomes;
satisfy the increased demands from healthcare payors, providers and patients for lower‑cost procedures;
innovate and develop new materials, product designs and surgical techniques; and
provide adequate medical and consumer education relating to new products and attract key ophthalmologists and
other eye care professionals to advocate these new products.
Moreover, we will need to make a substantial investment in research and development before we can determine the
commercial viability of any innovations, and we may not have the financial resources required to fund such research and
development. In addition, even if we are able to successfully develop product enhancements or new products, these enhancements
or new products may not produce net sales in excess of the costs of development, or they may be quickly rendered obsolete by
changing customer preferences or the introduction by our competitors of products embodying superior technologies or features.
Research programs to identify new products will require substantial technical, financial and human resources, whether or
not any such products are ultimately identified. We may determine that one or more of our pre‑clinical programs does not have
sufficient potential to warrant the allocation of such resources. Our research programs may initially show promise in identifying
potential products, yet fail to yield product candidates for clinical development for many reasons, including the following:
·
·
·
·
the research methodology used may not be successful in identifying potential products;
competitors may develop alternatives that render our future products, if any, obsolete;
our products may not be deployed safely or effectively;
our future products, if any, may, on further study, be shown to have harmful side effects or other characteristics that
indicate they are unlikely to be effective;
our clinical trials may not be successful; and
·
· we may not receive regulatory approval.
If
we
are
not
successful
in
obtaining
market
acceptance
of
our
products
globally,
overall
utilization
of
our
products
may
fall
below
targeted
levels.
If
we
are
unable
to
establish
a
global
sales
and
marketing
organization,
we
may
not
be
able
to
effectively
commercialize
our
products,
which
would
adversely
affect
our
business
prospects,
results
of
operations
and
financial
condition.
Because of the numerous risks and uncertainties associated with our global commercialization efforts, our products may
not obtain market acceptance outside of the United States, which would adversely impact the overall utilization of our products.
International markets differ significantly from the U.S. market, including as a result of differences in payor systems,
reimbursement, competitive dynamics, market size, regulations and patient treatment regimens. As a result of the differences in
these markets, you should not compare our financial results in the U.S. market to any potential results in the international markets
nor should you rely on our past results as an indication of our future performance.
In order to generate increased sales, we will need to establish a global sales organization. Our future success will depend
largely on our ability to train, retain and motivate skilled regional sales managers and direct sales representatives and distributors
around the world with significant technical knowledge of MIGS and the iStent and our other products. Because of the competition
for their services, we cannot assure you we will be able to retain such
27
Table of Contents
representatives on favorable or commercially reasonable terms, if at all. If we are unable to establish a global sales and marketing
organization, we may not be able to effectively commercialize our products globally, which would adversely affect our business
prospects, results of operations and financial condition.
Our
global
growth
strategy
requires
us
to
enter
new
foreign
markets
to
increase
international
sales.
If
we
fail
to
obtain
and
maintain
the
regulatory
approvals
or
the
favorable
reimbursement
coverage
or
payment
levels
necessary
to
market
our
products
in
foreign
jurisdictions,
our
market
penetration
opportunities
will
be
limited.
Foreign
governments
tend
to
impose
strict
price
controls,
which
could
negatively
impact
our
profitability.
Additionally,
our
existing
and
new
potential
international
operations
subject
us
to
certain
operating
risks,
which
could
adversely
impact
our
results
of
operations
and
financial
condition.
To implement our global growth strategy, we must continue to market our iStent and other medical device products in
the international jurisdictions in which we are currently authorized, as well as expand such operations into additional foreign
countries. In order to market our products in the European Union, Asia or other foreign jurisdictions, we must obtain and maintain
separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies
from country to country and can involve additional testing. The time required to obtain approval abroad may be longer than the
time required to obtain FDA clearance or approval. Foreign regulatory approval processes include many of the risks associated
with obtaining FDA clearance or approval and we may not obtain foreign regulatory approvals on a timely basis, if at all. FDA
clearance or approval does not ensure approval by regulatory authorities in other countries, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in other foreign countries. However, the failure to obtain
clearance or approval in one jurisdiction may have a negative impact on our ability to obtain clearance or approval elsewhere. If
we do not obtain or maintain necessary approvals to commercialize our products in markets outside the United States, it would
negatively affect our overall market penetration.
Even when we receive the necessary approvals to market our products in a foreign jurisdiction, we face challenges to
reaching or maintaining profitability. In some foreign countries, particularly in the European Union, the pricing of medical
devices is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take
considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some
countries, we may be required to supply data that compares the cost‑effectiveness of our products to other available therapies. If
reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, it may not
be profitable to sell our products in certain foreign countries, which could negatively affect the long‑term growth of our business.
Our existing foreign operations, as well as our planned international growth, expose us to additional uncertainty and
risks beyond regulatory authorization and reimbursement levels. Outside the United States, we sell our products through direct
sales organizations in 16 countries and a network of third-party distribution partners in other markets. These international
operations expose us and our subsidiaries and third-party distributors to a variety of risks including, without limitation, the
following:
·
·
·
·
·
compliance with foreign regulations and laws, as well as U.S. laws that apply to activities in foreign jurisdictions,
the adherence to which can be costly. Such regulations and laws expose us to penalties for non-compliance. These
laws and regulations include various anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, the United
Kingdom Bribery Act, the French Sunshine Act, as well as export control regulations. Any failure to comply with
applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to,
significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties,
denial of export privileges, seizure of shipments, restrictions on certain business activities and exclusion or
debarment from government contracting;
difficulties enforcing our intellectual property rights and defending against third-party threats and intellectual
property enforcement actions against us, our distributors, or any of our third-party suppliers;
reduced or varied protection for intellectual property rights in some countries;
pricing pressure that we may experience internationally;
foreign currency exchange rate fluctuations;
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Table of Contents
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
a shortage of high-quality sales people and distributors, and the difficulties of managing foreign operations;
the availability and level of third-party coverage and reimbursement within prevailing foreign healthcare systems
that may require some of the patients who would be good candidates for the iStent or our other products to directly
absorb medical costs, the ability of those patients to elect to privately pay for the iStent or our other products, or the
potential necessity to reduce the selling prices of our products;
relative disadvantages compared to competitors with more recognizable names, longer operating histories and better
established distribution networks and customer relationships;
the imposition of additional U.S. and foreign governmental controls or regulations;
political and economic instability;
changes in duties and tariffs, license obligations and other non-tariff barriers to trade;
the imposition of restrictions on the activities of foreign agents, representatives and distributors;
scrutiny of foreign tax authorities that could result in significant fines, penalties and additional taxes being imposed
on us;
laws and business practices favoring local companies;
longer sales and payment cycles;
difficulties in maintaining consistency with our internal guidelines;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
the imposition of costly and lengthy new export licensing requirements and restrictions, particularly relating to
technology;
International terrorism and anti-U.S. sentiment;
the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do
business that would restrict or prohibit continued business with the sanctioned country, company, person or entity;
and
the imposition of new trade restrictions.
If we experience any of these risks, our sales in non-U.S. jurisdictions may be harmed, our results of operations would
suffer and our business prospects would be negatively impacted.
We
face
manufacturing
risks
that
may
adversely
affect
our
ability
to
manufacture
products
and
could
reduce
our
gross
margins
and
negatively
affect
our
operating
results.
Our business strategy depends on our ability to manufacture our current and proposed products in sufficient quantities
and on a timely basis so as to meet customer demand, while adhering to product quality standards, complying with regulatory
requirements and managing manufacturing costs.
Our corporate headquarters and our manufacturing operations are located in an approximately 86,000 square foot
campus located in San Clemente, California, comprised of two main buildings. This location serves as our sole manufacturing
location where we manufacture, inspect, package, release and ship nearly all of our final products pursuant to numerous U.S. and
foreign regulatory approvals. If this facility suffers a crippling event, or a force majeure event, this could materially impact our
ability to operate. If we are unable to continue to expand our manufacturing facility in compliance with regulatory requirements
or to hire additional necessary manufacturing personnel, we may encounter operational interruptions, delays or additional costs in
achieving our research, development and commercialization objectives, including in obtaining regulatory approvals of our
product candidates and meeting customer demand, which could materially damage our business and financial position. As our
business expands, we will require additional space, which could also result in a higher cost structure that could reduce our gross
margin and negatively affect our operating results.
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Table of Contents
We are also subject to numerous other risks relating to our manufacturing capabilities, including:
·
·
·
·
·
·
quality and reliability of product components that we source from third‑party suppliers, including the risk of
receiving contaminated heparin or sourcing quality heparin in quantities sufficient to coat our products;
our inability to secure product components in a timely manner, in sufficient quantities or on commercially
reasonable terms;
our inability to maintain compliance with quality system requirements;
our failure to increase production capacity or volumes to meet demand;
our inability to design or modify production processes to enable us to produce efficiently future products or
implement changes in current products in response to design or regulatory requirements; and
difficulty identifying and qualifying alternative suppliers for components in a timely manner.
As demand for our products increases, we will have to invest additional resources to purchase components, hire and train
employees and enhance our manufacturing processes. If we fail to increase our production capacity efficiently, our sales may not
increase in line with our expectations and our operating margins could fluctuate or decline. In addition, although we expect some
of our products in development to share product features and components with the iStent , the manufacture of these products may
require the modification of our current production processes or unique production processes, the hiring of specialized employees,
the identification of new suppliers for specific components or the development of new manufacturing technologies. It may not be
possible for us to manufacture these products at a cost or in quantities sufficient to make these products commercially viable or to
maintain current operating margins.
We
depend
on
a
limited
number
of
third‑‑party
suppliers
for
certain
components
and
pharmaceuticals,
and
the
loss
of
any
of
these
suppliers,
or
their
inability
to
provide
us
with
an
adequate
supply
of
materials,
could
harm
our
business.
We rely on a limited number of third‑party suppliers to supply components for the iStent , the iStent Inject and its unique
injector system and our other pipeline products, as well as drugs for our iDose drug delivery system in development. Other than
agreements with key suppliers, we generally do not enter into long‑term supply agreements with our suppliers, and we order most
components and other products on a purchase order basis. In some cases, we have a sole supplier or a limited number of suppliers.
For example, we rely on one machining company to manufacture the titanium iStent implant and one pharmaceutical supplier for
the heparin used in the iStent’s heparin coating. While we believe that there are at least several other vendors that could supply
the titanium implant, and other pharmaceutical vendors that could supply heparin, we have not yet qualified any of these vendors,
which could cause delay, thereby impairing our ability to meet the demand of our customers. Although we maintain inventory to
mitigate supply interruptions, we are nevertheless exposed to risks, including limited control over costs, availability, quality and
delivery schedules.
We have been and may continue to be required to make significant “last time” purchases of components that are being
discontinued by the supplier to ensure supply continuity. In addition, given our limited experience with certain suppliers, it may
be difficult for us to assess their ability to timely meet our demand in the future based on past performance. If any one or more of
our suppliers cease to provide us with sufficient quantities of components or drugs in a timely manner or on terms acceptable to
us, we would have to seek alternative sources of supply. Because of factors such as the proprietary nature of our products, our
quality control standards and regulatory requirements, we cannot quickly engage additional or replacement suppliers for some of
our critical components. Even if we are able to identify and qualify a suitable second source to replace one of our key suppliers, if
necessary, that replacement supplier would not have access to our previous supplier’s proprietary processes and would therefore
be required to develop its own, which could result in further delay.
Failure of any of our suppliers to deliver products at the level our business requires would limit our ability to meet our
sales commitments, which could harm our reputation and could have a material adverse effect on our business. We may also have
difficulty obtaining similar components or drugs from other suppliers that are acceptable to the FDA or other regulatory agencies,
and the failure of our suppliers to comply with strictly enforced regulatory requirements could expose us to regulatory action
including warning letters, product recalls, termination of distribution, product seizures or civil penalties. It could also require us to
cease using the components or drugs, seek alternative components, drugs or technologies and modify our products to incorporate
alternative components, drugs or technologies, which
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Table of Contents
could result in a requirement to seek additional regulatory approvals. Our suppliers may also encounter financial or other
hardships unrelated to our demand for their products, which could inhibit their ability to fulfill our orders and meet our
requirements. Any disruption of this nature or increased expense could harm our commercialization efforts and adversely affect
our operating results.
In addition, we rely on our suppliers to supply us with components and pharmaceuticals that comply with regulatory
requirements, Current Good Manufacturing Practices and quality control standards, and meet agreed upon specifications at
acceptable costs and on a timely basis. Although we expect our third‑party suppliers to act consistent with such standards, we do
not control our suppliers, as they operate and oversee their own businesses. There is a risk that our suppliers will not always act
consistent with our best interests, and may not always supply components that meet our needs. Unexpected safety or efficacy
concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls,
withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or
criminal governmental actions. Accordingly, if we fail to obtain sufficient quantities of high‑quality components and
pharmaceuticals to meet demand for our products on a timely basis, we could lose customer orders, our reputation may be harmed
and our business could suffer.
We
currently
operate
primarily
at
a
facility
in
a
single
location
and
any
crippling
accident,
natural
disaster
or
other
force
majeure
event
or
disruption
at
this
facility
could
materially
affect
our
ability
to
operate
and
produce
saleable
products
and
could
shut
down
our
manufacturing
capacity
for
an
extended
period.
Our principal office and manufacturing facility is located in San Clemente, California, adjacent to U.S. Marine Corps
Base Camp Pendleton and wilderness area susceptible to brushfires, earthquakes and other natural disasters. Thus, substantially
all of our operations are conducted primarily at a single location, including our manufacturing processes, research and
development activities, customer and technical support, and management and administrative functions. In addition, substantially
all of our inventory of component supplies and finished goods are held at a single location. Despite our efforts to safeguard this
facility, including acquiring insurance on commercially reasonable terms, adopting environmental health and safety protocols and
utilizing off‑site storage of computer data, vandalism, terrorism or a natural or other disaster, such as an earthquake, fire or flood,
could damage or destroy our manufacturing equipment or our inventory of component supplies or finished goods, cause
substantial delays in our operations, result in the loss of key information, and cause us to incur additional expenses, including
relocation expenses. Our insurance may not cover our losses in any particular case, or insurance may not be available on
commercially reasonable terms to cover certain of these catastrophic events. In addition, regardless of the level of insurance
coverage, damage to our facilities may have a material adverse effect on our business, financial condition and operating results.
Failure
to
secure
and
maintain
adequate
coverage
or
reimbursement
by
third‑‑party
payors
for
procedures
using
the
iStent
or
our
other
products
in
development,
or
changes
in
current
coverage
or
reimbursement,
could
materially
impact
our
net
sales
and
future
growth.
We currently derive nearly all our net sales from sales of the iStent in the United States and expect this to continue for
the next several years. Hospitals and ambulatory surgery centers that purchase the iStent typically bill various third‑party payors,
including Medicare, Medicaid, private commercial insurance companies, health maintenance organizations and other
healthcare‑related organizations, to cover all or a portion of the costs and fees associated with the MIGS procedures in which the
iStent is used and bill patients for any applicable deductibles or co‑payments. Access to adequate coverage and reimbursement for
the procedures using the iStent (and our other products in development) by third‑party payors is essential to the acceptance of our
products by our customers.
Because there is generally no separate reimbursement for medical devices and other supplies used in such procedures,
including the iStent , the additional cost associated with the use of our iStent device could impact the profit margin of the hospital
or surgery center where the cataract surgery is performed if the incremental facility fee payment is not sufficient. Some of our
target customers may be unwilling to adopt our iStent in light of the additional associated cost. Further, any decline in the amount
payors are willing to reimburse our customers for MIGS procedures could make it difficult for existing customers to continue
using, or new customers to adopt, our iStent devices and could create additional pricing pressure for us. If we are forced to lower
the price we charge for our products, our gross margins would decrease, which would adversely affect our ability to invest in and
grow our business.
In addition, a key component of our global expansion strategy is obtaining reimbursement for the iStent device and
procedure by governmental or private payors within the foreign countries in which we are seeking to commercialize
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Table of Contents
our products. The requirements and processes for obtaining approval for such reimbursement may vary significantly from country
to country, entail prolonged delay, or be more difficult for foreign manufacturers with new, unfamiliar products and treatments. If
we face one or more of these challenges as we pursue commercializing our products internationally, our business prospects will
suffer.
Third‑party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and
reimbursement for medical device products and services exists among third‑party payors. Therefore, coverage and reimbursement
for medical device products and services can differ significantly from payor to payor. In addition, payors continually review new
technologies for possible coverage and can, without notice, deny coverage for these new products and procedures. As a result, the
coverage determination process is often a time‑consuming and costly process that will require us to provide scientific and clinical
support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be
obtained, or maintained if obtained.
Many third‑party payors in the United States model their coverage policies and payment amounts after those determined
by CMS, the federal agency responsible for administering the Medicare program. CMS relies on an extensive network of
Medicare Administrative Contractors (MACs) to develop coverage policies when no national coverage determination exists for a
procedure. Because there currently is no Medicare national coverage determination for procedures using our iStent devices, we
are required to provide scientific and clinical support for the use of the iStent (including the iStent Inject device and iStent Supra
device, if approved) to each MAC separately, with no assurance that coverage and adequate reimbursement will be obtained.
Although all MACs currently provide coverage and reimbursement for the MIGS procedure using the iStent , difficulties in
processing reimbursement or regional differences or reductions in the reimbursement amount for the physician professional
services could negatively impact iStent penetration or usage by customers. These differences in MAC reimbursement could also
negatively impact the amount paid by private commercial insurance companies, further negatively affecting customer penetration
or usage.
Third‑party payors, including CMS, regularly assess and propose changes to their coverage and reimbursement policies.
Changes in these current policies impact the profit margin of the hospital or surgery center where the surgery is performed and
increase costs to customers. For example, beginning in 2016, Medicare started to make a single, comprehensive payment for
combination iStent insertion and cataract procedures performed in hospital outpatient departments (HOPDs), eliminating the
separate payments that were available for the procedures in prior years and reducing the total reimbursement amount for the
combination procedure in the HOPD. Further, any decline in the amount payors are willing to reimburse our customers for MIGS
procedures could make it difficult for existing customers to continue using, or new customers to adopt, our iStent devices and
could create additional pricing pressure for us. If we were forced to lower the price we charge for our products, our gross margins
would decrease, which would adversely affect our ability to invest in and grow our business. Conversely, although the
reimbursement payments from Medicare to surgery centers for the iStent procedure was increased effective January 1, 2017, there
can be no assurance that this increase will remain in effect in future years or that the amount of reimbursement will not be
decreased in future years. Any reduction in the amount of Medicare reimbursement payments will have a negative effect on our
net sales.
Some third‑party payors in the United States, including Medicaid and certain commercial payors, have developed
policies that deny coverage for the MIGS procedure using the iStent . To support changes in these policies, we may need to
conduct prospective, randomized controlled clinical trials and present data from such trials to these payors to demonstrate the
medical necessity or cost‑effectiveness of the iStent . There can be no assurance that coverage for our products will be expanded.
In addition, those private payors that do not follow the Medicare guidelines may adopt different coverage and reimbursement
policies for MIGS procedures performed with the iStent , though we cannot predict whether coverage will be sufficient or if there
will be coverage at all. Failure to obtain favorable payor policies could have a material adverse effect on our business and
operations.
We believe that Medicare coverage and existing coverage by third‑party payors represents more than 90% of our target
patient population. U.S. third‑party payors representing more than 90% of individuals covered by commercial insurance currently
reimburse the iStent procedure. While we anticipate gaining coverage and reimbursement from additional third‑party payors, we
cannot guarantee that we will be successful or that coverage and reimbursement will be at levels that support continued
penetration and usage by our customers. Moreover, compliance with the administrative procedures and requirements of
third‑party payors may result in delays in processing approvals by those third‑party payors for customers to obtain coverage and
reimbursement for procedures using the iStent . Failure to secure or maintain adequate coverage or reimbursement for procedures
using the iStent by third‑party payors, or delays in processing
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approvals by those payors, could result in the cancellations of procedures to insert the iStent in combination with cataract surgery,
resulting in the loss of net sales from these procedures. If these issues remain unresolved, they could have a material adverse
effect on our business, financial condition and operating results.
In addition, although we have obtained temporary Category III Current Procedural Terminology (CPT) codes for the
MIGS procedures associated with the insertion of our iStent products, there is no guarantee that these billing codes or the payment
amounts associated with such codes will not change in the future. Category III codes expire five years after the date they become
effective. Prior to expiration, there are two options: submit an application to convert to a permanent Category I code; or submit an
application for a five-year extension of Category III status. If we are unable to maintain our existing codes or obtain new
permanent Category I codes for procedures using our iStent products, or obtain new reimbursement codes for our other products
in development, we will be subject to significant pricing pressure, which could harm our business, results of operations, financial
condition and prospects. Additionally, if we do obtain a permanent Category I Code for procedures using our iStent products,
national reimbursement levels for such procedures may be adjusted at that time. Reimbursement levels may be decreased or
significantly decreased, which would have a material adverse effect on our business, financial condition and operating results.
Physicians are typically paid separately from the facility for surgical procedures involving the iStent . Unlike the facility
payment associated with the CPT code that describes iStent insertion, there is no published Medicare payment schedule at the
national level, and the physician payment rate is left to the discretion of the individual MAC. In order to adopt a new procedure,
one of the factors that the surgeon evaluates is whether or not payment for the procedure adequately covers the surgeon’s time. As
with the facility payment, the incremental payment the physician receives for inserting the iStent device plays a role in a
surgeon’s decision to adopt the technology. Accordingly, changes in the payment the physician receives could affect the extent to
which physicians recommend the iStent procedure to patients, which could have a material adverse effect on our business,
financial condition and operating results.
Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the
United States and in international markets. Coverage decisions may depend upon clinical and economic standards that disfavor
new products when more established or lower cost therapeutic alternatives are already available or subsequently become
available. Adequate coverage and reimbursement from governmental and commercial payors are critical to new product
acceptance. Third‑party coverage and reimbursement for our products or any of our product candidates for which we may receive
regulatory approval may not be available or adequate in either the United States or international markets.
If
our
competitors
are
better
able
to
develop
and
market
products
that
are
safer,
more
effective,
less
costly
or
otherwise
more
attractive
than
the
iStent
or
any
new
products
that
we
may
develop,
our
commercial
opportunity
may
be
reduced
or
eliminated.
The medical device industry is highly competitive and subject to rapid and profound technological, market and product-
related changes. Our success depends, in part, upon our ability to maintain a competitive position in the development of MIGS
products. Our competitors, medical companies, academic and research institutions or others could develop new drugs, therapies,
medical devices or surgical procedures to treat glaucoma that could render our products obsolete.
Until recently, our iStent was the only MIGS device approved for sale in the United States by the FDA. Thus, we had for
several years commercialized the iStent in the United States without any direct MIGS competitors. Alcon, Inc. (which acquired
Transcend Medical, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its CyPass
suprachoroidal implant, a competitive MIGS device, in 2016. The CyPass device is indicated for use in conjunction with cataract
surgery for the reduction of IOP in adult patients with mild to moderate primary open-angle glaucoma. Also in 2016, Allergan plc
(which acquired AqueSys, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its Xen
Glaucoma Treatment System, a competitive MIGS device, for use in the U.S. The Xen device is indicated for the management of
refractory glaucoma, where previous surgical treatment has failed or in patients with primary open angle glaucoma, and
pseudoexfoliative or pigmentary glaucoma with open angles that are unresponsive to maximum tolerated medical therapy. We are
aware of several other companies, including Santen Pharmaceutical Co., Ltd. (which recently acquired InnFocus, Inc., a MIGS
competitor), Istar Medical SA and Ivantis Inc. that are conducting FDA‑approved investigational device exemption (IDE) clinical
trials or have filed for regulatory approval of MIGS devices. If these MIGS products, or other products that may be developed,
receive regulatory approval, we will have additional direct MIGS competitors. These new MIGS products
®
®
33
Table of Contents
could achieve greater commercial acceptance or demonstrate better safety or effectiveness, clinical results, ease of use or lower
costs than our iStent or other products under development, which may reduce demand for our primary product, the iStent , as well
as for our products in development. Demand for the iStent or our future products may decline when such products and
technologies are introduced, and our business may be harmed.
We also compete with the use of medication therapy for treating glaucoma and with manufacturers of medical devices
used in surgical therapy procedures for treating glaucoma, including Alcon, Inc., Johnson & Johnson (through its acquisition of
Abbott Medical Optics Inc.), Allergan plc, STAAR Surgical Company, Lumenis Ltd., NeoMedix, Inc., New World Medical, Inc.,
Iridex Corporation and Ellex Medical Lasers Limited. Alcon, Inc. and Johnson & Johnson (through its acquisition of Abbott
Medical Optics Inc.) are the leading manufacturers of aqueous shunts, and Alcon, Inc. also markets the EX‑PRESS Glaucoma
Filtration Device. Lumenis Ltd. is a leading manufacturer of selective laser trabeculoplasty equipment. Neomedix, Inc. markets
an electrosurgical device. New World Medical, Inc. offers a surgical device. Iridex Corporation offers laser systems. And, Ellex
Medical Lasers Limited markets a canaloplasty device that some physicians employ to lower intraocular pressure in glaucoma.
Many of our current and potential competitors (including MIGS competitors) are large publicly traded companies or
divisions of publicly traded companies and have several competitive advantages, including:
·
·
·
·
·
greater financial and human resources for product development, sales and marketing and patent litigation;
significantly greater name recognition;
longer operating histories;
established relationships with healthcare professionals, customers and third‑party payors;
additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or
incentives;
· more established sales and marketing programs and distribution networks; and
·
greater experience in conducting research and development, manufacturing, clinical trials, preparing regulatory
submissions and obtaining regulatory clearance or approval for drug and device products and marketing approved
products.
As discussed above, the Xen device is being marketed by Allergan plc, a publicly traded company, and the CyPass is
being marketed by Alcon, Inc., which is a division of Novartis International AG, a publicly traded multinational pharmaceutical
company. InnFocus, Inc. was acquired by Santen Pharmaceutical Co., Ltd., a publicly traded multinational pharmaceutical
company dedicated to the ophthalmic field. As a result of these transactions, we are competing directly against other MIGS
providers that have the efficiencies and advantages identified above.
The
training
required
for
surgeons
to
use
our
products
could
reduce
the
market
acceptance
of
our
products.
As with any new method or technique, ophthalmic surgeons must undergo a thorough training program before they are
qualified to perform procedures using our products. Surgeons could experience difficulty with the technique necessary to
successfully insert our products, including intraoperative gonioscopy, and not achieve the technical competency necessary to be
qualified to insert our devices. Also, even after successfully completing the training program, the physicians could experience
difficulty inserting our products and cease utilizing them or limit their use significantly in practice. Surgeons may also experience
greater success or competency with a competitive MIGS product.
We could also experience difficulty meeting expected levels of ophthalmic surgeons who complete our training
program. This could happen due to less demand than expected, preference for competitive MIGS products, the length of time
necessary to train each surgeon being longer than expected, the capacity of our sales representatives to train surgeons being less
than anticipated, or if we are unable to sufficiently increase our sales organization. All of these events would lead to fewer trained
ophthalmic surgeons qualified to insert our products, which could negatively impact our operating and financial results.
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Table of Contents
Ophthalmic
surgeons
may
not
use
our
products
if
they
do
not
believe
they
are
safe,
efficient,
effective
and
preferable
alternatives
to
other
treatment
solutions
in
the
market.
If
subsequent
or
continuing
patient
studies
on
the
iStent,
or
patient
outcomes,
demonstrate
results
that
are
inferior
to
or
inconsistent
with
our
existing
data,
our
sales
could
be
adversely
impacted.
Additionally,
ophthalmic
surgeons
not
completing
the
iStent
training
program
may
nevertheless
elect
to
perform
iStent
procedures
and
experience
inferior
clinical
outcomes.
We believe that ophthalmic surgeons will not use our products unless they conclude that our products provide a safe,
efficient, effective and preferable alternative to currently available treatment options. If longer‑term patient studies or clinical
experience indicate that treatment with our products is less effective, less efficient or less safe than our current data suggest, our
sales would be harmed, and we could be subject to significant liability. Further, unsatisfactory patient outcomes or patient injury
could cause negative publicity for our products, particularly in the early phases of product introduction for our products currently
under development. In addition, physicians may be slow to adopt our products if they perceive liability risks arising from their
use. It is also possible that as our products become more widely used, latent defects could be identified, creating negative
publicity and liability problems for us and adversely affecting demand for our products. Physicians may also conclude that the
products offered by our MIGS competitors have greater efficacy than our products, which could result in a decline in our sales.
Ophthalmic surgeons may also determine not to use our products due to other potential risks to patients. For example,
the iStent is rated “MRI Conditional” by the American Society for Testing and Materials. This means that a patient implanted
with the iStent can be scanned via magnetic resonance imaging (MRI) only under the following conditions specified on the
product label: static magnetic field of 3‑Tesla or less, and maximum spatial magnetic field gradient of 4,000‑Gauss/cm or less.
Therefore, it may not be safe for iStent recipients to undergo MRIs in environments that do not match these specified conditions.
Physicians may choose not to implant iStents because of this limitation, which could have an adverse impact on our net sales
growth and financial results.
Additionally, inferior patient outcomes, or patient injury, may result if untrained or unqualified ophthalmic surgeons
elect to perform iStent procedures. Although our sales representatives manage the training program for ophthalmic surgeons to
become qualified to insert the iStent in combination with cataract surgery, once training is completed the surgeon and/or surgical
facility that the surgeon utilizes are cleared to purchase and maintain an iStent supply. There is a risk that untrained or
unqualified ophthalmic surgeons could gain access to iStent devices from a facility’s inventory and conduct iStent procedures
without having received qualified status from us. If performing iStent procedures by unqualified ophthalmic surgeons were to
become pervasive, this could raise the risk of complications and inferior clinical outcomes, which could result in negative patient
experiences or experiences being published and damaging our reputation and that of the iStent . This could result in lower
penetration and utilization by ophthalmic surgeons and could have a material adverse effect on our net sales growth, expected
operating results and financial condition.
If an increasing number of ophthalmic surgeons do not continue to adopt the use of our products, our operating and
financial results will be negatively impacted.
Product
liability
suits
brought
against
us
could
cause
us
to
incur
substantial
liabilities,
limit
sales
of
our
existing
products
and
limit
commercialization
of
any
products
that
we
may
develop.
If our product offerings, including the iStent , are defectively designed or manufactured, contain defective components,
or are used or deployed improperly, or if someone claims any of the foregoing, whether or not such claims are meritorious, we
may become subject to substantial and costly litigation. Any product liability claims brought against us, with or without merit,
could divert management’s attention from our business, be expensive to defend, result in sizable damage awards against us,
damage our reputation, increase our product liability insurance rates, prevent us from securing continuing coverage, or prevent or
interfere with commercialization of our products. In addition, we may not have sufficient insurance coverage for all future claims.
