o Confidential,
for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
þ Definitive Proxy
Statement
o Definitive
Additional Materials
o Soliciting
Material Pursuant to
§240.14a-12
NxSTAGE MEDICAL, INC.
(Name of Registrant as Specified In
Its Charter)
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
o
No fee required.
o
Fee computed on table below per Exchange Act
Rules 14a-6(i)(1)
and 0-11.
(1)
Title of each class of securities to which transaction applies:
(2)
Aggregate number of securities to which transaction applies:
(3)
Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11
(set forth the amount on which the filing fee is calculated and
state how it was determined):
(4)
Proposed maximum aggregate value of transaction:
(5)
Total fee paid:
þ
Fee paid previously with preliminary materials: $2,752
o
Check box if any part of the fee is offset as provided by
Exchange Act
Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
NxStage Medical, Inc. and David S. Utterberg have entered into a
stock purchase agreement under which we will purchase from
Mr. Utterberg the issued and outstanding shares of
Medisystems Corporation and Medisystems Services Corporation,
90% of the issued and outstanding shares of Medisystems Europe
S.p.A. (the remaining equity of which is held by Medisystems
Corporation) and 0.273% of the issued and outstanding equity
participation of Medisystems Mexico s. de R.L. de C.V. (the
remaining equity of which is held by Medisystems Corporation),
which are collectively referred to as the MDS Entities. Our
acquisition of the MDS Entities is referred to as the Stock
Purchase. Following the Stock Purchase, each of the MDS Entities
will be a direct or indirect wholly-owned subsidiary of ours.
We will issue Mr. Utterberg 6,500,000 shares of our
common stock, subject to a post-closing working capital
adjustment that may increase or decrease the number of shares of
common stock we issue to Mr. Utterberg, in consideration
for the Stock Purchase. The shares of our common stock issuable
to Mr. Utterberg pursuant to this proxy statement are
referred to as the Shares. In addition, we may be required to
issue additional shares of our common stock to
Mr. Utterberg. Pursuant to the terms of the Stock Purchase,
we and Mr. Utterberg have agreed to indemnify each other in
the event of certain breaches or failures, and any such
indemnification amounts must be paid in shares of our common
stock, valued at the time of payment. However, we will not be
required to issue shares for indemnification purposes that in
the aggregate would exceed 20% of the then outstanding shares of
our common stock without first obtaining stockholder approval,
and any such shares will not be registered under the Securities
Act of 1933, as amended.
Our shares of common stock are listed on the NASDAQ Global
Market under the symbol “NXTM”. As of
September 10, 2007, the last trading day before the date of
this proxy statement, the last sales price of our common stock,
as quoted on the NASDAQ Global Market, was $13.01.
This proxy statement has been prepared in connection with a
special meeting of our stockholders to be held at the offices of
WilmerHale, 60 State Street, Boston, Massachusetts02109, on
October 1, 2007 at 10:00 a.m., local time. At the
special meeting, stockholders will consider a proposal to
approve the issuance of the Shares and a proposal to amend our
2005 Stock Incentive Plan to increase the number of shares of
our common stock that may be issued under the plan. Pursuant to
applicable NASDAQ Marketplace Rules, the issuance of the shares
of our common stock pursuant to the Stock Purchase and the
amendment to our 2005 Stock Incentive Plan require approval by
holders of a majority of the shares of our common stock present
and voting at a special meeting of stockholders at which a
quorum is present.
This proxy statement sets forth more information about NxStage,
Mr. Utterberg, the MDS Entities, the Stock Purchase and the
proposed amendment to our 2005 Stock Incentive Plan. We
encourage you to read carefully this proxy statement before
voting, including the section entitled “Risk Factors”
beginning on page 18.
A special meeting of our stockholders will be held at the
offices of WilmerHale, 60 State Street, Boston, Massachusetts02109, on October 1, 2007 at 10:00 a.m., local time.
At the special meeting, stockholders will consider and act upon
the following matters:
•
the issuance of 6,500,000 shares of our common stock, plus
any additional shares of common stock issuable pursuant to a
post-closing adjustment, to David S. Utterberg pursuant to the
stock purchase agreement, dated as of June 4, 2007, between
Mr. Utterberg and NxStage, as amended (which is referred to
in this notice and proxy statement as the stock purchase
agreement), and any additional shares of our common stock that
we may be required to issue Mr. Utterberg in the future to
satisfy any indemnification claims payable by us for failures or
breaches under the stock purchase agreement and/or the
consulting agreement we intend to enter into with
Mr. Utterberg; and
•
an amendment to our 2005 Stock Incentive Plan, or 2005 Plan, to
increase the number of shares of our common stock that may be
issued under the 2005 Plan by an additional 3,800,000 shares, of
which no more than 1,500,000 shares shall be granted as
restricted stock.
Pursuant to applicable NASDAQ Marketplace Rules, the issuance of
shares of our common stock pursuant to the stock purchase
agreement and the amendment to our 2005 Plan require approval by
holders of a majority of the our shares of common stock present
and voting at a special meeting of stockholders at which a
quorum is present.
After careful consideration, our board of directors has
approved the proposals referred to above and concluded that they
are fair to, and in the best interests of, NxStage and our
stockholders. Our board of directors recommends that our
stockholders vote “FOR” each of the proposals referred
to above.
You are entitled to vote only if you were a holder of our common
stock at the close of business on September 10, 2007, the
record date for the special meeting. Only record holders of our
common stock at the close of business on that date are entitled
to notice of and to vote at the special meeting and at any
adjournments or postponements thereof. At the close of business
on the record date, there were 30,041,633 shares of our
common stock outstanding and entitled to vote.
The proxy statement accompanying this notice sets forth more
information about NxStage, Mr. Utterberg, the stock
purchase agreement and related transactions and the proposed
amendment to our 2005 Plan. The accompanying materials also
provide instructions on how to vote your shares in person at the
special meeting or by proxy.
Your vote is very important. Whether or not you plan to attend
the special meeting, please take the time to vote by completing
and mailing the enclosed proxy card to NxStage or, if the option
is available to you, by granting your proxy electronically over
the Internet or by telephone. If your shares are held in
“street name,” meaning they are held for your account
by a broker or other nominee, your shares will only be voted at
the special meeting if you direct your broker to vote your
shares by following the procedures established by your broker.
The following questions and answers briefly address some
commonly asked questions about the special meeting and this
proxy statement. They may not include all the information that
is important to you. You should read carefully this entire proxy
statement, including the annexes and the other documents
referred to herein.
Q:
What will happen in connection with the Stock Purchase?
A:
We are proposing to purchase from David S. Utterberg, who is a
member of our board of directors and the owner of approximately
6.7% of our common stock:
• all of the issued and outstanding shares of
Medisystems Corporation, or MDS;
• all of the issued and outstanding shares of
Medisystems Services Corporation, or MDS Services;
• 90% of the issued and outstanding shares of
Medisystems Europe S.p.A. (the remaining equity of which is held
by MDS), or MDS Italy; and
• 0.273% of the issued and outstanding equity
participation of Medisystems Mexico s. de R.L. de C.V. (the
remaining equity of which is held by MDS), or MDS Mexico.
MDS, MDS Services, MDS Italy and MDS Mexico are referred to
collectively in this proxy statement as the MDS Entities. We
refer to our acquisition of the MDS Entities under the stock
purchase agreement as the Stock Purchase.
As consideration for the Stock Purchase, we will issue
Mr. Utterberg 6,500,000 shares of our common stock,
plus any additional shares issuable pursuant to a post-closing
working capital adjustment provided for in the stock purchase
agreement. We may also be required to issue Mr. Utterberg
additional shares of our common stock, which we refer to as the
indemnification shares, to satisfy any indemnification claims
payable by us under the stock purchase agreement
and/or the
consulting agreement we intend to enter into with
Mr. Utterberg, which is described below. In this proxy
statement, we refer to the shares to be issued to
Mr. Utterberg as consideration for the Stock Purchase,
together with the indemnification shares, as the Stock Purchase
Shares.
Following the Stock Purchase, each of the MDS Entities will be a
direct or indirect wholly-owned subsidiary of ours. A copy of
the stock purchase agreement is attached to this proxy statement
as Annex A.
Q:
Why are you receiving this proxy statement?
A:
Our stock is listed on the NASDAQ Global Market.
Rule 4350(i) of the NASDAQ Marketplace Rules requires
listed companies to obtain stockholder approval in certain
circumstances, which include:
• when an issuance or potential issuance of securities
would result in a change in control of the company, as such term
has been interpreted by NASDAQ for purposes of Rule 4350(i);
• when an equity compensation arrangement is made,
pursuant to which stock may be acquired by directors or
directors’ affiliates; and
• when in connection with the stock or assets of
another company, where due to the issuance of common stock or
securities convertible into common stock, the securities to be
issued represent 20% or more of the voting power or number of
shares of common stock outstanding before the issuance.
You are being asked to approve the issuance of the Stock
Purchase Shares because such issuance implicates each of the
circumstances listed above, and, pursuant to the stock purchase
agreement, our stockholders approving the issuance of the Stock
Purchase Shares to Mr. Utterberg is a condition to closing
the Stock Purchase. In addition, we are proposing to amend our
2005 Stock Incentive Plan, or 2005 Plan, to increase the number
of shares reserved for issuance under the 2005 Plan by
3,800,000, from 3,601,459 to 7,401,459; provided that, of the
additional 3,800,000 shares, no more than
1,500,000 shares may be granted as restricted stock. Under
NASDAQ Marketplace Rule 4350(i) and the terms of the 2005
Plan, we are required to obtain stockholder approval prior to
amending the 2005 Plan to increase the number of
shares issuable under the 2005 Plan. We will hold a special
meeting of our stockholders to obtain approval of the issuance
of the Stock Purchase Shares and the amendment to our 2005 Plan.
This proxy statement contains important information about
NxStage, the special meeting, the Stock Purchase, the MDS
Entities, Mr. Utterberg and the proposed amendments to our
2005 Plan, and you should read it carefully.
Q:
Why is NxStage proposing the Stock Purchase?
A:
We believe the Stock Purchase will provide the following
benefits:
• expansion of our business on a commercial,
operational and financial scale; and
• enhancement of our capability to execute
operationally.
We also believe that the Stock Purchase has the potential to
accelerate our profitability. For a description of the other
factors considered by our board of directors in determining to
approve the Stock Purchase, see “The Stock
Purchase — Our Reasons for the Stock
Purchase” beginning on page 57.
Q:
Does NxStage’s board of directors recommend voting in
favor of the issuance of the Stock Purchase Shares and the
amendment to the 2005 Plan?
A:
Proposal One — Approval of the Issuance of the
Stock Purchase Shares
Yes. After careful consideration, our board of directors
determined that the Stock Purchase is fair to, and in the best
interests of, NxStage and our stockholders. Our board of
directors recommends that our stockholders vote
“FOR”the issuance of the Stock Purchase Shares.
For a description of the factors considered by our board of
directors in making its determination, see “The Stock
Purchase — Our Reasons for the Stock Purchase”
beginning on page 57.
Proposal Two — Approval of an Amendment to our
2005 Plan
Yes. After careful consideration, our board of directors
believes that the proposed amendment to our 2005 Plan is in the
best interests of NxStage and our stockholders and recommends a
vote “FOR”the approval of the amendment to our
2005 Plan.
For a description of the factors considered by our board of
directors in making its determination, see “Matters
Submitted to a Vote of NxStage Stockholders —
Proposal Two — Approval of an Amendment to Our
2005 Plan” beginning on page 49.
Q:
Is the Stock Purchase a related person transaction?
A:
Yes. Mr. Utterberg is a director of NxStage and currently
owns approximately 6.7% of our outstanding common stock based on
the number of shares of our common stock outstanding as of
July 31, 2007. Pursuant to our policies and procedures
concerning related person transactions, the Audit Committee of
our board of directors reviewed and approved the Stock Purchase.
Q:
What will Mr. Utterberg receive as consideration for the
Stock Purchase?
A:
Upon the closing of the Stock Purchase, we will issue
Mr. Utterberg 6,500,000 shares of our common stock.
The total number of shares payable by us to Mr. Utterberg
is subject to a post-closing working capital adjustment pursuant
to the stock purchase agreement that may increase or decrease
the final number of shares of common stock issued to
Mr. Utterberg. We will not know, until at least
60 days following the closing of the Stock Purchase, how
many shares, if any, we will be required to issue, or which Mr.
Utterberg will be required to return, in connection with the
post-closing working capital adjustment. One million of the
shares issued to Mr. Utterberg will be placed into escrow
to cover potential indemnification claims we may have against
him. For a further discussion of the consideration payable to
Mr. Utterberg, see “The Stock Purchase —
Stock Purchase Consideration” on page 66 and for a
further discussion of the escrow arrangement and indemnification
see “The Stock Purchase
Agreement — Indemnification” beginning on
page 74.
Could we be required to issue Mr. Utterberg additional
shares of our common stock in connection with the Stock
Purchase?
A.
Yes. We may be required to issue Mr. Utterberg additional
shares of our common stock in the event we are required to
indemnify him for certain breaches or failures. Pursuant to the
terms of the stock purchase agreement and the consulting
agreement, we and Mr. Utterberg have agreed to indemnify
each other in the event of certain breaches or failures under
such agreements. Indemnification amounts payable by either
party, if any, must be paid in shares of our common stock,
valued at the time of payment. However, we will not be required
to issue shares for indemnification purposes that in the
aggregate would exceed 20% of the then outstanding shares of our
common stock without first obtaining stockholder approval, and
any such shares will not be registered under the Securities Act
of 1933, as amended. For a further discussion of indemnification
see “The Stock Purchase
Agreement — Indemnification” beginning on
page 74.
Q:
When does NxStage expect to complete the Stock Purchase?
A:
Subject to satisfaction or waiver of all conditions, we expect
to complete the Stock Purchase approximately two days following
the special meeting.
For a description of the conditions to completion of the Stock
Purchase, see “The Stock Purchase Agreement —
Conditions to the Completion of the Stock Purchase”
beginning on page 68.
Q:
Are there risks you should consider in deciding whether to
vote for the issuance of the Stock Purchase Shares?
A:
Yes. In evaluating the issuance of the Stock Purchase Shares,
you should carefully consider the factors discussed under the
heading “Risk Factors” beginning on page 18.
Q:
Why are we proposing to amend the 2005 Plan to increase the
number of shares issuable under the plan?
A:
If the Stock Purchase is completed, our employee population will
grow from approximately 300 to over 1,000. In order for us to
grant equity incentives to these new employees and to support
our continued growth and compensation needs, we are seeking to
increase the number of shares available for issuance under the
2005 Plan by 3,800,000 shares, of which no more than
1,500,000 shares may be issued as restricted stock awards.
Q:
What vote is required by NxStage stockholders to approve the
issuance of the Stock Purchase Shares and the 2005 Plan
Amendment?
A:
Pursuant to applicable NASDAQ Marketplace Rules and our by-laws,
the affirmative vote of the holders of a majority of the shares
of our common stock represented in person or by proxy and voting
on such matter at a special meeting at which a quorum is present
is required to approve the issuance of the Stock Purchase
Shares. In addition, pursuant to NASDAQ Marketplace Rules, our
bylaws and the terms of our 2005 Plan, the affirmative vote
of the holders of a majority of the shares of our common stock
represented in person or by proxy and voting on such matter at a
special meeting at which a quorum is present is required to
approve the proposed amendment to our 2005 Plan. As of
July 31, 2007, our directors and executive officers and
their affiliates, including Mr. Utterberg, were entitled to
vote approximately 32.5% of our outstanding shares of common
stock (not including options, warrants or other convertible
securities).
Q:
What do you need to do now?
A:
We urge you to carefully read and consider the information
contained in this document, including the annexes, and to
consider how the Stock Purchase, including the issuance of the
Stock Purchase Shares, and the proposal to increase the number
of shares available for issuance under our 2005 Plan will affect
you as a stockholder. You should then vote as soon as possible
in accordance with the instructions provided in this document
and on the enclosed proxy card.
The special meeting of our stockholders will be held at the
offices of WilmerHale, 60 State Street, Boston, Massachusetts02109, on October 1, 2007 at 10:00 a.m., local time.
Q:
How do you vote?
A:
If you are a record holder, meaning your shares are registered
in your name, you may vote:
(1) Over the
Internet: Go to the website of our tabulator,
Computershare Investor Services, at www.investorvote.com.
Use the vote control number printed on your enclosed proxy card
to access your account and vote your shares. You must specify
how you want your shares voted or your Internet vote cannot be
completed and you will receive an error message. Your shares
will be voted according to your instructions.
(2) By Telephone: Call
1-800-652-VOTE
(8683) toll free from the United States, Canada and Puerto
Rico, and follow the instructions on your enclosed proxy card.
You must specify how you want your shares voted and confirm your
vote at the end of the call or your telephone vote cannot be
completed. Your shares will be voted according to your
instructions.
(3) By Mail: Complete
and sign your enclosed proxy card and mail it in the enclosed
postage prepaid envelope to Computershare Investor Services.
Your shares will be voted according to your instructions. If you
do not specify how you want your shares voted, they will be
voted as recommended by our board of directors.
(4) In Person at the Special
Meeting: If you attend the special meeting, you
may deliver your completed proxy card in person or you may vote
by completing a ballot, which we will provide to you at the
meeting.
If your shares are held in “street name”, meaning they
are held for your account by a broker or other nominee, you may
vote:
(1) Over the Internet or by
Telephone: You will receive instructions from
your broker or other nominee if they permit Internet or
telephone voting. You should follow those instructions.
(2) By Mail: You will
receive instructions from your broker or other nominee
explaining how you can vote your shares by mail. You should
follow those instructions.
(3) In Person at the Special
Meeting: Contact your broker or other nominee who
holds your shares to obtain a brokers’ proxy card and bring
it with you to the special meeting. You will not be able to
vote in person at the special meeting unless you have a proxy
from your broker issued in your name giving you the right to
vote your shares.
Q:
What happens if you do not vote?
A:
If you do not vote at the special meeting by submitting a proxy
or otherwise, your shares will not be counted as present for the
purpose of determining a quorum and will have no effect on the
outcome of the proposal to approve the issuance of the Stock
Purchase Shares or the proposal to increase the number of shares
issuable under our 2005 Plan. If you submit a proxy card and
affirmatively elect to abstain from voting, your proxy will be
counted as present for the purpose of determining the presence
of a quorum but will not be voted at the special meeting. If you
hold shares in street name and do not instruct your broker how
to vote your shares, your shares will be counted as present for
the purpose of determining the presence of a quorum but will not
be voted at the special meeting. As a result, your abstention
will have the same effect as a vote against such
proposals. A “broker non-vote” will have no effect on,
and will not be counted towards, the total vote. Each of the
proposals to be considered at the special meeting requires the
affirmative vote of a majority of the votes cast at the special
meeting.
Can you change your vote after you have mailed your signed
proxy?
A:
Yes. If you want to change your vote, send our corporate
secretary a later dated, signed proxy card before the special
meeting or attend the special meeting and vote in person, or you
may vote over the Internet or by telephone as only your latest
Internet or telephone vote received before the special meeting
will be counted. You may also revoke your proxy by sending
written notice to our corporate secretary before the special
meeting. If you have instructed your broker to vote your shares,
you must follow your broker’s directions in order to change
those instructions.
Q:
Are you entitled to appraisal rights?
A:
Our stockholders are not entitled to appraisal rights in
connection with any proposals to be considered at the special
meeting.
Q:
Who will bear the costs of the proxy solicitation?
A:
We will bear the costs of soliciting proxies, including the
printing, mailing and filing of this proxy statement and any
additional information furnished to stockholders. We have
engaged Georgeson Shareholder Communications Inc., a proxy
solicitation firm, to solicit proxies from our stockholders. For
these services, we expect to pay a fee of approximately $7,500,
plus expenses. Our directors, officers and employees may also
solicit proxies by telephone, email, facsimile and in person,
without additional compensation. Upon request, we will reimburse
brokerage houses and other custodians, nominees and fiduciaries
for their reasonable out-of-pocket expenses for distributing
proxy materials.
Q:
Whom should you call with questions?
A:
If you have any questions about the Stock Purchase or any of the
proposals to be considered at the special meeting, or if you
need additional copies of this document or the enclosed proxy,
you should contact:
Georgeson Shareholder
Communications Inc.
17 State Street, 10th Floor New York, NY10004
(888) 605-7618
NxStage Medical, Inc.
439 South Union Street,
5th
Floor
Lawrence, Massachusetts08143
(978) 687-4700
Attention: General Counsel
You may
also obtain additional information about us from documents filed
with the Securities and Exchange Commission by following the
instructions under “Where You Can Find More
Information” on page 174.
This summary highlights only selected information from this
proxy statement and may not contain all of the information that
is important to you. To better understand the Stock Purchase and
the proposals being considered at the special meeting, you
should read this entire proxy statement carefully, including the
stock purchase agreement, attached as Annex A, the opinion
of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
attached as Annex B, and the other documents to which we
refer. You may obtain further information about us by following
the instructions under the heading “Where You Can Find More
Information” on page 174. We have included page
references parenthetically to direct you to a more complete
description of the topics presented in this summary.
The
Stock Purchase and the Stock Purchase Agreement (see
pages 55 and 68)
We have agreed to acquire the equity interests in the MDS
Entities held by Mr. Utterberg. Following the Stock
Purchase, each of the MDS Entities will be a direct or indirect
wholly-owned subsidiary of ours. In consideration for the Stock
Purchase, we will issue 6,500,000 shares of our common
stock to Mr. Utterberg, subject to a post-closing working
capital adjustment that may increase or decrease the number of
shares of our common stock to be issued to Mr. Utterberg.
In addition, we may be required to issue additional shares of
common stock to Mr. Utterberg in the event we are required
to indemnify him for certain breaches or failures. Following the
consummation of the Stock Purchase, Mr. Utterberg will own
approximately 23.4% of our outstanding common stock, assuming he
is issued 6,500,000 shares of our common stock.
Mr. Utterberg is currently a member of our board of
directors. He will continue to be a director following the
closing of the Stock Purchase.
The stock purchase agreement, which is the legal document
governing the Stock Purchase, is attached as Annex A to
this document. You should read the entire agreement carefully
and in its entirety.
NxStage
Medical, Inc. 439
South Union Street,
5th
Floor
Lawrence, Massachusetts08143
(978) 687-4700
We are a medical device company that develops, manufactures and
markets innovative systems for the treatment of end-stage renal
disease, or ESRD, and acute kidney failure. We market our
principal product, the System One, to dialysis clinics for
chronic hemodialysis treatment, providing clinics with improved
access to the developing home hemodialysis market and the
ability to expand their patient base by adding home-based
patients without adding clinic infrastructure.
We were incorporated on December 31, 1998, under the name
QB Medical, Inc. and changed our name to NxStage Medical, Inc.
in 1999. Our principal offices are located at 439 South Union
Street,
5th Floor,
Lawrence, Massachusetts08143, and our telephone number at that
address is
(978) 687-4700.
David S.
Utterberg
c/o Medisystems Corporation 701
Pike Street,
16th
Floor Seattle, Washington98101
(206) 834-1200
Medisystems, the business we are acquiring from
Mr. Utterberg, is a medical device company that designs,
manufactures, assembles, imports and distributes disposables
used in dialysis and related blood treatments and procedures.
Medisystems is a leader in the market for hemodialysis blood
tubing sets, A.V. fistula needles, apheresis needles and
hemodialysis transducer protectors in the United States.
Medisystems is also the sole supplier of the disposable
cartridges used in our primary product, the System One.
Mr. Utterberg, a NxStage director, is the sole stockholder
of MDS, a Washington corporation incorporated in 1981, and MDS
Services, a Nevada corporation incorporated in 1998.
Mr. Utterberg is also the owner of 90% of the issued and
outstanding shares of MDS Italy, a company organized in 1991
under the laws of Italy in Sorbara, Modena, Italy, and 0.273% of
the issued and outstanding equity participation of MDS Mexico, a
company organized in 1993 under the laws of Mexico in Tijuana,
Baja California, Mexico. MDS holds the remaining issued and
outstanding equity interests in each of MDS Italy and MDS Mexico.
Mr. Utterberg is also the sole stockholder of Medisystems
Technology Corporation, or MTC, Medisystems Research
Corporation, or MRC, Life Stream Medical Corporation, or LSM,
and Infusion Care Services, or ICS, which entities we are not
acquiring in connection with the Stock Purchase. In this proxy
statement, MTC, MRC, LSM, ICS and the MDS Entities are
collectively referred to as the Medisystems Group. Unless
otherwise indicated, all financial data presented in this proxy
statement with respect to Medisystems is the financial data of
the Medisystems Group.
Our board of directors has approved, subject to stockholder
approval, an amendment to our 2005 Plan, increasing from
3,601,459 to 7,401,459 the number of shares of our common stock
issuable under the 2005 Plan; provided that of this
3,800,000 share increase, no more than
1,500,000 shares may be issued as restricted stock awards.
Recommendations
of the NxStage Board of Directors (see pages 49 and
54)
After careful consideration, our board of directors determined
that the Stock Purchase is advisable, and in the best interests,
of NxStage and our stockholders, and has approved the Stock
Purchase. Our board of directors recommends that our
stockholders vote “FOR”the issuance of the
Stock Purchase Shares. Mr. Utterberg did not participate in
our discussions or consideration of, or the board votes
authorizing the Stock Purchase.
After careful consideration, our board of directors determined
that the amendment to our 2005 Plan to increase the number of
shares issuable thereunder is in the best interests of NxStage
and our stockholders. Our board of directors recommends that our
stockholders vote “FOR” the approval of the
amendment to our 2005 Plan.
Opinion
of NxStage’s Financial Advisor Regarding the Stock Purchase
(see page 59)
On June 4, 2007, Merrill Lynch delivered its written
opinion to our board of directors that, as of that date and
subject to the assumptions, considerations and limitations set
forth in its opinion, the Stock Purchase was fair, from a
financial point of view, to us. Merrill Lynch provided its
opinion for the information and assistance of our board of
directors in connection with its consideration of the Stock
Purchase. The Merrill Lynch opinion is not a recommendation as
to how any NxStage stockholder should vote or take any other
action with respect to the proposal to approve the issuance the
Stock Purchase Shares.
The full text of the written opinion of Merrill Lynch, which
sets forth assumptions made, matters considered and limitations
on the review undertaken in connection with its opinion, is
attached to this proxy statement as Annex B. You are urged
to read the opinion carefully and in its entirety. You should
carefully consider the discussion of Merrill Lynch’s
analysis under the heading “Opinion of NxStage’s
Financial Advisor” beginning on page 59.
Interests
of Mr. Utterberg in the Stock Purchase (see
page 65)
When considering the recommendation of our board of directors,
you should be aware that Mr. Utterberg, a NxStage director,
has interests in the Stock Purchase that are different from
yours. Mr. Utterberg owns, directly or indirectly, all of
the equity interests in the MDS Entities. Mr. Utterberg
will receive 6,500,000 shares of our common stock, subject
to a post-closing working capital adjustment, if the Stock
Purchase is approved and completed. As a result,
Mr. Utterberg’s aggregate ownership of our outstanding
stock will increase to
approximately 23.4% of our outstanding common stock, assuming he
receives 6,500,000 shares. Additionally, in connection with
the Stock Purchase we will enter into a two-year consulting
agreement with Mr. Utterberg pursuant to which we will pay
him $200,000 annually, plus reimbursement of certain expenses,
and we will receive through our ownership of MDS a license to
patents and other intellectual property rights from DSU Medical
Corporation, a corporation wholly-owned by Mr. Utterberg.
The consulting agreement and license agreement are each more
fully detailed in this proxy statement under the heading
“License Agreement and Consulting Agreement” beginning
on page 75.
Given his interests in the Stock Purchase and related
transactions, Mr. Utterberg did not participate in
discussions held by our board of directors concerning these
transactions, nor did he participate in the board votes
authorizing these transactions. In addition, the Stock Purchase
and consulting arrangement with Mr. Utterberg are related person
transactions for purposes of applicable rules of the Securities
and Exchange Commission, or SEC, and our internal policies
concerning related persons. Accordingly, our Audit Committee, as
well as our board of directors, reviewed and approved the
transactions. Our policies and procedures regarding the review,
approval and ratification of related person transactions are
described under the heading “NxStage Certain Relationships
and Related Transactions” beginning on page 168.
Following the Stock Purchase, Mr. Utterberg will continue
to serve on our board of directors. In addition, the stock
purchase agreement provides that, if Mr. Utterberg is no
longer a director of NxStage, our board of directors will
nominate for election to our board any director nominee proposed
by Mr. Utterberg, subject to certain conditions. Our board
of directors took into account these interests in considering
whether to approve the Stock Purchase.
Vote
Required to Approve the Stock Purchase and the 2005 Plan
Amendment
Pursuant to applicable NASDAQ Marketplace Rules and our by-laws,
the affirmative vote of the holders of a majority of the shares
of our common stock present and voting on the matter at the
special meeting is required to approve the issuance of the Stock
Purchase Shares to Mr. Utterberg. Pursuant to applicable
NASDAQ Marketplace Rules, our bylaws and the Plan, the
affirmative vote of the holders of a majority of the shares of
our common stock present and voting on the matter at the special
meeting is required to approve the amendment to our 2005 Plan.
Conditions
to Completion of the Stock Purchase (see page 68)
Several conditions must be satisfied or waived before we and
Mr. Utterberg complete the Stock Purchase, including those
summarized below:
•
expiration or termination of applicable waiting periods under
the
Hart-Scott-Rodino
Act;
•
approval by our stockholders of the issuance of shares of our
common stock to Mr. Utterberg in connection with the Stock
Purchase;
•
receipt by each party of the waivers, permits, consents,
approvals or other authorizations required to complete the Stock
Purchase, as specified in the stock purchase agreement;
•
filing by us of all filings required to be filed with NASDAQ;
•
accuracy of each party’s respective representations and
warranties in the stock purchase agreement;
•
compliance by each party with its covenants in the stock
purchase agreement; and
•
absence of court orders or legal proceedings that would prevent
the consummation of the Stock Purchase, cause the Stock Purchase
to be rescinded or have a material adverse effect on the MDS
Entities.
Termination
of the Stock Purchase Agreement Under Specified Circumstances
(see page 72)
Under circumstances specified in the stock purchase agreement,
either we or Mr. Utterberg may terminate the stock purchase
agreement and, as a result, the Stock Purchase would not be
completed. These circumstances generally include if:
we or Mr. Utterberg breach any representation, warranty or
covenant contained in the stock purchase agreement, and such
breach remains uncured, such that the conditions to the
completion of the Stock Purchase regarding representations,
warranties and covenants would not be satisfied;
•
our stockholders do not approve the issuance of shares of our
common stock to Mr. Utterberg pursuant to the stock
purchase agreement; or
•
we and Mr. Utterberg consent to the termination of the
stock purchase agreement by mutual written agreement.
NxStage
May be Required to Pay a Termination Fee Under Specified
Circumstances (see page 72)
Under certain circumstances, we may be required to pay a
termination fee to Mr. Utterberg up to an aggregate of
$600,000 in reasonable documented expenses incurred by
Mr. Utterberg relating to the Stock Purchase.
U.S.
Federal Income Tax Consequences of the Stock Purchase (see
page 67)
No gain or loss will be recognized by us or by holders of shares
of our common stock as a result of the Stock Purchase.
We will account for the Stock Purchase as a purchase under
U.S. generally accepted accounting principles, or GAAP.