Product liability claims brought against us in excess of our insurance coverage would likely be paid out of cash reserves, harming
our financial condition and results of operations.
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Table of Contents
Operating
results
could
be
unpredictable
and
may
fluctuate
significantly
from
quarter
to
quarter,
which
could
adversely
affect
our
business,
financial
condition,
results
of
operations
and
the
trading
price
of
our
common
stock.
Our net sales from the sale of the iStent may experience volatility due to a number of factors, many of which are beyond
our control, including:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
our ability to drive increased sales of our products;
our ability to establish and maintain an effective and dedicated sales organization;
fluctuations in the demand for our products;
pricing pressure applicable to our products, including adverse third‑party coverage and reimbursement outcomes
and competitor pricing;
results of clinical research and trials on our products;
fluctuations in the number of cataract procedures performed by our customers, which could decrease significantly
during holiday seasons and summer months, when significant numbers of physicians and patients may schedule
vacations;
timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
deferrals of customer orders in anticipation of the introduction of new products or product enhancements by us;
regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;
interruption in the manufacturing or distribution of our products;
the ability of our suppliers to timely provide us with an adequate supply of product components;
the effect of competing technological, industry and market developments;
changes in our ability to obtain regulatory clearance or approval for our products or to obtain or maintain our CE
Certificates of Conformity for our products;
variances in the sales terms, timing or volume of customer orders from period to period;
the length of our sales cycle, which varies and may be unpredictable; and
our ability to expand the geographic reach of our sales and marketing efforts.
As a result, you should not rely on our results in any past period as an indication of future results and you should
anticipate that fluctuations in our quarterly and annual operating results may continue and could generate volatility in the price of
our common stock. We believe that quarterly comparisons of our financial results should not be relied upon as an indication of
our future performance.
If
we
fail
to
manage
our
anticipated
growth
effectively,
our
business
could
suffer.
Since the commercial launch of the iStent in July 2012, we have seen significant period‑to‑period growth in our
business. We anticipate that this growth will continue in the near term as the iStent continues to gain market acceptance and we
develop and introduce new products. Not only do we expect this growth to continue, but we must continue to grow in order to
meet our business and financial objectives. However, continued growth may create numerous challenges, including:
·
·
·
·
new and increased responsibilities for our management team;
increased pressure on our operating, financial and reporting systems;
increased pressure from our competitors;
increased pressure to anticipate and satisfy market demand;
36
Table of Contents
·
additional manufacturing capacity requirements;
strain on our ability to source a larger supply of components that meet our required specifications on a timely basis;
·
· management of an increasing number of relationships with our customers, suppliers and other third parties;
·
·
entry into new international territories with unfamiliar regulations and business approaches, and
the need to hire, train and manage additional qualified personnel.
If we fail to manage any of the above challenges effectively, our business may be harmed.
Our
future
growth
depends
on
our
ability
to
retain
members
of
our
senior
management
and
other
key
employees.
If
we
are
unable
to
retain
or
recruit
qualified
personnel
for
growth,
our
business
results
could
suffer.
We have benefited substantially from the leadership and performance of our senior management as well as certain key
employees. For example, our chief executive officer, as well as other key members of our senior management, has experience
successfully developing novel technologies and scaling early‑stage medical device companies to achieve profitability. Our
success will depend on our ability to retain our current management and key employees, and to attract and retain qualified
personnel in the future. Competition for senior management and key employees in our industry is intense and we cannot
guarantee that we will be able to retain our personnel or attract new, qualified personnel. The loss of services of certain members
of our senior management or key employees could prevent or delay the implementation and completion of our strategic
objectives, or divert management’s attention to seeking qualified replacements. Each member of senior management as well as
our key employees may terminate employment without notice and without cause or good reason. The members of our senior
management are not subject to non‑competition agreements. Accordingly, the adverse effect resulting from the loss of certain
members of senior management could be compounded by our inability to prevent them from competing with us.
In addition to competing for market share for our products, we also compete against our competitors for personnel,
including qualified sales representatives that are necessary to grow our business. Also, we compete with universities and research
institutions for scientific and clinical personnel that are important to our research and development efforts.
We also rely on consultants and advisors in our research, operations, clinical and commercial efforts to implement our
business strategies. Our consultants and advisors may be employed by employers other than us and may have commitments under
consulting or advisory contracts with other entities that may limit their availability to us.
Our strategic plan requires us to continue growing our sales, marketing, clinical and operational infrastructure in order to
generate, and meet, the demand for our products. If we fail to retain or attract these key personnel, we could fail to take advantage
of the market for our iStent technologies and our business, financial condition and operating results could be adversely affected.
Our
iDose
implant
will
be
regulated
as
a
drug
and
be
subject
to
a
different
regulatory
approval
process
than
our
other
products
in
development.
iDose
is
in
early
stages
of
development
and
may
never
be
commercialized.
As a drug delivery implant, iDose will be subject to a regulatory approval process similar to that for pharmaceuticals.
This process is often a more lengthy, costly and complex process than obtaining regulatory approval for a medical device. The
future success of our iDose product depends on our ability to complete clinical trials, and will require significant development
activities, clinical trials, regulatory approvals, and substantial additional investment.
This development program may not lead to a commercially viable product for several reasons. For example, we may fail
to demonstrate safety and efficacy in pre‑clinical tests or clinical trials, or we may have inadequate financial or other resources to
pursue drug development efforts. From time to time, we may establish and announce certain development goals for our iDose
product candidate; however, it is difficult to predict accurately if and when we will achieve these goals. We may be unsuccessful
in advancing this drug delivery implant into clinical testing or in obtaining FDA approval, and our long‑term business prospects
could be harmed.
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Table of Contents
Our
business
requires
substantial
capital
and
operating
expenditures
to
operate
and
grow.
Although we raised net proceeds of approximately $113.6 million from our IPO and generate net sales from our
approved products, we may nevertheless need to raise substantial additional capital in the future to:
·
·
·
·
·
·
expand our sales and marketing organization in the United States and internationally;
fund our operations, clinical trials and commercialization efforts for new products, if any such products receive
regulatory approval for commercial sale;
scale‑up our manufacturing operations;
pursue additional research and development;
enforce or defend, in litigation or otherwise, our patent or other intellectual property rights against infringement,
misappropriation or other violation by third parties or any claims that we infringe or have otherwise violated
third‑party patent or other intellectual property rights; and
acquire companies or in‑license products or intellectual property.
We believe that our available cash, cash equivalents, investment balances and interest we earn on these balances and
cash generated from sales of our iStent products will be sufficient to fund our operations and satisfy our liquidity requirements for
at least the next 12 months from the date our consolidated financial statements for the year ended December 31, 2017 are made
publicly available. However, our future funding requirements will depend on many factors, including:
·
·
·
·
·
·
·
·
·
·
the scope, rate of progress and cost of our clinical trials and other research and development activities;
the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual
property rights;
the cost of asserting or defending, in litigation or otherwise, our patent or other intellectual property rights against
infringement, misappropriation or other violation by third parties or any claims that we infringe or have otherwise
violated third‑party patent or other intellectual property rights;
the terms and timing of any collaborative, licensing and other arrangements that we may establish;
the cost and timing of regulatory approvals;
the cost and timing of establishing sales, marketing and distribution capabilities;
the cost of establishing clinical and commercial supplies of our products and any products that we may develop;
the effect of competing technological and market developments;
licensing technologies for future development; and
the extent to which we acquire or invest in businesses, products and technologies, although we currently have no
commitments or agreements relating to any of these types of transactions.
If we raise additional funds through further issuances of equity or issuances of convertible debt securities, our existing
stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges
superior to those of holders of our common stock. Any debt financing obtained by us in the future would likely be senior to our
common stock, would likely cause us to incur interest expense, and could involve restrictive covenants relating to our capital
raising activities and other financial and operational matters, which may increase our expenses and make it more difficult for us to
obtain additional capital and to pursue business opportunities, including potential acquisitions. We may also be required to secure
any such debt obligations with some or all of our assets.
We cannot assure you that we will be able to obtain additional financing on terms favorable to us, if at all. If we are
unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend
38
Table of Contents
capital on projects that are not successful, our ability to continue to support our business growth and to respond to business
challenges could be significantly limited, or we may even have to scale back our operations.
We
may
enter
into
acquisitions,
collaborations,
in‑‑licensing
agreements,
joint
ventures,
alliances
or
partnerships
with
third
parties
that
fail
to
result
in
a
commercial
product
or
net
sales.
We may enter into acquisitions, collaborations, in‑licensing agreements, joint ventures, alliances, partnerships or
undertake one or more of these transactions in order to retain our competitive position within the marketplace or to expand into
new markets. However, we cannot assure you that we would be able to successfully complete any acquisition we choose to
pursue, or that we would be able to successfully integrate any acquired business, product or technology in a cost‑effective and
non‑disruptive manner. If we were unable to integrate any acquired businesses, products or technologies effectively, our business
would likely suffer.
Failure
to
protect
our
information
technology
infrastructure
against
cyber-based
attacks,
network
security
breaches,
service
interruptions
or
data
corruption
could
materially
disrupt
our
operations
and
adversely
affect
our
business
and
operating
results.
The efficient operation of our business depends on our information technology systems. We rely on our information
technology systems to effectively manage sales and marketing data, accounting and financial functions, inventory management,
product development tasks, clinical data, customer service and technical support functions. Our information technology systems
are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, cyber-based
attacks, attacks by computer viruses or hackers, power losses, computer system or data network failures, security breaches and
data corruption. In addition, a variety of our software systems are cloud‑based data management applications, hosted by
third‑party service providers whose security and information technology systems are subject to similar risks.
The failure of either our or our service providers’ information technology could disrupt our entire operation or result in
decreased sales, increased overhead costs and product shortages, all of which could have a material adverse effect on our
reputation, business, financial condition and operating results.
We
cannot
be
certain
that
our
net
operating
loss
tax
carryforwards
will
be
available
to
offset
future
taxable
income.
As of December 31, 2017, we had net operating loss carryforwards of approximately $125.7 million for U.S. federal
income tax purposes, approximately $94.2 million of net operating loss carryforwards for state income tax purposes and
approximately $18.0 million of net operating loss carryforwards for foreign purposes. The federal net operating loss
carryforwards begin to expire in 2018 and $2.5 million of the state net operating loss carryforwards expired in 2017 and the
remainder will begin to expire in 2028. The foreign net operating loss carryforwards will begin to expire no earlier than 2023, if
not utilized sooner. At December 31, 2017, we had federal and state research and development carryforwards of approximately
$7.5 million and $7.0 million, respectively, which begin to expire in 2021 for federal purposes and carry over indefinitely for state
purposes. We have recorded a full valuation allowance against these tax attributes because we believe that uncertainty exists with
respect to the future realization of the tax attributes as well as with respect to the amount of the tax attributes that will be available
in future periods. To the extent available, we intend to use these net operating loss carryforwards to offset future taxable income
associated with our operations. There can be no assurance that we will generate sufficient taxable income in the carryforward
period to utilize any remaining net operating loss carryforwards before they expire.
In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the Code) contains rules that limit for U.S.
federal income tax purposes the ability of a corporation that undergoes an “ownership change” to utilize its net operating losses
(and certain other tax attributes) existing as of the date of such ownership change. Under these rules, a corporation is treated as
having had an “ownership change” if there is more than a 50% increase in stock ownership by one or more “five percent
shareholders,” within the meaning of Section 382 of the Code, during a rolling three‑year period. We believe a portion of our
existing net operating losses are subject to limitations arising from previous ownership changes, and if we undergo an ownership
change, our ability to utilize our net operating losses to offset future taxable income could be further limited, which could have a
negative effect on our liquidity. For these reasons, we may not be able to utilize a material portion of our net operating losses,
even if we continue to achieve profitability.
39
Table of Contents
Risks Related to the Regulatory Environment
Our
failure
to
obtain
and
maintain
regulatory
clearances
or
approvals
on
a
timely
basis,
or
at
all,
could
prevent
us
from
commercializing
our
current
or
pipeline
products
in
the
U.S.,
which
could
severely
impede
our
ability
to
grow
our
business
and/or
harm
our
business,
financial
condition
and
operating
results.
The iStent is classified as a medical device. As a result, we are subject to extensive government regulation in the United
States by the FDA and state regulatory authorities and by foreign regulatory authorities in the countries in which we conduct
business. These regulations relate to, among other things, research and development, design, testing, clinical trials,
manufacturing, clearance or approval, environmental controls, safety and efficacy, labeling, advertising, promotion, pricing,
recordkeeping, reporting, import and export, post‑approval studies and the sale and distribution of the iStent and our other
products in development.
In the United States, before we can market a new medical device, or a new use of, new claim for, or significant
modification to, an existing product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug and
Cosmetic Act (FDCA) or approval of a premarket approval application (PMA) from the FDA, unless an exemption applies. The
process of obtaining PMA approval, which was required for the iStent , is much more costly and uncertain than the 510(k)
clearance process. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent”
to a device legally on the market, known as a “predicate” device, in order to clear the proposed device for marketing. To be
“substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same
technological characteristics as the predicate device or have different technological characteristics and not raise different
questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial
equivalence. In the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended
use based, in part, on extensive data, including, but not limited to, technical, pre‑clinical, clinical trial, manufacturing and labeling
data. The PMA process is typically required for devices for which the 510(k) process cannot be used and that are deemed to pose
the greatest risk.
To the extent clinical data is required to support a 510(k) clearance or PMA approval process, clinical testing must be
conducted in compliance with FDA requirements pertaining to human research. Depending on the risk posed by a device, we may
be required to obtain an IDE from the FDA prior to beginning any clinical trial; similar notifications are required in other
countries. Among other requirements, we must obtain approval from an independent Institutional Review Board (IRB) before
such studies may begin. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the United States
for any new devices we intend to market in the United States. If the IDE application is approved, there can be no assurance the
FDA will determine that the data derived from the trials support the safety and effectiveness of the device or warrant the
continuation of clinical trials. We must also comply with other FDA requirements such as obtaining informed consent,
monitoring, record-keeping, reporting and the submission of information regarding certain clinical trials to a public database
maintained by the National Institutes of Health. Compliance with these requirements can require significant time and resources
and if the FDA determines that we have not complied with such requirements, it may refuse to consider the data to support our
applications or initiate enforcement actions.
Modifications to products that are approved through a PMA application generally need FDA approval. Similarly, some
modifications made to products cleared through a 510(k) may require a new 510(k). The FDA’s 510(k) clearance process usually
takes from three to 12 months, but may last longer. The process of obtaining a PMA generally takes from one to three years, or
even longer, from the time the PMA is submitted to the FDA until an approval is obtained. Any delay or failure to obtain
necessary regulatory approvals would have a material adverse effect on our business, financial condition and prospects.
The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
·
·
our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that
our products are safe or effective for their intended uses;
the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our
clinical trials or the interpretation of data from pre‑clinical studies or clinical trials;
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·
·
·
·
·
·
failure of clinical sites to conduct the clinical trial in accordance with applicable regulatory requirements or our
clinical protocols;
serious and unexpected adverse effects experienced by participants in our clinical trials;
the data from our pre‑clinical studies and clinical trials may be insufficient to support clearance or approval, where
required;
our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;
the manufacturing process or facilities we use may not meet applicable requirements; and
the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change
significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval.
The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug
products is also subject to extensive regulation by the FDA and other regulatory authorities in the United States and other
countries, which regulations differ from country to country. We are not permitted to market any drug product candidate in the
United States until we receive FDA approval of a NDA or other appropriate drug product application. Prior to submitting a
marketing application, human clinical studies are required. In order for clinical studies of a new drug to commence in the United
States, an Investigational New Drug (IND) application must be filed with the FDA; similar notifications are required in other
countries. Informed consent also must be obtained from study participants. In general, studies may begin in the United States
without specific approval by the FDA after a 30‑day review period has passed. However, the FDA may prevent studies from
moving forward, and may suspend or terminate studies once initiated. Studies are also subject to review by an independent
Institutional Review Board (IRB) responsible for overseeing studies at particular sites and protecting human research study
subjects. An IRB may prevent a study from beginning or suspend or terminate a study once initiated. Furthermore, the FDA may
suggest amendments to any study protocol that may be necessary for the results to support approval. These amendments and the
associated discussions with the FDA may further delay study initiation and, as a result, approval of our drug product. Generally,
studies also may not commence until after receiving approval by an independent IRB. The IRB is responsible for overseeing
studies at particular sites and protecting human research study subjects. An IRB may disapprove a study or suspend or terminate
an approved study once initiated.
The FDA or other applicable foreign regulatory bodies can delay, limit or deny approval of a drug candidate for many
reasons, including, but not limited to, the following:
·
·
·
·
·
·
·
·
our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that the drug
candidate is safe and effective for the requested indication;
the FDA’s or the applicable foreign regulatory body’s disagreement with design or implementation of our clinical
trials or the interpretation of data from preclinical studies or clinical trials;
serious and unexpected drug‑related side effects experienced by participants in our clinical trials or by individuals
using drugs similar to our product candidates;
our inability to demonstrate that the clinical and other benefits of the drug candidate outweigh any safety or other
perceived risks;
the FDA’s or the applicable foreign regulatory body’s requirement for additional preclinical or clinical studies;
the FDA’s or the applicable foreign regulatory body’s non‑approval of the drug candidate’s chemistry,
manufacturing or controls or labeling;
the FDA’s or the applicable foreign regulatory body’s failure to approve the manufacturing processes or facilities of
third‑party manufacturers; or
the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change
significantly in a manner rendering our clinical data or regulatory filings insufficient for approval.
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Further, we are subject to laws directed at preventing fraud and abuse, which subject our marketing, training and other
practices to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or
their contractors often conduct routine audits and request customer records and other documents to support claims submitted for
payment of services rendered. Government agencies or their contractors also periodically open investigations and obtain
information from healthcare providers. Violations of federal and state regulations can result in severe criminal, civil and
administrative penalties and sanctions, including debarment, suspension or exclusion from Medicare, Medicaid and other
government reimbursement programs, any of which would have a material adverse effect on our business.
Legislative
or
regulatory
reform
of
the
healthcare
system
may
affect
our
ability
to
sell
our
products
profitably
.
In the United States and in certain foreign jurisdictions, there have been a number of legislative and regulatory proposals
to change the regulatory and healthcare systems in ways that could impact our ability to sell our products profitably, if at all. In
the United States in recent years, new legislation has been proposed and adopted at the federal and state levels that is effecting
major changes in the healthcare system. In addition, new regulations and interpretations of existing healthcare statutes and
regulations are frequently adopted.
For example, in 2011, the FDA announced a Plan of Action to modernize and improve the FDA’s premarket review of
medical devices, and has implemented, and continues to implement, reforms intended to improve the timeliness and predictability
of the premarket review process. In addition, as part of the Food and Drug Administration Safety and Innovation Act of 2012,
Congress enacted several reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions
that will further affect medical device regulation both pre‑and post‑approval.
Further, in December 2016, Congress enacted the 21st Century Cures Act (Cures Act), which contained several
provisions related to the review and approval of new medical technologies. Along with other changes, the Cures Act established a
statutory program for “breakthrough” devices. The FDA will apply additional resources to help speed the approval or clearance of
devices that are designated as breakthrough devices. The Cures Act also included provisions related to the “least burdensome”
principle with respect to demonstrating substantial equivalence or reasonable assurance of safety and effectiveness and expanded
the number of patients that could be treated by a device approved under a Humanitarian Device Exemption, among other
provisions.
Similarly, in August 2017, Congress enacted the FDA Reauthorization Act of 2017 (FDARA). FDARA reauthorized the
FDA to collect device user fees, including a new user fee for de novo classification requests, and contained substantive
amendments to the device provisions of the FDCA. Among other changes, FDARA required that the FDA update and revise its
processes for scheduling inspections of device establishments, communicating about those inspections with manufacturers and
providing feedback on the manufacturer’s responses to Form 483s. The statute also required that the FDA study the impact of
device servicing, including third party servicers, and creates a new process for device sponsors to request classification of
accessory devices as part of the PMA application for the parent device or to request a separate classification of accessory devices.
If, as a result of legislative or regulatory healthcare reform, we cannot sell the iStent (or our other products in
development, if approved) profitably, our business would be harmed. In addition, any change in the laws or regulations that
govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to
obtain clearance or approval for new products, or to produce, market and distribute existing products.
In March 2010, the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (ACA) was
signed into law. While the goal of health care reform is to expand coverage to more individuals, it also involves increased
government price controls, additional regulatory mandates and other measures designed to constrain medical costs. The ACA
substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the
quality of healthcare items and services and significantly impacts the medical device industry. Among other things, the ACA:
·
imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in
the United States, with limited exceptions (described in more detail below), which, under the PATH Act, was
suspended from January 1, 2016 to December 31, 2017, and, pursuant to HR 195 passed on January 22, 2018, was
further suspended through December 31, 2019;
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·
·
·
establishes a new Patient‑Centered Outcomes Research Institute to oversee and identify priorities in comparative
clinical effectiveness research in an effort to coordinate and develop such research;
implements payment system reforms including a national pilot program on payment bundling to encourage
hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare
services through bundled payment models; and
creates an independent payment advisory board that will submit recommendations to Congress to reduce Medicare
spending if projected Medicare spending exceeds a specified growth rate.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011,
the Budget Control Act of 2011 was signed into law, which, among other things, created the Joint Select Committee on Deficit
Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted
deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to
several government programs. This includes reductions to Medicare payments to providers of up to 2% per fiscal year, which
went into effect on April 1, 2013 and, due to subsequent legislation, will remain in effect through 2025 unless additional
Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among
other things, further reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations
period for the government to recover overpayments to providers from three to five years. On April 16, 2015, President Obama
signed into law the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things, repealed the formula by
which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a
new system of incentive payments scheduled to begin in 2019 that are based on various performance measures and physicians’
participation in alternative payment models such as accountable care organizations.
The medical device excise tax moratorium imposed by the PATH Act for 2016 and 2017 favorably impacted our gross
profit margin in 2017, and will continue to do so through 2019, based upon its recent extension. However, this impact will not
continue in 2020 when the tax is automatically reinstated, absent further legislation, as the iStent was subject to this excise tax
prior to the moratorium and the other products in our pipeline potentially will be subject to this tax. There are no assurances that
our business will not be materially adversely affected by the current, or possible future additional tax, provisions implemented
under healthcare reform or appropriate legislation. It is also possible that legislation may be introduced and passed by Congress
repealing the ACA in whole or in part and signed into law by President Trump. Because of the continued uncertainty about the
likelihood or extent of a potential repeal of that legislation, we cannot quantify or predict with any certainty the likely impact of a
repeal of ACA on our business model, prospects, financial condition or results of operations.
Additional state and federal healthcare reform measures may be adopted in the future, any of which could limit the
amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand
for our products or product candidates or additional pricing pressures.
In May 2017, the EU adopted a new Medical Devices Regulation (EU) 2017/745 (MDR), which will repeal and replace
the Medical Device Directive (MDD). The MDR will take effect beginning May 25, 2020. The MDR does not set out a
substantially different regulatory system, but provides for stricter controls of medical devices, including, among other things,
strengthening of conformity assessment procedures, increased requirements as regards clinical data for devices and pre-market
regulatory review of high-risk devices. The MDR also provides for greater control over conformity assessment notified bodies
and their standards, increased transparency, more robust device vigilance requirements and clarification of the rules for clinical
investigations. Under provisions that govern the transition period until the MDR takes effect, medical devices with notified body
certificates issued under the MDD prior to May 26, 2020 may continue to be marketed and sold as long as those certificates are
valid, until May 27, 2024 at the latest. After the expiration of any applicable transitional period, only devices that have been CE
marked under the MDR may be placed on the market in the EU. If, as a result of these regulatory changes, we cannot obtain or
maintain the approvals necessary to sell the iStent or our other products (including pipeline products, if approved) in the EU, our
business would be harmed.
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The
clinical
trial
process
required
to
obtain
regulatory
approvals
is
lengthy
and
expensive
with
uncertain
outcomes,
and
could
result
in
delays
in
new
product
introductions.
Because of the indication we chose to pursue for the iStent , the FDA required that we seek PMA approval rather than
clearance under the 510(k) process. In order to obtain PMA and FDA approval for a product, the sponsor must conduct
well‑controlled clinical trials designed to assess the safety and efficacy of the product candidate. We also will be required to
conduct clinical trials to obtain approval of products using the iDose drug delivery system, new indications for the iStent or new
product candidates. Conducting clinical trials is a complex and expensive process, can take many years, and outcomes are
inherently uncertain. We incur substantial expense for, and devote significant time to, clinical trials but cannot be certain that the
trials will ever result in commercial sales. We may suffer significant setbacks in clinical trials, even after earlier clinical trials
showed promising results, and failure can occur at any time during the clinical trial process. Any of our products may malfunction
or may produce undesirable adverse effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials.
We, the clinical trial investigators, the reviewing IRB, the FDA, or another regulatory authority may suspend or terminate clinical
trials at any time to avoid exposing trial participants to unacceptable health risks.
Successful results of pre‑clinical studies are not necessarily indicative of future clinical trial results, and predecessor
clinical trial results may not be replicated in subsequent clinical trials. Additionally, the FDA may disagree with our interpretation
of the data from our pre‑clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to
prove safety or efficacy, and may require us to pursue additional pre‑clinical studies or clinical trials, which could further delay
the clearance or approval of our products. The data we collect from our pre‑ clinical studies and clinical trials may not be
sufficient to support FDA clearance or approval, and if we are unable to demonstrate the safety and efficacy of our future
products in our clinical trials, we will be unable to obtain regulatory clearance or approval to market our products.
In addition, we may estimate and publicly announce the anticipated timing of the accomplishment of various clinical,
regulatory and other product development goals, which are often referred to as milestones. These milestones could include the
right to affix the CE Mark in the European Union; the submission to the FDA of an IDE application, or an IND application, to
commence a clinical trial for a new product candidate; the enrollment of patients in clinical trials; the release of data from clinical
trials; and other clinical and regulatory events. The actual timing of these milestones could vary dramatically compared to our
estimates, in some cases for reasons beyond our control. We cannot assure you that we will meet our projected milestones and if
we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and, as a result,
our stock price may decline.
Clinical trials are necessary to support PMA applications for our device product candidates and may be necessary to
support PMA supplements for modified versions of our marketed device products. This would require the enrollment of large
numbers of suitable subjects, which may be difficult to identify, recruit and maintain as participants in the clinical trial. The
clinical trials supporting the PMA application for the iStent involved 289 randomized patients. We conducted an extended follow-
up post-approval study with 108 patients from the pivotal study, and are currently conducting a post-approval study of 180
patients who will be implanted with the iStent in combination with cataract surgery and then monitored for three years thereafter.
If the FDA were to require us to submit data on a greater number of patients or a longer follow‑up period, we would incur
additional expenses that could be significant. Adverse outcomes in the post‑approval studies could also result in restrictions or
withdrawal of approval of the PMA.
Before we can obtain regulatory approval for any drug product candidate, such as our iDose drug delivery implant, we
must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA and other
regulatory agencies. Clinical trials of drug product candidates are expensive and take years to complete, and the outcome of such
trials is uncertain. We completed a U.S. IND Phase II clinical trial of iDose Travoprost in 2017 and we intend to commence U.S.
Phase III clinical trials in the first half of 2018. Our ability to conduct additional iDose clinical trials depends on many factors,
including the data obtained in the Phase III clinical trials.
Delays in the commencement or completion of clinical trials or testing could significantly affect our product
development costs. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll an
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adequate number of patients in a timely manner or be completed on schedule, if at all. The commencement and completion of
clinical trials can be delayed or terminated for a number of reasons, including delays or failures related to:
·
·
·
the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical
studies;
obtaining regulatory approval to commence a clinical trial;
reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and trial sites,
the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and
trial sites;
· manufacturing sufficient quantities of a product candidate for use in clinical trials;
·
·
·
·
·
·
obtaining IRB or ethics committees approval to conduct a clinical trial at each prospective site;
recruiting and enrolling patients and maintaining their participation in clinical trials;
having clinical sites observe trial protocol or continue to participate in a trial;
addressing any patient safety concerns that arise during the course of a clinical trial;
addressing any conflicts with new or existing laws or regulations; and
adding a sufficient number of clinical trial sites.
Patient enrollment in clinical trials and completion of patient follow‑up depend on many factors, including the size of
the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the eligibility criteria for the
clinical trial, patient compliance, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages
of the product being studied in relation to other available therapies, including any new treatments that may be approved for the
indications we are investigating. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol
requires them to undergo extensive post‑treatment procedures or follow‑up to assess the safety and efficacy of a product
candidate, or they may be persuaded to participate in contemporaneous clinical trials of a competitor’s product candidate. In
addition, patients participating in our clinical trials may drop out before completion of the trial or suffer adverse medical events
unrelated to our products. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may delay
commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial and delays, or result in the
failure of the clinical trial.
We could also encounter delays if the FDA concluded that our financial relationships with our principal investigators
resulted in a perceived or actual conflict of interest that may have affected the interpretation of a study, the integrity of the data
generated at the applicable clinical trial site or the utility of the clinical trial itself. Principal investigators for our clinical trials
may serve as scientific advisors or consultants to us from time to time and receive cash compensation and/or stock options in
connection with such services. If these relationships and any related compensation to or ownership interest by the clinical
investigator carrying out the study result in perceived or actual conflicts of interest, or the FDA concludes that the financial
relationship may have affected interpretation of the study, the integrity of the data generated at the applicable clinical trial site
may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of our
marketing application by the FDA. Any such delay or rejection could prevent us from commercializing any of our products
currently in development.
Further, clinical trials may also be delayed as a result of ambiguous or negative interim results. In addition, a clinical
trial may be suspended or terminated by us, the FDA, the IRB overseeing the clinical trial at issue, the Data Safety Monitoring
Board for such trial, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of
factors, including:
·
·
failure to conduct the clinical trial in accordance with applicable regulatory requirements or our clinical protocols;
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the
imposition of a clinical hold;
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·
·
·
·
inability of a clinical investigator or clinical trial site to continue to participate in the clinical trial;
unforeseen safety issues or adverse side effects;
failure to demonstrate a benefit from using the product candidate; and
lack of adequate funding to continue the clinical trial.
Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial
protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination,
which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we
terminate, any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to
generate product revenues from these product candidates will be delayed or not realized at all. In addition, any delays in
completing our clinical trials will increase our costs, slow down our product candidate development and approval process and
jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our
business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the
commencement or completion of a clinical trial may also ultimately lead to the denial of regulatory approval of the subject
product candidate.
If
the
FDA
does
not
conclude
that
the
iDose
drug
delivery
implant
satisfies
the
requirements
for
the
Section
505(b)(2)
regulatory
approval
pathway,
or
if
the
requirements
for
approval
of
the
iDose
drug
delivery
implant
under
Section
505(b)(2)
are
not
as
we
expect,
the
approval
pathway
will
likely
take
significantly
longer,
cost
significantly
more
and
encounter
significantly
more
complications
and
risks
than
anticipated,
and
in
any
case
may
not
be
successful.