Under the purchase method of accounting, the assets and
liabilities of the MDS Entities will be recorded as of the date
of the closing of the Stock Purchase, at their respective fair
values, and consolidated with those of NxStage. The results of
operations of the MDS Entities will be consolidated with ours
beginning on the date of the Stock Purchase.
Share
Ownership of Directors and Executive Officers of NxStage (see
page 171)
At the close of business on the record date of our special
meeting, our directors and executive officers and their
affiliates, including Mr. Utterberg, beneficially owned and
were entitled to vote approximately 32.5% of the shares of our
common stock outstanding on that date.
We are not aware of any governmental or regulatory approval
required for completion of the Stock Purchase, other than
compliance with the
Hart-Scott-Rodino
Act, compliance with applicable corporate laws of Delaware,
compliance with state securities laws and the filing with the
NASDAQ Global Market of a Notification Form for Listing
Additional Shares and a Notification Form for Change in the
Number of Shares Outstanding, with respect to the shares of our
common stock to be issued to Mr. Utterberg pursuant to the
stock purchase agreement.
If any other governmental approvals or actions are required, we
intend to try to obtain them. We cannot assure you, however,
that we will be able to obtain any such approvals or actions.
SUMMARY
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
NxSTAGE
The following tables present our summary selected consolidated
statements of operations data and balance sheet data for our
fiscal years 2002 through 2006 and for the six months ended
June 30, 2006 and 2007. The selected financial data as of
December 31, 2005 and 2006 and for the years ended
December 31, 2004, 2005 and 2006 have been derived from our
consolidated financial statements, which have been audited by
Ernst & Young LLP, an independent registered public
accounting firm, included in this proxy statement beginning on
page F-16.
The selected consolidated financial data as of December 31,2002, 2003 and 2004 and for the years ended December 31,2002 and 2003, are derived from our consolidated financial
statements, which have been audited by Ernst & Young LLP,
an independent registered accounting firm, not included in this
proxy statement. The selected consolidated financial data as of
June 30, 2007 and for the six months ended June 30,2006 and 2007 are derived from our unaudited consolidated
financial statements, which are included in this proxy statement
beginning on page
F-2. Our
unaudited consolidated financial statements have been prepared
on the same basis as the audited financial statements and notes
thereto, and include, in the opinion of our management, all
adjustments necessary for a fair presentation of the information
for the unaudited interim period. Reclassifications have been
made to our results from prior years to conform to the current
presentation. You should read this information in conjunction
with our consolidated financial statements, including the
related notes, and “NxStage Management’s Discussion
and Analysis of Financial Conditions and Results of
Operations” included elsewhere in this proxy statement. The
historical results are not necessarily indicative of results to
be expected in any future period.
SUMMARY
SELECTED HISTORICAL COMBINED
FINANCIAL DATA OF MEDISYSTEMS GROUP
The following tables present a summary of the Medisystems Group
combined statements of operations data and balance sheet data
for its fiscal years 2002 through 2006 and for the six months
ended June 30, 2006 and 2007. The selected financial data
as of December 31, 2005 and 2006 and for the years ended
December 31, 2004, 2005 and 2006 have been derived from the
audited combined financial statements of the Medisystems Group,
which have been audited by Grant Thornton LLP, an independent
registered public accounting firm, and are included in this
proxy statement beginning on
page F-42.
The selected combined financial data as of December 31,2004 have been derived from the audited combined financial
statements of the Medisystems Group, which have been audited by
Grant Thornton LLP, an independent registered public accounting
firm, not included in this proxy statement. The selected
financial data as of December 31, 2002 and 2003 and for the
years ended December 31, 2002 and 2003, are derived from
the audited combined financial statements of the Medisystems
Group, which have been audited by another independent registered
public accounting firm, not included in this proxy statement.
The selected combined financial data as of June 30, 2007
and for the six months ended June 30, 2006 and 2007 are
derived from Medisystems Group unaudited combined financial
statements, which are included in this proxy statement beginning
on
page F-42.
The unaudited combined financial statements of the Medisystems
Group have been prepared on the same basis as the audited
financial statements and notes thereto, and include, in the
opinion of the management of the Medisystems Group companies,
all normal recurring adjustments necessary for a fair
presentation of the information for the unaudited interim
period. Reclassifications have been made to results from prior
years to conform to the current presentation. These interim
results are not necessarily an indication of the results for the
full year. You should read this information in conjunction with
the combined financial statements of the Medisystems Group,
including the related notes, and “Medisystems
Management’s Discussion and Analysis of Financial
Conditions and Results of Operations” included elsewhere in
this proxy statement. The historical results are not necessarily
indicative of results to be expected in any future period.
In accordance with Article 11 of
Regulation S-X
under the Securities Act of 1933, as amended, we have prepared a
combined pro forma balance sheet as of June 30, 2007 and
combined pro forma statements of operations for the six months
ended June 30, 2007 and the fiscal year ended
December 31, 2006. For additional information, please refer
to the unaudited pro forma combined financial statements and
related notes beginning on page 131.
The following tables present our summary historical and pro
forma statement of operations data for the six months ended
June 30, 2007 and for the year ended December 31, 2006
and our summary historical and pro forma balance sheet data as
of June 30, 2007. The summary statements of operations data
for the year ended December 31, 2006 are derived from our
audited consolidated financial statements included in this proxy
statement beginning on page F-17. The summary statements of
operations data for the six months ended June 30, 2007 and
the selected balance sheet data as of June 30, 2007 have
been derived from our unaudited consolidated financial
statements included in this proxy statement beginning on
page F-2.
Our unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and notes thereto, and include, in the opinion of our
management, all adjustments necessary for a fair presentation of
the information for the unaudited interim period. Our historical
results for prior interim periods are not necessarily indicative
of results to be expected for a full fiscal year or for any
future period. You should read this data together with our
financial statements and related notes included in this proxy
statement beginning on page F-2 and the information under
“Summary Selected Historical Consolidated Financial Data of
NxStage,”“Summary Selected Historical Combined
Financial Data of Medisystems Group,”“NxStage
Management’s Discussion and Analysis of Financial
Conditions and Results of Operations” and “Medisystems
Management’s Discussion and Analysis of Financial
Conditions and Results of Operations.”
The following unaudited pro forma combined financial data should
be read in conjunction with our audited and unaudited historical
financial statements and those of the Medisystems Group and the
unaudited pro forma combined financial statements and related
notes included in this proxy statement beginning on
page 131. The unaudited pro forma combined financial data
has been presented for illustrative purposes only and is not
necessarily indicative of the results of operations or financial
position that would have occurred if the transaction had been
completed at the dates indicated.
COMPARATIVE
HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The information below reflects the historical net loss and net
book value per share of our common stock in comparison with the
unaudited pro forma net loss and book value per share after
giving effect to the acquisition of the MDS Entities on a
purchase basis.
You should read the tables below in conjunction with the audited
and unaudited financial statements of NxStage beginning on page
F-2 and the audited and unaudited financial statements of the
Medisystems Group beginning on
page F-42
and the related notes and the unaudited pro forma combined
financial statements and related notes included elsewhere in
this proxy statement.
Our common stock has been quoted on the NASDAQ Global Market
under the symbol “NXTM” since July 1, 2006, and
prior to that it was quoted on the NASDAQ National Market from
October 27, 2005 until June 30, 2006. Prior to that
time, there was no public market for our common stock.
The following table sets forth the high and low intraday sales
prices of our common stock as reported on the NASDAQ Global
Market for each of the periods set forth below.
The last reported sale price of our common stock on the NASDAQ
Global Market on August 27, 2007 was $13.39 per share.
On July 31, 2007, the last trading day prior to
announcement of the Stock Purchase, the closing price of our
common stock was $12.11. Assuming the issuance of
6,500,000 shares of our common stock to Mr. Utterberg
on June 4, 2007, he would have realized approximately
$78.7 million in connection with the Stock Purchase.
Because the market price of our common stock is subject to
fluctuation, the value of the shares to be issued to Mr.
Utterberg in the Stock Purchase may increase or decrease.
As of July 31, 2007, we had approximately 86 holders
of record of our common stock. For detailed information
regarding the beneficial ownership of our common stock see
“NxStage Principal Stockholders.”
Market price data regarding the MDS Entities is not provided as
there is no public market for their equity. See “Questions
and Answers” for a summary of the ownership of the
outstanding equity of the MDS Entities.
Given the absence of a public trading market for the outstanding
equity of the MDS Entities, the foregoing per share market data
may not provide meaningful information to you in determining
whether to approve the issuance of the Stock Purchase Shares.
Our stockholders are urged to obtain current market quotations
for our common stock and to carefully review the other
information contained in this proxy statement or incorporated
herein by reference in considering whether to approve the
issuance of the Stock Purchase Shares. See “Where you Can
Find More Information” beginning on page 174.
We have never declared or paid any dividends on our common
stock. We currently intend to retain any future earnings to
finance our research and development efforts, the development of
our proprietary technologies and the expansion of our business
and do not intend to declare or pay cash dividends on our
capital stock in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our
board of directors and will depend upon a number of factors,
including our results of operations, financial condition, future
prospects, contractual restrictions, restrictions imposed by
applicable law and other factors our board of directors deems
relevant.
Certain of the MDS Entities, which are S corporations, have paid
dividends to Mr. Utterberg for compensation and tax payment
purposes; however, no such dividends were declared or paid to
Mr. Utterberg during the years ended December 31, 2006
and December 31, 2005, during the six months ended
June 30, 2007, or during the period between June 30,2007 and July 31, 2007. Pursuant to the terms of the stock
purchase agreement, Mr. Utterberg is permitted to receive
cash dividends from the MDS Entities (1) in the amount of
$55,000 per month for each month from January 1, 2007
through the closing of the Stock Purchase and (2) for
reimbursement of tax liability with respect to Medisystems.
In addition to the other information included in this proxy
statement, including the matters addressed under “Special
Note Regarding Forward-Looking Statements,” you should
carefully consider the following risks before deciding whether
to vote for the issuance of the shares of our common stock in
the Stock Purchase or the increase in the number of shares
issuable under our 2005 Plan. You should also consider the other
information in this proxy statement and the other documents
incorporated by reference into this proxy statement. See
“Where You Can Find More Information.” Risks relating
to NxStage’s business are described under “Risks
Related to NxStage.” Risks relating to the
Medisystems’ business are described under “Risks
Related to the Combined Businesses Following the Stock
Purchase.”
The
number of shares of common stock to be issued as consideration
for the Stock Purchase is not adjustable based on the market
price of our common stock and if the market price of our common
stock increases, the value of the shares of common stock issued
as consideration for the Stock Purchase to Mr. Utterberg
could increase.
The purchase price to be paid by us to Mr. Utterberg has
been set in the stock purchase agreement at 6,500,000 shares of
our common stock and is only adjustable upward or downward
depending upon the amount of Medisystems working capital, as
calculated pursuant to the stock purchase agreement, at the time
of the closing; the number of shares of our common stock that we
will issue will not be adjusted as a result of changes in the
market price of our common stock. Any changes in the market
price of our common stock will not affect the number of shares
received by Mr. Utterberg as consideration for the Stock
Purchase. Therefore, if the market price of our common stock
increases from the market price on the date of the Stock
Purchase, Mr. Utterberg would receive consideration with a
market value that is higher than the value on the date we
executed the stock purchase agreement or the date of this proxy
statement.
If the
working capital of Medisystems at the closing is less negative
than the target amount of working capital by $250,000 or more or
we are required to indemnify Mr. Utterberg for breaches or
failures under the stock purchase agreement or consulting
agreement, the number of shares to be issued to
Mr. Utterberg will be increased.
The stock purchase agreement provides that, if the working
capital of Medisystems at the closing is less negative than the
target amount of working capital, as determined pursuant to the
stock purchase agreement, by $250,000 or more, the number of
shares of our common stock to be issued to Mr. Utterberg
will be increased. The items that will constitute
Medisystems’ working capital at the closing are subject to
many factors. For a more detailed discussion of the calculation
of Medisystems’ working capital at the closing, see
“The Stock Purchase — Stock Purchase
Consideration — Working Capital Adjustment Following
Closing” on page 66.
If we are required to indemnify Mr. Utterberg for failures
or breaches under the stock purchase agreement or consulting
agreement, we will be required to satisfy any such
indemnification obligations with shares of our common stock,
valued at the time of payment. Our aggregate indemnification
liability is generally limited to a maximum amount equal to 50%
of the value of the shares issued as consideration for the Stock
Purchase, measured at the time the Stock Purchase closes, minus
$1,250,000. However, because any shares issued in satisfaction
of an indemnification claim will be valued at the time of
payment, we do not know the maximum number of shares that we may
required to issue to Mr. Utterberg. For a more detailed
discussion of the indemnification requirements under the stock
purchase agreement and consulting agreement, see “The Stock
Purchase Agreement — Indemnification” on
page 74.
Failure
to complete the Stock Purchase could harm our common stock price
and future business and operations.
If the Stock Purchase is not completed, we may be subject to the
following risks:
•
the price of our common stock may decline;
•
we will not realize our expected benefits of the Stock Purchase;
•
under certain circumstances we will be required to pay
Mr. Utterberg a termination fee of up to $600,000 in
reasonable documented expenses incurred by him in connection
with the Stock Purchase; and
•
the costs incurred by us related to the Stock Purchase, such as
legal, accounting and certain financial advisory fees, must be
paid even if the Stock Purchase is not completed.
The
Stock Purchase may be completed even though material adverse
changes may result from the announcement of the Stock Purchase,
industry-wide changes and other causes.
In general, either party can refuse to complete the Stock
Purchase if there is a material adverse change affecting the
other party between June 4, 2007, the date of the stock
purchase agreement, and the closing. However, certain types of
changes do not permit either party to refuse to complete the
Stock Purchase, even if such change would have a material
adverse effect on us or Medisystems, including:
•
with respect to us, changes resulting from general economic
conditions or conditions generally affecting the industry in
which we operate;
•
changes due to the announcement of the Stock Purchase or the
completion of the transactions contemplated by the stock
purchase agreement; or
•
changes resulting from a change in the price of our common stock
excluding any underlying effect that may have caused such change.
If adverse changes occur but we and Mr. Utterberg must
still complete the Stock Purchase, our stock price may suffer.
Medisystems’
KeyBank Credit Commitment is with all entities within the
Medisystems Group, and it is not a condition to closing that
this be modified. If the parties to the agreement are not
limited to the MDS Entities, Medisystems Group companies that
are not MDS Entities could borrow under the KeyBank commitment,
and we could be required to pay.
In January 2003, the Medisystems Group entered into a credit
agreement with KeyBank National Association, or KeyBank,
pursuant to which all of the assets of each Medisystems Group
company, including the assets of the MDS Entities, were pledged
as collateral. The credit agreement provides for a
$3.5 million revolving line of credit and a
$1.5 million demand line of credit. As of July 25,2007, there were no amounts outstanding under the revolving line
of credit and Medisystems Group had issued approximately
$812,000 of standby letters of credit, which are securing
guarantees of VAT refunds made to MDS Italy by an Italian bank.
Medisystems has indicated that it will amend the KeyBank credit
commitment prior to the closing of the Stock Purchase to remove
from the commitment the Medisystems Group companies that we are
not acquiring. However, removal of these entities from the
KeyBank credit commitment is not within our control and is not a
condition to closing. While they remain parties to the credit
commitment, Medisystems Group companies that are not MDS
Entities may borrow under the credit facility, and, if they
default on any such obligations, we could be required to satisfy
the obligations.
The
market price of our common stock may decline as a result of the
Stock Purchase.
The market price of our common stock may decline as a result of
the Stock Purchase for a number of reasons including if:
•
we do not achieve the perceived benefits of the Stock Purchase
as rapidly or to the extent anticipated by financial or industry
analysts;
•
the effect of the Stock Purchase on our business and prospects
is not consistent with the expectations of financial or industry
analysts; or
•
investors react negatively to the effect on our business and
prospects from the Stock Purchase.
Our
stockholders may not realize a benefit from the Stock Purchase
commensurate with the ownership dilution they will experience in
connection with the Stock Purchase.
As consideration for the Stock Purchase, we expect to issue
6,500,000 shares of our common stock, or approximately 21.7% of
our outstanding common stock as of July 31, 2007. If we are
unable to realize the strategic and financial benefits currently
anticipated from the Stock Purchase, our stockholders will have
experienced substantial dilution of their ownership interest
without receiving commensurate benefit.
In addition to the other information contained in this proxy
statement and the other risk factors set forth herein, you
should carefully consider the following risks relating to
NxStage’s business.
Risks
Related to NxStage’s Business
We
expect to derive substantially all of our future revenues from
the rental or sale of our System One and the sale of our related
disposable products used with the System One.
Since our inception, we have devoted substantially all of our
efforts to the development of the System One and the related
products used with the System One. We commenced marketing the
System One and the related disposable products to the critical
care market in February 2003. We commenced marketing the System
One for chronic hemodialysis treatment in September 2004. We
expect that the rental or sale of the System One and the sale of
related products will account for substantially all of our
revenues for the foreseeable future. Most of our related
products cannot be used with any other dialysis systems and,
therefore, we will derive little or no revenues from related
products unless we sell or otherwise place the System One. To
the extent that the System One is not a successful product or is
withdrawn from the market for any reason, we do not have other
products in development that could replace revenues from the
System One.
We
cannot accurately predict the size of the home hemodialysis
market, and it may be smaller or slower to develop than we
expect.
Although home hemodialysis treatment options are available,
adoption has been limited. The most widely adopted form of
dialysis therapy used in a setting other than a dialysis clinic
is peritoneal dialysis. Based on the most recently available
data from the United States Renal Data System, or USRDS, the
number of patients receiving peritoneal dialysis was
approximately 26,000 in 2004, representing approximately 8% of
all patients receiving dialysis treatment for ESRD in the United
States. Very few ESRD patients receive hemodialysis treatment
outside of the clinic setting; USRDS data indicates
approximately 2,000 patients were receiving home-based
hemodialysis in 2004. Because the adoption of home hemodialysis
has been limited to date, the number of patients who desire to,
and are capable of, administering their own hemodialysis
treatment with a system such as the System One is unknown and
there is limited data upon which to make estimates. Our
long-term growth will depend on the number of patients who adopt
home-based hemodialysis and how quickly they adopt it, and we do
not know whether the number of home-based dialysis patients will
be greater or fewer than the number of patients performing
peritoneal dialysis or how many peritoneal dialysis patients
will switch to home-based hemodialysis. We received our home use
clearance for the System One from the FDA in June
2005 and we will need to devote significant resources to
developing the market. We cannot be certain that this market
will develop, how quickly it will develop or how large it will
be.
We
will require significant capital to build our business, and
financing may not be available to us on reasonable terms, if at
all.
We believe that the chronic care market is the largest market
opportunity for our System One hemodialysis system.
Historically, we have typically billed the dialysis clinic for
the rental of the equipment and the sale of the related
disposable cartridges and treatment fluids. In our recent DaVita
agreement, DaVita agreed to purchase all of its System One
equipment then being rented from us and to buy a significant
percentage of its future System One equipment needs. It is not
clear what percentage of our future chronic customers will
purchase rather than rent System One equipment. However, it is
possible that a significant percentage of our chronic customers
will continue to rent rather than purchase System One equipment
and that, as a result, we will generate a significant percentage
of our revenues and cash flow from the use of the System One
over time rather than upfront from the sale of the System One
equipment. In this event, we will need significant amounts of
working capital to manufacture System One equipment for rental
to dialysis clinics.
We only recently began marketing our System One to dialysis
clinics for the treatment of ESRD, and we have not achieved
widespread market acceptance of our product. We may not be able
to generate sufficient cash flow to meet our capital needs. If
our existing resources are insufficient to satisfy our liquidity
requirements, we may need to sell additional equity or issue
debt securities. Any sale of additional equity or issuance of
debt securities may result in dilution to our stockholders, and
we cannot be certain that additional public or private financing
will be available in amounts or on terms acceptable to us, or at
all. If we are unable to obtain this additional financing when
needed, we may be required to delay, reduce the scope of, or
eliminate one or more aspects of our business development
activities, which could harm the growth of our business.
We
have limited operating experience, a history of net losses and
an accumulated deficit of $148.5 million at June 30,2007. We cannot guarantee if, when and the extent that we will
become profitable, or that we will be able to maintain
profitability once it is achieved.
Since inception, we have incurred losses every quarter and at
June 30, 2007, we had an accumulated deficit of
approximately $(148.5) million. We expect to incur
increasing operating expenses as we continue to grow our
business. Additionally, in the chronic care market, the cost of
manufacturing the System One and related disposables currently
exceeds the market price. We cannot provide assurance that we
will be able to lower the cost of manufacturing the System One
and related disposables below the current chronic care market
price, that we will achieve profitability, when we will become
profitable, the sustainability of profitability should it occur,
or the extent to which we will be profitable. Our ability to
become profitable is dependent in part upon achieving a
sufficient scale of operations, obtaining better purchasing
terms and prices, achieving efficiencies in manufacturing
overhead costs, implementing design and process improvements to
lower our costs of manufacturing our products and achieving
efficient distribution of our products.
In March 2006, we received clearance from the FDA to market our
PureFlow SL module as an alternative to the bagged fluid
presently used with our System One in the chronic care market,
and we commercially launched the PureFlow SL module in July
2006. This accessory to the System One allows for the
preparation of high purity dialysate in the patient’s home
using ordinary tap water and dialysate concentrate. The PureFlow
SL is designed to help patients with ESRD more conveniently and
effectively manage their home hemodialysis therapy by
eliminating the need for bagged fluids. Since its launch,
PureFlow SL penetration has reached approximately 58% of all of
our chronic patients. The product is still early in its
commercial launch and we continue to work to improve product
reliability and user experience, based upon customer feedback.
Any failure to further improve reliability and user experience,
and thereby gain rapid market acceptance of the PureFlow SL
module, including converting our installed base of patients
currently using bagged fluid, could adversely affect our ability
to achieve profitability.
We
compete against other dialysis equipment manufacturers with much
greater financial resources and better established products and
customer relationships, which may make it difficult for us to
penetrate the market and achieve significant sales of our
products.
Our System One competes directly against equipment produced by
Fresenius Medical Care AG, Baxter Healthcare, Gambro AB, B.
Braun and others, each of which markets one or more FDA-cleared
medical devices for the treatment of acute or chronic kidney
failure.
To date, only one other company has had a hemodialysis product
specifically cleared for home use, Aksys Ltd., announced in
January the withdrawal of its product from the market. Products
sold by our other competitors have also been used in the home,
in particular Fresenius systems. Each of these competitors
offers products that have been in use for a longer time than our
System One and are more widely recognized by physicians,
patients and providers. These competitors have significantly
more financial and human resources, more established sales,
service and customer support infrastructures and spend more on
product development and marketing than we do. Many of our
competitors also have established relationships with the
providers of dialysis therapy and, Fresenius owns and operates a
chain of dialysis clinics. Most of these companies manufacture
additional complementary products enabling them to offer a
bundle of products and have established sales forces and
distribution channels that may afford them a significant
competitive advantage. One of our competitors, Gambro AB, has
been subject to an import hold imposed by the FDA on its acute
and chronic dialysis machines. This import hold has been
recently lifted, and it is not yet clear what the chronic and
acute market impact of this will be on our future revenues. We
believe the overall impact of the import hold has been positive
to us, however, we are not sure of the magnitude of the impact
this import hold has had on revenues.
The market for our products is competitive, subject to change
and affected by new product introductions and other market
activities of industry participants, including increased
consolidation of ownership of clinics by large dialysis chains.
If we are successful, our competitors are likely to develop
products that offer features and functionality similar to our
System One. Improvements in existing competitive products or the
introduction of new competitive products may make it more
difficult for us to compete for sales, particularly if those
competitive products demonstrate better safety, convenience or
effectiveness or are offered at lower prices than our System
One. Our ability to successfully market the System One could
also be adversely affected by pharmacological and technological
advances in preventing the progression of ESRD
and/or in
the treatment of acute kidney failure or fluid overload. If we
are unable to compete effectively against existing and future
competitors and existing and future alternative treatments and
pharmacological and technological advances, it will be difficult
for us to penetrate the market and achieve significant sales of
the System One.
Our
success will depend on our ability to achieve market acceptance
of our System One.
Our products have limited product and brand recognition and have
only been used at a limited number of dialysis clinics and
hospitals. In the chronic care market, we will have to convince
four distinct constituencies involved in the choice of dialysis
therapy, namely operators of dialysis clinics, nephrologists,
dialysis nurses and patients, that our system provides an
effective alternative to other existing dialysis equipment. Each
of these constituencies will use different considerations in
reaching their decision. Lack of acceptance by any of these
constituencies will make it difficult for us to grow our
business. We may have difficulty gaining widespread or rapid
acceptance of the System One for a number of reasons including:
•
the failure by us to demonstrate to patients, operators of
dialysis clinics, nephrologists, dialysis nurses and others that
our product is equivalent or superior to existing therapy
options or, that the cost or risk associated with use of our
product is not greater than available alternatives;
•
competition from products sold by companies with longer
operating histories and greater financial resources, more
recognizable brand names and better established distribution
networks and relationships with dialysis clinics;
•
the ownership and operation of some dialysis providers by
companies that also manufacture and sell competitive dialysis
products;
the introduction of competing products or treatments that may be
more effective, safer, easier to use or less expensive than ours;
•
the number of patients willing and able to perform therapy
independently, outside of a traditional dialysis clinic, may be
smaller than we estimate; and
•
the continued availability of satisfactory reimbursement from
healthcare payors, including Medicare.
Current
Medicare reimbursement rates limit the price at which we can
market the System One, and adverse changes to reimbursement
could affect the adoption of the System One.
Our ability to attain profitability will be driven in part by
our ability to set or maintain adequate pricing for our System
One. As a result of legislation passed by the U.S. Congress
more than 30 years ago, Medicare provides comprehensive and
well-established reimbursement in the United States for ESRD.
With over 80% of U.S. ESRD patients covered by Medicare,
the reimbursement rate is an important factor in a potential
customer’s decision to use the System One and limits the
fee for which we can rent the System One and sell the related
disposable cartridges and treatment fluids. Current CMS rules
limit the number of hemodialysis treatments paid for by Medicare
to three times a week, unless there is medical justification for
additional treatments. Most patients using the System One in the
home treat themselves, with the help of a partner, up to six
times per week. To the extent that Medicare contractors elect
not to pay for the additional treatments, adoption of the System
One may be slowed. Changes in Medicare reimbursement rates could
negatively affect demand for our products and the prices we
charge for them.
As we
continue to commercialize the System One and related products,
we may have difficulty managing our growth and expanding our
operations successfully.
As the commercial launch of the System One continues, we will
need to expand our regulatory, manufacturing, sales and
marketing and on-going development capabilities or contract with
other organizations to provide these capabilities for us. As our
operations expand, we expect that we will need to manage
additional relationships with various partners, suppliers,
manufacturers and other organizations. Our ability to manage our
operations and growth requires us to continue to improve our
operational, financial and management controls and reporting
systems and procedures. Such growth could place a strain on our
administrative and operational infrastructure. We may not be
able to make improvements to our management information and
control systems in an efficient or timely manner and may
discover deficiencies in existing systems and controls.
If we
are unable to improve on the product reliability performance
typically experienced in the early stages of a product’s
life cycle, our ability to grow our business and achieve
profitability could be impaired.
Our System One is still early in its product launch, and our
PureFlow SL module was only introduced during the third quarter
of 2006. We continue to experience product reliability issues
that are higher than we expect long-term, which lead us to incur
increased service and distribution costs, as well as increase
the size of our field equipment base. This, in turn, negatively
impacts our gross margins and increases our working capital
requirements. Additionally, product reliability issues can also
lead to decreases in customer satisfaction and our ability to
grow or maintain our revenues. We continue to work to improve
product reliability, and have achieved some improvements to
date. If we are unable to continue to improve product
reliability, our ability to achieve our growth objectives as
well as profitability could be significantly impaired.
Most recently, in the second quarter of 2007, we started to
experience an increased incidence of reported dialysate leaks
associated with our System One cartridges. The reported
incidence of leaks is higher than we have historically observed.
When the System One is used in accordance with its instructions,
these leaks present no risk to patient health. System One device
labeling anticipates the potential for leaks to occur and
specifically warns against leaks and alerts users of the need to
observe treatments in order to detect leaks. Four patients with
reported leaks, that were unobserved by these patients or their
partners until after their treatments were terminated, reported
hypotension, or low blood pressure, resolved by a fluid bolus,
with no
lasting clinical effect. In early August 2007, we sent a letter
to our patients and customers informing them of the increased
incidence in leaks and reminding them of existing System One
labeling alerting users of the potential for leaks and
instructing them to observe treatments in order to detect any
leaks. We have characterized this notification as a voluntary
recall. On August 24, 2007, we elected to initiate a second
step in our recall actions, and decided to physically recall the
affected lots of cartridge inventory being held by chronic
market customers and patients, and replace the affected
inventory with newer lots of cartridges at no charge. We have
instructed patients and customers to destroy all inventory of
affected cartridges they have on hand, and we expect to
write-off up to all of the inventory of affected cartridges we
have in-house. It is possible that we may be able to rework this
cartridge inventory, or reuse certain components of this
inventory, but we have not made a final determination related to
this recovery.
Based on these facts, we determined on August 24, 2007 that
we would incur total charges in connection with this recall in
the range of $1.9 million to $2.5 million, the
principal component of which relates to the write-off of
inventory in the range of $1.8 million to
$2.2 million. Other charges primarily relate to increased
shipping for replacement product and cycler servicing costs.
Substantially all of these charges would be recorded in the
quarter ending September 30, 2007.
The increased incidence in leaks has also been associated with
increased cycler service requirements, which have led to
increased service costs as well as imposed additional service
pool requirements on our cycler inventory. In the short term,
this may impede our ability to meet customer demand.
We
have a significant amount of field equipment, and our ability to
effectively manage this asset could negatively impact our
working capital requirements and future
profitability.
Because the majority of our chronic care business continues to
rely upon an equipment rental model, our ability to manage
System One equipment is important to minimizing our working
capital requirements. In addition, our gross margins may be
negatively impacted if we have excess equipment deployed, and
unused, in the field. If we are unable to successfully track,
service and redeploy equipment, we could (1) incur
increased costs, (2) realize increased cash requirements
and/or
(3) have material write-offs of equipment.
Our
agreement with DaVita confers certain geographic market rights
to DaVita and limits our ability to sell the System One to
Fresenius, both of which may present a barrier to adoption of
the System One.
Fresenius and DaVita own and operate the two largest chains of
dialysis clinics in the United States. Fresenius controls
approximately 33% of the U.S. dialysis clinics and is the
largest worldwide manufacturer of dialysis systems. DaVita
controls approximately 27% of the U.S. dialysis clinics,
and has entered into a preferred supplier agreement with Gambro
pursuant to which Gambro will provide a significant majority of
DaVita’s dialysis equipment and supplies for a period of at
least 10 years. Each of Fresenius and DaVita may choose to
offer their dialysis patients only the dialysis equipment
manufactured by them or their affiliates, to offer the equipment
they contractually agreed to offer or to otherwise limit access
to the equipment manufactured by competitors.