We intend to seek FDA approval of an NDA under Section 505(b)(2) of the FDCA for our drug delivery implant, iDose .
The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch‑Waxman Act, added
Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required
for approval comes from studies that were not conducted by or for the applicant.
If the FDA does not allow us to pursue the 505(b)(2) regulatory pathway for iDose as anticipated, we may need to
conduct additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. If
this were to occur, the time and financial resources required to obtain FDA approval would likely substantially increase.
Moreover, the inability to pursue the 505(b)(2) regulatory pathway could result in new competitive products reaching the market
faster than our product candidate, which could materially adversely impact our competitive position and prospects. In addition,
circumstances could change that would render a 505(b)(2) application for the product no longer appropriate. Even if we are
allowed to pursue the 505(b)(2) regulatory pathway for iDose , we cannot assure you that we will receive the requisite or timely
approvals for commercialization of this product candidate.
We
and
our
suppliers
are
subject
to
extensive
post‑‑marketing
regulatory
requirements
and
failure
to
comply
with
applicable
requirements
could
subject
us
to
enforcement
actions,
including
substantial
penalties,
and
might
require
us
to
recall
or
withdraw
a
product
from
the
market.
Once a medical device is approved, a manufacturer must notify the FDA of any modifications to the device. Any
modification to a device that has received FDA clearance or approval that could significantly affect its safety or effectiveness, or
that would constitute a major change in its intended use, design or manufacture, requires premarket clearance or approval from
the FDA pursuant to a new 510(k) clearance or approval of a PMA supplement. The FDA requires every manufacturer to make
the determination in the first instance regarding whether a modification to a cleared or approved device necessitates the filing of a
new 510(k) notification or PMA supplement. The FDA may review any manufacturer’s decision and can disagree. If the FDA
disagrees with any future determination by us that a new clearance or approval is not required, we may need to cease marketing or
to recall the modified product until and unless we obtain clearance or approval. In addition, we could also be subject to significant
regulatory fines or penalties. Any of these outcomes could harm our business.
A manufacturer must also submit periodic reports to the FDA as a condition of PMA approval. These reports include
safety and effectiveness information about the device after its approval. Failure to submit such reports, or failure to submit the
reports in a timely manner, could result in enforcement action by the FDA. Following its review of the periodic reports, the FDA
might ask for additional information or initiate further investigation.
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The PMA approval for the iStent is subject to several conditions of approval, including postmarket study and registry
study requirements. Failure to comply with the conditions of approval could result in the withdrawal of PMA approval, and the
inability to continue to market the device. Failure to conduct the required studies in accordance with IRB and informed consent
requirements could also be grounds for withdrawal of approval of the PMA.
Medical devices are also subject to other postmarket requirements including establishment registration and device
listing, quality system requirements, reporting of adverse events and device malfunctions, reporting of corrections and removals,
labeling requirements, and promotional restrictions. The regulations to which we are subject are complex and have become more
stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher
than anticipated costs, or lower than anticipated sales. Even after we have obtained the proper regulatory clearance or approval to
market a product, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA,
state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the
following sanctions:
·
·
·
·
·
·
untitled letters or warning letters;
fines, injunctions, consent decrees and civil penalties;
recalls, termination of distribution, administrative detention, or seizure of our products;
customer notifications or repair, replacement or refunds;
operating restrictions or partial suspension or total shutdown of production;
delays in or refusal to grant our requests for future 510(k) clearances, PMA approvals or foreign regulatory
approvals of new products, new intended uses, or modifications to existing products;
· withdrawals or suspensions of current 510(k) clearances or PMAs or foreign regulatory approvals, resulting in
prohibitions on sales of our products;
·
·
FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and
criminal prosecution.
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material
adverse effect on our reputation, business, results of operations and financial condition.
We
must
continually
monitor
the
performance
of
our
products
once
approved
and
marketed
for
signs
that
their
use
may
elicit
serious
and
unexpected
adverse
effects.
Any
recall
of
our
products,
either
voluntarily
or
at
the
direction
of
the
FDA
or
another
governmental
authority,
or
the
discovery
of
serious
safety
issues
with
our
products
that
leads
to
corrective
actions,
could
have
a
significant
adverse
impact
on
us.
Our ability to achieve our strategic objectives will depend, among other things, on the long‑term clinical performance of
the iStent for lowering intraocular pressure in mild‑to‑moderate open‑angle glaucoma patients undergoing cataract surgery. Our
original PMA approval for the iStent included several post‑marketing study requirements and future approvals may be subject to
similar requirements. Failure to conduct required post‑marketing studies in a timely manner could result in the revocation of the
clearance or approval for the product that is subject to such a requirement and could also result in the recall or withdrawal of the
product, which would prevent us from generating sales from that product in the United States.
Although we believe follow‑up at three years continues to support efficacy and safety of the iStent for lowering
intraocular pressure in mild‑to‑moderate open‑angle glaucoma patients undergoing cataract surgery, in the future, longer term
study outcomes could demonstrate conflicting clinical effectiveness, a reduction of effectiveness, no clinical effectiveness or
longer term safety issues with the iStent . This type of differing data could have a detrimental effect on the market penetration and
usage of the iStent by customers treating mild‑to‑moderate open‑angle glaucoma and/or the risk/benefit profile of using the iStent
to treat mild‑to‑moderate open‑angle glaucoma in combination with cataract surgery. As a result, our sales may decline or
expected growth would be negatively impacted. This could put pressure on
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our ability to execute key components of our business strategy and/or negatively impact our operating condition and financial
results.
More generally, all medical devices, such as the iStent , can experience performance problems that require review and
possible corrective action by us or a component supplier. We cannot provide assurance that component failures, manufacturing
errors, noncompliance with quality system requirements or good manufacturing practices, design defects and/or labeling
inadequacies in any device or drug products that could result in an unsafe condition or injury to the patient will not occur. The
FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event
of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk
to health. Manufacturers may also, under their own initiative, stop shipment or recall a product if any material deficiency is found,
take corrective action with respect to product in the field, or withdraw a product to improve device performance or for other
reasons. A government‑mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable
risk to health, component failures, manufacturing errors, noncompliance with good manufacturing practices or quality system
requirements, design or labeling defects or other deficiencies and issues. Similar regulatory agencies in other countries have
similar authority to recall products because of material deficiencies or defects in design or manufacture that could endanger
health. Any recall would divert management attention and financial resources, could cause the price of our stock to decline and
expose us to product liability or other claims and harm our reputation with customers. A recall involving our products could be
particularly harmful to our business, financial and operating results.
The FDA requires that certain corrections or removals be reported to the FDA within 10 working days after the recall is
initiated. Notice to the FDA of a correction or removal is required when undertaken to reduce a risk to health, including when
there is a reasonable probability that the product will cause serious adverse health consequences or death, or when use of the
device may cause temporary or medically reversible adverse health consequences or an outcome where the probability of serious
adverse health consequences is remote. In addition, companies are required to maintain certain records of corrections and
removal, even if they are not reportable to the FDA or similar foreign governmental authorities. We may initiate voluntary recalls
involving our products in the future that we determine do not require notification of the FDA or foreign governmental authorities.
If the FDA or foreign governmental authorities disagree with our determinations, they could require us to report those actions as
recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the
FDA or a foreign governmental authority could take enforcement action for failing to report the recalls when they were
conducted.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or applicable foreign
regulatory authority may require, or we may decide, that we will need to obtain new approvals or clearances for the device before
we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the
recalled devices in a timely manner. Moreover, we may face additional regulatory enforcement action, including FDA warning
letters, product seizure, injunctions, administrative penalties, civil penalties or criminal fines. We may also be required to bear
other costs or take other actions that may have a negative impact on our sales as well as face significant adverse publicity or
regulatory consequences, which could harm our business, including our ability to market our products in the future.
In addition, under the FDA’s medical device reporting regulations, we are required to report to the FDA any incident in
which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the
malfunction were to recur, would likely cause or contribute to death or serious injury. Repeated product malfunctions may result
in a voluntary or involuntary product recall. We are subject to similar obligations in the EEA and other countries in which we
market our products.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or applicable foreign
regulatory authority may require, or we may decide, that we will need to obtain new approvals or clearances for the device before
we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the
recalled devices in a timely manner. Moreover, we may face additional regulatory enforcement action, including FDA warning
letters, product seizure, injunctions, administrative penalties, civil penalties or criminal fines. We may also be required to bear
other costs or take other actions that may have a negative impact on our sales as well as face significant adverse publicity or
regulatory consequences, which could harm our business, including our ability to market our products in the future.
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Any adverse event involving our products, whether in the United States or abroad, could result in future voluntary
corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall, orders of
repair, replacement or refund or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as
defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our
business and may harm our reputation and financial results.
If
we
or
our
component
manufacturers
fail
to
comply
with
the
FDA’s
Quality
System
Regulation
or
Good
Manufacturing
Practice
regulations,
our
manufacturing
operations
could
be
interrupted,
and
our
product
sales
and
operating
results
could
suffer.
We and some of our component manufacturers are required to comply with regulatory requirements known as the FDA’s
Quality System Regulation (QSR), which covers the procedures and documentation of the design, testing, production, control,
quality assurance, inspection, complaint handling, recordkeeping, management review, labeling, packaging, sterilization, storage
and shipping of our device products. The FDA’s Current Good Manufacturing Practices (cGMPs) also apply to the manufacture
of our products. The FDA audits compliance with these regulatory requirements through periodic announced and unannounced
inspections of manufacturing and other facilities. The FDA may conduct inspections or audits at any time, and we and some of
our component suppliers are subject to such inspections. Although we believe our manufacturing facilities and those of our
critical component suppliers are in material compliance with the QSR requirements and with applicable cGMPs, we cannot
provide assurance that any future inspection will not result in adverse findings. If our manufacturing facilities or those of any of
our component suppliers are found to be in violation of applicable laws and regulations, or we or our suppliers have significant
noncompliance issues or fail to timely and adequately respond to any adverse inspectional observations or product safety issues,
or if any corrective action plan that we or our suppliers propose in response to observed deficiencies is not sufficient, the FDA
could take enforcement action, including any of the following sanctions:
·
·
·
·
untitled letters or warning letters;
fines, injunctions, consent decrees and civil penalties;
customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for clearance or approval of new products or modified products;
·
· withdrawing clearances or approvals that have already been granted;
·
·
refusal to grant export approval for our products; or
criminal prosecution.
Any of these sanctions could adversely affect our business, financial conditions and operating results.
Outside the United States, our products and operations are also often required to comply with standards set by industrial
standards bodies, such as the ISO. Foreign regulatory bodies may evaluate our products or the testing that our products undergo
against these standards. The specific standards, types of evaluation and scope of review differ among foreign regulatory bodies. If
we fail to adequately comply with any of these standards, a foreign regulatory body may take adverse actions similar to those
within the power of the FDA. Any such action may harm our reputation and could have an adverse effect on our business, results
of operations and financial condition.
We
may
be
subject
to
fines,
penalties,
injunctions
or
other
enforcement
actions
if
we
are
determined
to
be
promoting
the
use
of
our
products
for
unapproved
or
“off‑‑label”
uses,
resulting
in
damage
to
our
reputation
and
business.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations,
including the prohibition of the promotion of a drug or medical device for a use that has not been cleared or approved by the
FDA. Use of a drug or device outside of its cleared or approved indications is known as “off‑label” use. Physicians may use our
products off‑label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine.
However, if the FDA determines that our promotional materials or training constitutes promotion of an off‑label use, it could
request that we modify our training or promotional materials or subject us to
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regulatory or enforcement actions, including the issuance of warning letters, untitled letters, fines, penalties, consent decrees,
injunctions, or seizures, which could have an adverse impact on our reputation and financial results. We could also be subject to
enforcement action under other federal or state laws, including the federal False Claims Act (FCA). While we may request
additional indications for our products, the FDA may deny those requests, require additional expensive clinical data to support
any additional indications or impose limitations on the intended use of any cleared or approved product as a condition of
clearance or approval.
In addition to promoting our products in a manner consistent with our clearances, we must have adequate substantiation
for the claims we make for our products. If any of our claims are determined to be false, misleading or deceptive, our products
could be considered to be misbranded under the FDCA or to violate the Federal Trade Commission Act. We could also face
lawsuits from our competitors under the Lanham Act alleging that our marketing materials are false or misleading.
Failure
to
comply
with
the
Federal
Health
Insurance
Portability
and
Accountability
Act
of
1996,
the
Health
Information
Technology
for
Economic
and
Clinical
Health
Act,
and
implementing
regulations
affecting
the
transmission,
security
and
privacy
of
health
information
could
result
in
significant
penalties.
Numerous federal and state laws and regulations, including the Federal Health Insurance Portability and Accountability
Act of 1996 (HIPAA), and the Health Information Technology for Economic and Clinical Health Act (HITECH Act) govern the
collection, dissemination, security, use, disclosure and confidentiality of patient‑identifiable health information. HIPAA and the
HITECH Act may require us to comply with standards for the use and disclosure of patient-identifiable health information. The
Privacy Standards and Security Standards under HIPAA establish a set of basic national privacy and security standards for the
protection of patient-identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers,
referred to as covered entities, and the business associates with whom such covered entities contract for services. Notably,
whereas HIPAA previously directly regulated only these covered entities, the HITECH Act makes certain of HIPAA’s privacy
and security standards also directly applicable to covered entities’ business associates. As a result, both covered entities and
business associates are now subject to significant civil and criminal penalties for failure to comply with the Privacy Standards and
Security Standards.
HIPAA and the HITECH Act also include standards for common healthcare electronic transactions and code sets, such
as claims information, plan eligibility and payment information. Covered entities, such as healthcare providers, are required to
conform to such transaction set standards pursuant to HIPAA.
HIPAA requires covered entities to develop and maintain policies and procedures with respect to the use and disclosure
of patient-identifiable health information and the adoption of administrative, physical and technical safeguards to protect such
information. The HITECH Act expands the notification requirement for breaches of patient‑identifiable health information,
restricts certain disclosures and sales of patient‑identifiable health information and provides a tiered system for civil monetary
penalties for HIPAA violations. The HITECH Act also increased the civil and criminal penalties that may be imposed against
covered entities, business associates and possibly other persons and gave state attorneys general new authority to file civil actions
for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with
pursuing federal civil actions. Additionally, certain states have adopted comparable privacy and security laws and regulations,
some of which may be more stringent than HIPAA.
If we do not comply with applicable existing or new laws and regulations related to patient health information, we could
be subject to criminal or civil sanctions. New health information standards, whether implemented pursuant to HIPAA, the
HITECH Act, congressional action or otherwise, could have a significant effect on the manner in which we handle
healthcare‑related data and the cost of complying with these standards could be significant.
The 2013 final HITECH Act omnibus rule modified the breach reporting standard in a manner that will likely make
more data security incidents qualify as reportable breaches. Any liability from a failure to comply with the applicable
requirements of HIPAA or the HITECH Act could adversely affect our financial condition. The costs of complying with privacy
and security‑related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of
operations. These provisions, as modified, will be subject to interpretation by various courts and other governmental authorities,
thus creating potentially complex compliance issues for us, as well as our clients and strategic partners. In addition, we are unable
to predict what changes to the HIPAA Privacy Standards and Security Standards might be made in the future or how those
changes could affect our business. Any new legislation or regulation in the area of privacy and security of personal information,
including personal health information, could also
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adversely affect our business operations.
If
we
fail
to
comply
with
state
and
federal
healthcare
regulatory
laws,
we
could
face
substantial
penalties,
damages,
fines,
disgorgement,
exclusion
from
participation
in
governmental
healthcare
programs,
and
the
curtailment
of
our
operations,
any
of
which
could
adversely
affect
our
business,
operations,
and
financial
condition.
Although we do not provide healthcare services, submit claims for third‑party reimbursement, or receive payments
directly from Medicare, Medicaid or other third‑party payors for our products, we are subject to healthcare fraud, abuse and
transparency regulation and enforcement by federal and state governments, which could significantly impact our business. To
ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors often conduct routine
audits and request customer records and other documents to support claims submitted for payment of services rendered.
Government agencies or their contractors also periodically open investigations and obtain information from healthcare providers.
Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including
debarment, suspension or exclusion from Medicare, Medicaid and other government reimbursement programs, any of which
would have a material adverse effect on our business.
The laws that may affect our ability to operate include, but are not limited to:
·
·
·
the federal Anti‑Kickback Statute, which prohibits, among other things, persons and entities from knowingly and
willfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in cash or in kind, in exchange
for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good,
facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs
such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of this statute or specific
intent to violate it;
the civil False Claims Act (FCA), which prohibits, among other things, individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other Federal payors that are
false or fraudulent; knowingly making using, or causing to be made or used, a false record or statement to get a false
or fraudulent claim paid or approved by the government; or knowingly making, using, or causing to be made or
used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal
government;
the criminal FCA, which imposes criminal fines or imprisonment against individuals or entities who make or
present a claim to the government knowing such claim to be false, fictitious or fraudulent;
· HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit
program or making false statements relating to healthcare matters;
·
·
·
the federal civil monetary penalties statute, which prohibits, among other things, the offering or giving of
remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the
beneficiary’s selection of a particular supplier of items or services reimbursable by a Federal or state governmental
program;
the federal Physician Payments Sunshine Act under ACA, which require certain manufacturers of drugs, devices,
biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services
information related to payments and other transfers of value to physicians, other healthcare providers, and teaching
hospitals, and ownership and investment interests held by physicians and other healthcare providers and their
immediate family members. Manufacturers must submit such reports by the 90th day of each subsequent calendar
year; 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; state laws that require
pharmaceutical companies to comply with the device industry’s voluntary compliance guidelines and the relevant
compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to
healthcare providers and other potential referral sources; and state laws that require device manufacturers to report
information related to payments and other transfers of value to physicians and other healthcare providers or
marketing expenditures.
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Further, the ACA, among other things, amended the intent requirements of the federal Anti‑Kickback Statute and certain
criminal statutes governing healthcare fraud. A person or entity can now be found guilty of violating the statute without actual
knowledge of the statute or specific intent to violate it. In addition, ACA provided that the government may assert that a claim
including items or services resulting from a violation of the federal Anti‑Kickback Statute constitutes a false or fraudulent claim
for purposes of the FCA.
While we do not submit claims and our customers make the ultimate decision on how to submit claims, from time to
time, we may provide reimbursement guidance to our customers. If a government authority were to conclude that we provided
improper advice to our customers or encouraged the submission of false claims for reimbursement, we could face action against
us by government authorities. Any violations of these laws, or any action against us for violation of these laws, even if we
successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and
financial condition.
We have entered into consulting and scientific advisory board arrangements with physicians and other healthcare
providers, including some who influence the ordering of and use of our products in procedures they perform. Compensation for
some of these arrangements includes the provision of stock options. In addition, in connection with our clinical trial recruitment
activities, we have entered into compensation arrangements with some of the physicians who recruit subjects to our clinical trials.
While we believe we are in material compliance with applicable laws, because of the complex and far‑reaching nature of these
laws, regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or
that affect our ability to use all of the data from the clinical trial to support our marketing applications, or for which we could be
subject to other significant penalties. We could be adversely affected if regulatory agencies interpret our financial relationships
with providers who influence the ordering of and use our products to be in violation of applicable laws.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of
healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies
scrutinize of interactions between healthcare companies and healthcare providers, which has led to a number of investigations,
prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time‑ and
resource‑consuming and can divert management’s attention from the business. Additionally, as a result of these investigations,
healthcare providers and entities may have to agree to additional onerous compliance and reporting requirements as part of a
consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have
an adverse effect on our business.
If our operations are found to be in violation of any of the laws described above or any other government regulations that
apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, imprisonment,
exclusion from participation in federal and state healthcare programs and the curtailment or restricting of our operations, any of
which could harm our ability to operate our business and our financial results.
Our
operations
involve
hazardous
materials,
and
we
must
comply
with
environmental
laws
and
regulations,
which
can
be
expensive.
We are subject to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of,
and human exposure to, hazardous and toxic materials. We could incur costs, fines, and civil and criminal sanctions, third‑party
property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were
to violate or become liable under environmental laws. Compliance with current or future environmental and safety laws and
regulations could restrict our ability to expand our facilities, impair our research, development or production efforts, or require us
to incur other significant expenses. There can be no assurance that violations of environmental laws or regulations will not occur
in the future as a result of the inability to obtain permits, human error, accident, equipment failure or other causes.
Risks Related to Our Intellectual Property
If
we
are
unable
to
adequately
protect
our
intellectual
property,
our
competitors
and
other
third
parties
could
develop
and
commercialize
products
similar
or
identical
to
ours,
which
would
substantially
impair
our
ability
to
compete.
Our success and ability to compete depends significantly upon our ability to maintain and protect our proprietary rights
to the technologies and inventions used in or embodied by our products. We rely on a combination of patents and trademark
rights, and to a lesser extent on trade secrets and copyrights, together with licenses and
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Table of Contents
nondisclosure agreements to protect our intellectual property. These legal means, however, afford only limited protection and
may not adequately protect our intellectual property rights. We also have not pursued or maintained, and may not pursue or
maintain in the future, patent protection for our products in every country or territory in which we sell or will in the future sell our
products. In addition, we cannot be sure that any of our pending patent applications or pending trademark applications will issue
or that, if issued, they will issue in a form that will be advantageous to us. The United States Patent and Trademark Office
(USPTO) or other foreign patent offices may deny or significantly narrow claims made under our patent applications and our
issued patents may be successfully challenged, may be designed around, or may otherwise be of insufficient scope to provide us
with any meaningful protection for our present or future commercial products. Further, the USPTO or other foreign trademark
offices may deny our trademark applications and, even if published or registered, these trademarks may be ineffective in
protecting our brand and goodwill and may be successfully opposed or challenged.
The patent prosecution process itself is expensive and time consuming, and we may not be able to file and prosecute all
necessary or desirable patent applications at a reasonable cost or in a timely manner. The patent prosecution process requires
compliance with complex laws, rules and regulations imposed by patent authorities. Failure to comply with these laws, rules and
regulations may derive, among other bases, from various defects of form in the preparation or filing of our patents or patent
applications, which may include defects that relate to our making proper priority claims and inventorship determinations. If any
such defects are identified, we may need to take corrective action. For example, we have filed petitions with the USPTO to
request in part that Dr. Richard Hill, one of our consultants, be added as an inventor on patents related to our iStent , iStent
Inject, iStent SA, iStent Infinite and iStent Supra product candidate that were developed during Dr. Hill’s consultancy. Dr. Hill has
assigned his rights in these patents and certain other patent applications to us pursuant to the terms of his consulting agreement.
Because Dr. Hill was employed as an Associate Professor at the University of California, Irvine, or the University, during the
period when these patents and patent applications were developed in December 2014, we entered into an agreement with the
University pursuant to which the University agreed not to challenge our ownership of these patents and patent applications. In
addition, if any material defects are found in the form or preparation of any of our patents or patent applications, such patents or
applications may be invalid and unenforceable. Any of these outcomes could impair our ability to prevent competition from third
parties, which could harm our business. Moreover, the USPTO and various foreign governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application
process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies
over the lifetime of the patent. Noncompliance with these requirements can result in abandonment or lapse of the patent or patent
application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we fail to maintain the patents and
patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that
are the same as or similar to our products, which would have a material adverse effect on our business. In addition, patents are
limited in term. Once all of the patents covering a particular product of ours in a particular jurisdiction have expired, we will no
longer be able to stop competitors from marketing a product that is the same as or similar to our product in that jurisdiction, which
could have a material adverse effect on our business.
The patent position of medical device companies is generally highly uncertain, involves complex legal and factual
questions and has in recent years been the subject of much litigation and administrative proceedings, such as post-grant or inter
partes review proceedings at the USPTO. In the United States and in many foreign jurisdictions, policies regarding the breadth of
claims allowed in patents can be inconsistent. The U.S. Supreme Court and the Court of Appeals for the Federal Circuit have
made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign
courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are
interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted
into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our
ability to obtain patents. Future protection for our proprietary rights is uncertain because legal means afford only limited
protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage, which could
adversely affect our business, financial condition and results of operations.
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy‑Smith America Invents
Act, or the Leahy‑Smith Act, was signed into law. The Leahy‑Smith Act includes a number of significant changes to U.S. patent
law. These include provisions that affect the way patent applications are prosecuted, redefine
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prior art, affect patent litigation or administrative proceedings at the USPTO, and switch the U.S. patent system from a
“first‑to‑invent” system to a “first‑to‑file” system. Under a “first‑to‑file” system, assuming the other requirements for
patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention
regardless of whether another inventor had made the invention earlier. The USPTO developed new regulations and procedures to
govern administration of the Leahy‑Smith Act, and many of the substantive changes to patent law associated with the
Leahy‑Smith Act, and in particular, the first‑to‑file provisions, only became effective on March 16, 2013. Accordingly, it is not
clear what, if any, impact the Leahy‑Smith Act will have on the operation of our business. However, the Leahy‑Smith Act and its
implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the
enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition. In addition, patent reform legislation may pass in the future, in the U.S. or elsewhere, that could lead to additional
uncertainties and increased costs surrounding the prosecution, enforcement, and defense of our patents and applications.
We may be subject to a third‑party pre-issuance submission of prior art to the USPTO or to another foreign patent office,
or become involved in opposition, interference, derivation, reexamination, inter partes review, post‑grant review, or other patent
office proceedings or litigation, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An
adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights,
allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in
our inability to manufacture or commercialize products without infringing third‑party patent rights.
We have a number of foreign patents and patent applications, and expect to pursue patent protection in the most
significant markets in which we do business. The laws of other countries in which our product offerings are or may be sold may
not protect our product offerings and intellectual property to the same extent as U.S. laws, if at all. Many companies have
encountered significant difficulties in obtaining, protecting and defending such rights in such markets. In addition, many countries
limit the enforceability of patents against other parties, including government agencies or government contractors. In these
countries, the patent owner may have limited remedies, and certain countries have compulsory licensing laws under which a
patent owner may be compelled to grant licenses to other parties. We also may be unable to protect our rights in trade secrets and
unpatented proprietary technology in these countries. If we encounter such difficulties or we are otherwise precluded from
effectively protecting our intellectual property rights in these jurisdictions, our business, financial condition and results of
operations could be substantially harmed.
Despite our efforts to safeguard our intellectual property rights, we may not be successful in doing so, or the steps taken
by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third
party from copying or otherwise obtaining and using our products, technology or other information that we regard as proprietary.
Moreover, our competitors may independently develop equivalent knowledge, methods and know‑how. Competitors could
purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts,
infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies
that fall outside of our intellectual property rights. Our inability to adequately protect our intellectual property could allow our
competitors and other third parties to produce products based on our patented or proprietary technology and other intellectual
property rights, which could substantially impair our ability to compete.
We may not be able to accurately estimate or control our future operating expenses in relation to obtaining, enforcing
and/or defending intellectual property, which could lead to cash shortfalls. Our operating expenses may fluctuate significantly in
the future as a result of the costs of preparing, filing, prosecuting, defending and enforcing patent claims and other patent related
costs, including litigation costs and the results of such litigation or costs associated with administrative proceedings and the
results of such proceedings.
We
have
been
and
may
in
the
future
become
involved
in
patent
and
other
intellectual
property
litigation
or
administrative
proceedings
to
enforce
or
defend
our
intellectual
property
rights,
which
could
be
costly,
time
consuming
and
unsuccessful
and
could
interfere
with
our
ability
to
successfully
commercialize
our
products.
We have asserted and may in the future need to assert claims of infringement against third parties to protect our
intellectual property.
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Regardless of the final outcome, any litigation to enforce our intellectual property rights in patents, copyrights, trade
secrets or trademarks is highly unpredictable and could result in substantial costs and diversion of resources, which could have a
material adverse effect on our business, financial condition and results of operations. Any claims we assert against alleged
infringers could provoke these third parties to assert counterclaims against us alleging that we infringe their own intellectual
property rights, or that our rights are invalid or unenforceable. A court could hold that some or all of our asserted intellectual
property rights are not infringed, or could invalidate our rights, hold our rights unenforceable, or substantially narrow the scope of
protection. Any such adverse result would undermine our competitive position. In addition, there could be public announcements
of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these
results to be negative, it could hurt the price of our common stock. Such litigation proceedings could substantially increase our
operating losses and reduce the resources available for development activities or any future sales, marketing or distribution
activities.
We
may
become
subject
to
claims
of
infringement
or
misappropriation
of
the
intellectual
property
rights
of
others,
which
could
prohibit
us
from
selling
our
products,
require
us
to
obtain
licenses
from
third
parties,
require
us
to
develop
non‑‑infringing
alternatives
and/or
subject
us
to
substantial
monetary
damages
and
injunctive
relief.
The medical device industry is characterized by the existence of a large number of patents and frequent litigation based
on allegations of patent infringement. Third parties could assert infringement or misappropriation claims against us with respect
to our current or future commercial products. Moreover, because patent applications can take many years to issue, there may be
currently pending applications, unknown to us, which may later result in issued patents that materially and adversely affect our
business. Our competitors or other interested parties could also pursue additional patent protection related to their earlier patent
disclosures with the intent to cover our products. Whether or not any such claims are valid, we cannot be certain that we have not
infringed and will not in the future infringe the intellectual property rights of such third parties or others. Additionally, for
business reasons, we have challenged and may in the future seek to invalidate or challenge the intellectual property rights of a
third party, including those rights owned by our competitors, before any infringement assertion is made. This action could include
seeking a declaration or decision from a court or patent office that one or more of our products do not infringe one or more
patents or other intellectual property rights owned by third parties and/or that one or more patents owned by one or more third
parties are invalid.
Any infringement or misappropriation claim or validity or infringement challenge could result in significant costs,
substantial damages and our inability to manufacture, market or sell our existing or future products that are found to infringe.
Even if we were to prevail in any such action, the litigation or administrative proceeding could result in substantial cost and
diversion of resources that could materially and adversely affect our business. If a court determined, or if we independently
discovered, that our product offerings violated third‑party proprietary rights, there can be no assurance that we would be able to
re‑engineer our products to avoid those rights or to obtain a license under those rights on commercially reasonable terms, if at all.
As a result, we could be prohibited from selling products that are found to infringe, or we could elect not to sell or to stop selling
products that we believe have a substantial probability of infringing a third‑party’s intellectual property rights. Even if obtaining a
license were feasible, it may be costly and time‑consuming. A court could also enter orders that temporarily, preliminarily or
permanently enjoin us or our customers from making, using, selling, offering to sell, distributing, exporting or importing the
iStent or future products, such as the iStent Inject , iStent SA, iStent Infinite, iStent Supra or iDose Travoprost , or could enter
orders mandating that we undertake certain remedial activities. A court could also order us to pay compensatory damages for such
infringement, plus prejudgment interest, and if we are found to have willfully infringed third‑party rights, could in addition treble
the compensatory damages and award attorneys’ fees. These damages could be substantial and could harm our reputation,
business, financial condition and results of operations.