Our recent agreement with DaVita confers certain market rights
for the System One and related supplies for home hemodialysis
therapy. DaVita is granted exclusive rights in a small
percentage of geographies, which geographies collectively
represent less than 10% of the U.S. ESRD patient
population, and limited exclusivity in the majority of all other
U.S. geographies, subject to DaVita’s meeting certain
requirements, including patient volume commitments and new
patient training rates. Under the agreement, we can continue to
sell to other clinics in the majority of geographies. If certain
minimum patient numbers or training rates are not achieved,
DaVita can lose all or part of its preferred geographic rights.
The agreement further limits, but does not prohibit, the sale by
NxStage of the System One for chronic home patient hemodialysis
therapy to any provider that is under common control or
management of a parent entity that collectively provides
dialysis services to more than 25% of U.S. chronic dialysis
patients and that also supplies dialysis products. Therefore,
our ability to sell the System One for chronic home patient
hemodialysis therapy to Fresenius is presently limited.
It is not yet clear what impact this agreement may have on the
market acceptance for our product. It is also not yet clear to
what extent DaVita will purchase the System One from us. For the
six months ended June 30, 2007, sales to DaVita represented
30% of our total revenues. Although we expect that DaVita will
continue to be a significant customer of ours, the agreement
imposes no purchase obligations upon DaVita and we cannot be
certain whether DaVita will continue to purchase
and/or rent
the System One from us in the future. We believe that any future
decision by DaVita to stop or limit the use of the System One
would adversely affect our business, at least in the near term.
If
kidney transplantation becomes a viable treatment option for
more patients with ESRD, the market for our System One may be
limited.
While kidney transplantation is the treatment of choice for most
ESRD patients, it is not currently a viable treatment for most
patients due to the limited number of donor kidneys, the high
incidence of kidney transplant rejection and the higher surgical
risk associated with older ESRD patients. According to the most
recent USRDS data, in 2004 approximately 17,000 patients
received kidney transplants in the United States. The
development of new medications designed to reduce the incidence
of kidney transplant rejection, progress in using kidneys
harvested from genetically engineered animals as a source of
transplants or any other advances in kidney transplantation
could limit the market for our System One.
If we
are unable to convince hospitals and healthcare providers of the
benefits of our products for the treatment of acute kidney
failure and fluid overload, we may not be successful in
penetrating the critical care market.
We sell the System One for use in the treatment of acute kidney
failure and fluid overload associated with, among other
conditions, congestive heart failure. Physicians currently treat
most acute kidney failure patients using conventional
hemodialysis systems or dialysis systems designed specifically
for use in the ICU. We will need to convince hospitals and
healthcare providers that using the System One is as effective
as using conventional hemodialysis systems or ICU specific
dialysis systems for treating acute kidney failure and that it
provides advantages over conventional systems or other ICU
specific systems because of its significantly smaller size and
ease of operation.
We are
subject to the risk of costly and damaging product liability
claims and may not be able to maintain sufficient product
liability insurance to cover claims against us.
If our System One is found to have caused or contributed to
injuries or deaths, we could be held liable for substantial
damages. Claims of this nature may also adversely affect our
reputation, which could damage our position in the market. As is
the case with a number of other medical device companies, it is
likely that product liability claims will be brought against us.
Since their introduction into the market, our products have been
subject to three voluntary recalls and one voluntary product
withdrawal. Our first voluntary recall occurred in February 2001
in Canada and related to a software glitch that we detected in
our predecessor system, which could have increased the
likelihood of a clotted filter during treatment. There were no
patient injuries associated with this recall, and the software
glitch was remedied with a subsequent software release. The
second voluntary recall occurred in April 2004 in the United
States relating to pinhole-sized dialysate leaks in our
cartridges. Although System One device labeling anticipates the
potential for leaks to occur, and therefore specifically warns
against leaks and alerts users of the need to check for leaks
while performing treatments, the incidence of leaks was higher
than we had historically experienced. There were no patient
injuries associated with this recall; we subsequently switched
suppliers and instituted additional testing requirements to
minimize the chance for pinhole-sized leaks in our cartridges.
Our third voluntary recall occurred in the United Sates in
August 2007 and also related to pinhole-sized leaks in our
cartridges. Four patients with reported leaks, that were
unobserved by these patients or their partners until the end of
their treatments, reported hypotension, or low blood pressure,
resolved by a fluid bolus, with no lasting clinical effect. No
other patient injuries were reported in connection with this
recall. In response to this increased
incidence in leaks, we are developing tests to better evaluate
the susceptibility of cartridges to leaks prior to release, with
the goal of reducing the chance for pinhole-sized leaks in our
cartridges. The voluntary market withdrawal occurred in the
United States in May 2002 when we suspended sales of our
predecessor system while we addressed issues involving limited
instances of contaminated hemofiltration fluids compounded by a
pharmacy and supplied by a third-party. Six patients exposed to
contaminated fluids reported fevers
and/or
chills, with no lasting clinical effect. We subsequently
modified our cartridge to allow for an additional filter to
remove contaminants from fluids used with our product. Our
products may be subject to further recalls or withdrawals, which
could increase the likelihood of product liability claims. We
have also received several reports of operator error from both
patients in the home hemodialysis setting and nurses in the
critical care setting. We have sought to address many potential
sources of operator error with product design changes to
simplify the operator process. In addition, we have made
improvements in our training materials and product labeling.
However, instances of operator error cannot be eliminated and
could also increase the likelihood of product liability claims.
Although we maintain insurance, including product liability
insurance, we cannot provide assurance that any claim that may
be brought against us will not result in court judgments or
settlements in amounts that are in excess of the limits of our
insurance coverage. Our insurance policies also have various
exclusions, and we may be subject to a product liability claim
for which we have no coverage. We will have to pay any amounts
awarded by a court or negotiated in a settlement that exceed our
coverage limitations or that are not covered by our insurance.
Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability
insurance rates or the inability to secure additional insurance
coverage in the future. A product liability claim, whether
meritorious or not, could be time consuming, distracting and
expensive to defend and could result in a diversion of
management and financial resources away from our primary
business, in which case our business may suffer.
We
maintain insurance at levels deemed adequate by management,
however, future claims could exceed our applicable insurance
coverage.
We maintain insurance for property and general liability,
directors’ and officers’ liability, workers
compensation, and other coverage in amounts and on terms deemed
adequate by management based on our expectations for future
claims. Future claims could, however, exceed our applicable
insurance coverage, or our coverage could not cover the
applicable claims.
We
have had limited sales, marketing, customer service and
distribution experience. We need to expand our sales and
marketing, customer service and distribution infrastructures to
be successful in penetrating the dialysis market.
We currently market and sell the System One through our own
sales force, and we have had limited experience in sales,
marketing and distribution of dialysis products. As of
July 31, 2007, we had 113 employees in our sales,
marketing and distribution organization, including 31 direct
sales representatives. We plan to expand our sales, marketing,
customer service and distribution infrastructures. We cannot
provide assurance that we will be able to retain or attract
experienced personnel to our early-stage company and build an
adequate sales and marketing, customer service and distribution
staff or that the cost will not be prohibitive.
We
face risks associated with having international manufacturing
operations, and if we are unable to manage these risks
effectively, our business could suffer.
In addition to our operations in Lawrence, Massachusetts, we
operate manufacturing facilities in Rosdorf, Germany and
Fresnillo, Mexico and we purchase components and supplies from
foreign vendors. We are subject to a number of risks and
challenges that specifically relate to these international
operations, and we may not be successful if we are unable to
meet and overcome these challenges. These risks include
fluctuations in foreign currency exchange rates that may
increase the U.S. dollar cost of the disposables we
purchase from foreign third-party suppliers, costs associated
with sourcing and shipping goods internationally,
difficulty managing operations in multiple locations and local
regulations that may restrict or impair our ability to conduct
our operations.
Risks
Related to the Proposed Acquisition of the Medisystems Entities
and Other Possible Business Combinations
We may
not complete the acquisition of the Medisystems entities and,
the failure to do so, could harm our common stock price and
future business and operations.
On June 4, 2007, we entered into a stock purchase agreement
with David S. Utterberg to purchase his issued and outstanding
shares of Medisystems Services Corporation, a Nevada
corporation, Medisystems Corporation, a Washington corporation,
Medisystems Europe S.p.A., a company organized under the laws of
Italy, and Medimexico s. de R.L. de C.V., a company organized
under the laws of Mexico, which we refer to collectively as the
Medisystems entities. The proposed acquisition of the
Medisystems entities is subject to a number of closing
conditions, including approval of our stockholders, and may not
be completed. If the acquisition is not completed, we may be
subject to the following risks:
•
the price of our common stock may decline;
•
we will not realize our expected benefits of the acquisition;
•
under certain circumstances we will be required to pay
Mr. Utterberg a termination fee of up to $600,000 in
reasonable documented expenses incurred by him in connection
with the acquisition; and
•
the costs incurred by us related to the acquisition, such as
legal, accounting and certain financial advisory fees, must be
paid even if the acquisition is not completed.
The
market price of our common stock may decline as a result of the
acquisition.
The market price of our common stock may decline as a result of
the acquisition for a number of reasons including if:
•
we do not achieve the perceived benefits of the acquisition as
rapidly or to the extent anticipated by financial or industry
analysts;
•
the effect of the acquisition on our business and prospects is
not consistent with the expectations of financial or industry
analysts; or
•
investors react negatively to the effect on our business and
prospects from the acquisition.
Our
stockholders may not realize a benefit from the acquisition
commensurate with the ownership dilution they will experience in
connection with the acquisition.
As consideration for the acquisition of the Medisystems
entities, we expect to issue 6,500,000 shares of our common
stock, or approximately 21.7% of our outstanding common stock as
of July 31, 2007. If we are unable to realize the strategic
and financial benefits currently anticipated from the
acquisition, our stockholders will have experienced substantial
dilution of their ownership interest without receiving
commensurate benefit.
We may
face challenges in integrating Medisystems’ business with
NxStage’s and, as a result, may not realize the expected
benefits of the proposed acquisition.
Even though NxStage’s and Medisystems’ businesses are
relatively distinct, integrating the operations and personnel of
Medisystems and NxStage will require a significant investment of
management’s time and effort as well as the investment of
capital, particularly with respect to information systems. The
successful integration of Medisystems and NxStage will require,
among other things, coordination of certain manufacturing
operations and sales and marketing operations and the
integration of Medisystems’ operations into the NxStage
organization. The diversion of the attention of NxStage’s
and Medisystems’ senior management and any difficulties
encountered in the process of combining the companies could
cause the disruption of, or a loss of momentum in, the
activities of the combined businesses.
The inability to successfully integrate the operations and
personnel of Medisystems and NxStage, or any significant delay
in achieving integration, could have a material adverse effect
on the combined businesses after the completion of the
acquisition, and, as a result, on the market price of
NxStage’s common stock.
We may
grow through additional acquisitions, which could dilute our
existing shareholders and could involve substantial integration
risks.
As part of our business strategy, we may acquire, in addition to
our proposed acquisition of Medisystems, other businesses and
technologies in the future. We may issue equity securities as
consideration for future acquisitions that would dilute our
existing stockholders, perhaps significantly depending on the
terms of the acquisition. We may also incur additional debt in
connection with future acquisitions, which, if available at all,
may place additional restrictions on our ability to operate our
business. Acquisitions may involve a number of risks, including:
•
difficulty in transitioning and integrating the operations and
personnel of the acquired businesses, including different and
complex accounting and financial reporting systems;
•
potential disruption of our ongoing business and distraction of
management;
•
potential difficulty in successfully implementing, upgrading and
deploying in a timely and effective manner new operational
information systems and upgrades of our finance, accounting and
product distribution systems;
•
difficulty in incorporating acquired technology and rights into
our products and technology;
•
unanticipated expenses and delays in completing acquired
development projects and technology integration;
•
management of geographically remote units both in the United
States and internationally;
•
impairment of relationships with partners and customers;
•
customers delaying purchases of our products pending resolution
of product integration between our existing and our newly
acquired products;
•
entering markets or types of businesses in which we have limited
experience; and
•
potential loss of key employees of the acquired company;
•
Inaccurate assumptions of acquired company’s product
quality
and/or
product reliability.
As a result of these and other risks, we may not realize
anticipated benefits from our acquisitions. Any failure to
achieve these benefits or failure to successfully integrate
acquired businesses and technologies could seriously harm our
business.
Purchase
accounting treatment of acquisitions could decrease our net
income in the foreseeable future, which could have a material
and adverse effect on the market value of our common
stock.
Under accounting principles generally accepted in the United
States of America, we would account for acquisitions using the
purchase method of accounting. Under purchase accounting, we
would record the consideration issued in connection with the
acquisition and the amount of direct transaction costs as the
cost of acquiring the company or business. We would allocate
that cost to the individual assets acquired and liabilities
assumed, including various identifiable intangible assets such
as acquired technology, acquired trade names and acquired
customer relationships based on their respective fair values.
Intangible assets generally will be amortized over a three to
fifteen year period. Goodwill and certain intangible assets with
indefinite lives are not subject to amortization but are subject
to at least an annual impairment analysis, which may result in
an impairment charge if the carrying value exceeds their implied
fair value. These potential future amortization and impairment
charges may significantly reduce net income, if any, and
therefore may adversely affect the market value of our common
stock.
We are
subject to significant regulation, primarily by the FDA. We
cannot market or commercially distribute our products without
obtaining and maintaining necessary regulatory clearances or
approvals.
Our System One and related products, including the disposables
required for its use, are all medical devices subject to
extensive regulation in the United States, and in foreign
markets we may wish to enter. To market a medical device in the
United States, approval or clearance by the FDA is required,
either through the pre-market approval process or the 510(k)
clearance process. We have obtained the FDA clearances necessary
to sell our current products under the 510(k) clearance process.
Medical devices may only be promoted and sold for the
indications for which they are approved or cleared. In addition,
even if the FDA has approved or cleared a product, it can take
action affecting such product approvals or clearances if serious
safety or other problems develop in the marketplace. We may be
required to obtain 510(k) clearances or pre-market approvals for
additional products, product modifications, or for new
indications for the System One. We cannot provide assurance that
such clearances or approvals would be forthcoming, or, if
forthcoming, what the timing and expense of obtaining such
clearances or approvals might be. Delays in obtaining clearances
or approvals could adversely affect our ability to introduce new
products or modifications to our existing products in a timely
manner, which would delay or prevent commercial sales of our
products.
Modifications
to our marketed devices may require new regulatory clearances or
pre-market approvals, or may require us to cease marketing or
recall the modified devices until clearances or approvals are
obtained.
Any modifications to a 510(k) cleared device that could
significantly affect its safety or effectiveness, or would
constitute a major change in its intended use, requires the
submission of another 510(k) pre-market notification to address
the change. Although in the first instance we may determine that
a change does not rise to a level of significance that would
require us to make a pre-market notification submission, the FDA
may disagree with us and can require us to submit a 510(k) for a
significant change in the labeling, technology, performance
specifications or materials or major change or modification in
intended use, despite a documented rationale for not submitting
a pre-market notification. We have modified various aspects of
the System One and have filed and received clearance from the
FDA with respect to some of the changes in the design of our
products. If the FDA requires us to submit a 510(k) for any
modification to a previously cleared device, or in the future a
device that has received 510(k) clearance, we may be required to
cease marketing the device, recall it, and not resume marketing
until we obtain clearance from the FDA for the modified version
of the device. Also, we may be subject to regulatory fines,
penalties
and/or other
sanctions authorized by the Federal Food, Drug, and Cosmetic
Act. In the future, we intend to introduce new products and
enhancements and improvements to existing products. We cannot
provide assurance that the FDA will clear any new product or
product changes for marketing or what the timing of such
clearances might be. In addition, new products or significantly
modified marketed products could be found to be not
substantially equivalent and classified as products requiring
the FDA’s approval of a pre-market approval application, or
PMA, before commercial distribution would be permissible. PMAs
usually require substantially more data than 510(k) submissions
and their review and approval or denial typically takes
significantly longer than a 510(k) decision of substantial
equivalence. Also, PMA products require approval supplements for
any change that affects safety and effectiveness before the
modified device may be marketed. Delays in our receipt of
regulatory clearance or approval will cause delays in our
ability to sell our products, which will have a negative effect
on our revenues growth.
Even
if we obtain the necessary FDA clearances or approvals, if we or
our suppliers fail to comply with ongoing regulatory
requirements our products could be subject to restrictions or
withdrawal from the market.
We are subject to the Medical Device Reporting, or MDR,
regulations that require us to report to the FDA if our products
may have caused or contributed to patient death or serious
injury, or if our device malfunctions and a recurrence of the
malfunction would likely result in a death or serious injury. We
must also file reports of device corrections and removals and
adhere to the FDA’s rules on labeling and promotion.
Our failure to comply with these or other applicable regulatory
requirements could result in enforcement action by the FDA,
which may include any of the following:
•
untitled letters, warning letters, fines, injunctions and civil
penalties;
•
administrative detention, which is the detention by the FDA of
medical devices believed to be adulterated or misbranded;
•
customer notification, or orders for repair, replacement or
refund;
•
voluntary or mandatory recall or seizure of our products;
•
operating restrictions, partial suspension or total shutdown of
production;
•
refusal to review pre-market notification or pre-market approval
submissions;
•
rescission of a substantial equivalence order or suspension or
withdrawal of a pre-market approval; and
•
criminal prosecution.
Our
products are subject to market withdrawals or product recalls
after receiving FDA clearance or approval, and market
withdrawals and product recalls could cause the price of our
stock to decline and expose us to product liability or other
claims or could otherwise harm our reputation and financial
results.
Complex medical devices, such as the System One, can experience
performance problems in the field that require review and
possible corrective action by us or the product manufacturer. We
cannot provide assurance that component failures, manufacturing
errors, design defects
and/or
labeling inadequacies, which could result in an unsafe condition
or injury to the operator or the patient will not occur. These
could lead to a government mandated or voluntary recall by us.
The FDA has the authority to require the recall of our products
in the event a product presents a reasonable probability that it
would cause serious adverse health consequences or death.
Similar regulatory agencies in other countries have similar
authority to recall devices because of material deficiencies or
defects in design or manufacture that could endanger health. We
believe that the FDA would request that we initiate a voluntary
recall if a product was defective or presented a risk of injury
or gross deception. Any recall could 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. Recalls, involving the
System One, depending upon the nature and scope of the recall,
may be particularly harmful to our business and financial
results, because the System One is our primary product. We will
incur costs in connection with our August 2007 voluntary recall
relating to the increased incidence of reported cartridge leaks
in the range of $1.9 million to $2.5 million,
primarily associated with the write-off of affected inventory.
The leaks associated with this recall have also led to customer
dissatisfaction which, in the short term, could impair our
future growth.
If we
or our contract manufacturers fail to comply with FDA’s
Quality System regulations, our manufacturing operations could
be interrupted, and our product sales and operating results
could suffer.
Our finished goods manufacturing processes, and those of some of
our contract manufacturers, are required to comply with the
FDA’s Quality System regulations, or QSRs, which cover the
procedures and documentation of the design, testing, production,
control, quality assurance, labeling, packaging, sterilization,
storage and shipping of our devices. The FDA enforces its QSRs
through periodic unannounced inspections of manufacturing
facilities. We and our contract manufacturers have been, and
anticipate in the future being, subject to such inspections. Our
U.S. manufacturing facility has previously had three FDA
QSR inspections. The first resulted in one observation, which
was rectified during the inspection and required no further
response from us. Our last two inspections, including our most
recent inspection in March 2006, resulted in no observations. We
cannot provide assurance that any future inspections would have
the same result. If one of our manufacturing facilities or those
of any of our contract manufacturers fails to take satisfactory
corrective action in response to an adverse QSR inspection, FDA
could take enforcement action, including issuing a public
warning letter, shutting down our manufacturing operations,
embargoing the import of components from
outside of the United States, recalling our products, refusing
to approve new marketing applications, instituting legal
proceedings to detain or seize products or imposing civil or
criminal penalties or other sanctions, any of which could cause
our business and operating results to suffer.
Changes
in reimbursement for treatment for ESRD could affect the
adoption of our System One and the level of our future product
revenues.
In the United States, all patients who suffer from ESRD,
regardless of age, are eligible for coverage under Medicare,
after a requisite coordination period if other insurance is
available. As a result, more than 80% of patients with ESRD are
covered by Medicare. Although we rent and sell our products to
hospitals, dialysis centers and other healthcare providers and
not directly to patients, the reimbursement rate for ESRD
treatments is an important factor in a potential customer’s
decision to purchase the System One. The dialysis centers that
purchase our product rely on adequate third-party payor coverage
and reimbursement to maintain their ESRD facilities. The CMS
provides the composite rate for dialysis services, which is
subject to regional variation and varies depending upon whether
the facility is hospital-based or an independent clinic. The
composite rate is intended to cover most items and services
related to the treatment of ESRD, but does not include payment
for physician services or separately billable laboratory
services or drugs. Changes in Medicare reimbursement rates could
negatively affect demand for our products and the prices we
charge for them.
Most ESRD patients who use our product for dialysis therapy in
the home treat themselves six times per week. CMS rules,
however, limit the number of hemodialysis treatments paid for by
Medicare to three a week, unless there is medical justification
for the additional treatments. The determination of medical
justification must be made at the local Medicare contractor
level on a
case-by-case
basis. If daily therapy is prescribed, a clinic’s decision
as to how much it is willing to spend on dialysis equipment and
services will be at least partly dependent on whether Medicare
will reimburse more than three treatments per week for the
clinic’s patients.
Unlike Medicare reimbursement for ESRD, Medicare only reimburses
healthcare providers for acute kidney failure and fluid overload
treatment if the patient is otherwise eligible for Medicare,
based on age or disability. Medicare and many other third-party
payors and private insurers reimburse these treatments provided
to hospital inpatients under a traditional DRG system. Under
this system, reimbursement is determined based on a
patient’s primary diagnosis and is intended to cover all
costs of treating the patient. The presence of acute kidney
failure or fluid overload increases the severity of the primary
diagnosis and, accordingly, may increase the amount reimbursed.
For care of these patients to be cost-effective, hospitals must
manage the longer hospitalization stays and significantly more
nursing time typically necessary for patients with acute kidney
failure and fluid overload. If we are unable to convince
hospitals that our System One provides a cost-effective
treatment alternative under this diagnosis related group
reimbursement system, they may not purchase our product. In
addition, changes in Medicare reimbursement rates for hospitals
could negatively affect demand for our products and the prices
we charge for them.
Legislative
or regulatory reform of the healthcare system may affect our
ability to sell our products profitably.
In both the United States and foreign countries, there have been
legislative and regulatory proposals to change the healthcare
system in ways that could affect our ability to sell our
products profitably. The federal government and some states have
enacted healthcare reform legislation, and further federal and
state proposals are likely. We cannot predict the exact form
this legislation may take, the probability of passage, or the
ultimate effect on us. Our business could be adversely affected
by future healthcare reforms or changes in Medicare.
Failure
to obtain regulatory approval in foreign jurisdictions would
prevent us from marketing our products outside the United
States.
Although we have not initiated any marketing efforts in
jurisdictions outside of the United States and Canada, we intend
in the future to market our products in other markets. In order
to market our products in the European
Union or other foreign jurisdictions, we must obtain 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. The foreign regulatory
approval process includes many of the risks associated with
obtaining FDA clearance and we may not obtain foreign regulatory
approvals on a timely basis, if at all. FDA clearance 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.
We may not be able to file for regulatory approvals and may not
receive necessary approvals to commercialize our products in any
market outside the United States, which could negatively effect
our overall market penetration.
We
currently have obligations under our contracts with dialysis
clinics and hospitals to protect the privacy of patient health
information.
In the course of performing our business we obtain, from time to
time, confidential patient health information. For example, we
learn patient names and addresses when we ship our System One
supplies to home hemodialysis patients. We may learn patient
names and be exposed to confidential patient health information
when we provide training on System One operations to our
customer’s staff. Our home hemodialysis patients may also
call our customer service representatives directly and, during
the call, disclose confidential patient health information.
U.S. Federal and state laws protect the confidentiality of
certain patient health information, in particular individually
identifiable information, and restrict the use and disclosure of
that information. At the federal level, the Department of Health
and Human Services promulgated health information and privacy
and security rules under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. At this time, we are not a
HIPAA covered entity and consequently are not directly subject
to HIPAA. However, we have entered into several business
associate agreements with covered entities that contain
commitments to protect the privacy and security of
patients’ health information and, in some instances,
require that we indemnify the covered entity for any claim,
liability, damage, cost or expense arising out of or in
connection with a breach of the agreement by us. If we were to
violate one of these agreements, we could lose customers and be
exposed to liability
and/or our
reputation and business could be harmed. In addition, conduct by
a person that is not a covered entity could potentially be
prosecuted under aiding and abetting or conspiracy laws if there
is an improper disclosure or misuse of patient information.
Many state laws apply to the use and disclosure of health
information, which could affect the manner in which we conduct
our business. Such laws are not necessarily preempted by HIPAA,
in particular those laws that afford greater protection to the
individual than does HIPAA. Such state laws typically have their
own penalty provisions, which could be applied in the event of
an unlawful action affecting health information.
We are
subject to federal and state laws prohibiting
“kickbacks” and false and fraudulent claims which, if
violated, could subject us to substantial penalties.
Additionally, any challenges to or investigation into our
practices under these laws could cause adverse publicity and be
costly to respond to, and thus could harm our
business.
The Medicare/ Medicaid anti-kickback laws, and several similar
state laws, prohibit payments that are intended to induce
physicians or others either to refer patients or to acquire or
arrange for or recommend the acquisition of healthcare products
or services. These laws affect our sales, marketing and other
promotional activities by limiting the kinds of financial
arrangements, including sales programs, we may have with
hospitals, physicians or other potential purchasers or users of
medical devices. In particular, these laws influence, among
other things, how we structure our sales and rental offerings,
including discount practices, customer support, education and
training programs and physician consulting and other service
arrangements. Although we seek to structure such arrangements in
compliance with applicable requirements, these laws are broadly
written, and it is often difficult to determine precisely how
these laws will be applied in specific circumstances. If one of
our sales representatives were to offer an inappropriate
inducement to purchase our System One to a customer, we could be
subject to a claim under the Medicare/ Medicaid anti-kickback
laws.
Other federal and state laws generally prohibit individuals or
entities from knowingly presenting, or causing to be presented,
claims for payments from Medicare, Medicaid or other third-party
payors that are
false or fraudulent, or for items or services that were not
provided as claimed. Although we do not submit claims directly
to payors, manufacturers can be held liable under these laws if
they are deemed to “cause” the submission of false or
fraudulent claims by providing inaccurate billing or coding
information to customers, or through certain other activities.
In providing billing and coding information to customers, we
make every effort to ensure that the billing and coding
information furnished is accurate and that treating physicians
understand that they are responsible for all billing and
prescribing decisions, including the decision as to whether to
order dialysis services more frequently than three times per
week. Nevertheless, we cannot provide assurance that the
government will regard any billing errors that may be made as
inadvertent or that the government will not examine our role in
providing information to our customers concerning the benefits
of daily therapy. Anti-kickback and false claims laws prescribe
civil, criminal and administrative penalties for noncompliance,
which can be substantial. Moreover, an unsuccessful challenge or
investigation into our practices could cause adverse publicity,
and be costly to respond to, and thus could harm our business
and results of operations.
Foreign
governments tend to impose strict price controls, which may
adversely affect our future profitability.
Although we have not initiated any marketing efforts in
jurisdictions outside of the United States and Canada, we intend
in the future to market our products in other markets. 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 the System One 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 outside of the United States, which would negatively
affect the long-term growth of our business.
Our
business activities involve the use of hazardous materials,
which require compliance with environmental and occupational
safety laws regulating the use of such materials. If we violate
these laws, we could be subject to significant fines,
liabilities or other adverse consequences.
Our research and development programs as well as our
manufacturing operations involve the controlled use of hazardous
materials. Accordingly, we are subject to federal, state and
local laws governing the use, handling and disposal of these
materials. Although we believe that our safety procedures for
handling and disposing of these materials comply in all material
respects with the standards prescribed by state and federal
regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the
event of an accident or failure to comply with environmental
laws, we could be held liable for resulting damages, and any
such liability could exceed our insurance coverage.
Risks
Related to Operations
We
depend on the services of our senior executives and certain key
engineering, scientific, clinical and marketing personnel, the
loss of whom could negatively affect our business.
Our success depends upon the skills, experience and efforts of
our senior executives and other key personnel, including our
chief executive officer, certain members of our engineering
staff, our marketing executives and managers, our manufacturing
executives and managers and our clinical educators. Much of our
corporate expertise is concentrated in relatively few employees,
the loss of which for any reason could negatively affect our
business. Competition for our highly skilled employees is
intense and we cannot prevent the resignation of any employee.
Virtually all of our employees have agreements which impose
obligations that may prevent a former employee of ours from
working for a competitor for a period of time; however, these
clauses may not be enforceable, or enforceable only in part, or
the company may choose not to seek enforcement. We do not
maintain “key man” life insurance on any of our senior
executives, other than our chief executive officer.
We
obtain some of the components, subassemblies and completed
products included in the System One from a single source or a
limited group of manufacturers or suppliers, and the partial or
complete loss of one of these manufacturers or suppliers could
cause significant production delays, an inability to meet
customer demand and a substantial loss in
revenues.
We depend on single source suppliers for some of the components
and subassemblies we use in the System One. KMC Systems, Inc. is
our only contract manufacturer of the System One cycler,
although we are considering a plan to develop alternative
manufacturing capabilities for this product; B. Braun
Medizintechnologie GmbH is our only supplier of
bicarbonate-based dialysate used with the System One; Membrana
GmbH is our only supplier of the fiber used in our filters; PISA
is our primary supplier of lactate-based dialysate; and
Medisystems Corporation is the only supplier of our disposable
cartridge and several cartridge components. Medisystems is a
related party to NxStage. David Utterberg, the chief executive
officer and sole stockholder of Medisystems, is a member of our
board of directors and, at June 30, 2007, held
approximately 6.7% of our common stock. We also obtain certain
other components included in the System One from other single
source suppliers or a limited group of suppliers. Our dependence
on single source suppliers of components, subassemblies and
finished goods exposes us to several risks, including
disruptions in supply, price increases, late deliveries, and an
inability to meet customer demand. This could lead to customer
dissatisfaction, damage to our reputation, or customers
switching to competitive products. Any interruption in supply
could be particularly damaging to our customers using the System
One to treat chronic ESRD and who need access to the System One
and related disposables.
Finding alternative sources for these components and
subassemblies would be difficult in many cases and may entail a
significant amount of time and disruption. In the case of B.
Braun, for bicarbonate, and Membrana, for fiber, we are
contractually prevented from obtaining an alternative source of
supply, except in certain limited instances. In the case of
Medisystems, we are contractually prevented from obtaining an
alternative source of supply for more than 10% of our North
American requirements, except in certain limited instances. In
the case of other suppliers, we would need to change the
components or subassemblies if we sourced them from an
alternative supplier. This, in turn, could require a redesign of
our System One and, potentially, further FDA clearance or
approval of any modification, thereby causing further costs and
delays.
Certain
of our products are recently developed or are transitioning to
other locations and we, and certain of our third party
manufacturers, have limited manufacturing experience with these
products.
We continue to develop new products and make improvements to
existing products. We are also expanding our manufacturing
capacity which requires us to relocate our manufacturing
operations to other locations. As such, we and certain of our
third party manufacturers, have limited manufacturing experience
with certain of our products, including key products such as the
PureFlow SL and related disposables. We are, therefore, more
exposed to risks relating to product quality and reliability
until the manufacturing processes for these new products mature.