Even if resolved in our favor, litigation or other legal or administrative proceedings relating to intellectual property
claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal
responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings
or developments. If securities analysts or investors perceive these results to be negative, it could hurt the price of our common
stock. Such litigation or administrative proceedings could substantially increase our operating losses and reduce the resources
available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial
or other resources to conduct such litigation or administrative proceedings adequately. Some of our competitors may be able to
sustain the costs of such litigation or administrative proceedings more effectively than we can because of their greater financial
resources. Uncertainties
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resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in
the marketplace.
If
any
of
our
employees,
consultants
or
others
breach
their
proprietary
information
agreements,
our
competitive
position
could
be
harmed.
We protect our proprietary technology, in part, through proprietary information and inventions agreements with
employees, consultants and other parties. These agreements with employees and consultants generally contain standard provisions
requiring those individuals to assign to us, without additional consideration, inventions conceived or reduced to practice by them
while employed or retained by us, subject to customary exceptions. Although it is our policy to require each of our employees,
consultants and any other parties who may be involved in the development of intellectual property on our behalf to execute such
agreements, we may be unsuccessful in doing so with each party who in fact develops intellectual property that we regard as our
own. The relevant assignment provisions may not be self‑executing or may be breached. As a result, our competitors may learn
our trade secrets or we may be required to pursue litigation in order to determine the ownership of the intellectual property rights
at issue.
Even if we file suit to prevent or stop such disclosure, there is a risk that a court could find we have not adequately
protected the information as a trade secret and allow use of the disclosed information by our competitors. Additionally, we may
need to file suit to force the employee, consultant or other party in breach to assign his, her or its rights to us, or we may need to
pay additional compensation to such employee, consultant or other party in order to quiet or obtain legal title to the intellectual
property rights at issue.
We
may
be
subject
to
claims
that
we
or
our
employees
have
misappropriated
the
intellectual
property
of
a
third
party,
including
trade
secrets
or
know‑‑how,
or
are
in
breach
of
non‑‑competition
or
non‑‑solicitation
agreements
with
our
competitors
and
third
parties
may
claim
an
ownership
interest
in
intellectual
property
we
regard
as
our
own.
Many of our employees and consultants were previously employed at or engaged by other medical device,
biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees,
consultants and contractors, may have executed proprietary rights, non‑disclosure and non‑competition agreements in connection
with such previous employment. Although we try to ensure that our employees and consultants do not use the intellectual
property, proprietary information, know‑how or trade secrets of others in their work for us, we may be subject to claims that we
or these individuals have, inadvertently or otherwise, misappropriated the intellectual property or disclosed the alleged trade
secrets or other proprietary information, of these former employers or competitors. Additionally, we may be subject to claims
from third parties challenging our ownership interest in intellectual property we regard as our own, based on claims that our
employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to
another person or entity. Litigation may be necessary to defend against claims, and it may be necessary or we may desire to enter
into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on
commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court
could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found
to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to
incorporate technologies or features that are important or essential to our products could have a material adverse effect on our
business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or
personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a
distraction to management. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with
independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to
commercialize our products, which could have an adverse effect on our business, results of operations and financial condition.
Risks Related to Being a Public Company
If
we
experience
material
weaknesses
in,
or
otherwise
fail
to
maintain
an
effective
system
of,
internal
controls
in
the
future,
we
may
not
be
able
to
accurately
report
our
financial
condition
or
results
of
operations,
which
may
adversely
affect
investor
confidence
in
us
and,
as
a
result,
the
value
of
our
common
stock.
The Sarbanes‑Oxley Act requires, among other things, that we assess the effectiveness of our internal control over
financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular,
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Section 404(a) of the Sarbanes‑Oxley Act requires us to perform system and process evaluation and testing of our internal control
over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. We
are no longer an “emerging growth company” as of December 31, 2017, and consequently, Section 404(b) of the Sarbanes‑Oxley
Act requires our independent registered public accounting firm to annually attest to the effectiveness of our internal control over
financial reporting commencing with the year ending December 31, 2017.
Investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market
price of our stock. Regardless of compliance with Section 404, any failure of our internal control over financial reporting could
have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these
requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an
adverse opinion on our internal controls from our independent registered public accounting firm.
Risks Related to our Common Stock and Ownership of Our Common Stock
We
expect
that
the
price
of
our
common
stock
may
fluctuate
substantially.
The market price for our common stock may fluctuate depending upon many factors, including, but not limited to:
·
·
·
·
·
·
·
·
·
·
the depth and liquidity of the market for our common stock;
volume, timing and nature of orders for our products;
developments generally affecting medical device companies;
actual or anticipated quarterly variation in our results of operations or the results of our competitors;
the announcements by us or our competitors of new products or product enhancements, significant contracts,
commercial relationships or capital commitments;
developments or disputes concerning our intellectual property or other proprietary rights;
issuance of new or changes in earnings estimates or recommendations or reports by securities analysts;
investor perceptions of us and our business, including changes in market valuations of medical device companies;
actions by institutional or other large stockholders;
commencement of, or our involvement in, litigation;
failure to achieve significant sales;
·
· manufacturing disruptions that could occur if we were unable to successfully expand our production in our current
or an alternative facility;
·
·
·
·
any future sales of our common stock or other securities;
any major change to the composition of our board of directors or management;
our results of operations and financial performance; and
general economic, industry and market conditions.
In addition, the market price of the stocks of medical device, medical technology, pharmaceutical, biotechnology and
other life science companies have experienced significant volatility that often does not relate to the operating performance of the
companies represented by the stock. Further, there has been particular volatility in the market price of securities of early‑stage
and development‑stage life science and medical device companies. These broad market and industry factors may seriously harm
the market price of our common stock, regardless of our operating performance.
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Table of Contents
If
securities
or
industry
analysts
publish
unfavorable
research
about
our
business,
our
stock
price
and
trading
volume
could
decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts
publish about us and our business. We will not have any control over the analysts or the content and opinions included in their
reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other
unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish
reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to
decline..
Our
officers,
directors
and
principal
stockholders
have
significant
voting
power
and
may
take
actions
that
may
not
be
in
the
best
interests
of
our
other
stockholders.
Our executive officers, directors and stockholders holding more than 5% of our outstanding common stock currently
collectively own or control a significant amount of our outstanding common stock. As a result, our executive officers, directors
and stockholders holding more than 5% of our outstanding common stock, acting as a group, have substantial influence over the
outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale
of all or substantially all of our assets or any other significant corporate transactions. These stockholders may also have the effect
of delaying or preventing a change in control of us, even if such a change of control would benefit our other stockholders. This
significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’
perception that conflicts of interest may exist or arise.
Two
members
of
our
board
of
directors
are
directors
of
DOSE.
In
addition,
there
is
significant
overlap
between
our
current
stockholders
and
the
stockholders
of
DOSE.
Their
interests
may
conflict
with
those
of
our
other
stockholders.
Two of our current directors, Thomas W. Burns and William J. Link, Ph.D., serve as the only two members of the board
of directors of DOSE. This could result in conflicts of interest between their obligations to our company and DOSE. In addition,
there is significant overlap between our stockholders and the stockholders of DOSE. DOSE’s interests and the interests of its
stockholders may be different from ours or those of our other stockholders and this could result in conflicts. The resolution of any
of these conflicts may not always be in our or your best interest.
Anti‑‑takeover
provisions
in
our
charter
documents
and
under
Delaware
law
could
make
an
acquisition
of
us,
which
may
be
beneficial
to
our
stockholders,
more
difficult
and
may
prevent
attempts
by
our
stockholders
to
replace
or
remove
our
current
management
and
limit
the
market
price
of
our
common
stock.
Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying
or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and
restated bylaws include provisions that:
·
·
·
·
·
·
·
authorize our board of directors to issue, without further action by the stockholders, up to 5,000,000 shares of
undesignated preferred stock;
require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not
by written consent;
specify that special meetings of our stockholders may be called only by our board of directors, the chairman of the
board of directors, the chief executive officer or the president;
establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our
stockholders, including proposed nominations of persons for election to our board of directors;
establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class
serving staggered three year terms;
provide that our directors may be removed only for cause by a supermajority vote of our stockholders;
provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even
though less than a quorum;
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Table of Contents
·
·
specify that no stockholder is permitted to cumulate votes at any election of directors; and
require a supermajority vote of the stockholders and a majority vote of the board to amend certain of the
above‑mentioned provisions and our bylaws.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for
appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of
15% of our outstanding voting stock to merge or combine with us.
We
have
never
paid
dividends
on
our
capital
stock
and
do
not
anticipate
paying
cash
dividends
in
the
foreseeable
future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and
any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Accordingly, you may have to sell some or all of your shares of our common stock in order to generate cash
flow from your investment. You may not receive a gain on your investment when you sell shares and you may lose the entire
amount of the investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2017, we leased or owned approximately 94,000 square feet of office and operations space. This
space includes our corporate headquarters and production facilities in San Clemente, California as well as smaller administrative
offices and sales offices in the United States, Germany, Australia, Canada, Brazil, Japan and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
Neither we nor any of our subsidiaries is a party to, and none of their respective property is the subject of, any material
legal proceeding, although we are from time to time party to legal proceedings that arise in the ordinary course of our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our common stock trades on the NYSE under the symbol “GKOS”. The table below sets forth, for the periods indicated,
the high and low intra‑day sales prices per share of our common stock as reported on the NYSE.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
52.49
52.48
43.49
36.20
High
25.97
30.01
39.82
39.02
$
$
$
$
$
$
$
$
Low
33.18
36.51
30.22
23.08
Low
14.25
16.26
28.26
28.72
$
$
$
$
$
$
$
$
As of February 26, 2018, we had 22 holders of record of our common stock. The actual number of stockholders is
greater than this number of record holders, and includes stockholders who are beneficial owners but whose shares are held in
street name by brokers and other nominees. The number of record holders also does not include stockholders whose shares may
be held in trust by other entities.
Stock Performance Graph
The following performance graph shows the cumulative total stockholder return of an investment of $100 at the close of
market on June 25, 2015 (the first day of trading of our common stock on the NYSE) in (i) our common stock, (ii) the S&P Small
Cap 600 index and (iii) the S&P Small Cap 600 Healthcare index. The graph assumes that all
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Table of Contents
dividends were reinvested. Stockholder returns over the indicated period should not be considered indicative of future stockholder
returns.
6/25/2015 12/31/2015 12/30/2016 12/29/2017
82.16
GKOS
$
131.89
$
S&P Small Cap 600 index
135.91
S&P Small Cap 600 Healthcare index $
109.87 $
116.47 $
100.89 $
79.08 $
92.03 $
98.73 $
100.00 $
100.00 $
100.00 $
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise
subject to the liabilities under that section and shall not be deemed to be incorporated by reference into any of our filings under
the Securities Act of 1933, as amended, or the Exchange Act.
Dividend Policy
We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we
will retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying
cash dividends in the foreseeable future. In addition, our ability to pay dividends may be restricted by the terms of any future
credit agreement or any future debt or preferred equity securities of us or of our subsidiaries Payment of future cash dividends, if
any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs, the requirements of then existing debt instruments and other factors our
board of directors may deem relevant.
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Table of Contents
ITEM 6. SELECTED FINANCIAL DAT A
The selected consolidated financial information set forth below for each of the years ended December 31, 2017, 2016,
2015, 2014 and 2013 has been derived from our audited consolidated financial statements. The information below should be read
in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited
consolidated financial statements and notes thereto included in Items 7 and 8, respectively, of this Annual Report on Form 10-K.
(in thousands, except per share amounts)
Statements of Operations Data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
In-process research and development
Research and development
Total operating expenses
(Loss) income from operations
Loss on deconsolidation of DOSE
Total other income (expense), net
Provision for income taxes
Net (loss) income
Net loss attributable to noncontrolling interest
Net (loss) income attributable to Glaukos Corporation
Basic net (loss) income per share attributable to Glaukos
Corporation stockholders
Diluted net (loss) income per share attributable to Glaukos
Corporation stockholders
Weighted average shares used to compute basic net
(loss) income per share attributable to Glaukos
Corporation stockholders
Weighted average shares used to compute diluted net
(loss) income per share attributable to Glaukos
Corporation stockholders
2017
2016
Year ended December 31,
2014
2015
2013
$ 159,254 $ 114,397 $
16,177
98,220
21,050
138,204
71,700 $
12,988
58,712
45,587 $
11,418
34,169
20,946
2,535
18,411
96,260
5,320
38,905
140,485
(2,281)
—
2,282
93
(92) $
—
(92) $
$
$
64,756
—
29,223
93,979
4,241
43,961
—
25,047
69,008
(10,296)
— (25,685)
(2,307)
324
33
43
17,098
—
15,511
32,609
(14,198)
—
(23)
6
4,522 $ (38,321) $ (14,057) $ (14,227)
(1,588)
4,522 $ (37,241) $ (12,126) $ (12,639)
28,135
—
19,205
47,340
(13,171)
—
(868)
18
(1,080)
(1,931)
—
$
$
(0.00) $
(0.00) $
0.14 $
(2.13) $
(5.29) $
(6.21)
0.12 $
(2.13) $
(5.29) $
(6.21)
34,381
32,928
17,474
2,294
2,036
34,381
36,459
17,474
2,294
2,036
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Table of Contents
(in thousands)
Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Net working capital (deficit)
Total assets
Total liabilities
Convertible preferred stock
Additional paid in capital
Total stockholders’ equity (deficit)
Noncontrolling interest
Total equity (deficit)
2017
2016
As of December 31,
2014
2015
2013
6,494 21,572 $
$ 24,508 $
94,506
122,672
165,836
27,634
—
331,073
138,202
—
138,202
89,268 69,552
103,085 83,778
134,371 116,661
17,097 21,470
—
308,815 291,853
117,274 95,191
—
117,274 95,191
—
—
2,304 $
—
(9,633)
26,021
29,546
157,379
8,155
(151,299)
(9,605)
(160,904)
6,728
—
6,487
30,877
23,709
156,210
6,073
(141,298)
(7,744)
(149,042)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with
“Selected financial data” and our audited consolidated financial statements and related notes included in Items 6 and 8,
respectively, of this Annual Report on Form 10-K. This discussion and analysis and other parts of this Annual Report on Form
10-K contain forward-looking statements that reflect our current plans, expectations, estimates and beliefs that involve risks,
uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our
actual results and the timing of selected events may differ materially from those discussed in these forward-looking statements.
You should carefully read Item 1A - “Risk Factors” included in this Annual Report on Form 10-K to gain an understanding of the
important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the
section entitled “Special Note Regarding Forward-Looking Statements and Industry Data.”
Overview
We are an ophthalmic medical technology and pharmaceutical company focused on the development and
commercialization of novel surgical devices and sustained pharmaceutical therapies designed to treat glaucoma, one of the
world’s leading causes of blindness. We developed Micro‑Invasive Glaucoma Surgery (MIGS) to address the shortcomings of
traditional glaucoma treatment options. MIGS procedures involve the insertion of a micro‑scale device or drug delivery system
from within the eye’s anterior chamber through a small corneal incision. Our MIGS devices are designed to reduce intraocular
pressure by restoring the natural outflow pathways for aqueous humor. Our MIGS drug delivery systems are designed to reduce
intraocular pressure by continuously eluting a glaucoma drug from within the eye, potentially providing sustained pharmaceutical
therapy for extended periods of time.
Our iStent , a micro‑bypass stent that is designed to reduce intraocular pressure by restoring the natural physiologic
pathways for aqueous humor, was the first commercially available MIGS treatment solution. Approved by the United States
(U.S.) Food and Drug Administration (FDA) for insertion in combination with cataract surgery, the iStent procedure is currently
reimbursed by Medicare and all major national private payors. Our next product, the iStent Inject, includes two stents pre‑loaded
in an auto‑injection inserter that are also designed to lower intraocular pressure. The iStent Inject was commercially available in
2017 in certain European Union countries, Canada, Australia, Brazil and South Africa. In these markets, it is approved for use in
conjunction with cataract surgery or as a standalone procedure, even though reimbursement may not be available for all such
procedures. We are currently seeking FDA approval to market the iStent Inject in the U.S.
We are developing four additional iStent pipeline products: the iStent Inject (in the U.S.), the iStent SA, the iStent Infinite
and the iStent Supra . In an effort to obtain approval to market the iStent Inject in the U.S. in conjunction with cataract surgery,
we completed a U.S. investigational device exemption (IDE) pivotal trial and submitted a premarket approval application (PMA)
for the iStent Inject in 2017. The iStent SA is designed for use as a standalone
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glaucoma procedure. Similar to the iStent Inject , the iStent SA is a two-stent product that is slightly wider than the iStent Inject
and uses a different auto‑injection inserter designed for use in a standalone procedure. The iStent SA is currently being studied in
a U.S. pivotal IDE study as a standalone treatment for lowering intraocular pressure in pseudophakic glaucoma patients. We
recently submitted an IDE application for the iStent Infinite, which includes three stents pre-loaded in an auto-injection inserter
and is intended to lower intraocular pressure in refractory glaucoma patients. The iStent Supra is designed to access an alternative
drainage space within the eye and is being evaluated in a U.S. pivotal IDE trial. We completed enrollment for the U.S. pivotal
IDE trial for the iStent Supra in 2017.
We are also pursuing regulatory approval of our first sustained pharmaceutical therapy using our iDose drug delivery
system. A U.S. investigational new drug (IND) Phase II study of our initial iDose platform product, iDose Travoprost , was
completed in 2017 and we intend to commence U.S. Phase III clinical trials for this product in the first half of 2018. We are also
conducting research and development activities to explore other potential drugs that may benefit from the use of the iDose drug
delivery system. In addition, other proprietary R&D efforts are underway on early-stage technologies, including, without
limitation, an intraocular pressure sensor (IOP) system that is designed to capture and store a glaucoma patient’s short-interval
IOP measurements over extended periods of time, and transmit data to the patient’s physician in order to enhance treatment
decisions.
Prior to 2016, we had never been profitable and had incurred operating losses in each year since our inception. Our net
sales increased to $159.3 million for the year ended December 31, 2017 from $114.4 million and $71.7 million for the years
ended December 31, 2016 and 2015, respectively. We incurred a net loss of $0.1 million for the year ended December 31, 2017.
We achieved net income of $4.5 million for the year ended December 31, 2016 and we incurred a net loss of $38.3 million for the
year ended December 31, 2015.
As of December 31, 2017, we had an accumulated deficit of $192.2 million.
We have made and expect to continue to make significant investments in our global sales force, marketing programs, research and
development activities and clinical studies. FDA‑approved IDE studies and new product development programs in our industry
are expensive, and we have incurred a significant increase in administrative costs since we began operating as a public company.
Accordingly, although we achieved profitability in 2016, we incurred a loss in 2017 and there can be no assurance that we will be
profitable in future.
Components of results of operations
Net
sales
We currently operate in one reportable segment, ophthalmic medical devices, and substantially all of our net sales are
derived from sales of our iStent products, net of customer returns and allowances. We recognize net sales when goods are
shipped, title and risk of loss transfer to our customers, persuasive evidence of an arrangement exists and collectability is
reasonably assured.
We sell our products through a direct sales organization in the United States, and outside the United States we sell our
products primarily through direct sales subsidiaries in sixteen countries and through independent distributors in certain countries
in which we do not have a direct presence. The primary end‑user customers for our products are hospitals and surgery centers.
We anticipate our net sales will increase as we expand our global sales and marketing infrastructure and continue to
increase awareness of our products by expanding our sales base and increasing our marketing efforts. We also expect that our net
sales within a fiscal year may be impacted seasonally and reflect seasonality patterns generally consistent with U.S. cataract
procedure volumes, which are typically softer in the first quarter and stronger in the fourth quarter of a given year. However, until
recently, our iStent was the only MIGS device approved for sale in the United States by the FDA. Thus, we had for several years
commercialized the iStent in the United States without any direct MIGS competitors. Other MIGS devices have now become
available in the United States and globally, or are in development by third parties that have entered or could enter the market and
which may affect adoption of or demand for our products. These new MIGS products could achieve greater commercial
acceptance than our iStent or our pipeline products under development, which may reduce demand for our products and reduce
our net sales.
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In 2017, the Australian Department of Health (ADOH) initiated a comprehensive review of its Medicare Benefits
Schedule (MBS), a list of approximately 5,600 codes used to determine reimbursement. As part of this review, reimbursement of
the surgeon fee code for implantation of iStent devices was suspended effective May 1, 2017. Prior to suspension of the code, the
Company filed an application with the ADOH to obtain a new code for reimbursement of the surgeon fee. On May 4, 2017 the
ADOH created a temporary MBS code for the implantation of iStent and iStent Inject , which is set to expire on December 31,
2018. The Company has submitted a request to the ADOH for the creation of a permanent MBS code for the implantation of
iStent and iStent Inject. See Item 1, Business above for additional information.
Cost
of
sales
Cost of sales reflects the aggregate costs to manufacture our products and includes raw material costs, labor costs,
manufacturing overhead expenses and the effect of changes in the balance of reserves for excess and obsolete inventory. We
manufacture our iStent products at our headquarters in San Clemente, California using components manufactured by third parties.
Due to the relatively low production volumes of our iStent products compared to our potential capacity for those products, a
significant portion of our per unit costs is comprised of manufacturing overhead expenses. These expenses include quality
assurance, material procurement, inventory control, facilities, equipment and operations supervision and management.
Beginning in late 2013, cost of sales has included amortization of the $17.5 million intangible asset we recognized in
connection with our royalty buyout agreement with GMP Vision Solutions, Inc. (GMP) in November 2013. See “Indebtedness-
Notes payable to GMP Vision Solutions” for additional information. The amortization expense was $3.5 million in each of the
years ended December 31, 2017, 2016 and 2015 and is estimated to be $3.0 million in 2018, after which it will be fully amortized.
Beginning in 2015, cost of sales includes a charge equal to a low single‑digit percentage of worldwide net sales of
certain current and future products, including our iStent products, with a required minimum annual payment of $500,000, which
amount became payable to the Regents of the University of California (University) in connection with our December 2014
agreement with the University (UC Agreement) related to a group of the Company’s U.S. patents (Patent Rights). This ongoing
product payment obligation will terminate on the date the last of the Patent Rights expires, which is currently expected to be in
2022.
Under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), the 2.3% federal medical device excise tax
on U.S. sales of medical devices manufactured by us was suspended from January 1, 2016 to December 31, 2017, and, pursuant to
HR 195 passed on January 22, 2018, was further suspended through December 31, 2019.
Our future gross profit as a percentage of net sales, or gross margin, will be impacted by numerous factors including
commencement of sales of products in our pipeline, or any other future products, which may have higher product costs. Our gross
margin will also be affected by manufacturing inefficiencies that we may experience as we attempt to manufacture our products
on a larger scale, manufacture new products and change our manufacturing capacity or output. Additionally, our gross margin
will continue to be affected by the aforementioned intangible asset amortization and expense related to the UC Agreement.
Selling,
general
and
administrative
Our selling, general and administrative (SG&A) expenses primarily consist of personnel‑related expenses, including
salaries, sales commissions, bonuses, fringe benefits and stock‑based compensation for our executive, financial, marketing, sales,
and administrative functions. Other significant SG&A expenses include marketing programs, advertising, conferences and
congresses, and travel expenses, as well as the costs associated with obtaining and maintaining our patent portfolio, professional
fees for accounting, auditing, consulting and legal services, travel and allocated overhead expenses.
We expect SG&A expenses to continue to grow as we increase our sales and marketing infrastructure globally and our
clinical education and general administration infrastructure in the United States. We also expect other nonemployee‑related costs,
including sales and marketing program activities for new products, outside services and accounting and general legal costs to
increase as our overall operations grow. The timing of these increased expenditures
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and their magnitude are primarily dependent on the commercial success and sales growth of our products, as well as on the timing
of any new product launches and other potential business and operational activities. In addition, we have incurred increased
SG&A expenses resulting from becoming a public company, which we expect will increase in 2018 now that, as of the end of
fiscal year 2017, we are no longer able to rely on certain “emerging growth company” exemptions that we are afforded under the
Jumpstart Our Business Startups Act.
In-process
research
and
development
Our in-process research and development (IPR&D) expense consists of the cost associated with purchasing the IOP
Sensor System from DOSE on April 12, 2017. The IOP Sensor System was in the development-stage at the time of purchase.
Research
and
development
Our research and development (R&D) activities primarily consist of new product development projects, pre‑clinical
studies, IDE studies, and other clinical trials. Our R&D expenses primarily consist of personnel‑related expenses, including
salaries, fringe benefits and stock‑based compensation for our R&D employees; research materials; supplies and services; and the
costs of conducting clinical studies, which include payments to investigational sites and investigators, clinical research
organizations, consultants, and other outside technical services and the costs of materials, supplies and travel. We expense R&D
costs as incurred. We expect our R&D expenses to increase as we initiate and advance our development programs and clinical
trials, the most costly of which are expected to be our iStent Inject, iStent Supra, iDose Travoprost, iStent SA and iStent Infinite
product candidates. Additionally, we expect our R&D expenses to increase as we incur developmental spend on the IOP Sensor
System product line we purchased from DOSE in April 2017.
Completion dates and costs for our clinical development programs include seeking regulatory approvals and our research
programs can vary significantly for each current and future product candidate and are difficult to predict. As a result, while we
expect our R&D costs to continue to increase for the foreseeable future, we cannot estimate with any degree of certainty the costs
we will incur in connection with the development of our product candidates. We anticipate we will make determinations as to
which programs and product candidates to pursue and how much funding to direct to each program and product candidate on an
ongoing basis in response to the scientific success of early research programs, results of ongoing and future clinical trials, as well
as ongoing assessments as to each current or future product candidate’s commercial potential and our likelihood of obtaining
necessary regulatory approvals.
Other
income
(expense),
net
Other income (expense), net primarily consists of interest income derived from our short-term investments, interest
expense during the time our secured notes payable were outstanding during 2016, and until the common stock warrants were
exercised during the first three months of 2016, changes in the fair value of our stock warrant liability. Also included are
unrealized gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the U.S.
dollar, primarily related to intercompany loans.
Income
taxes
The provision for income taxes is determined using an estimated annual effective tax rate which is generally lower than
the U.S. federal statutory rate primarily due to the utilization of net operating loss carryforwards, the benefit of which had not
previously been recognized due to a full valuation allowance. The annual effective tax rate may be subject to fluctuations during
the year as new information is obtained which may affect the assumptions used to estimate the annual effective tax rate, including
factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions
where the we conduct business, our expansion into new states or foreign countries, and the amount of valuation allowances
against deferred tax assets.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. Among other changes, the Act reduces the US federal
corporate tax rate from 34 percent to 21 percent for federal tax purposes. In accordance with Staff
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Accounting Bulletin 118, as of December 31, 2017, we have not completed the accounting for the tax effects of enactment of the
Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on the existing deferred tax
balances. In all cases, we will continue to make and refine calculations as additional analysis is completed. In addition, estimates
may also be affected as we gain a more thorough understanding of the Act.
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future,
which is generally 21%. However, we are still analyzing certain aspects of the Act and refining calculations, which could
potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded
related to the remeasurement of the deferred tax balance was $25.2 million, which was fully offset by a decrease in the valuation
allowance.
Due to uncertainties which currently exist in the interpretation of the provisions of the Act regarding Internal Revenue
Code (IRC) Section 162(m), we are still evaluating the potential impacts of IRC Section 162(m) as amended by the Act.
Results of operations
Comparison
of
years
ended
December
31,
2017
and
2016
Year ended
% Increase
(decrease)
(in thousands)
Statements of operations data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
In-process research and development
Research and development
Total operating expenses
(Loss) income from operations
Total other income, net
Provision for income taxes
Net (loss) income
Net sales
2017
December 31,
2016
$ 159,254 $ 114,397
16,177
98,220
21,050
138,204
96,260
5,320
38,905
140,485
(2,281)
2,282
93
(92) $
64,756
—
29,223
93,979
4,241
324
43
4,522
$
39 %
30 %
41 %
49 %
NM
33 %
49 %
NM
604 %
116 %
NM
Net sales for the years ended December 31, 2017 and 2016 were $159.3 million and $114.4 million, respectively,
reflecting an increase of $44.9 million or 39%. The increase in net sales resulted from unit volume increases worldwide, an
increase in the average selling price of iStents sold to U.S. ASCs related to an increase in Medicare reimbursement payments, and
expansion of the Company’s direct sales operations into new international markets. Net sales in the United States represented
$140.9 million and $105.0 million of net sales for the years ended December 31, 2017 and 2016, respectively, increasing by 34%.
International sales for the years ended December 31, 2017 and 2016 were $18.4 million and $9.4 million, respectively, increasing
by 95%. Net sales at our subsidiaries in Australia, Germany, Japan and the United Kingdom accounted for the majority of the
increase internationally.
Cost of sales
Cost of sales for the years ended December 31, 2017 and 2016 were $21.1 million and $16.2 million, respectively,
reflecting an increase of $4.9 million or 30%. Our gross margin for the year ended December 31, 2017 was approximately 87%
compared to approximately 86% in 2016.
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Selling, general and administrative expenses
SG&A expenses for the years ended December 31, 2017 and 2016 were $96.3 million and $64.8 million, respectively, reflecting
an increase of $31.5 million or 49%. The increase in SG&A expenses was primarily the result of an increase of approximately
$11.7 million in salary and related expenses and stock-based compensation associated with our increased number of domestic
employees, an increase in SG&A expenses incurred by our foreign subsidiaries of approximately $8.9 million and an increase of
approximately $4.4 million in consulting and professional services fees.
Research and development expenses
R&D expenses for the years ended December 31, 2017 and 2016 were $38.9 million and $29.2 million, respectively,
reflecting an increase of $9.7 million or 33%. The increase in R&D expenses primarily resulted due to approximately $6.2 million
in salary and related expenses, stock-based compensation, travel and other costs associated with our increased number of
personnel, primarily in our clinical and regulatory affairs functions, required to manage the increased number of global clinical
studies with associated investigational sites and study investigators , an increase of approximately $2.0 million in product costs
for supplies and inventory requisitions for iStent Inject and an increase of approximately $1.8 million in consulting and
professional services fees. Partially offsetting these increases was a reduction in U.S. clinical trial expenses of approximately
$1.8 million given we achieved full enrollment in a U.S.-based clinical study during the fiscal year ended 2017.
Other income, net
We had other income, net for the years ended December 31, 2017 and December 31, 2016 of $2.3 million and $0.3
million, respectively. The increase in interest and other income reflects higher interest rates on a comparatively higher balance of
short-term investments and the recognition of greater unrealized foreign currency gains due to higher intercompany loan balances.
Provision for income taxes
Our effective tax rate for the year ended 2017 was not meaningful. For the years ended December 31, 2017 and 2016, we
recorded a provision for income taxes of $93,000 and $43,000, respectively, which were primarily comprised of federal
alternative minimum tax and state income taxes.
Comparison
of
years
ended
December
31,
2016
and
2015
(in thousands)
Statements of operations data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income (loss) from operations
Loss on deconsolidation of DOSE
Total other income (expense), net
Provision for income taxes
Net income (loss)
Year ended
December 31, % Increase
2016
2015
(decrease)
$ 114,397 $
16,177
98,220
64,756
29,223
93,979
4,241
—
324
43
4,522 $
$
71,700
12,988
58,712
43,961
25,047
69,008
(10,296)
(25,685)
(2,307)
33
(38,321)
60 %
25 %
67 %
47 %
17 %
36 %
NM
NM
NM
30 %
NM
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Net sales
Net sales for the years ended December 31, 2016 and 2015 were $114.4 million and $71.7 million, respectively,
reflecting an increase of $42.7 million or 60%. Net sales in the United States represented $105.0 million and $67.7 million of net
sales for the years ended December 31, 2016 and 2015, respectively, increasing by 55% and accounting for 87% of the overall
increase in net sales. Increases in both the number of customer facilities purchasing our iStent products and the average utilization
of iStent in our customers’ available MIGS-appropriate procedures accounted for the growth in unit sales in the United States.
International sales for the year ended December 31, 2016 and 2015 were $9.4 million and $4.0 million, respectively, increasing
by $5.4 million or 135%, and accounting for 13% of the Company’s worldwide net sales increase. Net sales at our Australian and
Canadian subsidiaries accounted for the majority of the increase internationally. Worldwide, i ncreased unit volume due to
increased iStent utilization across our expanding customer base was responsible for the majority of the increase in net sales.
Cost of sales
Cost of sales for the years ended December 31, 2016 and 2015 were $16.2 million and $13.0 million, respectively,
reflecting an increase of $3.2 million or 25%. Our gross margin for the year ended December 31, 2016 was approximately 86%
compared to approximately 82% in 2015. The increased gross margin percentage reflects that our fixed costs within cost of sales,
such as certain manufacturing overhead costs and the intangible asset amortization in both the 2016 and 2015 periods, represent a
smaller percentage of the larger 2016 revenue amount. Also, there was no medical device excise tax in cost of sales for the year
ended 2016 due to the suspension of the excise tax pursuant to the PATH Act.
Selling, general and administrative expenses
SG&A expenses for the years ended December 31, 2016 and 2015 were $64.8 million and $44.0 million, respectively, reflecting
an increase of $20.8 million or 47%. The increase in SG&A expenses was primarily the result of an increase of approximately
$6.5 million in salary, commissions, bonuses, stock-based compensation, travel and other costs associated with our domestic sales
force; an increase in SG&A expenses incurred by our foreign subsidiaries of approximately $6.4 million; and an increase of
approximately $5.3 million for additional administrative and marketing personnel.
Research and development expenses
R&D expenses for the years ended December 31, 2016 and 2015 were $29.2 million and $25.0 million, respectively,
reflecting an increase of $4.2 million or 17%. Most of the increase in R&D expenses resulted from the cost of additional
personnel, primarily in our clinical affairs function, required to manage the increased number of clinical studies and associated
investigational sites and study investigators. Also contributing to the increase in R&D expenses were higher clinical study costs,
which included payments to investigational sites and study investigators and consultants.
Other income (expense), net
We recorded other income, net for the year ended December 31, 2016 of $0.3 million and other expense, net for the year
ended December 31, 2015 of approximately $28.0 million. The 2016 period primarily reflected interest income from our short-
term investments of approximately $0.9 million, offset by interest expense on our secured notes payable and changes in the fair
value of our stock warrant liability. The 2015 period includes a charge of $25.7 million incurred with the deconsolidation of the
non‑glaucoma related assets of DOSE and elimination of the noncontrolling interest.
Liquidity and capital resources
From our inception through 2015, we incurred losses and negative cash flow from our operations. For the 12 months
ended December 31, 2016, we generated net income of $4.5 million and for the 12 months ended December 31, 2017, we
incurred a $0.1 million net loss but generated $25.5 million of cash from operations. As of December 31, 2017, we had an
accumulated deficit of approximately $192.2 million. We have funded our operations to date from the sale of
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equity securities, including our June 2015 initial public offering (IPO), the issuance of notes payable, cash exercises of stock
options and warrants to purchase equity securities and cash generated from operations. We have made and expect to continue to
make significant investments in our global sales force, marketing programs, research and development activities and clinical
studies. FDA‑approved IDE studies and new product development programs in our industry are expensive, and we have also
incurred a significant increase in administrative costs since we began operating as a public company in 2015. Accordingly,
although we were profitable in 2016, and have generated cash from operations, there can be no assurance that we will continue to
be profitable or continue to generate cash from operations.
At December 31, 2017, we had $119.0 million in cash, cash equivalents and short-term investments. We plan to fund
our operations and capital funding needs using existing cash and investments and cash generated from commercial operations,
and we may seek to obtain additional financing in the future through debt or equity financings. There can be no assurance that we
will be able to obtain additional financing on terms acceptable to us, or at all. We believe that our available cash, cash
equivalents, investment balances and interest we earn on these balances and cash generated from sales of our iStent products will
be sufficient to fund our operations and satisfy our liquidity requirements for at least the next 12 months from the date our
financial statements for the year ended December 31, 2017 are made publicly available.
Cash flows
Our historical cash outflows have primarily been associated with cash used for operating activities such as the purchase
and growth of inventory, expansion of our sales, marketing and R&D activities and other working capital needs; the acquisition of
intellectual property; and expenditures related to equipment and improvements used to increase our manufacturing capacity, to
improve our manufacturing efficiency and for overall facility expansion. For the year ended December 31, 2017 we generated
cash from operations.
The following table is a summary of our cash flows for the periods indicated:
(in millions)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Exchange rate changes
Net increase (decrease) in cash and cash equivalents
2017
2016
Year ended
December 31,
2015
$
$
25.5 $
(11.7)
4.7
(0.5)
18.0 $
12.3 $
(26.1)
(1.7)
0.4
(15.1) $
(2.2)
(85.6)
107.1
—
19.3
At December 31, 2017, our cash, cash equivalents and short-term investments were held for working capital purposes.
We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate
requirements in investments designed to preserve the principal balance and provide liquidity.
Operating
activities
In the years ended December 31, 2017 and December 31, 2016, our operating activities generated net cash of $25.5
million and $12.3 million, respectively, and in the year ended December 31, 2015, our operating activities used $2.2 million of
net cash.
The improvement in net cash generation from operating activities primarily reflects an increase in cash generated from
significantly higher net sales of our iStent partially offset by increases in our total operating expenses. For the year ended
December 31, 2017, the total net change in operating assets and liabilities provided cash of $2.7 million due to an increase in
accounts payable and accrued liabilities of $9.7 million partially offset by increases in accounts receivable and inventory of $6.3
million. The remaining adjustments to reconcile net loss to net cash provided
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by operating activities provided cash of $22.9 million, primarily consisting of stock‑based compensation expense of $17.6 million
and depreciation and amortization of $5.5 million.
For the year ended December 31, 2016, the total net change in operating assets and liabilities reflected cash usage of
$6.3 million due to increases in accounts receivable and inventory of $9.7 million, partially offset by an increase in accounts
payable of $5.1 million. The remaining adjustments to reconcile net income to net cash used in operating activities provided cash
of $14.1 million, primarily consisting of stock‑based compensation expense of $8.8 million and depreciation and amortization of
$4.7 million.
For the year ended December 31, 2015, the total net change in operating assets and liabilities reflected cash usage of
$3.4 million due to increases in accounts receivable and inventory of approximately $4.0 million, partially offset by an increase in
accounts payable of $1.5 million. All other adjustments to reconcile net loss to net cash used in operating activities totaled
$39.5 million, primarily consisting of the $25.7 million loss on the deconsolidation of DOSE. The remaining adjustments
primarily consisted of stock‑based compensation expense of $7.9 million and depreciation and amortization of $4.3 million.
Investing
activities
In the years ended December 31, 2017, 2016 and 2015, we used approximately $11.7 million, $26.1 million and
$85.6 million, respectively, of net cash in investing activities.
In the year ended December 31, 2017, we used approximately $94.3 million for purchases of short-term investments,
and received proceeds from sales and maturities of short-term investments of $88.9 million.
In the year ended December 31, 2016, we used approximately $75.2 million for purchases of short-term investments,
and received proceeds from sales and maturities of short-term investments of $55.4 million.
In the year ended December 31, 2015, we used approximately $69.8 million for purchases of short-term investments,
and we used $15.0 million for the purchase of the iDose product line from DOSE.
Cash used for purchases of property and equipment was approximately $6.3 million, $6.3 million and $0.9 million for
the years ended December 31, 2017, 2016 and 2015, respectively.
We expect to increase our investment in property and equipment in the future as we expand our manufacturing capacity
for current and new products, improve our manufacturing efficiency and for overall facility expansion.
Financing
activities
In the years ended December 31, 2017, 2016 and 2015, our financing activities provided (used) net cash of $4.7 million,
($1.7) million and $107.1 million of cash, respectively.
In the year ended December 31, 2017, we received net cash proceeds of approximately $4.7 million from the exercises
of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan.
In the year ended December 31, 2016, we received net cash proceeds of approximately $8.0 million from the exercises
of stock options and warrants and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan,
and we used net cash of approximately $9.7 million for note payments.
In the year ended December 31, 2015, we received net cash proceeds of approximately $113.6 million from our IPO,
approximately $6.9 million in net proceeds from senior secured term and draw-to term loans, and approximately $3.3 million
from the exercises of stock options, warrants and purchases of our common stock by employees pursuant to our Employee Stock
Purchase Plan. Additionally, we used approximately $7.8 million for note payments, approximately
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$7.0 million to pay off and fully retire the senior secured term and draw-to term loans, and used approximately $1.9 million for
net payments on the line of credit.
Indebtedness
Notes
payable
to
GMP
Vision
Solutions
In November 2013, we entered into an agreement with GMP pursuant to which we bought out all remaining royalties
payable to GMP in connection with the prior January 2017 agreement with GMP in exchange for the issuance of $17.5 million in
secured promissory notes to GMP and a party related to GMP. These notes were secured by all of our assets, excluding
intellectual property, and were previously subordinate to the rights of our bank lender in connection with our Amended Credit
Agreement (as defined below) prior to the repayment in full of that facility in July 2015. The notes carried an interest rate of 5%
per annum and required monthly interest‑only payments from November 30, 2013 through December 31, 2014 of $72,900,
followed by 24 equal monthly principal and interest payments of $0.8 million, which we began paying on January 31, 2015 and
were fully paid as of December 31, 2016. The buyout agreement also calls for payment of up to $2.0 million in the event of a sale
of the Company that meets certain criteria. In connection with this buyout agreement, we recognized an intangible asset valued at
$17.5 million. After determining that the pattern of future cash flows associated with this intangible asset could not be reliably
estimated with a high level of precision, we concluded that the intangible asset would be amortized to cost of sales in our
statements of operations on a straight line basis over the estimated useful life of five years.
In each of the years ended December 31, 2017, 2016 and 2015, we recorded related amortization expense of $3.5 million
in cost of sales. Estimated amortization expense will be $3.0 million in 2018, after which it will be fully amortized.
Purchase
commitments
The Company had $0.9 million in commitments for capital expenditures as of December 31, 2017.
Contractual obligations
The following table summarizes our significant contractual obligations as of December 31, 2017 and the effect those
obligations are expected to have on our liquidity and cash flows in future periods.
Contractual obligations
(in millions)
Operating lease obligations
Firm purchase commitments
Total contractual obligations
Total
5,382 $
11,365
16,747
$
Less than
1 year
1,513 $
9,897
11,410
$
1 - 3 years
2,618 $
1,468
4,086
$
$
$
Off‑‑balance sheet arrangements
3 - 5 years
Payments due by period
More than
5 years
—
—
—
1,251 $
—
1,251
$
We do not have any off‑balance sheet arrangements as defined in the rules and regulations of the SEC. We do not have
any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of facilitating off‑balance sheet arrangements or for
any other contractually narrow or limited purpose. However, from time to time we enter into certain types of contracts that
contingently require us to indemnify parties against third‑party claims including in connection with certain real estate leases, and
supply purchase agreements, and with directors and officers. The terms of such obligations vary by contract and in most instances
a maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot by reasonably
estimated until a specific claim is asserted, thus no liabilities have been recorded for these obligations on our balance sheets for
any of the periods presented.
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Inflation
We may experience pressure on our iStent selling prices resulting from potential future reductions in reimbursement
payments to our customers, particularly from governmental payors such as Medicare or Medicaid but also from private payors.
We could also be impacted by rising costs for certain inflation‑sensitive operating expenses such as labor and employee benefits.
However, we do not believe that inflation has had a material effect on our business, financial condition or results of operations
presented herein. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such
higher costs through selling price increases. Our inability or failure to do so could adversely affect our business, financial
condition and results of operations.
Critical accounting policies and significant estimates
Management’s discussion and analysis of our financial condition and results of operations are based on our financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities
and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally,
we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be
reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or
conditions and such differences could be material to our financial position and results of operations.
While our significant accounting policies are more fully described in the Notes to our consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical for
fully understanding and evaluating our financial condition and results of operations.
Revenue
recognition
Our revenue is generated primarily from sales of our iStent products to customers in the United States and
internationally. Our customers are comprised of ASCs, hospitals and distributors in certain international locations where we
currently do not have a direct commercial presence. We recognize revenue from product sales when the following criteria are
met: goods are shipped, title and risk of loss has transferred to our customers, persuasive evidence of an arrangement exists and
collectability is reasonably assured. Persuasive evidence of an arrangement exists when we have a contractual arrangement in
place with the customer. Delivery has occurred when a product is shipped. If persuasive evidence of an arrangement exists and
delivery has occurred, we determine whether the invoiced amount is fixed or determinable and collectability of the invoiced
amount is reasonably assured. We assess whether the invoiced amount is fixed or determinable based on the existing arrangement
with the customer, including whether we have sufficient history with a customer to reliably estimate the customer’s payment
patterns. We assess collectability by evaluating historical cash receipts and individual customer outstanding balances. To the
extent all criteria set forth above are not satisfied at the time of shipment, revenue is recognized when cash is received from the
customer.
We permit returns of product if such product is returned in good condition and from normal distribution channels, and
we provide a warranty on our products for one year from the date of shipment. Estimated allowances for sales returns and
warranty replacements are based upon the historical patterns of our product returns and warranty replacements matched against
sales, and our evaluation of specific factors that may increase the risk of product returns and warranty replacements. Product
returns and warranty replacements to date have been immaterial.
Clinical
trial
expense
accruals
As part of our R&D expenses, we accrue at each balance sheet date the estimated costs of clinical study activities
performed by third‑party clinical sites with whom we have agreements providing for fees based upon the quantities of subjects
enrolled and clinical evaluation visits that occur over the life of the study. The estimates are determined based upon a review of
the agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and
are based upon the facts and circumstances known to us at each financial reporting date. If the actual timing of performance of
activities varies from the assumptions used in the estimates, we
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adjust the accruals accordingly. There have been no material adjustments to our prior period accrued estimates for clinical trial
activities through December 31, 2017. If we underestimate or overestimate the activity or fees associated with a study or service
at a given point in time, adjustments to R&D expenses may be necessary in future periods. Subsequent changes in estimates may
result in a material change in our accruals. Nonrefundable advance payments for goods and services, including fees for process
development or manufacturing and distribution of clinical supplies that will be used in future research and development activities,
are deferred and recognized as expense in the period that the related goods are consumed or services are performed.
Inventory
valuation
We value inventory at the lower of cost or market (net realizable value). Cost is determined by the first‑in, first‑out
method. This policy requires us to make estimates regarding the market value of our inventory, including an assessment of excess
or obsolete inventory. We evaluate inventory for excess quantities and obsolescence based on an estimate of the future demand
for our product within a specified time horizon, and record an allowance to reduce the carrying value of inventory as determined
necessary. The estimates we use for demand are also used for near‑term capacity planning and inventory purchasing and are
consistent with our revenue forecasts. If our actual demand is less than our forecast demand, we may be required to take
additional excess inventory charges, which would decrease gross margin and adversely impact net operating results in the future.
Stock‑‑based
compensation
expense
Stock‑based compensation expense for stock options is measured at the date of grant, based on the estimated fair value
of the award using the Black‑Scholes option pricing model.
Stock-based compensation expense for restricted stock units is also measured at the date of grant, based on the closing
price of our common stock.
For awards subject to time‑based vesting conditions, we recognize stock‑based compensation expense over the
employee’s requisite service period on a straight‑line basis, net of estimated forfeitures. We account for stock‑based
compensation arrangements with non‑employees using a fair value approach. Stock options granted to non‑employees are subject
to periodic revaluation over their vesting terms.
The estimation of the fair value of each stock‑based option grant or issuance on the date of grant involves numerous
assumptions by management. Although we calculate the fair value under the Black‑Scholes option pricing model, which is a
standard option pricing model, this model still requires the use of numerous assumptions, including, among others, the expected
life (turnover), volatility of the underlying equity security, a risk free interest rate and expected dividends. Because we have a
limited operating history as a public company, there is a lack of company‑specific historical and implied volatility data, and
therefore we have estimated stock price volatility based upon an index of the historical volatilities of a group of comparable
publicly‑traded medical device peer companies. We will continue to apply this process until a sufficient amount of historical
information regarding the volatility of our own stock price becomes available. We have estimated the expected term of our
employee stock options using the “simplified” method, whereby the expected life equals the average of the vesting term and the
original contractual term of the option. The model and assumptions also attempt to account for changing employee behavior as
the stock price changes and capture the observed pattern of increasing rates of exercise as the stock price increases. The use of
different values by management in connection with these assumptions in the Black‑Scholes option pricing model could produce
substantially different results.
In July 2014, we granted stock options to purchase an aggregate of 1.2 million shares of common stock, which options
contained a performance condition such that they only become exercisable in the event that our common stock is listed on a
national securities exchange within one year from the date of grant. In accordance with authoritative guidance, we did not record
any compensation expense associated with the grants until the performance condition was satisfied in the three month period
ended June 30, 2015. Upon the completion of the IPO on June 30, 2015, we immediately recognized cumulative compensation
cost of $3.8 million for the grants as if the method had been applied since the date of grant using the required graded accelerated
attribution method, and we will record compensation expense over the
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remainder of the four‑year vesting period using this method. Stock options granted subsequent to July 2014 do not contain a
performance condition.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 of the notes to our consolidated financial statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. Our cash and cash equivalents include cash in
readily available checking and money market accounts, as well as a certificate of deposit. These securities are not dependent on
interest rate fluctuations that could cause the principal amount of these assets to fluctuate and thus do not pose any interest rate
risk to the Company. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute
assurance that in the future our investments will not be subject to adverse changes in market value.
In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in
excess of federally insured limits.
Foreign currency exchange risk
The financial statements of our foreign subsidiaries and their sales to customers are denominated in the foreign
subsidiaries’ respective functional currencies, and therefore we have exposure to foreign currency exchange rates. The remainder
of our business is primarily denominated in U.S. dollars. The effect of a 10% adverse change in exchange rates on foreign
denominated cash, receivables and payables would not have been material for the periods presented. As our operations in
countries outside of the United States grow, our results of operations and cash flows will be subject to fluctuations due to changes
in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any material
foreign currency hedging contracts although we may do so in the future.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DAT A
Index to consolidated financial statements
Report of independent registered public accounting firm
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of comprehensive (loss) income
Consolidated statements of convertible preferred stock and stockholders’ equity (deficit)
Consolidated statements of cash flows
Notes to consolidated financial statements
77
78
79
80
81
82
83
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Glaukos Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Glaukos Corporation (the Company) as of December 31, 2017
and 2016, the related consolidated statements of operations, comprehensive (loss) income, convertible preferred stock and
stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2017, and the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2006.
Irvine, California
February 28, 2018
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Glaukos Corporation
Consolidated balance sheets
(in thousands, except par values)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory, net
Prepaid expenses and other current assets
Restricted cash
Total current assets
Property and equipment, net
Intangible assets, net
Deferred tax asset, net
Deposits and other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Accrued liabilities
Deferred rent
Total current liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and
outstanding
Common stock, $0.001 par value; 150,000 shares authorized; 34,647 and 33,971 shares
issued and 34,619 and 33,943 shares outstanding at December 31, 2017 and 2016,
respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Less treasury stock (28 shares as of December 31, 2017 and 2016)
Total stockholders’ equity
Total liabilities and stockholders' equity
2017
December 31,
2016
24,508 $
94,506
16,656
11,222
2,568
—
149,460
11,794
3,147
235
1,200
165,836 $
6,244 $
20,449
95
26,788
846
27,634
6,494
89,268
14,305
6,844
3,032
80
120,023
7,593
6,567
—
188
134,371
2,967
13,911
60
16,938
159
17,097
—
—
35
331,073
(591)
(192,183)
(132)
138,202
165,836 $
34
308,815
648
(192,091)
(132)
117,274
134,371
$
$
$
$
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Consolidated statements of operations
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
In-process research and development
Research and development
Total operating expenses
(Loss) income from operations
Other income (expense), net
Interest and other income
Loss on deconsolidation of DOSE
Loss on extinguishment of debt
Interest and other expense, net
Change in fair value of stock warrant liability
Total other income (expense), net
Income (loss) before taxes
Provision for income taxes
Net (loss) income
Net loss attributable to noncontrolling interest
Net (loss) income attributable to Glaukos Corporation
Basic net (loss) income per share, attributable to Glaukos
Corporation stockholders
Diluted net (loss) income per share, attributable to Glaukos
Corporation stockholders
Weighted-average shares used to compute basic net (loss) income per share
attributable to Glaukos Corporation stockholders
Weighted-average shares used to compute diluted net (loss) income per share
attributable to Glaukos Corporation stockholders
2017
2016
$
159,254 $
21,050
138,204
114,397 $
16,177
98,220
96,260
5,320
38,905
140,485
(2,281)
2,326
—
—
(44)
—
2,282
1
93
(92)
(92) $
64,756
—
29,223
93,979
4,241
889
—
—
(608)
43
324
4,565
43
4,522
—
4,522 $
(0.00) $
0.14 $
(0.00) $
0.12 $
34,381
34,381
32,928
36,459
$
$
$
Year ended
December 31,
2015
71,700
12,988
58,712
43,961
—
25,047
69,008
(10,296)
82
(25,685)
(195)
(1,062)
(1,132)
(27,992)
(38,288)
33
(38,321)
(1,080)
(37,241)
(2.13)
(2.13)
17,474
17,474
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Consolidated statements of comprehensive (loss) income
(in thousands)
Net (loss) income
Other comprehensive (loss) income:
Foreign currency translation (loss) gain
Unrealized (loss) gain on short-term investments, net of tax
Other comprehensive (loss) income
Total comprehensive (loss) income
Comprehensive loss attributable to noncontrolling interest
Comprehensive (loss) income attributable to Glaukos Corporation
2017
2016
Year ended
December 31,
2015
$
(92) $
4,522 $
(38,321)
(1,115)
(124)
(1,239)
(1,331)
—
(1,331) $
542
55
597
5,119
—
5,119 $
155
(148)
7
(38,314)
(1,080)
(37,234)
$
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Consolidated statements of convertible preferred stock and stockholders’ equity
(deficit)
(in thousands, except per share amounts)
Convertible
preferred stock
Amount
Shares
Common stock
Amount
Shares
Additional
paid-in
capital
Accumulated
other
comprehensive
income
21,642 $
157,379
2,470 $
6 $
8,155 $
Accumulated
deficit
(159,372)
44 $
Treasury stock
Amount
Shares
Non-
controlling
interest
Total
equity
(deficit)
(28) $
(132) $
(9,605) $ (160,904)
Balance at December 31, 2014
Issuance of Series D
convertible preferred stock
at $18.00 per share
in connection with exercises
of preferred stock warrants
Conversion of preferred
stock into common stock
Issuance of common stock
in initial public offering
Common stock issued under
stock plans
Exercise of common stock
warrant
Share-based compensation
Other comprehensive
income
Deconsolidation of DOSE
Net loss
Balance at December 31, 2015
Common stock issued under
stock plans
Exercise of common stock
warrant
Share-based compensation
Other comprehensive
income
Net income
Balance at December 31, 2016
Common stock issued under
stock plans
Share-based compensation
Other comprehensive loss
Net loss
Balance at December 31, 2017
94
1,698
—
—
—
(21,736)
(159,077)
21,736
17
159,060
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
— $
—
6,900
—
1,097
—
—
6
—
—
—
—
— 32,209
—
—
—
—
1,756
$
—
—
—
—
—
—
—
—
—
—
6
—
—
—
33,971 $
676
—
—
—
34,647 $
7
2
—
—
—
—
—
32
2
—
—
113,582
2,979
188
7,889
—
—
—
$ 291,853
$
8,064
112
8,786
—
—
34 $
1
—
—
—
35 $
—
—
308,815 $
4,666
17,592
—
—
331,073 $
—
—
—
—
—
—
—
—
(37,241)
(196,613)
$
—
—
—
—
—
—
7
—
—
51
—
—
—
—
—
—
—
4,522
(192,091)
—
—
—
(92)
(192,183)
597
—
648 $
—
—
(1,239)
—
(591) $
See accompanying notes to consolidated financial statements.
81
—
—
—
—
—
—
—
—
—
(28)
—
—
—
—
—
(28) $
—
—
—
—
(28) $
—
—
—
—
—
—
—
—
—
$ (132)
—
—
—
159,077
—
113,589
—
—
—
—
10,685
(1,080)
2,981
188
7,889
7
10,685
(38,321)
$
— $ 95,191
—
—
—
—
—
(132) $
—
—
—
—
(132) $
—
—
—
—
—
— $
—
—
—
—
— $
8,066
112
8,786
597
4,522
117,274
4,667
17,592
(1,239)
(92)
138,202
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Glaukos Corporation
Consolidated statements of cash flow s
(in thousands)
Operating Activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by (used) in operating
activities:
Depreciation and amortization
Loss on disposal of fixed assets
Stock-based compensation
Loss on deconsolidation of DOSE
Loss on extinguishment of debt
Change in fair value of stock warrant liability
Unrealized foreign currency (gains) losses
Amortization of premium on short-term investments
Amortization of debt discount and deferred financing costs
Deferred rent
Changes in operating assets and liabilities:
Accounts receivable, net
Inventory, net
Prepaid expenses and other current assets
Restricted cash
Accounts payable and accrued liabilities
Deferred tax asset, net
Other assets
Net cash provided by (used in) operating activities
Investing activities
Purchases of property and equipment
Purchase of iDOSE product line and related assets from DOSE Medical
Purchases of short-term investments
Proceeds from sales and maturities of short-term investments
Net cash used in investing activities
Financing activities
Proceeds from public offering, net of issuance costs
Proceeds from senior secured term and draw-to term loans
Payments of senior secured term and draw-to term loans
Proceeds from line of credit
Payments of line of credit
Payments of subordinated notes
Proceeds from exercise of stock options
Share purchases under Employee Stock Purchase Plan
Proceeds from exercise of stock warrants
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information
Interest paid
Taxes paid, net of refunds
Supplemental schedule of noncash investing and financing activities
Purchase of intangible assets in exchange for future payments
Conversion of preferred stock into common stock
Reduction of liability upon vesting of stock options previously exercised for unvested
stock
$
$
$
$
$
$
2017
2016
Year ended
December 31,
2015
$
(92)
$
4,522 $
(38,321)
5,482
6
17,592
—
—
—
(951)
20
—
722
(2,181)
(4,162)
494
80
9,741
(235)
(1,008)
25,508
(6,311)
—
(94,307)
88,891
(11,727)
—
—
—
—
—
—
3,699
968
—
4,667
(434)
18,014
6,494
24,508
$
— $
$
12
— $
— $
4
$
4,722
40
8,786
—
—
(43)
368
210
—
(31)
(6,791)
(2,935)
(1,762)
—
5,096
—
127
12,309
(6,278)
—
(75,192)
55,354
(26,116)
—
—
—
—
—
(9,696)
6,059
1,945
50
(1,642)
371
(15,078)
21,572
6,494 $
285 $
513 $
— $
— $
62 $
4,267
—
7,889
25,685
186
1,132
192
51
15
91
(2,163)
(1,848)
(755)
—
1,518
—
(127)
(2,188)
(877)
(15,000)
(69,751)
—
(85,628)
113,589
6,852
(7,000)
1,750
(3,600)
(7,804)
1,734
1,161
428
107,110
(26)
19,268
2,304
21,572
834
25
243
159,077
86
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Notes to consolidated financial statements
1. Organization and basis of presentation
Organization
and
business
Glaukos Corporation (Glaukos or the Company), incorporated in Delaware on July 14, 1998, is an ophthalmic medical technology
and pharmaceutical company focused on the development and commercialization of novel surgical devices and sustained
pharmaceutical therapies designed to treat glaucoma, one of the world’s leading causes of blindness. The accompanying
consolidated financial statements include the accounts of Glaukos, its wholly owned subsidiaries and, through June 30, 2015,
affiliated entity DOSE Medical Corporation (DOSE) (see Note 11). All significant intercompany balances and transactions among
the consolidated entities have been eliminated in consolidation.
Liquidity
From inception through 2015, the Company was not profitable and incurred operating losses in each year. For the year ended
December 31, 2017, the Company incurred a net loss of $0.1 million, generated $25.5 million of cash from operations and as of
December 31, 2017 had an accumulated deficit of $192.2 million. For the year ended December 31, 2016, the Company generated
net income of approximately $4.5 million. The Company has financed operations to date primarily through private placements of
equity securities, the issuance of common stock in the initial public offering (IPO) completed in June 2015, debt financings and
cash generated by its commercial operations. While the Company became profitable in 2016, it may not be able to sustain
profitability on a recurring basis in the future, as evidenced by losses incurred in 2017. The Company plans to fund its operations
and capital funding needs using existing cash and investments, cash generated from commercial operations, and through future
debt and equity financings. There can be no assurance that the Company will be able to obtain additional financing on terms
acceptable to it, or at all. Any equity financing may result in dilution to existing stockholders and any additional debt financing
may include restrictive covenants. As of December 31, 2017, the Company had cash, cash equivalents and short-term investments
totaling $119.0 million and net working capital of $123.0 million. The Company has performed an analysis and concluded
substantial doubt does not exist with respect to the Company being able to continue as a going concern through one year from the
date of issuance of the consolidated financial statements for the year ended December 31, 2017.
Initial
public
offering
On June 30, 2015, the Company completed its IPO, selling 6.9 million newly issued shares of common stock at a price of $18.00
per share. The IPO generated net cash proceeds of approximately $113.6 million, after deducting underwriting discounts and
commissions of approximately $8.7 million and other related expenses of approximately $1.9 million. The underwriting discounts
and commissions and offering costs were recorded as a reduction to the IPO proceeds included in additional paid‑in capital.