We do
not have long-term supply contracts with many of our third-party
suppliers.
We purchase components and subassemblies from third-party
suppliers, including some of our single source suppliers,
through purchase orders and do not have long-term supply
contracts with many of these third-party suppliers. Many of our
third-party suppliers, therefore, are not obligated to perform
services or supply products to us for any specific period, in
any specific quantity or at any specific price, except as may be
provided in a particular purchase order.
We do not maintain large volumes of inventory from most of these
suppliers. If we inaccurately forecast demand for components or
subassemblies, our ability to manufacture and commercialize the
System One could be delayed and our competitive position and
reputation could be harmed. In addition, if we fail to
effectively manage our relationships with these suppliers, we
may be required to change suppliers which would be time
consuming and could lead to disruptions in product supply, which
could permanently impair our customer base and reputation.
If we
are unable to protect our intellectual property and prevent its
use by third parties, we will lose a significant competitive
advantage.
We rely on patent protection, as well as a combination of
copyright, trade secret and trademark laws to protect our
proprietary technology and prevent others from duplicating our
products. However, these means may afford only limited
protection and may not:
•
prevent our competitors from duplicating our products;
•
prevent our competitors from gaining access to our proprietary
information and technology; or
•
permit us to gain or maintain a competitive advantage.
Any of our patents may be challenged, invalidated, circumvented
or rendered unenforceable. We cannot provide assurance that we
will be successful should one or more of our patents be
challenged for any reason. If our patent claims are rendered
invalid or unenforceable, or narrowed in scope, the patent
coverage afforded our products could be impaired, which could
make our products less competitive.
As of June 30, 2007, we had 48 pending patent applications,
including foreign, international and U.S. applications, and
27 U.S. and international issued patents. We cannot specify
which of these patents individually or as a group will permit us
to gain or maintain a competitive advantage. We cannot provide
assurance that any pending or future patent applications we hold
will result in an issued patent or that if patents are issued to
us, that such patents will provide meaningful protection against
competitors or against competitive technologies. The issuance of
a patent is not conclusive as to its validity or enforceability.
The United States federal courts or equivalent national courts
or patent offices elsewhere may invalidate our patents or find
them unenforceable. Competitors may also be able to design
around our patents. Our patents and patent applications cover
particular aspects of our products. Other parties may develop
and obtain patent protection for more effective technologies,
designs or methods for treating kidney failure. If these
developments were to occur, it would likely have an adverse
effect on our sales.
The laws of foreign countries may not protect our intellectual
property rights effectively or to the same extent as the laws of
the United States. If our intellectual property rights are not
adequately protected, we may not be able to commercialize our
technologies, products or services and our competitors could
commercialize similar technologies, which could result in a
decrease in our revenues and market share.
Our
products could infringe the intellectual property rights of
others, which may lead to litigation that could itself be
costly, could result in the payment of substantial damages or
royalties, and/or prevent us from using technology that is
essential to our products.
The medical device industry in general has been characterized by
extensive litigation and administrative proceedings regarding
patent infringement and intellectual property rights. Products
to provide kidney replacement therapy have been available in the
market for more than 30 years and our competitors hold a
significant number of patents relating to kidney replacement
devices, therapies, products and supplies. Although no third
party has threatened or alleged that our products or methods
infringe their patents or other intellectual property rights, we
cannot provide assurance that our products or methods do not
infringe the patents or other intellectual property rights of
third parties. If our business is successful, the possibility
may increase that others will assert infringement claims against
us.
Infringement and other intellectual property claims and
proceedings brought against us, whether successful or not, could
result in substantial costs and harm to our reputation. Such
claims and proceedings can also distract and divert management
and key personnel from other tasks important to the success of
the business. In addition, intellectual property litigation or
claims could force us to do one or more of the following:
•
cease selling or using any of our products that incorporate the
asserted intellectual property, which would adversely affect our
revenues;
•
pay substantial damages for past use of the asserted
intellectual property;
obtain a license from the holder of the asserted intellectual
property, which license may not be available on reasonable
terms, if at all and which could reduce profitability; and
•
redesign or rename, in the case of trademark claims, our
products to avoid infringing the intellectual property rights of
third parties, which may not be possible and could be costly and
time-consuming if it is possible to do so.
Confidentiality
agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary
information.
In order to protect our proprietary technology and processes, we
also rely in part on confidentiality agreements with our
corporate partners, employees, consultants, outside scientific
collaborators and sponsored researchers, advisors and others.
These agreements may not effectively prevent disclosure of
confidential information and trade secrets and may not provide
an adequate remedy in the event of unauthorized disclosure of
confidential information. In addition, others may independently
discover or reverse engineer trade secrets and proprietary
information, and in such cases we could not assert any trade
secret rights against such party. Costly and time consuming
litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain or maintain
trade secret protection could adversely affect our competitive
position.
We may
be subject to damages resulting from claims that our employees
or we have wrongfully used or disclosed alleged trade secrets of
other companies.
Many of our employees were previously employed at other medical
device companies focused on the development of dialysis
products, including our competitors. Although no claims against
us are currently pending, we may be subject to claims that these
employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend
against these claims. If we fail in defending such claims, in
addition to paying monetary damages, we may lose valuable
intellectual property rights. Even if we are successful in
defending against these claims, litigation could result in
substantial costs, damage to our reputation and be a distraction
to management.
Risks
Related to our Common Stock
Our
stock price is likely to be volatile, and the market price of
our common stock may drop.
The market price of our common stock could be subject to
significant fluctuations. Market prices for securities of early
stage companies have historically been particularly volatile. As
a result of this volatility, you may not be able to sell your
common stock at or above the price you paid for the stock. Some
of the factors that may cause the market price of our common
stock to fluctuate include:
•
timing of market acceptance of our products;
•
timing of achieving profitability and positive cash flow from
operations;
•
changes in estimates of our financial results or recommendations
by securities analysts or the failure to meet or exceed
securities analysts’ expectations;
•
actual or anticipated variations in our quarterly operating
results;
•
disruptions in product supply for any reason, including product
recalls of the failure of third party suppliers to needed
products or components;
•
reports by officials or health or medical authorities, the
general media or the FDA regarding the potential benefits of the
System One or of similar dialysis products distributed by other
companies or of daily or home dialysis;
•
announcements by the FDA of non-clearance or non-approval of our
products, or delays in the FDA or other foreign regulatory
agency review process;
regulatory developments in the United States and foreign
countries;
•
changes in third-party healthcare reimbursements, particularly a
decline in the level of Medicare reimbursement for dialysis
treatments;
•
litigation involving our company or our general industry or both;
•
announcements of technical innovations or new products by us or
our competitors;
•
developments or disputes concerning our patents or other
proprietary rights;
•
our ability to manufacture and supply our products to commercial
standards;
•
significant acquisitions, strategic partnerships, joint ventures
or capital commitments by us or our competitors;
•
departures of key personnel; and
•
investors’ general perception of our company, our products,
the economy and general market conditions.
The stock markets in general have experienced substantial
volatility that has often been unrelated to the operating
performance of individual companies. These broad market
fluctuations may adversely affect the trading price of our
common stock.
In the past, following periods of volatility in the market price
of a company’s securities, stockholders have often
instituted class action securities litigation against those
companies. Such litigation, if instituted, could result in
substantial costs and diversion of management attention and
resources, which could significantly harm our profitability and
reputation.
Anti-takeover
provisions in our restated certificate of incorporation and
amended and restated bylaws and under Delaware law could make an
acquisition of us more difficult and may prevent attempts by our
stockholders to replace or remove our current
management.
Provisions in our restated certificate of incorporation and our
amended and restated bylaws may delay or prevent an acquisition
of us. In addition, these provisions may frustrate or prevent
attempts by our stockholders to replace or remove members of our
board of directors. Because our board of directors is
responsible for appointing the members of our management team,
these provisions could in turn affect any attempt by our
stockholders to replace current members of our management team.
These provisions include:
•
a prohibition on actions by our stockholders by written consent;
•
the ability of our board of directors to issue preferred stock
without stockholder approval, which could be used to institute a
“poison pill” that would work to dilute the stock
ownership of a potential hostile acquirer, effectively
preventing acquisitions that have not been approved by our board
of directors;
•
advance notice requirements for nominations of directors or
stockholder proposals; and
•
the requirement that board vacancies be filled by a majority of
our directors then in office.
In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a person who owns in
excess of 15% of our outstanding voting stock from merging or
combining with us for a period of three years after the date of
the transaction in which the person acquired in excess of 15% of
our outstanding voting stock, unless the merger or combination
is approved in a prescribed manner. These provisions would apply
even if the offer may be considered beneficial by some
stockholders.
If
there are substantial sales of our common stock in the market by
our existing stockholders, our stock price could
decline.
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that existing
stockholders might sell shares of common stock, the market price
of our common stock could decline significantly. We have
29,995,126 shares of common stock outstanding as of
July 31, 2007. Shares held by our affiliates may only be
sold in compliance with the volume limitations of Rule 144.
These volume limitations restrict the number of shares that may
be sold by an affiliate in any three-month period to the greater
of 1% of the number of shares then outstanding, which
approximates 299,951 shares, or the average weekly trading
volume of our common stock during the four calendar weeks
preceding the filing of a notice on Form 144 with respect
to the sale.
At July 31, 2007, subject to certain conditions, holders of
an aggregate of approximately 13,511,174 shares of common
stock have rights with respect to the registration of these
shares of common stock with the SEC. We have agreed that
following the Stock Purchase, Mr. Utterberg will have
“piggyback” registration rights which means if we
propose to register shares of our common stock,
Mr. Utterberg will have the opportunity to include the
shares he received in the Stock Purchase in the registration. In
addition, we have agreed to register for resale the shares
issued to Mr. Utterberg as consideration for the Stock
Purchase in the event that, prior to the time this holding
period under rule 144(k) lapses as to such shares, he
ceases to be an affiliate of NxStage. If we register any of
these shares of common stock, they can be sold in the public
market without regard to the volume limitations of Rule 144.
As of July 31, 2007, 3,204,801 shares of common stock
are authorized for issuance under our stock incentive plan,
employee stock purchase plan and outstanding stock options. As
of July 31, 2007, 3,155,323 shares were subject to
outstanding options, of which 2,078,502 were exercisable and can
be freely sold in the public market upon issuance, subject to
the restrictions imposed on our affiliates under Rule 144.
Our
costs have increased significantly as a result of operating as a
public company, and our management is required to devote
substantial time to comply with public company
regulations.
As a public company, we incur significant legal, accounting and
other expenses that we did not incur as a private company. In
addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act, as well as new rules subsequently implemented by the SEC
and the NASDAQ Global Market, have imposed various new
requirements on public companies, including changes in corporate
governance practices. Our management and other personnel now
need to devote a substantial amount of time to these new
requirements. Moreover, these rules and regulations increase our
legal and financial compliance costs and make some activities
more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal controls for
financial reporting and disclosure controls and procedures. In
particular, commencing in fiscal 2006, we must perform system
and process evaluation and testing of our internal controls over
financial reporting to allow management and our independent
registered public accounting firm to report on the effectiveness
of our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. Our compliance
with Section 404 will require that we incur substantial
accounting expense and expend significant management efforts. If
we are not able to comply with the requirements of
Section 404 in a timely manner, or if we or our independent
registered public accounting firm identify deficiencies in our
internal controls over financial reporting that are deemed to be
material weaknesses, the market price of our stock could decline
and we could be subject to sanctions or investigations by the
NASDAQ Global Market, SEC or other regulatory authorities.
We do
not anticipate paying cash dividends, and accordingly
stockholders must rely on stock appreciation for any return on
their investment in us.
We anticipate that we will retain our earnings for future growth
and therefore do not anticipate paying cash dividends in the
future. As a result, only appreciation of the price of our
common stock will provide a return to investors. Investors
seeking cash dividends should not invest in our common stock.
Our
executive officers, directors and current and principal
stockholders own a large percentage of our voting common stock
and could limit new stockholders’ influence on corporate
decisions or could delay or prevent a change in corporate
control.
Our directors, executive officers and current holders of more
than 5% of our outstanding common stock, together with their
affiliates and related persons, beneficially own, in the
aggregate, approximately 46% of our outstanding common stock. As
a result, these stockholders, if acting together, will have the
ability to determine the outcome of all matters submitted to our
stockholders for approval, including the election and removal of
directors and any merger, consolidation or sale of all or
substantially all of our assets and other extraordinary
transactions. The interests of this group of stockholders may
not always coincide with our corporate interests or the
interests of other stockholders, and they may act in a manner
with which you may not agree or that may not be in the best
interests of other stockholders. This concentration of ownership
may have the effect of:
•
delaying, deferring or preventing a change in control of our
company;
•
entrenching our management
and/or Board;
•
impeding a merger, consolidation, takeover or other business
combination involving our company; or
•
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
In addition to the other information included in this proxy
statement, you should carefully consider the following risks
before deciding whether to vote for approval of the issuance of
the shares of our common stock in the Stock Purchase or the
increase in the number of shares issuable under our 2005 Plan.
Risks related to NxStage’s business are described above
under “Risks Related to NxStage.” In the event the
Stock Purchase is completed, we will also face the following
risks.
The
combined businesses of NxStage and Medisystems will continue to
rely upon the sale of a limited number of
products.
The Medisystems’ business relies nearly exclusively upon
the sale of a few key disposable products, including bloodlines
and needles, and this is expected to continue for the
foreseeable future. NxStage’s business relies nearly
exclusively upon the sale of the System One, and this is
expected to continue for the foreseeable future. Although the
acquisition of Medisystems’ business will broaden
NxStage’s product offerings, the combined business will
continue to rely upon the sale of a limited number of key
products primarily applicable to the dialysis business. To the
extent that any of the combined businesses’ primary
products are no longer successful or are withdrawn from the
market for any reason, our combined businesses will suffer and
we do not have other significant products in development that
could replace these revenues.
The
future growth of Medisystems’ business will depend on the
successful launch and market acceptance of Medisystems’
StreamLine2 bloodline product.
The future growth of the Medisystems’ business depends upon
the successful launch and market acceptance of Medisystems’
latest generation bloodline product, StreamLine2. StreamLine2 is
designed to be a high-quality, high-performance bloodline that
promises to yield valuable savings and improved patient outcomes
for those clinics that adopt it for use. Market penetration of
this product is quite limited to date, and it is not possible to
predict whether and to what extent current and future customers
will elect to use this product instead of more established
Medisystems’ or competitive bloodlines. If we are unable to
convert customers to the StreamLine2 product and receive more
widespread commercial acceptance of this product, our ability to
achieve our growth objectives for the Medisystems’ business
could be impaired.
The
future profitability, growth and success of our combined
businesses will also depend on our ability to achieve further
product cost reductions by our combined
operations.
The future profitability and growth of our combined businesses
depends upon our ability to achieve further product cost
reductions by our combined operations including improved
manufacturing efficiencies at Medisystems’ manufacturing
facilities and product design synergies. If product cost
reductions are not achieved on a timely basis, the future
profitability of our combined businesses will be delayed and may
not be delivered.
The
combined businesses will need to invest capital to expand
Medisystems’ manufacturing facilities in Mexico and Italy
to support anticipated increased product demand for System One
cartridges and StreamLine2. We cannot guarantee that cash from
operations will be sufficient to finance this expansion, or that
we will complete this expansion on a timely and cost-effective
basis.
To support the expected increased demand for the System One
disposable cartridges and StreamLine2, we will need to increase
the scale of Medisystems’ manufacturing and molding
operations in Mexico and Italy. This will require the investment
of capital over the next two years. It is possible that cash
flow from our combined operations may not be sufficient to
support our capital needs, and that we may require additional
financing to fund the expansion. We cannot be certain that
financing will be available in the amounts or on terms
acceptable to us, or at all. If we are unable to obtain this
additional financing when needed, we may be required to delay,
reduce the scope of, or eliminate one or more aspects of our
capacity expansion plans, which could harm the growth or
profitability of our combined businesses.