Immediately prior to the closing of the IPO, all unexercised warrants to purchase shares of Series D convertible preferred stock
were net exercised at the IPO price per share, and then all outstanding shares of convertible preferred stock automatically
converted into approximately 21.7 million shares of common stock. Following the completion of the IPO, there were no shares of
preferred stock and no warrants to purchase shares of Series D convertible preferred stock outstanding. An additional 4.5 million
shares of common stock were reserved for issuance under the Company’s 2015 Omnibus Incentive Compensation Plan and
450,000 shares of common stock were reserved for the Company’s 2015 Employee Stock Purchase Plan.
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Acquisition
of
the
IOP
Sensor
System
and
certain
assets
from
DOSE
Medical
On April 12, 2017, the Company entered into an IOP Sensor System Purchase Agreement (the Purchase Agreement),
between the Company and DOSE, to purchase from DOSE its intraocular pressure (IOP) sensor system, including all patents,
license rights and tangible assets, and to assume certain liabilities related thereto (collectively, the IOP Sensor System), for
consideration consisting of an initial cash payment of $5.5 million, plus performance-based consideration of up to $9.5 million
upon achievement of certain development, clinical and regulatory milestones. The Company completed the purchase of the IOP
Sensor System concurrent with the execution of the Purchase Agreement.
The transaction was accounted for as an asset acquisition. Of the $5.5 million initial cash payment, $5.3 million was
immediately charged to in-process research and development expense as management determined there was no alternative future
use related to the assets purchased. Of the remaining $0.2 million, the majority was capitalized to fixed assets and will be
depreciated over the corresponding asset’s useful life, and a small portion was recorded as a prepaid asset and will be amortized
to general and administrative expense as the underlying amounts are utilized.
DOSE was previously a wholly-owned subsidiary of the Company. In 2010, it was spun-out as a standalone entity and was
accounted for as a consolidated variable interest entity. In 2015, the Company acquired the iDose product line and related assets
from DOSE for a cash payment of $15.0 million and upon the acquisition, the Company derecognized DOSE as a consolidated
entity in the financial statements. In addition to an asset purchase, the parties agreed to an amended and restated patent license
agreement and an amended and restated transition services agreement that provides for limited support from the Company to
DOSE for a period of up to three years, which period was extended through June 30, 2021 in connection with the Purchase
Agreement (see Note 11).
Thomas W. Burns, the Company’s President, Chief Executive and a member of its board of directors, and William J.
Link, Ph.D., Chairman of the Company’s board of directors, currently serve on the board of directors of DOSE and certain
members of the Company’s management and board of directors hold an equity interest in DOSE.
2. Summary of significant accounting policies
Basis
of
presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP).
Use
of
estimates
The preparation of the financial statements in conformity with GAAP requires management to make informed estimates and
assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ
materially from those estimates and assumptions. Management considers many factors in selecting appropriate financial
accounting policies and controls and in developing the estimates and assumptions that are used in the preparation of these
financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates,
including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing
estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield
a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls
within that range of reasonable estimates. The most significant estimates in the accompanying consolidated financial statements
relate to revenue recognition and stock‑based compensation expense. Although these estimates are based on the Company’s
knowledge of current events and actions it may undertake in the future, this process may result in actual results differing
materially from those estimated amounts used in the preparation of the financial statements.
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Foreign
currency
translation
The accompanying consolidated financial statements are presented in United States (U.S.) dollars. The Company considers the
local currency to be the functional currency for its international subsidiaries. Accordingly, their assets and liabilities are translated
into U.S. dollars using the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average
exchange rates prevailing throughout the periods presented. Currency translation adjustments arising from period to period are
charged or credited to accumulated other comprehensive (loss) income in stockholders’ equity. For the year ended December 31,
2017, the Company reported a loss from foreign currency translation adjustments of approximately $1.1 million, and for the years
ended December 31, 2016 and 2015, the Company reported income from foreign currency translation adjustments of
approximately $0.5 million and $0.2 million, respectively.
Realized gains and losses resulting from foreign currency transactions are included in selling, general and administrative expense
in the consolidated statements of operations. For the year ended December 31, 2017, the Company reported a foreign currency
transaction gain of approximately $0.1 million, and for the years ended December 31, 2016 and 2015, the Company reported
foreign currency transaction losses of approximately $0.2 million and $0.1 million, respectively.
Unrealized gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other
than the functional currency, primarily gains and losses on intercompany loans, are included in the consolidated statements of
operations as a component of other income, net. For the year ended December 31, 2017, the Company reported a net foreign
currency transaction gain of $1.0 million and for the years ended December 31, 2016 and 2015, the Company reported net foreign
currency transaction losses of $0.4 million and $0.2 million, respectively.
Cash,
cash
equivalents
and
short-term
investments
The Company invests its excess cash in marketable securities, including money market funds, money market securities, bank
certificates of deposit, corporate bonds, corporate commercial paper, U.S. government bonds and U.S. government agency bonds.
For financial reporting purposes, liquid investment instruments purchased with an original maturity of three months or less are
considered to be cash equivalents. Cash and cash equivalents are recorded at face value or cost, which approximates fair market
value. From time to time, the Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance
Commission (FDIC). Investments are stated at fair value as determined by quoted market prices. Investments are considered
available‑for‑sale and, accordingly, unrealized gains and losses are included in accumulated other comprehensive (loss) income
within stockholders’ equity.
The Company’s entire investment portfolio, except for restricted cash, is considered to be available for use in current operations
and, accordingly, all such investments are stated at fair value using quoted market prices and classified as current assets, although
the stated maturity of individual investments may be one year or more beyond the balance sheet date. The Company did not have
any trading securities or restricted investments at December 31, 2017, 2016 and 2015.
Realized gains and losses and declines in value, if any, judged to be other‑than‑temporary on available‑for‑sale securities, are
reported in other income, net. When securities are sold, any associated unrealized gain or loss previously reported as a separate
component of stockholders’ equity is reclassified out of stockholders’ equity and recorded in the statements of operations in the
period sold using the specific identification method. Accrued interest and dividends are included in other income, net. The
Company periodically reviews its available‑for‑sale securities for other‑than‑temporary declines in fair value below the cost
basis, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Concentration
of
credit
risk
and
significant
customers
Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash,
cash equivalents, short-term investments and accounts receivable. The Company maintains deposits in federally insured financial
institutions in excess of federally insured limits and management believes that the Company is not exposed to significant credit
risk due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has
established guidelines regarding investment instruments and their maturities
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which are designed to maintain preservation of principal and liquidity. The Company believes that the concentration of credit risk
in its accounts receivable is mitigated by its credit evaluation process, relatively short collection terms and the level of credit
worthiness of its customers. During 2017, 2016 and 2015, none of the Company’s customers accounted for more than 10% of
revenues.
Accounts
receivable
The Company sells its products directly to hospitals, surgery centers and distributors in the U.S. and internationally. The
Company periodically assesses the payment performance of these customers and establishes reserves for anticipated losses when
necessary, which losses historically have not been significant and have not exceeded management’s estimates. Accounts
receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful
accounts based on historical collection experience and expectations of future collection based on current market conditions. The
allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses. Account balances are
charged against the allowance when it is probable the receivable will not be recovered. The Company’s allowance for doubtful
accounts was approximately $0.6 million, $0.5 million and $0.1 million as of December 31, 2017, 2016 and 2015, respectively.
Additionally, no customers accounted for more than 10% of net accounts receivable as of either date.
The Company generally permits returns of product from customers if such product is returned in a timely manner and in good
condition. Estimated allowances for sales returns are based upon the Company’s historical patterns of product returns matched
against sales, and management’s evaluation of specific factors that may increase or decrease the risk of product returns. The
Company’s sales return reserve was approximately $0.3 million, $0.2 million and $0.1 million as of December 31, 2017, 2016
and 2015, respectively.
Inventory
Inventory is valued at the lower of cost or market (net realizable value). Cost is determined by the first‑in, first‑out method.
Management evaluates inventory for excess quantities and obsolescence and records an allowance to reduce the carrying value of
inventory as determined necessary.
Long
lived
assets
Property and equipment is recorded at cost. Depreciation of property and equipment is generally provided using the straight‑line
method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized
over their estimated useful life or the related lease term, whichever is shorter. Maintenance and repairs are expensed as incurred.
All long lived assets are reviewed for impairment in value when changes in circumstances dictate, based upon undiscounted
future operating cash flows, and appropriate losses are recognized and reflected in current earnings to the extent the carrying
amount of an asset exceeds its estimated fair value, determined by the use of appraisals, discounted cash flow analyses or
comparable fair values of similar assets. The Company recorded no impairment charges during 2017 and 2015 and $14,000 in
2016.
Intangible
assets
Intangible assets are recorded at cost and are amortized over the estimated useful life. Intangible assets in the accompanying
balance sheets are currently comprised of the cost of the Company’s buyout of a royalty payment obligation and the value of non-
compete agreements entered with three former international distributors. (See Note 5).
Fair
value
of
financial
instruments
The carrying amounts of cash equivalents, accounts receivable, accounts payable, and accrued liabilities are considered to be
representative of their respective fair values because of the short‑term nature of those instruments.
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The valuation of assets and liabilities is subject to fair value measurements using a three‑tiered approach and fair value
measurements are classified and disclosed by the Company in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or
inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market activity).
Revenue
recognition
The Company recognizes revenue from product sales when the following criteria are met: goods are shipped, title and risk of loss
has transferred to its customers, persuasive evidence of an arrangement exists and collectability is reasonably assured. Persuasive
evidence of an arrangement exists when there is a contractual arrangement in place with the customer. Delivery has occurred
when a product is shipped. If persuasive evidence of an arrangement exists and delivery has occurred, the Company determines
whether the invoiced amount is fixed or determinable and collectability of the invoiced amount is reasonably assured. The
Company assesses whether the invoiced amount is fixed or determinable based on the existing arrangement with the customer,
including whether the Company has sufficient history with a customer to reliably estimate the customer’s payment patterns. The
Company assesses collectability by evaluating historical cash receipts and individual customer outstanding balances. To the
extent all criteria set forth above are not satisfied at the time of shipment, revenue is recognized when cash is received from the
customer.
Customers are not granted specific rights of return; however, the Company may permit returns of product from customers if such
product is returned in a timely manner and in good condition. The Company provides a warranty on its products for one year from
the date of shipment, and any product found to be defective or out of specification will be replaced at no charge during the
warranty period. Estimated allowances for sales returns and warranty replacements are recorded at the time of sale of the product
and are estimated based upon the historical patterns of product returns matched against sales, and an evaluation of specific factors
that may increase the risk of product returns. Product returns and warranty replacements to date have been consistent with
amounts reserved or accrued and have not been significant.
Shipping
and
handling
costs
All shipping and handling costs are expensed as incurred and are charged to general and administrative expense. Charges to
customers for shipping and handling are credited to general and administrative expense.
Advertising
costs
All advertising costs are expensed as incurred. Advertising costs incurred during the years ended December 31, 2017, 2016 and
2015 were approximately $2.1 million, $1.6 million and $0.8 million, respectively.
Income
taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and the tax
basis of the Company’s assets and liabilities at the applicable tax rates, along with net operating loss and tax credit carryovers.
The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it
believes is more likely than not to be realized. Management has considered estimated taxable income and ongoing prudent and
feasible tax planning strategies in assessing the amount of the valuation allowance. Based upon the weight of available evidence,
which includes the Company’s historical operating performance and limited potential to utilize tax credit carryforwards, the
Company has determined that total deferred tax assets should
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be fully offset by a valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred
tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.
The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions. The
preparation of these state income tax returns requires the company to interpret the applicable tax laws and regulations in effect in
such jurisdictions, which could affect the amount of tax paid by us.
Additionally, the Company follows an accounting standard addressing the accounting for uncertainty in income taxes that
prescribes rules for recognition, measurement, and classification in the financial statements of tax positions taken or expected to
be taken in a tax return.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. Among other changes, the Act reduces the US federal
corporate tax rate from 34 percent to 21 percent. In accordance with Staff Accounting Bulletin 118, as of December 31, 2017, the
Company has not completed the accounting for the tax effects of enactment of the Act; however, in certain cases, as described
below, the Company has made a reasonable estimate of the effects on the existing deferred tax balances. In all cases, the
Company will continue to make and refine calculations as additional analysis is completed. In addition, estimates may also be
affected as the Company gains a more thorough understanding of the Act.
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the
future, which is generally 21% for federal tax purposes. However, the Company is still analyzing certain aspects of the Act and
refining calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts.
The provisional amount recorded related to the remeasurement of the deferred tax balance was $25.2 million, which was fully
offset by a decrease in the valuation allowance.
Due to uncertainties which currently exist in the interpretation of the provisions of the Act regarding Internal Revenue Code
(IRC) Section 162(m), the Company is still evaluating the potential impacts of IRC Section 162(m) as amended by the Act.
Research
and
development
expenses
Major components of research and development expense include personnel costs, preclinical studies, clinical trials and related
clinical product manufacturing, materials and supplies, and fees paid to consultants. Research and development costs are
expensed as goods are received or services are rendered. Costs to acquire technologies to be used in research and development
that have not reached technological feasibility and have no alternative future use are also expensed as incurred.
At each financial reporting date, the Company accrues the estimated costs of clinical study activities performed by third party
clinical sites with whom the Company has agreements that provide for fees based upon the quantities of subjects enrolled and
clinical evaluation visits that occur over the life of the study. The cost estimates are determined based upon a review of the
agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and are
based upon the facts and circumstances known to the Company at each financial reporting date. If the actual performance of
activities varies from the assumptions used in the cost estimates, the accruals are adjusted accordingly. There have been no
material adjustments to the Company’s prior period accrued estimates for clinical trial activities through December 31, 2017.
Stock‑‑based
compensation
The Company recognizes compensation expense for all stock-based awards granted to employees and nonemployees,
including members of its board of directors.
The fair value of stock option awards is estimated at the grant date using the Black-Scholes option pricing model, and
the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service
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period using the straight-line method. The determination of the fair value-based measurement of stock options on the date of grant
using an option pricing model is affected by the determination of the fair value of the underlying stock as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s
stock price volatility over the expected term of the grants, and actual and projected employee stock option exercise behaviors. In
the future, as additional empirical evidence regarding these estimates becomes available, the Company may change or refine its
approach of deriving them, and these changes could impact the fair value-based measurement of stock options granted in the
future. Changes in the fair value-based measurement of stock awards could materially impact the Company’s operating results.
The fair values of stock option awards made to nonemployees are remeasured at each reporting period using the Black-
Scholes option pricing model. Compensation expense for these stock option awards is determined by applying the remeasured fair
values to the shares that have vested during a period.
The fair value of restricted stock unit (RSU) awards made to employees and nonemployees is equal to the closing market
price of the Company’s common stock on the grant date.
Comprehensive
(loss)
income
All components of comprehensive (loss) income, including net (loss) income, are reported in the financial statements in the period
in which they are recognized. Comprehensive (loss) income is defined as the change in equity during a period from transactions
and other events and circumstances from non‑owner sources, including unrealized gains and losses on marketable securities and
foreign currency translation adjustments.
Net
(loss)
income
per
share
Basic net (loss) income per share is calculated by dividing the net (loss) income by the weighted average number of common
shares that were outstanding for the period, without consideration for common stock equivalents.
For periods when the Company realizes a net loss, no common stock equivalents are included in the calculation of weighted
average number of dilutive common stock equivalents as the effect of applying the treasury stock method is considered anti-
dilutive.
For periods when the Company realizes net income, diluted net income per share is calculated by dividing the net income by the
weighted average number of common shares plus the sum of the weighted average number of dilutive common stock equivalents
outstanding for the period determined using the treasury stock method. Common stock equivalents are comprised of stock options
outstanding under the Company’s stock option plans, shares issuable under the Company’s Employee Stock Purchase Plan
(ESPP), and stock warrants.
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The Company’s computation of net (loss) income per share is as follows (in thousands, except per share amounts):
Numerator:
Net (loss) income - basic
Denominator:
2017
As of
December 31,
2016
2015
$
(92) $
4,522
$
(37,241)
Weighted average number of common shares outstanding - basic
Common stock equivalents from outstanding common stock options
Common stock equivalents for ESPP
Common stock equivalents from outstanding common stock warrants
Weighted average number of common shares outstanding - diluted
34,381
-
-
-
34,381
32,928
3,514
16
1
36,459
17,474
-
-
-
17,474
Basic net (loss) income per share
Diluted net (loss) income per share
$
$
(0.00) $
0.14 $
(2.13)
(0.00) $
0.12 $
(2.13)
Potentially dilutive securities not included in the calculation of diluted net (loss) income per share because to do so would be
anti‑dilutive were as follows (in common stock equivalent shares, in thousands):
Stock options outstanding
Employee stock purchase plan
Common stock warrants outstanding
Recently
adopted
accounting
pronouncements
2017
2016
As of
December 31,
2015
5,689
28
—
5,717
1,099
—
—
1,099
5,701
89
6
5,796
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2016-09 , Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU
2016-09), which modifies certain aspects of the accounting for share-based payment transactions, including income taxes,
classification of awards, and classification in the statement of cash flows. The amendments are intended to improve the
accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their
employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income
tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.
The amendments were effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods and the Company adopted ASU 2016-09 in its first quarter 2017. As a result of the prospective adoption of ASU 2016-09
on January 1, 2017, excess tax benefits of $13.1 million were recorded to the Company’s net operating loss carryover resulting in
an increase in the Company’s deferred tax assets with an identical increase in the associated valuation allowance, and no prior
periods have been adjusted.
Recently
issued
accounting
pronouncements
not
yet
adopted
In May 2014, the FASB issued guidance in ASU 2014-09 which was codified in Accounting Standards Codification
(ASC) 606, Revenue Recognition – Revenue from Contracts with Customers (ASC 606). ASC 606 provides a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers, and is
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principles-based, such that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services.
ASU 2015-14 deferred the effective date of ASC 606 to annual reporting periods beginning after December 15, 2017
(including interim periods within those periods) and while early adoption is permitted, the Company adopted ASC 606 on January
1, 2018. Companies are required to apply ASC 606 retrospectively; however, companies may use either a full retrospective or a
modified retrospective approach when adopting the standard. The Company will be using the modified retrospective approach,
and adoption of ASC 606 will not result in a cumulative catch-up adjustment to the opening balance sheet of retained earnings at
the effective date.
The Company has performed an analysis and does not believe adoption of the standard will have a material impact on its
consolidated financial statements with the exception of enhanced disclosure requirements required by ASC 606. In the analysis,
the Company has concluded it generally has one performance obligation, the transaction price is not impacted by any variable
consideration or other factors noted in ASC 606, except for offering a right of return, and the Company’s performance obligations
are generally satisfied when products are shipped.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires management to recognize
almost all leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present
value of the lease payments. The new standard must be adopted using the modified retrospective approach and will be effective
for the Company starting in the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact
this guidance will have on its consolidated financial statements; however, the Company anticipates recognition of additional
assets and corresponding liabilities on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASC
2016-18), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of
cash flows. ASU 2016-18 was effective for the Company starting January 1, 2018. Currently, the Company's restricted cash
balance is not significant and the Company does not expect the adoption of the guidance will have a material impact on its
consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business (ASU 2017-01), clarifying the definition of a business. The amendments are intended to help companies evaluate
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. When substantially all of the
fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not
represent a business. This introduces an initial required screening that, if met, eliminates the need for further assessment. To be
considered a business, an acquisition would have to include an input and a substantive process that together significantly
contribute to the ability to create outputs. To be a business without outputs, there will need to be an organized workforce. The
ASU also narrows the definition of the term “outputs” to be consistent with how it is described in ASC 606, Revenue Recognition
- Revenue from Contracts with Customers . The amendments are effective for annual periods beginning after December 15, 2017,
including interim periods within those periods with early adoption permitted. The Company does not expect the adoption of the
guidance will have a material impact on its consolidated financial statements.
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3. Balance sheet details
Short-term investments
Short-term investments consisted of the following (in thousands):
Maturity Amortized cost
Unrealized
U.S. government bonds
U.S. government agency bonds
Bank certificates of deposit
Commercial paper
Corporate notes
Asset-backed securities
Total
U.S. government agency bonds
Bank certificates of deposit
Commercial paper
Corporate notes
Asset-backed securities
Total
Accounts
receivable,
net
(in years)
less than 2 $
less than 2
less than 1
less than 1
less than 3
less than 3
$
or cost
1,799 $
2,698
10,300
11,598
51,532
16,796
94,723 $
gains
— $
—
1
—
6
—
7 $
Maturity Amortized cost
Unrealized
Unrealized
(in years)
1-3 $
less than 2
less than 1
less than 3
less than 2
$
or cost
9,535 $
11,101
17,011
45,178
6,503
89,328 $
gains
2 $
13
1
7
3
26 $
Unrealized
losses
At December 31, 2017
Estimated
fair value
1,782
2,681
10,298
11,593
51,417
16,735
94,506
(17) $
(17)
(3)
(5)
(121)
(61)
(224) $
losses
At December 31, 2016
Estimated
fair value
9,515
(22) $
11,113
(1)
17,010
(2)
45,124
(61)
—
6,506
(86) $ 89,268
Accounts receivable consisted of the following (in thousands):
Accounts receivable
Less allowance for doubtful accounts
Inventory,
net
Inventory consisted of the following (in thousands):
Finished goods
Work in process
Raw material
December 31,
2016
2017
$
$
17,248 $
(592)
16,656 $
14,800
(495)
14,305
December 31,
2016
2017
$
$
4,225 $
2,368
4,629
11,222 $
2,014
2,105
2,725
6,844
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Property
and
equipment,
net
Property and equipment consisted of the following (in thousands):
Buildings
Equipment
Furniture and fixtures
Leasehold improvements
Computer equipment and software
Construction in progress
Less accumulated depreciation and amortization
December 31,
2016
2017
$
$
874 $
8,311
1,382
4,568
1,980
1,134
18,249
(6,455)
11,794 $
874
5,342
639
3,474
1,239
1,320
12,888
(5,295)
7,593
Depreciation and amortization expense related to property and equipment was $2.1 million, $1.1 million and $0.8 million for the
years ended December 31, 2017, 2016 and 2015, respectively.
Accrued
liabilities
Accrued liabilities consisted of the following (in thousands):
Accrued contract payments (see Note 10)
Accrued sales commissions
Accrued clinical study payments
Accrued bonuses
Accrued vacation benefits
Accrued Employee Stock Purchase Plan liability
Other accrued liabilities
4. Fair value measurements
December 31,
2016
2017
$
$
1,033
506
609
9,106
2,121
1,517
5,557
20,449
$
$
823
1,641
1,167
6,122
1,382
4
2,772
13,911
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. As such, fair value is a market‑based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or liability.
The following tables present information about the Company’s financial assets measured at fair value on a recurring
basis as of December 31, 2017 and 2016, and indicates the fair value hierarchy of the valuation techniques
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utilized by the Company to determine such fair value (in thousands). The Company did not have any financial liabilities measured
at fair value on a recurring basis as of December 31, 2017 and December 31, 2016.
Quoted prices in
active markets for
identical assets
(Level 1)
December 31,
2017
At December 31, 2017
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
(i)
(ii)
(ii)
$
Assets
Money market funds
U.S. government agency bonds
U.S. Government bonds
Bank certificates of deposit
Commercial paper
(ii)
Corporate notes
Asset-backed securities
Total assets
(i) Included in cash and cash equivalents with a maturity of three months or less from date of purchase on the consolidated
2,370 $
2,681
1,782
10,298
14,593
51,417
16,735
99,876 $
2,370 $
—
—
—
—
—
—
2,370 $
2,681
1,782
10,298
14,593
51,417
16,735
97,506 $
— $
(iii)
$
(ii)
(ii)
(ii)
—
—
—
—
—
—
—
—
balance sheets.
(ii)Included in short-term investments on the consolidated balance sheets.
(iii) One commercial paper investment totaling $3,000 (in thousands) is included in cash and cash equivalents on the condensed
consolidated balance sheets, as the investment has a maturity of three months or less from the date of purchase on the
condensed consolidated balance sheets.
December 31,
2016
Quoted prices in
active markets for
identical assets
(Level 1)
At December 31, 2016
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
(i)
(ii)
Assets
Money market funds
U.S. government agency bonds
Bank certificates of deposit
Commercial paper
(ii)
Corporate notes
Asset-backed securities
Total assets
(i) Included in cash and cash equivalents with a maturity of three months or less from date of purchase on the consolidated balance sheets.
9,515
11,113
17,010
45,124
6,506
89,268 $
9,515
11,113
17,010
45,124
6,506
89,348 $
80 $
—
—
—
—
—
80 $
— $
80 $
$
$
(ii)
(ii)
(ii)
—
—
—
—
—
—
—
(ii) Included in short-term investments on the consolidated balance sheets.
Money market funds and currency are highly liquid investments and are actively traded. The pricing information on these
investment instruments is readily available and can be independently validated as of the measurement date. This approach results
in the classification of these securities as Level 1 of the fair value hierarchy.
U.S. government bonds, U.S. government agency bonds, bank certificates of deposit, commercial paper, corporate notes and
asset-backed securities are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for
these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, the
Company uses market pricing and other observable market inputs for similar securities obtained from third party data providers.
These inputs represent quoted prices for similar assets in active
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markets or these inputs have been derived from observable market data. This approach results in the classification of these
securities as Level 2 of the fair value hierarchy.
There were no transfers between levels within the fair value hierarchy during the periods presented.
5. Long‑‑term debt and intangible assets
Notes
payable
in
connection
with
GMP
Vision
Solutions
In January 2007, the Company entered into an agreement (the Original GMP Agreement) with GMP Vision
Solutions, Inc. (GMP) to acquire certain in‑process research and development in exchange for periodic royalty payments equal to
a single‑digit percentage of revenues received for royalty‑bearing products and periodic royalty payments at a higher royalty rate
applied to all amounts received in connection with the grant of licenses or sub-licenses of the related intellectual property.
In November 2013, the Company entered into an amended agreement with GMP in which remaining royalties payable to GMP
(the Buyout Agreement) were canceled in exchange for the issuance of $17.5 million in promissory notes payable to GMP and a
party related to GMP.
The Company concluded that the $17.5 million transaction represented the purchase of an intangible asset. The Company
estimated a useful life of five years over which the intangible asset is being amortized to cost of sales in the accompanying
statements of operations, which amortization period was determined after consideration of the projected outgoing royalty payment
stream had the Buyout Agreement not occurred, and the remaining life of the patents obtained in the Original GMP Agreement.
After determining that the pattern of future cash flows associated with this intangible asset could not be reliably estimated with a
high level of precision, the Company concluded that the intangible asset will be amortized on a straight‑line basis over the
estimated useful life. For each of the years ended December 31, 2017, 2016 and 2015, the Company recorded amortization
expense of $3.5 million related to this intangible asset in cost of sales .
Bank
loan
facility
In February 2015, the Company and its primary bank executed an Amended and Restated Revolving Credit and Term Loan
Agreement (the Amended Credit Agreement) which provided for a $5.0 million senior secured term loan, a $5.0 million senior
secured draw‑to term loan and an $8.0 million senior secured revolving credit facility. Amounts owed under the Amended Credit
Agreement were secured by a first priority security interest in all of the Company’s assets, excluding intellectual property. The
Amended Credit Agreement included certain reporting and financial covenants which, if not met, could have constituted an event
of default under the Amended Credit Agreement.
On the closing date, the Company received $5.0 million cash under the senior secured term loan. The Company incurred loan
origination fees of $41,000 which was recorded as a loan discount, and debt issuance costs of $0.1 million which was recorded as
a deferred asset. As of July 31, 2015, the Company had drawn $2.0 million under the draw‑to term loan. The senior secured term
loan and draw‑to term loan would have matured and would have been required to be fully paid by February 23, 2019. The entire
unpaid principal amount plus any accrued but unpaid interest under the revolving line of credit were due to become payable in
full on February 23, 2017.
On July 31, 2015, the Company paid off in full all amounts outstanding under the Amended Credit Agreement with the payment
of $7.0 million in principal plus all interest and fees payable through the payoff date, and recorded a loss on extinguishment of
debt in the amount of $0.2 million. Accordingly, this facility was terminated and is no longer outstanding and available to the
Company.
Intangible
assets
In 2015, the Company entered into agreements with two international distributors pursuant to which their distribution rights with
the Company were terminated effective as of December 31, 2015. In 2016 and 2017, the Company entered into agreements with
two additional international distributors pursuant to which their distribution
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rights with the Company were terminated effective as of January 1, 2017 and March 31, 2017, respectively. As part of the
agreements the distributors agreed to provide certain services to, and not compete with, the Company for one-to-two years in
exchange for payments calculated based on single-digit percentages of the Company’s future revenues in those years in the
respective countries that had comprised their distributors’ territories. Management recorded the estimated fair value of the non-
compete provisions as intangible assets. As of December 31, 2017, the net non-compete intangible assets totaled approximately
$0.2 million, and are being amortized on a straight-line basis to selling, general and administrative expense over the one-to-two
year period. For the years ended December 31, 2017 and 2016, the Company recorded amortization expense related to the non-
compete provisions of approximately $0.3 million and $0.2 million, respectively.
The following reflects the composition of intangible assets, net (in thousands):
GMP royalty buyout
Non-compete agreements
Accumulated amortization
Total
Weighted average amortization period (in months)
December 31,
2017
December 31,
2016
$
$
17,500 $
524
18,024
(14,877)
3,147 $
60
17,500
243
17,743
(11,176)
6,567
60
Estimated amortization expense will be $3.1 million in 2018 after which the above mentioned intangible assets will be fully
amortized.
6. Convertible preferred stock and stockholders’ equity
Convertible
preferred
stock
Immediately prior to the completion of the IPO, and after all unexercised warrants to purchase shares of Series D convertible
preferred stock were net exercised at the IPO price per share, the Company had outstanding 21,736,367 shares of convertible
preferred stock which automatically converted into 21,736,367 shares of the Company’s common stock. The related carrying
value of $159.1 million was reclassified to additional paid-in capital in the period ending June 30, 2015, and no shares of
convertible preferred stock were outstanding thereafter.
Preferred
stock
The Company is authorized to issue 5.0 million shares of its preferred stock. No shares of preferred stock have been issued.
Common
stock
Prior to the completion of the Company’s IPO in June 2015, all common stock issued resulted from the founding of the Company
and the exercises of stock options. On June 30, 2015, the Company completed its IPO, selling 6.9 million newly issued shares of
common stock at a price of $18.00 per share. Immediately prior to the closing of the IPO, all unexercised warrants to purchase
shares of Series D convertible preferred stock were net exercised at the IPO price per share, and then all outstanding shares of
convertible preferred stock automatically converted into approximately 21.7 million shares of common stock.
In 2013, the Company repurchased at fair market value and placed into treasury 28,000 shares of its common stock that had been
acquired in connection with the exercise of a stock option.
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7. Stock-based compensation
The Company has four stock‑based compensation plans (collectively, the Stock Plans)—the 2001 Stock Option Plan
(the 2001 Stock Plan), the 2011 Stock Plan (the 2011 Stock Plan), the 2015 Omnibus Incentive Compensation Plan (the 2015
Stock Plan) and the 2015 Employee Stock Purchase Plan (the ESPP). The 2015 Stock Plan permits grants of restricted stock units
(RSUs).
The Company has historically granted stock options, but the Company began to award RSU grants to certain employees
during the fiscal year ended 2017. RSU awards vest 25% on each of the first, second, third and fourth anniversaries of the grant
date.
The purpose of these plans is to provide incentives to employees, directors and nonemployee consultants. The Company no longer
grants any awards under the 2001 Stock Plan and the 2011 Stock Plan. The maximum term of any stock options granted under the
Stock Plans is 10 years. Stock options generally vest 25% on the first anniversary of the original vesting date, with the balance
vesting monthly or annually over the remaining three years. Stock options are granted at exercise prices at least equal to the fair
value of the underlying stock at the date of the grant.
The ESPP permits eligible employees to purchase shares of the Company’s common stock, using contributions via payroll
deduction of up to 15% of their earnings, at a price per share equal to 85% of the lower of the stock’s fair market value on the
offering date or purchase date. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the
Internal Revenue Code.
As of January 1, 2018, the Company has reserved an aggregate of 9.5 million shares of common stock for issuance under the 2015
Stock Plan, and 1.5 million shares of common stock for issuance under the ESPP.
Stock options granted pursuant to the 2001 Stock Plan and 2011 Stock Plan permitted optionees to elect to exercise unvested
options in exchange for restricted common stock. All unvested shares issued upon the early exercise of stock options, so long as
they remain unvested, are subject to the Company’s right of repurchase at the optionee’s original exercise price for a 90‑day
period beginning on the date that an optionee’s service with the Company voluntarily or involuntarily terminates. Consistent with
authoritative guidance, early exercises are not considered exercises for accounting purposes. Cash received for the exercise of
unvested options is recorded as a liability, which liability is released to equity at each reporting date as the shares vest. During the
years ended December 31, 2017, 2016 and 2015, there were option exercises for 0, 0 and 337 unvested shares, respectively. As of
December 31, 2017 and 2016, 27 and 977 shares, respectively, remained subject to a repurchase right by the Company. As of
December 31, 2017 and 2016, the related liability, which is included in other accrued liabilities in the accompanying consolidated
balance sheets, was approximately $0 and $4,000, respectively.
In July 2014, the Company granted stock options to purchase an aggregate of 1.2 million shares of common stock, which options
contain a performance condition such that they would only become exercisable in the event that the Company’s common stock
was listed on a national securities exchange within one year from the date of grant. In accordance with authoritative guidance, the
Company did not record any compensation expense associated with the grants until the performance condition was satisfied on
June 30, 2015. Upon the completion of the IPO on June 30, 2015, the Company immediately recognized cumulative
compensation cost of $3.8 million for the grants as if the method had been applied since the date of grant using the required
graded accelerated attribution method, and the Company will record compensation expense over the remainder of the four‑year
vesting period using this method. Stock options granted subsequent to July 2014 do not contain a performance condition.
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Stock options
The following table summarizes stock option activity under the 2001 Stock Plan, 2011 Stock Plan and 2015 Stock Plan (in
thousands):
Outstanding at December 31, 2014
Granted
Exercised
Canceled/forfeited/expired
Outstanding at December 31, 2015
Granted
Exercised
Canceled/forfeited/expired
Outstanding at December 31, 2016
Granted
Exercised
Canceled/forfeited/expired
Outstanding at December 31, 2017
Vested and expected to vest at December 31, 2017
Exercisable at December 31, 2017
5,657 $
1,139
(1,022)
(73)
5,701 $
1,979
(1,660)
(109)
5,911 $
1,877
(639)
(123)
7,026 $
6,893 $
3,687 $
3.93
18.07
1.70
6.56
7.10
21.24
3.65
20.00
12.59
43.85
5.76
23.79
21.36
21.13
10.58
Number of
Weighted-
underlying
shares Weighted-
average
options exercise price
average
remaining
contractual
per share life (in years)
(in thousands)
6.3 $
Aggregate
intrinsic
value (in
thousands)
16,131
9,174
6.7 $ 102,390
42,458
7.3 $ 129,591
22,105
69,555
69,080
57,987
7.3 $
7.2 $
5.9 $
Intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair
value of the common stock for the options that had exercise prices that were lower than the fair value per share
of the common stock on the date of exercise.
The weighted average estimated grant date fair value per share of stock options granted during the years ended December 31,
2017, 2016 and 2015 was $20.62, $10.81 and $9.77, respectively.
The total fair value of stock options that vested during the years ended December 31, 2017 and 2016 was $12.9 million and $5.7
million, respectively.
Restricted Stock Units
The following table summarizes the activity of unvested restricted stock units under the Stock Plans during the year ended
December 31, 2017 (in thousands):
Unvested at December 31, 2016
Granted
Vested
Canceled/forfeited
Unvested at December 31, 2017
No restricted stock units vested during the year ended December 31, 2017.
98
Number of
shares
(in thousands)
— $
173
—
—
173
Weighted-
average
grant date
fair value
—
39.10
—
—
39.10
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Valuation
and
expense
recognition
of
stock-based
awards
The Company accounts for the measurement and recognition of compensation expense for all share‑based awards made to the
Company’s employees and nonemployees based on the estimated fair value of the awards.
The fair value of RSU awards made to employees and nonemployees is equal to the closing marking proce of the Company’s
common stock price on the grant date.
The Company uses the Black‑Scholes option‑pricing model to estimate the fair value of stock options and shares purchased under
the ESPP. The determination of fair value using the Black‑Scholes option‑pricing model is affected by the estimated fair market
value per share of the Company’s common stock as well as assumptions regarding a number of highly complex and subjective
variables, including expected stock price volatility, risk‑free interest rate, expected dividends and expected option life and
generally requires significant management judgment to determine.
Risk‑free interest rate. The risk‑free interest rate is equal to the U.S. Treasury Note interest rate for the comparable term for the
expected option life as of the valuation date. If the expected option life is between the U.S. Treasury Note rates of two published
terms, then the risk‑free interest rate is based on the straight‑line interpolation between the U.S. Treasury Note rates of the two
published terms as of the valuation date.
Expected dividend yield. The expected dividend yield is based on the Company’s history and expectation of dividend payouts.
The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable
future.
Expected volatility. The Company only recently began to have publicly traded equity and has a limited operating history and a
lack of Company‑specific historical and implied volatility data, and therefore has estimated its stock price volatility based upon
an index of the historical volatilities of a group of comparable publicly‑traded medical device peer companies. The historical
volatility data was computed using the historical daily closing prices for the selected peer companies’ shares during the equivalent
period of the calculated expected term of the Company’s stock options. The Company will continue to apply this process until a
sufficient amount of historical information regarding the volatility of its own stock price becomes available.
Expected term. The Company has concluded that its stock option exercise history does not provide a reasonable basis upon which
to estimate expected term, and therefore it uses the simplified method for estimating the expected term of stock option grants.
Under this approach, the weighted‑average expected term is presumed to be the average of the vesting term and the contractual
term of the option.
Fair value of common stock. Historically, and until the June 30, 2015 completion of the Company’s IPO, the fair value of the
shares of common stock underlying the stock options has been the responsibility of and determined by the Company’s Board of
Directors. Because there had been no public market for the Company’s common stock, the Board of Directors determined the fair
value of common stock at the time of grant of the option by considering a number of objective and subjective factors including
independent third‑party valuations of the Company’s common stock, sales prices of convertible preferred stock to unrelated third
parties, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic
outlook, among other factors. Subsequent to the date of the Company’s IPO in June 2015, the Company has used the daily market
prices in the determination of the fair value of its common stock.
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Stock‑‑based
awards
to
employees
The weighted‑average assumptions used to estimate the fair value of stock options granted to employees were as follows:
Year ended
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
2017
2.13 %
0.0 %
46.5 %
6.04
2016
1.59 %
0.0 %
52.9 %
6.04
2015
1.77 %
0.0 %
56.0 %
6.07
December 31,
Forfeiture rate. The Company reduces employee share‑based compensation expense for estimated forfeitures. Forfeitures are
estimated at the time of grant based on historical experience, and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
The weighted‑average per share exercise price of options granted to employees during the years ended December 31, 2017, 2016
and 2015 was $43.85, $21.24 and $17.79, respectively.
Stock‑‑based
awards
to
nonemployees
The fair values of stock‑based awards made to nonemployees are remeasured at the end of the reporting period using the
Black‑Scholes option pricing model. The expected life for each option is determined based on the time remaining until the
expiration of the option as of the date of remeasurement. Compensation expense for these share‑based awards is determined by
applying the recalculated fair values to the shares that have vested during a period.
Through December 31, 2016, in conjunction with various consulting agreements, the Company issued options to nonemployees to
purchase 891,400 shares of common stock at exercise prices ranging from $0.25 to $25.91 per share. For the years ended
December 31, 2017, 2016 and 2015, the Company recorded nonemployee stock‑based compensation expense of $0.5 million,
$0.8 million and $1.1 million, respectively. No stock options were issued to nonemployees in 2017.
The following table summarizes the allocation of stock‑based compensation related to stock options and restricted stock units in
the accompanying consolidated statements of operations (in thousands):
Cost of sales
Selling, general & administrative
Research and development
Total
2017
2016
Year ended
December 31,
2015
$
597
13,006
3,989
$ 17,592
$
$
233 $
6,475
2,078
8,786 $
251
5,773
1,865
7,889
In the years ended December 31, 2017, 2016, and 2015, the related tax benefits were $5.4 million, $9.9 million and $0.5 million,
respectively, relating to stock-based compensation.
At December 31, 2017, the total unamortized stock‑based compensation expense is approximately $49.5 million. Of the
approximately $49.5 million in unamortized stock-based compensation expense, $43.9 million is attributable to stock options and
is to be recognized over the stock options’ remaining vesting terms of approximately 4.0 years (2.7 years on a weighted average
basis). The remaining $5.6 million is attributable to restricted stock units and is to be recognized over the restricted stock units’
vesting terms of approximately 4.0 years (3.5 years on a weighted-average basis).
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The total stock-based compensation cost capitalized in inventory was $0.1 million, $0.1 million and $43,000 for the years ended
December 31, 2017, 2016 and 2015, respectively.
Common
stock
reserved
for
future
issuance
Common stock reserved for issuance is as follows (in thousands):
Stock options issued and outstanding—2001 Plan
Stock options issued and outstanding—2011 Plan
Stock options issued and outstanding—2015 Plan
Employee stock purchase plan
Authorized for future stock awards or option grants
As of
December 31,
2017
811
2,001
4,388
838
3,443
11,481
8. Income taxes
United States and foreign income (loss) before income taxes was as follows (in thousands):
United States
Foreign
Total
The provision for income taxes was as follows (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Provision for income taxes
$
$
2017
12,543 $
(12,542)
1 $
Year ended December 31,
2015
(36,750)
(1,538)
(38,288)
2016
12,214 $
(7,649)
4,565 $
2017
2016
December 31,
2015
$
$
235 $
93
—
328
(235)
—
—
(235)
93 $
(28) $
71
—
43
—
—
—
—
43 $
—
33
—
33
—
—
—
—
33
The tax provision for the noncontrolling interest was $0 in 2015; therefore, no tax benefit or expense was allocated to the net loss
attributable to noncontrolling interest.
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The reconciliations of the U.S. federal statutory tax expense to the combined effective tax provision are as follows:
(amounts in thousands)
Statutory rate of tax expense
State income taxes, net of federal benefit
Permanent and other items
Deconsolidation of DOSE
Nondeductible offering costs
Research credits
Uncertain tax positions
Change in tax rate
Tax Cuts and Jobs Act
Valuation allowance
Provision for income taxes
$
2017
- $
(17)
(5,199)
-
-
(2,215)
1,108
1,013
25,216
(19,813)
$
93 $
Year ended
December 31,
2015
(13,018)
(1,347)
1,307
4,558
-
(1,745)
865
68
-
9,345
33
2016
1,552 $
530
789
-
7
(1,945)
940
1,337
-
(3,167)
43 $
Significant components of the Company’s net deferred tax assets at December 31, 2017 and 2016 are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Tax credits
Depreciation and amortization
Stock-based compensation
Reserves and accruals
Other, net
Total deferred tax assets
Deferred tax liabilities:
Other, net
Valuation allowance
Net deferred tax assets
$
2017
37,571 $
6,713
10,765
7,184
3,739
—
65,972
December 31,
2016
41,144
4,913
16,748
5,310
3,920
233
72,268
$
$
(42) $
—
(65,695)
235 $
(72,268)
—
Based on the weight of available evidence, management has established a valuation allowance for all of the deferred tax assets,
with the exception of known refundable federal credits, as it is more likely than not that the deferred tax assets will not be
realized. The net change in the valuation allowance was $(6.6) million in 2017.
At December 31, 2017, the Company had approximately $125.7 million, $94.2 million and $18.0 million of net operating loss
carryforwards for federal, state and foreign purposes, respectively, available to offset future taxable income. The federal and state
net operating loss carryforwards begin to expire in 2018 and 2028, respectively. The tax losses in foreign jurisdictions, if not
utilized sooner, will begin to expire no earlier than 2023.
At December 31, 2017, the Company had federal and state research and development credit carryforwards of $7.5 million and
$7.0 million, respectively, which begin to expire in 2021 for federal purposes and carry over indefinitely for state purposes.
Utilization of the net operating loss and tax credit carryforwards will be subject to annual limitations under Sections 382 and 383
of the Internal Revenue Code of 1986 and similar state provisions due to several ownership changes that have occurred previously
or that could occur in the future. These ownership changes will limit the amount
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of net operating loss and tax credit carryforwards and other deferred tax assets that can be utilized to offset future taxable income
and tax. In general, all ownership changes as defined by IRC Section 382 result from transactions increasing ownership of certain
stockholders in the stock of the Company by more than 50 percentage points over a three‑year period. An analysis was performed
by the Company which indicated that several ownership changes have occurred in previous years which created annual limitations
on the Company’s ability to utilize net operating loss and tax credit carryforwards. Such limitations will result in approximately
$0.1 million of tax benefits related to net operating loss and tax credit carryforwards that will expire unused. Accordingly, the
related net operating loss and tax credit carryforwards have been removed from deferred tax assets accompanied by a
corresponding reduction in the valuation allowance. The Company has not, however, conducted a IRC Section 382 study for any
periods subsequent to December 31, 2009 and as such, the Company cannot provide any assurance that a change in ownership
within the meaning of IRC has not occurred since that date. Due to the existence of the valuation allowance, limitations created
by future ownership changes, if any, will not impact the Company’s effective tax rate.
The Company considers all earnings and profits of its foreign subsidiaries to be indefinitely reinvested. Due to losses incurred,
there are no unrecorded income taxes associated with unrepatriated foreign earnings as of December 31, 2017.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2017, 2016 and 2015, excluding
interest and penalties, is as follows (in thousands):
Balance at beginning of the year
Reductions for tax positions—prior years
Additions for tax positions—current year
Balance at end of the year
$
$
2017
5,947 $
—
1,280
7,227 $
2016
4,848 $
(49)
1,148
5,947 $
December 31,
2015
4,066
(284)
1,066
4,848
As of December 31, 2017, there would be no impact on the effective tax rate if the uncertain tax benefits were recognized.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax
expense. There was no accrued interest and penalties associated with uncertain tax positions as of December 31, 2017, 2016 and
2015. It is not anticipated that there will be a significant change in the unrecognized tax benefits over the next 12 months.
Due to the Company’s net operating loss carryforwards, its federal, state and foreign income tax returns are open to examination
by the Internal Revenue Service and state jurisdictions for all years since inception.
The
Tax
Cuts
and
Jobs
Act
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. Among other changes, the Act reduces the US federal
corporate tax rate from 34 percent to 21 percent. In accordance with Staff Accounting Bulletin 118, as of December 31, 2017, the
Company has not completed the accounting for the tax effects of enactment of the Act; however, in certain cases, as described
below, the Company has made a reasonable estimate of the effects on the existing deferred tax balances. In all cases, the
Company will continue to make and refine calculations as additional analysis is completed. In addition, estimates may also be
affected as the Company gains a more thorough understanding of the Act.
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the
future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining calculations,
which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional
amount recorded related to the remeasurement of the deferred tax balance was $25.2 million, which was fully offset by a decrease
in the valuation allowance.
Due to uncertainties which currently exist in the interpretation of the provisions of the Act regarding Internal
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Revenue Code Section 162(m), the Company has not evaluated the potential impacts of IRC Section 162(m) as amended by the
Act in its consolidated financial statements.
9. Employee benefits
Defined
contribution
plan
The Company sponsors a defined contribution plan pursuant to section 401(k) of the United States Internal Revenue Code that
allows participating employees to contribute up to 100% of their salary, to an annual maximum of $18,000 in 2017 and 2016
($24,000 in 2017 and 2016 for employees over the age of 50). Through December 31, 2017, the Company has only made
“qualified nonelective contributions” to maintain compliance with IRS regulations. No plan contributions were made by the
Company in 2016 and 2015. Beginning in 2017, the Company will contribute a $0.50 match for every $1.00 contributed by a
participating employee up to 6% of plan-eligible earnings, with such Company contributions becoming vested when participating
employees reach the 3-year anniversary from their date of hire, giving credit for past service. For the fiscal year ended December
31, 2017, Company contributions totaled approximately $1.0 million.
Deferred
compensation
plan
Effective April 1, 2017,
the Company established a deferred compensation plan (the Deferred Compensation Plan) for
eligible senior level employees. The plan is designed to permit eligible employees to make elective deferrals of compensation to
which he or she will become entitled in the future. The Company also established a rabbi trust that serves as an investment to
shadow the Deferred Compensation Plan liability. The investments of the rabbi trust consist of company-owned life insurance
policies (COLIs). The fair value of the Deferred Compensation Plan liability, included in other liabilities on the consolidated
balance sheets, was approximately $0.6 million as of December 31, 2017 and the cash surrender value of the COLIs, included in
deposits and other assets on the consolidated balance sheets, which reflects the underlying assets at fair value, was approximately
$0.7 million as of December 31, 2017.
10. Commitments and contingencies
The Company, from time to time, is involved in legal proceedings or regulatory encounters or other matters in the ordinary course
of business that could result in unasserted or asserted claims or litigation. Management is not aware of any legal proceedings
where the likelihood of a loss contingency is reasonably possible and the amount or range of reasonably possible losses is
material to the Company’s results of operations, financial condition or cash flows.
Operating
leases
The Company leases its main headquarters and manufacturing facility and facilities for some of its foreign subsidiaries. Certain of
the Company’s leases contain renewal options, rent escalation clauses, and/or landlord incentives. Rent expense for noncancelable
operating leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term
beginning with the lease commencement date, or the date the Company takes control of the leased space, whichever is sooner.
The excess of straight-line rent expense over scheduled payment amounts and landlord incentives is recorded as a deferred rent
liability.
The Company leases two adjacent facilities located in San Clemente, California, both of which are subject to leases that
expire on December 31, 2021. The agreements each contain an option to extend the leases for up to two additional three-year
periods at market rates. The total square footage of both facilities equals approximately 77,000. The lease landlord agreed to
provide the Company with a tenant improvement allowance after January 1, 2017 in the amount of the cost of any leasehold
improvements, not to exceed approximately $264,000 upon the Company providing the necessary documentation evidencing the
costs of the allowable leasehold improvements.
The Company’s remaining U.S.-based and foreign subsidiaries’ leased office space totals less than 14,000 square feet.
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The Company recorded deferred rent of $0.3 million and $0.2 million as of December 31, 2017 and 2016, respectively, in
conjunction with its facilities lease agreements. Rent expense was $1.5 million, $1.1 million and $0.6 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Future minimum payments under the aforementioned noncancelable operating leases for each of the five succeeding years are as
follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Purchase
commitment
$
$
1,513
1,340
1,278
1,251
—
—
5,382
As of December 31, 2017, the Company did not have any noncancelable, firm purchase commitments due beyond one year.
Regents
of
the
University
of
California
On December 30, 2014, the Company executed an agreement (the UC Agreement) with the Regents of the University of
California (the University) to correct inventorship in connection with a group of the Company’s U.S. patents (the Patent Rights)
and to obtain from the University a covenant that it did not and would not claim any right or title to the Patent Rights and will not
challenge or assist any others in challenging the Patent Rights. In connection with the UC Agreement, Glaukos paid the
University a low single‑digit percentage of worldwide net sales of certain current and future products, including the Company’s
iStent products, with a required minimum annual payment of $0.5 million. This ongoing product payment terminates on the date
that the last of the Patent Rights expires, which is currently expected to be in 2022. For the years ended December 31, 2017, 2016
and 2015, the Company recorded approximately $3.9 million, $2.8 million and $1.8 million in cost of sales, respectively, in
connection with the product payment obligation.
11. Variable interest entity
In October 2009, the Company formed a wholly‑owned subsidiary, DOSE Medical Corporation and in April 2010, the Company
distributed all of its shares of common stock of DOSE via a stock dividend to the Company’s stockholders of record as of the
close of business on March 31, 2010. Since its formation, the Company had provided DOSE with a small number of leased
employees, management services and space, all of which had been charged to DOSE and pursuant to written agreements between
the parties. Additionally, the Company had provided DOSE the cash required to fund its operations that, together with accrued
interest and charges for the aforementioned services, the Company had recorded in an intercompany receivable account. Up until
the transaction on June 30, 2015 described below, the Company had accounted for DOSE as a variable interest entity in which it
had a variable interest in all reporting periods since the formation of DOSE. Accordingly, the Company’s consolidated financial
statements include the accounts of DOSE, with all intercompany balances eliminated and with the deficit balance of DOSE’s net
assets reflected as noncontrolling interest, up to but excluding June 30, 2015.
On June 30, 2015, the Company completed a transaction initially executed in July 2014, the closing of which was contingent upon
the successful completion of an IPO. Pursuant to the terms of the asset purchase agreement, the Company acquired from DOSE
certain assets, including the iDose product line, in exchange for payment of $15.0 million in cash and the elimination of the $10.9
million intercompany receivable owed by DOSE to the Company as of the closing date. The Company reconsidered its
relationship with DOSE as a result of the transaction and determined it was no longer considered to be the primary beneficiary
with the power to direct operations and the right to receive benefits/absorb losses of DOSE; therefore, upon the close of the
transaction, the Company derecognized DOSE
105
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and no longer considered it a consolidated entity in its financial statements. Accordingly, in the three months ended June 30,
2015, the Company recorded a charge to other expense in the amount of $25.7 million to reflect the deconsolidation of DOSE’
non‑glaucoma related assets and noncontrolling interest.
In addition to the asset purchase agreement, the parties agreed to an amended and restated patent license agreement and an
amended and restated transition services agreement that provides for limited support from the Company to DOSE for a period of
up to three years, which period was extended through June 30, 2021 in connection with the Purchase Agreement. Either party can
terminate the transition services agreement upon adequate written notice.
Consolidation of DOSE’s results of operations included the following (in thousands):
Selling, general & administrative
Research and development
Interest expense
Net loss of DOSE
2017
— $
—
—
— $
$
$
Year ended
December 31,
2015
2016
— $
—
—
— $
105
890
85
1,080
Consolidation of DOSE’s cash flows included the following (in thousands):
Cash used in operating activities
Cash used in investing activities
Cash provided by financing activities
$
(Decrease) increase in cash and cash equivalents of DOSE
$
12. Business segment information
2017
2016
Year ended
December 31,
2015
— $
—
—
— $
— $ (1,134)
(33)
—
1,158
—
(9)
— $
Operating segments are identified as components of an enterprise about which segment discrete financial information is available
for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing
performance. The Company operates its business on the basis of one reportable segment—ophthalmic medical devices.
Geographic net sales information (in thousands)
2017
2016
Year ended
December 31,
2015
United States
International
Total net sales
United States
International
Total
$ 140,902
18,352
$ 159,254
$ 104,995 $ 67,698
4,002
$ 114,397 $ 71,700
9,402
Property and equipment, net
As of December 31,
2015
2016
2017
Depreciation and amortization
Year ended December 31,
2015
2016
2017
Capital expenditures
Year ended December 31,
2015
2016
2017
$ 11,677 $ 7,463 $ 2,012 $ 5,406 $ 4,654 $ 4,180 $ 6,051 $ 6,493 $
972
62
$ 11,794 $ 7,593 $ 2,154 $ 5,482 $ 4,722 $ 4,267 $ 6,272 $ 6,549 $ 1,034
117
130
221
142
87
56
68
76
106
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13. Selected Quarterly Financial Information (Unaudited)
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
$
March 31,
2017
35,907 $
5,180
30,727
June 30,
2017
41,285 $
5,522
35,763
Three months ended
September 30, December 31,
2017
41,650
4,630
37,020
2017
40,412 $
5,718
34,694
Selling, general and administrative
In-process research and development
Research and development
Total operating expenses
Income (loss) from operations
Total other income (expense), net
Provision for income taxes
Net income (loss)
Net income (loss) per share
(1)
:
Basic
Diluted
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income from operations
Total other income (expense), net
Provision for income taxes
Net income
Net income per share
(1)
:
Basic
Diluted
21,481
—
8,942
30,423
304
629
55
878 $
24,675
5,320
9,633
39,628
(3,865)
586
22
(3,301) $
24,141
—
9,805
33,946
748
630
53
1,325 $
0.03 $
0.02 $
(0.10) $
(0.10) $
0.04 $
0.04 $
25,963
—
10,525
36,488
532
437
(37)
1,006
0.03
0.03
$
$
$
$
March 31,
2016
23,092 $
3,121
19,971
June 30,
2016
28,556 $
4,359
24,197
Three months ended
September 30, December 31,
2016
33,172
4,811
28,361
2016
29,577 $
3,886
25,691
12,288
7,062
19,350
621
276
—
897 $
15,120
6,955
22,075
2,122
210
—
2,332 $
16,854
7,807
24,661
1,030
269
140
1,159 $
0.03 $
0.03 $
0.07 $
0.06 $
0.03 $
0.03 $
20,494
7,399
27,893
468
(431)
(97)
134
0.00
0.00
$
$
$
(1) Net income or loss per share is computed independently for each of the quarters presented. Therefore, the sum of the
quarterly per-share amounts will not necessarily equal the annual per share amount.
14. Subsequent events
None.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROL S AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Our management, with the participation of our chief executive officer and our chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K. Based on that evaluation, our chief executive officer and our chief financial officer concluded that our
disclosure controls and procedures were effective, at the reasonable assurance level, as of December 31, 2017.
Management’s Annual Report on Internal Control Over Financial Reporting and Attestation Report of the Registered
Public Accounting Firm
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. 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 our assets; (ii)
provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and our directors; 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.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of the
end of the period covered by this Annual Report on Form 10-K based on the framework in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.
Ernst & Young LLP, our independent registered public accounting firm, which audited the consolidated financial statements
included in this Annual Report on Form 10‑K, has issued an audit report on our internal control over financial reporting. See
Report of Independent Registered Public Accounting Firm herein.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act, during our fourth fiscal quarter of 2017 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Glaukos Corporation
Opinion on Internal Control over Financial Reporting
We have audited Glaukos Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Glaukos Corporation (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated
statements of operations, comprehensive (loss) income, convertible preferred stock and stockholders’ equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated February 28,
2018 expressed an unqualified opinion thereon.
Basis for Opinion
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 Annual
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 are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s 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. 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 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.
/s/ Ernst & Young LLP
Irvine, California
February 28, 2018
109
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ITEM 9B. OTHER INFORMATION
None.
110
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a written code of business conduct and ethics that applies to our directors, executive officers and
employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions. A current copy of the code is posted on the investor section of our web site,
www.glaukos.com. To the extent required by rules adopted by the SEC and NYSE, we intend to promptly disclose future
amendments to certain provisions of the code, or waivers of such provisions granted to executive officers and directors, in the
Corporate Governance section of our Investor Relations web site at investors.glaukos.com.
The remaining information required by this Item 10 will be included in our Proxy Statement for the 2018 Annual
Meeting of Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended
December 31, 2017, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in our Proxy Statement for the 2018 Annual Meeting of
Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2017,
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 will be included in our Proxy Statement for the 2018 Annual Meeting of
Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2017,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item 13 will be included in our Proxy Statement for the 2018 Annual Meeting of
Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2017,
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be included in our Proxy Statement for the 2018 Annual Meeting of
Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2017,
and is incorporated herein by reference.
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Table of Contents
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this Annual Report on Form 10-K:
(1)
Financial Statements
The financial statements included in Part II, Item 8 of this document are filed as part of this Annual Report on
Form 10-K.
(2)
Financial Statement Schedules
Schedules have been omitted because they are not applicable or the amounts are immaterial or the required
information is presented in the financial statements or notes thereto.
(b)
Exhibits
The exhibits listed in the Exhibit Index (following the signatures page of this report) below are filed, furnished or
incorporated by reference as part of this Annual Report on Form 10-K.
ITEM 16. FORM 10-K SUMMAR Y
None.
112
Table of Contents
INDEX TO EXHIBITS
Exhibit
Number
2.1 †
3.1
3.2
10.1
10.2
10.3
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
Description
IOP System Purchase Agreement dated as of April 12, 2017 by and between Glaukos Corporation and DOSE
Medical Corporation (incorporated by reference to Exhibit 2.1 to the Form 8-K (File No. 001‑37463) filed on
April 12, 2017)
Restated Certificate of Incorporation of the Registrant (incorporated by referenced to Exhibit 3.1 to the
Form 8‑K (File No. 001‑37463) filed on June 30, 2015).
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Form 8‑K
(File No. 001‑37463) filed on June 30, 2015).
Fourth Amended and Restated Investors’ Rights Agreement, dated as of January 25, 2011, by and among the
Registrant and the stockholders named therein (incorporated by reference to Exhibit 10.1 to the Registration
Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Amendment No. 1 to the Fourth Amended and Restated Investors’ Rights Agreement, dated as of January 22,
2013, by and among the Registrant and the stockholders named therein (incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Amendment No. 2 to the Fourth Amended and Restated Investors’ Rights Agreement, dated as of July 10,
2014, by and among the Registrant and the stockholders named therein (incorporated by reference to
Exhibit 10.3 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Form of Director and Executive Officer Indemnification Agreement (incorporated by reference to Exhibit 10.8
to the Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
2001 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S‑1
(No. 333‑204091) filed on May 12, 2015).
Notice of Incentive Stock Option Grant and Stock Option Agreement under the 2001 Stock Option Plan
(incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S‑1 (No. 333‑204091) filed
on May 12, 2015).
Notice of Non‑Statutory Stock Option Grant and Stock Option Agreement under the 2001 Stock Option Plan
(incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S‑1 (No. 333‑204091) filed
on May 12, 2015).
2011 Stock Plan (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S‑1
(No. 333‑204091) filed on May 12, 2015).
Form of Notice of Incentive Stock Option Grant and Stock Option Agreement under the 2011 Stock Plan
(incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S‑1 (No. 333‑204091) filed
on May 12, 2015).
Form of Notice of Non‑Statutory Stock Option Grant and Stock Option Agreement under the 2011 Stock Plan
(incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S‑1 (No. 333‑204091) filed
on May 12, 2015).
Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement under the 2015
Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q (No. 333‑204091) filed on August 7, 2017).
2015 Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit 10.15 to Amendment No. 2
to the Registration Statement on Form S‑1 (No. 333‑204091) filed on June 15, 2015).
2015 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.16 to Amendment No. 2 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on June 15, 2015).
113
Table of Contents
Exhibit
Number
10.14+
10.15+
10.16+
10.17+
10.18+
10.19+
10.20+
10.21*+
10.22*+
10.23
10.24
10.25
10.26†
10.27
21*
23.1*
31.1*
31.2*
32.1**
Description
Thomas W. Burns Offer Letter dated July 10, 2014 (incorporated by reference to Exhibit 10.17 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Thomas W. Burns Amended and Restated Executive Severance and Change in Control Agreement dated
November 3, 2017 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No
001-37464) filed on November 7, 2017).
Chris M. Calcaterra Offer Letter dated July 10, 2014 (incorporated by reference to Exhibit 10.19 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Chris M. Calcaterra Amended and Restated Executive Severance and Change in Control Agreement dated
November 3, 2017 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File
No. 001‑37463) filed on November 7, 2017).
Joseph E. Gilliam Offer Letter dated February 3, 2017 (incorporated by reference to Exhibit 99.2 to the to the
Company’s Current Report on Form 8-K (File No. 001-37463) filed on February 6, 2017).
Joseph E. Gilliam Amended and Restated Executive Severance and Change in Control Agreement dated
November 3, 2017 (incorporated by reference to Exhibit 10.3 to the Form 8-K (File No. 001‑37463) filed on
November 7, 2017)
The Executive Nonqualified Excess Plan and the Executive Nonqualified Excess Plan Adoption Agreement
(incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K (No. 001-37463) filed on
March 15, 2017)
Directors’ Compensation Policy
Form of Director Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement under the
2015 Omnibus Incentive Compensation Plan.
Asset Purchase Agreement, dated as of July 10, 2014, by and between the Registrant and DOSE Medical
Corporation (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S‑1
(No. 333‑204091) filed on May 12, 2015).
Standard Industrial/Commercial Single‑Tenant Lease—Net, dated as of June 8, 2015, by and between the
Registrant and 229 Fabricante, LLC (incorporated by reference to Exhibit 10.35 to Amendment No. 2 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on June 15, 2015).
Amended and Restated Patent License Agreement, by and between the Registrant and DOSE Medical
Corporation, dated as of June 30, 2015 (incorporated by reference to Exhibit 10.1 to the Form 8‑K (File
No. 001‑37463) filed on June 30, 2015).
First Amendment to Amended and Restated Patent License Agreement dated as of April 12, 2017 by and
between Glaukos Corporation and DOSE Medical Corporation (incorporated by reference to Exhibit 10.1 to
the Form 8-K (File No. 001‑37463) filed on April 12, 2017)
Amended and Restated Transition Services Agreement, by and between the Registrant and DOSE Medical
Corporation, dated as of June 30, 2015 (incorporated by reference to Exhibit 10.2 to the Form 8‑K (File
No. 001‑37463) filed on June 30, 2015).
Subsidiaries of Glaukos Corporation as of December 31, 2017
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
114
Table of Contents
Exhibit
Number
32.2**
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
Description
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Schema Linkbase Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Definition Linkbase Document
XBRL Taxonomy Labels Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
+ Indicates a management contract or compensatory plan or arrangement.
† Schedules and exhibits are omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish
supplementally a copy of any omitted schedule or exhibit to the U.S. Securities and Exchange Commission upon request.
* Filed Herewith.
** Furnished Herewith.
115
Table of Contents
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, in the City of San Clemente, State of California, on February
28, 2018.
SIGNATURES
GLAUKOS CORPORATION
By:
/s/ Thomas W. Burns
Thomas W. Burns
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons in the capacities and on the dates indicated.
Signature
/s/ Thomas W. Burns
Thomas W. Burns
/s/ Joseph E. Gilliam
Joseph E. Gilliam
/s/ William J. Link
William J. Link, Ph.D.
/s/ Mark J. Foley
Mark J. Foley
/s/ David F. Hoffmeister
David F. Hoffmeister
/s/ Gilbert H. Kliman
Gilbert H. Kliman, M.D.
/s/ Jonathan T. Silverstein
Jonathan T. Silverstein
/s/ Marc A. Stapley
Marc A. Stapley
/s/ Aimee S. Weisner
Aimee S. Weisner
Title
Chief Executive Officer, President and
Director (Principal Executive Officer)
Chief Financial Officer & SVP, Corporate Development
(Principal Accounting and Financial Officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
116
Date
February 28 , 2018
February 28 , 2018
February 28 , 2018
February 28 , 2018
February 28 , 2018
February 28 , 2018
February 28 , 2018
February 28 , 2018
February 28 , 2018
GLAUKOS CORPORATION
DIRECTORS’ COMPENSATION POLICY
(Effective December 13, 2017)
Exhibit 10.21
Directors of Glaukos Corporation, a Delaware corporation (the “Company”), who are not employed by the Company or one of its
subsidiaries (“Non-Employee Directors”) are entitled to the compensation set forth below for their service as a member of the Board of
Directors (the “Board”) of the Company. The Board has the right to amend this policy from time to time.
Cash Compensation
Annual Retainer
Annual Committee Member Retainer
Annual Chairperson Retainer
Annual Committee Chair Retainers
Audit Committee Chair
Compensation, Nominating and Governance Committee Chair
Equity Compensation
Annual Equity Award
Initial Equity Award
Cash Compensation
$40,000
$10,000
$40,000
$10,000
$10,000
$175,000
$300,000
Each Non-Employee Director will be entitled to an annual cash retainer while serving on the Board in the amount set forth above (the
“Annual Cash Retainer”). A Non-Employee Director who serves as a member of any standing committee of the Board will be entitled to an
additional annual cash retainer for each such committee on which they are serving in the amount set forth above (the “Annual Committee
Member Retainer”). A Non-Employee Director who serves as the Chairperson of the Board will be entitled to an additional annual cash retainer
while serving in that position in the amount set forth above (the “Annual Chairperson Retainer”). A Non-Employee Director who serves as the
Chairperson of the Audit Committee will be entitled to an additional annual cash retainer while serving in that position in the amount set forth
above (the “Annual Audit Committee Chairperson Retainer”). A Non-Employee Director who serves as the Chairperson of the Compensation,
Nominating and Governance Committee will be entitled to an additional annual cash retainer while serving in that position in the amount set
forth above (the “Annual Compensation Committee Chairperson Retainer”).
The amounts of the Annual Cash Retainer, Annual Committee Member Retainer, Annual Chairperson Retainer, Annual Audit Committee
Chairperson Retainer and Annual Compensation Committee Chairperson Retainer are expressed as annualized amounts. These retainers will be
paid on a quarterly basis, at the end of each quarter in arrears, and will be pro-rated if a Non-Employee Director serves (or serves in the
corresponding position, as the case may be) for only a portion of the quarter (with the proration based on the number of calendar days in the
quarter that the director served as a Non-Employee Director or held the particular position, as the case may be).
Equity Awards
Initial Equity Awards
For each new Non-Employee Director appointed or elected to the Board, on the date that the new Non-Employee Director first becomes a
member of the Board, the new Non-Employee Director will automatically be granted an initial equity award consisting of restricted stock units
with respect to a number of shares of the Company’s common stock determined by dividing (1) the initial equity award amount set forth above
by (2) the per-share closing price of the Company’s common stock on the date the new Non-Employee Director first becomes a member of the
Board, with the result rounded to the nearest whole unit (the “Initial Equity Award”). The Initial
1
Equity Award shall vest in substantially equal annual installments on each of the first three annual anniversaries of the grant date, subject to the
Non-Employee Director’s continued service through each vesting date. The unvested portion of the Initial Equity Award shall also become
vested if the Non-Employee Director’s service on the Board terminates as a result of the director’s death or total and permanent disability. The
Initial Equity Award shall be payable in shares of common stock as soon as practicable (and no later than 30 days) after each applicable vesting
date.
An employee or former employee of the Company or one of its subsidiaries who ceases or has ceased to be so employed and becomes a
Non-Employee Director will not be eligible for an initial equity award grant, but will be eligible for cash compensation and annual equity
awards on the same basis as other Non-Employee Directors.
Annual Equity Awards for Continuing Board Members
On the date of each annual meeting of the Company’s stockholders beginning with the annual meeting that occurs in the 2018 calendar
year, each Non-Employee Director then in office following the meeting will automatically be granted an annual equity award consisting of
restricted stock units with respect to a number of shares of the Company’s common stock determined by dividing (1) the annual equity award
amount set forth above by (2) the per-share closing price of the Company’s common stock on the date of the applicable annual meeting, with
the result rounded to the nearest whole unit (the “Annual Equity Award”). The Annual Equity Award shall vest in one annual installment on
the first anniversary of the grant date (or on the date of the annual meeting in the following calendar year, if earlier), subject to the Non-
Employee Director’s continued service through the vesting date. The unvested portion of the Annual Equity Award shall also become vested if
the Non-Employee Director’s service on the Board terminates as a result of the director’s death or total and permanent disability. The Annual
Equity Award shall be payable in shares of common stock as soon as practicable (and no later than 30 days) after the applicable vesting date.
In the event that more than one annual meeting of the Company’s stockholders occurs during a given calendar year, Annual Equity
Awards will be made only in connection with the first such meeting to occur in that year.
Beginning after the annual meeting of the Company’s stockholders that occurs in the 2018 calendar year, for each new Non-Employee
Director appointed or elected to the Board other than on the date of an annual meeting of the Company’s stockholders, on the date that the new
Non-Employee Director first becomes a member of the Board, the new Non-Employee Director will automatically be entitled to a pro-rata
portion of the Annual Equity Award (a “Pro-Rata Annual Award”) determined by dividing (1) a pro-rata portion of the Annual Equity Award
grant value set forth above by (2) the per-share closing price of the Company’s common stock on the date the new Non-Employee Director first
becomes a member of the Board. The pro-rata portion of the Annual Equity Award grant value for purposes of a Pro-Rata Annual Award will
equal the Annual Equity Award grant value set forth above multiplied by a fraction (not greater than one), the numerator of which is 12 minus
the number of whole months that as of the particular grant date had elapsed since the Company’s last annual meeting of stockholders at which
Annual Equity Awards were granted, and the denominator of which is 12, with the result to be rounded to the nearest whole unit. Each Pro-
Rata Annual Award will vest on the same terms and otherwise be subject to the same terms set forth above for the Annual Equity Award.
Elective Grants of Equity Awards
Non-Employee Directors may elect, prior to the start of each applicable calendar year, to convert all or a portion of their Annual Cash
Retainer, Annual Committee Member Retainer, Annual Chairperson Retainer, Annual Audit Committee Chairperson Retainer, and Annual
Compensation Committee Chairperson Retainer (collectively, the “Retainers”) payable with respect to the particular calendar year into the right
to receive an award of restricted stock units of the Company (an “Elective Restricted Stock Unit Award”). The Elective Restricted Stock Unit
Award shall automatically be granted on the first business day of each calendar year in an amount determined by dividing (1) the amount of the
Retainers elected to be so converted multiplied by 115% (one hundred fifteen percent) by (2) the per-share closing price of the Company’s
common stock on the first business day of the year (rounded to the nearest whole share). Each Elective Restricted Stock Unit Award will vest
in one annual installment on the first anniversary of the grant date, subject to the Non-Employee Director’s continued service through the
vesting date. The Elective Restricted Stock Unit Award shall be payable in shares of common stock as soon as practicable (and no
2
later than 30 days) after the vesting date.
In order to elect to receive an Elective Restricted Stock Unit Award, Non-Employee Directors must complete an election form in such
form as the Board may prescribe from time to time (an “Election Form”), and file such completed form with the Company prior to the start of
the applicable calendar year (i.e. if a director wants to convert his or her Retainers payable for the 2018 calendar year, the Election Form must
be filed prior to December 31, 2017). Once an Election Form is validly filed with the Company, it shall automatically continue in effect for
future calendar years unless the Non-Employee Director changes or revokes his or her Election Form prior to the beginning of any such future
calendar years.
Provisions Applicable to All Outside Director Equity Awards
Each equity award will be made under and subject to the terms and conditions of the Company’s 2015 Omnibus Incentive Compensation
Plan (the “Plan”) or any successor equity compensation plan approved by the Company’s stockholders and in effect at the time of grant, and
will be evidenced by, and subject to the terms and conditions of, any applicable award agreement form approved by the Board to evidence such
type of grant pursuant to this policy.
Expense Reimbursement
All Non-Employee Directors will be entitled to reimbursement from the Company for their reasonable travel (including airfare and
ground transportation), lodging and meal expenses incident to meetings of the Board or committees thereof or in connection with other Board
related business.
3
GLAUKOS CORPORATION
NOTICE OF GRANT OF RESTRICTED STOCK UNITS
Exhibit 10.22
The Participant has been granted the number of Restricted Stock Units set forth below (the “ RSUs
” ) pursuant to the Glaukos Corporation 2015
Omnibus Incentive Compensation Plan (the “ Plan
” ), as follows:
Participant:
Date of Grant:
Number of Restricted Stock Units:
Vesting Commencement Date
Vested Shares:
Subject to your continued status as a Service Provider (“Service”) through each of the applicable
vesting dates, the RSUs shall become vested, in whole or in part, in accordance with the terms of the
Plan, the Award Agreement, this Notice of Grant and the following schedule:
First Anniversary of Vesting Commencement Date 100% of the Number of RSUs
Capitalized terms not defined herein shall have the meaning as set forth in the Plan.
Upon any termination of Participant’s Service, except in the event of Participant’s death or Disability or as otherwise specified in the Plan, if the
vesting conditions described in the Vested Shares section above are not achieved by the date indicated, the unvested RSUs will terminate and
Participant’s right to the unvested RSUs will be forfeited.
By signing below, the Participant agrees that the Company, its directors, officers and shareholders shall not be held liable for any tax, penalty,
interest or cost incurred by the Participant as a result of such determination by the IRS. The Participant is urged to consult with his or her own tax
advisor regarding the tax consequences of the RSUs, including the application of Section 409A.
By their signatures below, the Company and the Participant agree that the RSUs are governed by this Grant Notice and by the provisions of the Plan
and the Restricted Stock Unit Agreement, both of which are attached to and made a part of this document. The Participant acknowledges receipt of
copies of the Plan and the Restricted Stock Unit Agreement, represents that the Participant has read and is familiar with their provisions, and hereby
accepts the RSUs subject to all of their terms and conditions.
GLAUKOS CORPORATION
PARTICIPANT
By:
Its:
Address:
Signature
Date
Address
ATTACHMENTS: Glaukos Corporation 2015 Omnibus Incentive Compensation Plan, as amended to the Date of Grant; Restricted Stock Unit
Agreement
GLAUKOS CORPORATION
RESTRICTED STOCK UNIT AGREEMENT
Glaukos Corporation has granted to the Participant named in the Notice of Grant of Restricted Stock Units (the “ Grant
Notice
”) to which
this Restricted Stock Unit Agreement (the “ Agreement
”) is attached a number of Restricted Stock Units (the “ RSUs
”) pursuant to the terms and
conditions set forth in the Grant Notice and this Agreement. The RSUs have been granted pursuant to and shall in all respects be subject to the terms
and conditions of the Glaukos Corporation 2015 Omnibus Incentive Compensation Plan (the “ Plan
”), as amended to the Date of Grant, the
provisions of which are incorporated herein by reference. By signing the Grant Notice, the Participant: (a) acknowledges receipt of, and represents
that the Participant has read and is familiar with the terms and conditions of, the Grant Notice, this Agreement and the Plan, (b) accepts the RSUs
subject to all of the terms and conditions of the Grant Notice, this Agreement and the Plan, and (c) agrees to accept as binding, conclusive and final
all decisions or interpretations of the Board upon any questions arising under the Grant Notice, this Agreement or the Plan.
1. DEFINITIONS AND CONSTRUCTION .
1.1 Definitions
. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Grant Notice
or the Plan.
1.2 Construction
. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of
any provision of this Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include
the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.
2. ADMINISTRATION .
All questions of interpretation concerning the Grant Notice, this Agreement, the Plan or any other form of agreement or other document
employed by the Company in the administration of the Plan or the RSUs shall be determined by the Board. All such determinations by the Board
shall be final, binding and conclusive upon all persons having an interest in the RSUs, unless fraudulent or made in bad faith. Any and all actions,
decisions and determinations taken or made by the Board in the exercise of its discretion pursuant to the Plan or the RSUs or other agreement
thereunder (other than determining questions of interpretation pursuant to the preceding sentence) shall be final, binding and conclusive upon all
persons having an interest in the RSUs. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right,
obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with
respect to such matter, right, obligation, or election.
3. VESTING .
Except as set forth in Section 4 below and subject to the limitations contained herein, the RSUs shall vest as provided in the Grant Notice.
4. TERMINATION OF SERVICE .
4.1 Termination
of
Service
Due
to
Participant’s
Death.
Except as otherwise provided in this Agreement, if Participant’s Service
terminates because of Participant’ death, the unvested portion of the RSUs will become one hundred percent (100%) vested on the date of
Participant’s termination of Service due to death.
4.2 Termination
of
Service
Due
to
Participant’s
Disability.
Except as otherwise provided in this Agreement, if Participant’s Service
terminates as a result of Disability, the unvested RSUs will become one hundred percent (100%) vested on the date of Participant’s termination of
Service due to Disability.
For purposes of this Subsection 4.2, “Disability” will be determined in accordance with the standards and procedures of the then-
current long term disability plan maintained by the Company, which is generally a physical condition arising from an illness or injury, which renders
an individual incapable of performing work in any occupation, as determined by the Company.
4.3 Other
Termination
of
Service.
In the event Participant’s Service terminates for any reason other than death or Disability or as
otherwise specified in the Plan, vesting shall cease upon the termination of the Participant’s Service. Any portion of the RSUs that have not vested
as of Participant’s termination of Service for any reason other than death or Disability or as otherwise specified in the Plan shall be forfeited upon
termination of Service.
5. DIVIDENDS .
The Participant shall not receive any payment or other adjustment in the number of RSUs for dividends or other distributions that may be
made in respect of the shares of Stock to which the RSUs relate.
6. DISTRIBUTION OF SHARES OF STOCK .
The Company will deliver to the Participant a number of shares of Stock equal to the number of vested shares of Stock subject to the RSUs
on the vesting date or dates provided in the Grant Notice, less any shares of Stock withheld for the payment of taxes as described in Subsection 12.2
of this Agreement.
7. ADJUSTMENTS; CHANGE IN CONTROL .
The provisions of the Plan applicable to Adjustments and a Change in Control or other corporate transaction, as described in Section 12 of
the Plan, shall apply to the RSUs.
8. SECURITIES LAW COMPLIANCE .
The Participant may not be issued any shares of Stock pursuant to the RSUs unless the shares of Stock are either (i) then registered under
the Securities Act or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities
Act. The RSUs must also comply with other applicable laws and regulations governing the RSUs, and the Participant shall not receive such shares if
the Company determines that such receipt would not be in material compliance with such laws and regulations.
9. EXECUTION OF DOCUMENTS .
The Participant hereby acknowledges and agrees that the manner selected by the Company to indicate the Participant’s consent to the Grant
Notice is also deemed to be execution of the Grant Notice and of this Agreement. The Participant further agrees that such manner of indicating
consent may be relied upon as the Participant’s signature for establishing execution of any documents to be executed in the future in connection with
the RSUs. This Agreement shall be deemed to be signed by the Company and the Participant upon the respective signing by the Company and the
Participant of the Grant Notice to which it is attached.
10. RSUS NOT A SERVICE CONTRACT .
The RSUs are not an employment or service contract, and nothing in the RSUs shall be deemed to create in any way whatsoever any
obligation on the Participant to continue in the service of the Company or Participating Company, or on the part of the Company or Participating
Company to continue such service. In addition, nothing in the RSUs shall obligate the Company or Participating Companies, their respective
stockholders, boards of directors, Officers or Employees to continue any relationship that the Participant might have as an Employee, Director or
Consultant for the Company or Participating Company.
11. UNSECURED OBLIGATION .
The RSUs are unfunded, and as a holder of a vested number of RSUs, the Participant shall be considered an unsecured creditor of the
Company with respect to the Company’s obligation, if any, to issue shares of Stock pursuant to Section 6 of this Agreement.
12. TAX WITHHOLDING .
12.1 In
General.
At the time this Agreement is executed, or at any time thereafter as requested by the Company, the Participant hereby
authorizes withholding from payroll and any other amounts payable to the Participant, and otherwise agrees to make adequate provision for, any
sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company, if any, which arise in connection with the
grant or vesting of the RSUs or the
issuance of Stock in settlement thereof. The Company shall have no obligation to deliver Stock until the tax obligations of the Company have been
satisfied by the Participant.
12.2 Withholding
in
Securities.
The Company shall require the Participant to satisfy all of the tax obligations, if any, by deducting from
the shares of Stock otherwise deliverable to the Participant in settlement of the RSUs a number of shares of Stock having a fair market value, as
determined by the Company as of the date on which the tax obligations arise, not in excess of the amount of such tax obligations determined by the
applicable withholding rates. Any adverse consequences to the Participant resulting from the procedure permitted under this Subsection 12.2,
including, without limitation, tax consequences, shall be the sole responsibility of the Participant.
12.3 Consultation
. The Participant hereby acknowledges that he or she understands that the Participant may suffer adverse tax
consequences as a result of participation in the Plan. The Participant hereby represents that the Participant has consulted with tax consultants in
connection with the Award and that the Participant is not relying on the Company for any tax advice.
12.4 Beneficial
Ownership
of
Shares;
Certificate
Registration
. The Participant hereby authorizes the Company, in its sole discretion,
to deposit for the benefit of the Participant with any broker with which the Participant has an account relationship of which the Company has notice
any or all shares acquired by the Participant pursuant to the settlement of the RSUs. Except as provided by the preceding sentence, a certificate for
the shares pursuant to the RSUs shall be registered in the name of the Participant, or, if applicable, in the names of the heirs of the Participant.
13. NONTRANSFERABILITY OF THE RSUS .
The RSUs and the rights and privileges conferred hereby shall not be sold, pledged or otherwise transferred (whether by operation of law or
otherwise) in any manner otherwise than by will or by the laws of descent or distribution, shall not be subject to sale under execution, attachment,
levy or similar process and may be exercised during the lifetime of the Participant only by the Participant. The terms of the Plan and the Award
Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Participant.
14. RIGHTS AS A STOCKHOLDER, DIRECTOR, EMPLOYEE OR CONSULTANT .
The Participant shall have no rights as a stockholder with respect to any shares related to the RSUs until the date of issuance of the shares
pursuant to the RSUs (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). If
the Participant is an Employee, the Participant understands and acknowledges that, except as otherwise provided in a separate, written employment
agreement between a Participating Company and the Participant, the Participant’s employment is “at will” and is for no specified term. Nothing in
this Agreement shall confer upon the Participant any right to continue in the Service of a Participating Company or interfere in any way with any
right of the Participating Company Group to terminate the Participant’s Service as a Director, an Employee or Consultant, as the case may be, at any
time.
15. MISCELLANEOUS PROVISIONS .
15.1 Termination
or
Amendment.
The Board may terminate or amend the Plan or the RSUs at any time.
15.2 Compliance
with
Section
409A.
The Company intends that income realized by the Participant pursuant to the Plan and this
Agreement will not be subject to taxation under Section 409A of the Code. The provisions of the Plan and this Agreement shall be interpreted and
construed in favor of satisfying any applicable requirements of Section 409A of the Code. The Company, in its reasonable discretion, may amend
(including retroactively) the Plan and this Agreement in order to conform to the applicable requirements of Section 409A of the Code, including
amendments to facilitate the Participant’s ability to avoid taxation under Section 409A of the Code. However, the preceding provisions shall not be
construed as a guarantee by the Company of any particular tax result for income realized by the Participant pursuant to the Plan or this
Agreement. In any event, and except for the responsibilities of the Company set forth in Section 12, no Participating Company shall be responsible
for the payment of any applicable taxes on income realized by the Participant pursuant to the Plan or this Agreement.
15.3 Fractional
Shares
. The Company shall not be required to issue fractional shares upon the settlement of the RSUs.
15.4 Further
Instruments.
The parties hereto agree to execute such further instruments and to take such further action as may
reasonably be necessary to carry out the intent of this Agreement.
15.5 Binding
Effect.
Subject to the restrictions on transfer set forth herein, this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, executors, administrators, successors and assigns.
15.6 Delivery
of
Documents
and
Notices.
Any document relating to participation in the Plan, or any notice required or permitted
hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Agreement provides for effectiveness only
upon actual receipt of such notice) upon personal delivery or electronic delivery at the e-mail address, if any, provided for the Participant by the
Participating Company, or, upon deposit in the U.S. Post Office or foreign postal service, by registered or certified mail, or with a nationally
recognized overnight courier service with postage and fees prepaid, addressed to the other party at the address of such party set forth in the Grant
Notice or at such other address as such party may designate in writing from time to time to the other party.
(a) Description
of
Electronic
Delivery.
The Plan documents, which may include but do not necessarily include: the Plan, the
Grant Notice, this Agreement, and any reports of the Company provided generally to the Company’s shareholders, may be delivered to the
Participant electronically. In addition, if permitted by the Company, the Participant may deliver electronically the Grant Notice to the Company or to
such third party involved in administering the Plan as the Company may designate from time to time. Such means of electronic delivery may include
but do not necessarily include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the
delivery of the document via e-mail or such other means of electronic delivery specified by the Company.
(b) Consent
to
Electronic
Delivery.
The Participant acknowledges that the Participant has read Subsection 15.6(a) of this
Agreement and consents to the electronic delivery of the Plan documents and, if permitted by the Company, the delivery of the Grant Notice, as
described in Subsection 15.6(a). The Participant acknowledges that he or she may receive from the Company a paper copy of any documents
delivered electronically at no cost to the Participant by contacting the Company by telephone or in writing. The Participant further acknowledges
that the Participant will be provided with a paper copy of any documents if the attempted electronic delivery of such documents fails. Similarly, the
Participant understands that the Participant must provide the Company or any designated third party administrator with a paper copy of any
documents if the attempted electronic delivery of such documents fails. The Participant may revoke his or her consent to the electronic delivery of
documents described in Subsection 15.6(a) or may change the electronic mail address to which such documents are to be delivered (if Participant has
provided an electronic mail address) at any time by notifying the Company of such revoked consent or revised e-mail address by telephone, postal
service or electronic mail. Finally, the Participant understands that he or she is not required to consent to electronic delivery of documents described
in Subsection 15.6(a).
15.7 Integrated
Agreement.
The Grant Notice, this Agreement and the Plan, together with any employment, service or other agreement
with the Participant and a Participating Company referring to the RSUs, shall constitute the entire understanding and agreement of the Participant
and the Participating Company Group with respect to the subject matter contained herein or therein and supersede any prior agreements,
understandings, restrictions, representations, or warranties among the Participant and the Participating Company Group with respect to such subject
matter. To the extent contemplated herein or therein, the provisions of the Grant Notice, this Agreement and the Plan shall survive any vesting of the
RSUs and shall remain in full force and effect.
15.8 Applicable
Law.
This Agreement shall be governed by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within the State of California.
15.9 Counterparts.
The Grant Notice may be executed in counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Exhibit 21
Subsidiary Name
Jurisdiction
Subsidiaries
Exhibit 21
Glaukos Germany GmbH
Glaukos Japan GK
Glaukos Australia Pty Ltd
Glaukos Canada Inc.
Glaukos France SAS
Glaukos Ireland Limited
Glaukos Netherlands B.V.
Glaukos Produtos Médicos Ltda.
Glaukos Sweden AB
Glaukos UK Limited
Glaukos Singapore PTE. LTD.
Glaukos Medical Spain, S.L.
Glaukos (Switzerland) AG
Glaukos Norway AS
GKOS Medical, Unipessoal LDA
Glaukos Belgium
Germany
Japan
Australia
Canada
France
Ireland
Netherlands
Brazil
Sweden
England and Wales
Singapore
Spain
Switzerland
Norway
Portugal
Belgium
Exhibit 23.1
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1) Registration Statement (Form S-8 No. 333-205372), pertaining to the Glaukos Corporation 2015 Omnibus Incentive
Compensation Plan, 2015 Employee Stock Purchase Plan, 2011 Stock Plan, and 2001 Stock Option Plan, and
(2) Registration Statement (Form S-8 No. 333-212106) pertaining to Glaukos Corporation 2015 Omnibus Incentive
Compensation Plan and 2015 Employee Stock Purchase Plan;
of our reports dated February 28, 2018, with respect to the consolidated financial statements of Glaukos Corporation and the
effectiveness of internal control over financial reporting of Glaukos Corporation included in this Annual Report (Form 10-K) for
the year ended December 31, 2017.
/s/ Ernst & Young LLP
Irvine, California
February 28, 2018
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a) OF THE
SECURITIES EXCHANGE ACT, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, Thomas W. Burns, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Glaukos Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 28, 2018
/s/ THOMAS W. BURNS
Name: Thomas W. Burns
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13 a -14( a ) AND RULE 15 d -14( a ) OF THE
SECURITIES EXCHANGE ACT, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
I, Joseph E. Gilliam, certify that:
2002
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Glaukos Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 28, 2018
/s/ JOSEPH E. GILLIAM
Name: Joseph E. Gilliam
Chief Financial Officer & Sr. Vice President, Corporate Development
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Thomas W. Burns, President and Chief Executive Officer of Glaukos Corporation (the “Company”), certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
the Annual Report on Form 10-K for the year ended December 31, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2018
/s/ THOMAS W. BURNS
Name: Thomas W. Burns
President and Chief Executive Officer
This certification accompanies and is being “furnished” with this Report, shall not be deemed “filed” by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that Section and shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before
or after the date of this Report, irrespective of any general incorporation language contained in such filing.
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Joseph E. Gilliam, Chief Financial Officer & Sr. Vice President, Corporate Development of Glaukos Corporation (the “Company”), certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
the Annual Report on Form 10-K for the year ended December 31, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2018
/s/ JOSEPH E. GILLIAM
Name: Joseph E. Gilliam
Chief Financial Officer & Sr. Vice President, Corporate Development
This certification accompanies and is being “furnished” with this Report, shall not be deemed “filed” by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that Section and shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before
or after the date of this Report, irrespective of any general incorporation language contained in such filing.