The planned expansion of Medisystems’ manufacturing
facilities will also require the purchase of specialized
equipment and specialized construction. We cannot guarantee that
we will be able to purchase all of the necessary equipment on
satisfactory terms or timing, or that the necessary construction
will be completed on a cost-effective or timely basis. Any delay
in purchasing equipment or construction could harm the growth or
profitability of our combined businesses.
Medisystems
currently relies upon a third-party manufacturer to manufacture
a significant percentage of its bloodline products using
Medisystems’ supplied components. This manufacturer’s
contractual obligation to manufacture such products for
Medisystems expires in June 2008. In the event this agreement is
not renewed or extended upon favorable terms, if at all, or in
the event Medisystems is unable to sufficiently expand its
manufacturing capabilities prior to June 2008 to support its
requirements, the combined businesses’ growth and ability
to meet customer demand would be impaired.
Historically, Medisystems has relied upon a third-party
manufacturer, Kawasumi Laboratories, Inc. which we refer to as
Kawasumi, to manufacture a significant percentage of its
bloodline products using Medisystems’ supplied components.
This third party has a strong history of manufacturing
high-quality product for Medisystems. Kawasumi’s
contractual obligation to manufacture bloodlines for Medisystems
expires in June 2008. We cannot be certain this agreement will
be renewed or extended on favorable terms, if at all, that we
would be able to manufacture independently the volume of
products currently manufactured by Kawasumi, or that we would be
able to manufacture products at the same cost at which
Medisystems could purchase products from Kawasumi under a new
agreement, the failure of any of which could impair our combined
businesses.
Medisystems
also relies upon Kawasumi to supply all of its finished goods
needles.
Medisystems depends solely on Kawasumi for all of its finished
goods needles. Kawasumi’s obligation to supply needles to
Medisystems expires in February 2011. In the event this
agreement is not renewed or extended upon favorable terms, if at
all, the revenues and profitability of the combined businesses
will be impaired. It is not certain whether Medisystems would be
able to obtain another source of quality needles if its
agreement with Kawasumi is not renewed.
Medisystems’
business relies heavily upon third-party
distributors.
The majority of Medisystems’ revenues comes from three
distributors, which collectively accounted for approximately 90%
of Medisystems’ revenues in 2006, with its primary
distributor, Schein, accounting for 65% of Medisystems’
revenues in 2006. Schein recently agreed to extend its
distribution relationship with Medisystems through July 2009.
Medisystems’ contracts with its other two distributors are
scheduled to expire in October 2008 and July 2009.
Medisystems’ relationship with Schein, in particular, is
very significant for its business and any failure to continue
this relationship would be harmful to the combined businesses,
because Medisystems has no direct sales force and NxStage’s
sales force has no experience selling bloodlines or needles.
The
combined businesses will continue to rely heavily upon DaVita as
a key customer. The partial or complete loss of DaVita as a
customer could materially impair our combined financial
results.
We expect that DaVita will continue to be a significant customer
of the combined businesses. Sales through distributors to DaVita
of Medisystems’ products accounted for approximately 38% of
Medisystems’ revenues in 2006, and NxStage’s sales to
DaVita accounted for approximately 19% of our revenues in 2006.
Medisystems’ contract with DaVita includes certain minimum
order requirements; however, these can be reduced significantly
under certain circumstances. DaVita’s contractual
commitments to purchase Medisystems’ needles expire in
December 2007; and its commitments to purchase Medisystems’
bloodlines expire in September 2008. We cannot guarantee we will
be able to negotiate an extension of Medisystems’ agreement
with DaVita on favorable terms, if at all, or the extent to
which DaVita will purchase Medisystems’ products following
the completion of the Stock Purchase. NxStage’s agreement
with DaVita does not impose minimum purchase requirements, and
expires as early as 2010. The partial or complete loss of DaVita
as a customer of our combined businesses would materially impair
our combined financial results.
Medisystems,
like NxStage, obtains some of its raw materials or components
from a single source or a limited group of suppliers. It obtains
sterilization services from a single supplier. The partial or
complete loss of one of these suppliers could cause significant
production delays, an inability to meet customer demand and a
substantial loss in revenues.
Medisystems, like NxStage, depends on a number of single-source
suppliers for some of the raw materials and components it uses
in its products. It also obtains sterilization services from a
single supplier. The dependence of the combined companies on
single-source suppliers of raw materials, components and
production services will continue to expose us to several risks,
including disruptions in supply, price increases, late
deliveries and an inability to meet customer demand. This could
lead to customer dissatisfaction, damage to our reputation or
customers switching to competitive products.
Finding alternative sources for these raw materials, components
and production services would be difficult in several cases and
may entail a significant amount of time and disruption. In other
cases, it may not be possible to find an alternative source of
supply.
Resin
is a key input material to the manufacture of Medisystems
products and our System One cartridge. Rising oil prices affect
both the pricing and availability of this material. Continued
escalation of oil prices could affect our ability to obtain
sufficient supply of resin at the prices we need to manufacture
our products at current rates of profitability.
Medisystems currently sources resin from a small number of
suppliers. Rising oil prices over the last several years have
resulted in significant price increases for this material. We
cannot guarantee that prices will not continue to increase.
NxStage’s and Medisystems’ contracts with customers
restrict each of our ability to immediately pass on these price
increases, and we cannot guarantee that future pricing to
customers will be sufficient to accommodate increasing input
costs.
Medisystems
has labor agreements with its production employees in Italy and
in Mexico. We cannot guarantee that Medisystems will not in the
future face strikes, work stoppages, work slowdowns, grievances,
complaints, claims of unfair labor practices, other collective
bargaining disputes or in Italy, anti-union behavior, that may
cause production delays and negatively impact our ability to
deliver our products on a timely basis.
MDS Italy has a national labor contract with Contratto
collettivo nazionale di lavoro per gli addetti
all’industria della gomma cavi elettrici ed affini e
all’industria delle materie plastiche, and MDS Mexico has
entered into a collective bargaining agreement with a Union
named Mexico Moderno de Trabajadores de la Baja California
C.R.O.C. Medisystems has not to date experienced strikes, work
stoppages, work slowdowns, grievances, complaints, claims of
unfair labor practices, other collective bargaining disputes, or
in Italy, anti-union behavior, however we cannot guarantee that
Medisystems will not be subject to such activity in the future.
Any such activity would likely cause production delays, and
negatively affect our ability to deliver our production
commitments to customers, which could adversely affect our
reputation and cause our combined businesses and operating
results to suffer.
Medisystems
and NxStage each have recently developed products and have
limited manufacturing experience with these
products.
Both Medisystems and NxStage continue to develop new products
and make improvements to existing products. As such, both
businesses have limited manufacturing experience with certain of
their products, including Medisystems’ StreamLine2 product.
The combined companies will continue to be exposed to risks
relating to product quality, reliability and cost to produce
until the manufacturing processes for these new products mature.
Medisystems
does not have long-term supply contracts with many of its
third-party suppliers.
Medisystems purchases raw materials and components from
third-party suppliers, including some single source suppliers,
through purchase orders and does not have long-term supply
contracts with many of these third-party suppliers. Many of its
third-party suppliers, therefore, are not obligated to perform
services or supply products for any specific period, in any
specific quantity or at any specific price, except as may be
provided in a particular purchase order.
Medisystems does not maintain large volumes of inventory from
most of its suppliers. If the combined businesses inaccurately
forecast demand for finished goods, our ability to meet customer
demand could be delayed and our competitive position and
reputation could be harmed. In addition, if we fail to
effectively manage our relationships with these suppliers, we
may be required to change suppliers, which would be time
consuming and disruptive and could lead to disruptions in
product supply, which could permanently impair our customer base
and reputation.
Medisystems’
historical bloodline business has been a commodities business
subject to pricing pressure and the significant influences of
consolidated buying power. Unless Medisystems can demonstrate
sufficient product differentiation in its bloodline business
through StreamLine2 or products that we introduce in the future,
Medisystems will continue to be susceptible to further pressures
to reduce product pricing and more vulnerable to the loss of its
bloodline business to competitors in the dialysis
industry.
Medisystems’ bloodline business has historically been a
commodities business. Medisystems has competed favorably and
gained share through the development of a high quality,
low-cost, standardized blood tubing set, that could be used on
several different dialysis machines. Medisystems continues to
compete favorably in the dialysis bloodline business, but is
increasingly subject to pricing pressures, especially given
recent market consolidation in the dialysis services industry,
with Fresenius and DaVita collectively controlling approximately
61% of U.S. dialysis services business. NxStage’s
product, the System One, has been less subject to these
pressures given its significant product differentiation from
other competitive products, and its unique suitability to the
home hemodialysis application. If the Stock Purchase is
completed, the combined businesses will be subject to the
pressures of a commodities business, unless we can successfully
demonstrate to customers the differentiating features of the
StreamLine2 product or products that we introduce in the future.
If we are unsuccessful in establishing this differentiation, we
may be susceptible to further pressures to reduce Medisystems
product pricing and more vulnerable to the loss of
Medisystems’ bloodline business to competitors in the
dialysis industry.
The
combined businesses will be subject to an increased risk of
costly and damaging product liability claims and may not be able
to maintain sufficient product liability insurance to cover
claims against us.
With the expansion of our product offerings, the combined
companies will be subject to an increased risk of product
liability claims. If any of our products is found to have caused
or contributed to injuries or deaths, we could be held liable
for substantial damages. Claims of this nature may also
adversely affect our reputation, which could damage our position
in the market. Although NxStage has not been a party to any such
claims, Medisystems has been, and it is reasonably likely that
the combined businesses will be, party to future product
liability claims. Although we maintain insurance, including
product and excess liability insurance, we cannot provide
assurance that any claim that may be brought against us will not
result in court judgments or settlements in amounts that are in
excess of the limits of our insurance coverage. Our insurance
policies also have various exclusions, and we may be subject to
a product liability claim for which we have no coverage. We will
have to pay any amounts awarded by a court or negotiated in a
settlement that exceed our coverage limitations or that are not
covered by our insurance.
Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability
insurance rates or the inability to secure additional insurance
coverage in the future. A product liability claim, whether
meritorious or not, could be time consuming, distracting and
expensive to defend and could result in a diversion of
management and financial resources away from our primary
business, in which case our business may suffer.
We
expect to increase the level of our insurance coverage following
the completion of the proposed Stock Purchase, however, future
claims could exceed our applicable insurance
coverage.
The combined companies will continue to maintain insurance for
property and general liability, directors’ and
officers’ liability, products liability, workers
compensation and other coverage in amounts and on terms deemed
adequate by management based on our expectations for future
claims. Although we may increase the level of our insurance
coverage following the completion of the Stock Purchase, future
claims could exceed our applicable insurance coverage, or in
some instances our coverage may not cover the applicable claims.
The
combined businesses will have increased reliance upon
international manufacturing operations, and if we are unable to
manage these risks effectively, our combined businesses could
suffer.
In addition to NxStage’s operations in Germany and its new
operations in Mexico, the combined businesses will have
operations in Italy and additional operations in Mexico. The
combined businesses will also have increased reliance upon
foreign vendors for the purchase of finished goods and supplies.
We will be subject to increased risks and challenges that
specifically relate to these international operations, and we
may not be successful if we are unable to meet and overcome
these challenges. These risks include fluctuations in foreign
currency exchange rates that may increase the U.S. dollar
cost of foreign third-party supplies, increased costs associated
with sourcing and shipping goods internationally, increased
difficulty managing operations in multiple locations and local
regulations that may restrict or impair our ability to conduct
our operations.
The
activities of the combined businesses will involve the import of
finished goods into the United States from foreign countries,
subject to customs inspections and duties, and the export of
components and certain other products from other countries into
Mexico and Thailand. If we misinterpret or violate these laws,
or if laws governing our exemption from certain duties changes,
we could be subject to significant fines, liabilities or other
adverse consequences.
Medisystems imports into the United States disposable medical
supplies from Thailand and Mexico. Medisystems also imports into
the United States disposable medical components from Germany,
Italy and
Thailand and exports components and assemblies into Mexico and
Italy. The import and export of these items are subject to
extensive laws and regulations with which the combined
businesses will need to comply. To the extent we fail to comply
with these laws or regulations, or fail to interpret our
obligations accurately, we may be subject to significant fines,
liabilities and a disruption to our ability to deliver product,
which could cause our combined businesses and operating results
to suffer.
To the extent there are modifications to Generalised System of
Preferences or cancellation of the Nairobi Protocol
Classification such that our products would be subject to
duties, our profitability would also be negatively impacted.
The activity of the combined businesses will involve the
purchase of finished goods, components and assemblies from
foreign countries, which involves exchange rate risk.
The combined businesses will be exposed to significant exchange
rate risk in the Thai Baht, Euro and Peso. The U.S. dollar
has weakened significantly against the Euro and Thai Baht over
the last five years and may continue to do so. To the extent we
fail to control our exchange rate risk, our profitability may
suffer and our ability to maintain mutually beneficial and
profitable relationships with key vendors could be impaired.
We may
face challenges in integrating Medisystems’ business with
NxStage’s and, as a result, may not realize the expected
benefits of the proposed Stock Purchase.
Even though NxStage’s and Medisystems’ businesses are
relatively distinct, integrating the operations and personnel of
Medisystems and NxStage will require a significant investment of
management’s time and effort as well as the investment of
capital, particularly with respect to information systems. The
successful integration of Medisystems and NxStage will require,
among other things, coordination of certain manufacturing
operations and sales and marketing operations and the
integration of Medisystems’ operations into the NxStage
organization. The diversion of the attention of NxStage’s
and Medisystems’ senior management and any difficulties
encountered in the process of combining the companies could
cause the disruption of, or a loss of momentum in, the
activities of the combined businesses.
The inability to successfully integrate the operations and
personnel of Medisystems and NxStage, or any significant delay
in achieving integration, could have a material adverse effect
on the combined businesses after the completion of the
acquisition, and, as a result, on the market price of
NxStage’s common stock.
NxStage
expects to incur significant costs associated with the proposed
Stock Purchase.
NxStage estimates that it will incur direct transaction costs of
approximately $3.5 million in connection with the proposed
Stock Purchase. In addition, the combined businesses may incur
charges to operations that they cannot currently reasonably
estimate in the quarter in which the Stock Purchase is completed
or the following quarters to reflect costs associated with
integrating the two businesses. There can be no assurance that
the combined businesses will not incur additional charges
relating to the transaction in subsequent periods.
The
success of the combined businesses will depend on the services
of each of our senior executives as well as certain key
engineering, scientific, manufacturing, clinical and marketing
personnel, the loss of whom could negatively affect the combined
businesses.
Our success has always depended upon the skills, experience and
efforts of our senior executives and other key personnel,
including our research and development and manufacturing
executives and managers. Following the completion of the Stock
Purchase, this will be even more important as we work to
integrate our businesses. For both Medisystems and NxStage, much
of our expertise is concentrated in relatively few employees,
the loss of whom for any reason could negatively affect our
business. Medisystems has experienced the loss of certain key
employees recently, and the failure of further employees to
remain with the combined businesses could be harmful to the
success of the combined businesses. In March 2006,
Medisystems’ Chief
Financial Officer and Corporate Controller resigned. In October
2006, Medisystems’ Vice President of Regulatory and Quality
Assurance resigned. In August 2007, NxStage’s Chief
Operating Officer announced his intention to resign effective
upon the completion of the Stock Purchase. Competition for our
highly skilled employees is intense and we cannot prevent the
future resignation of any employee. Most of the combined
businesses’ employees have agreements which impose
obligations that may prevent a former employee from working for
a competitor for a period of time; however, these clauses may
not be enforceable, or may be enforceable only in part.
The
combined business, like NxStage, will continue to require
significant capital to build the business, and financing may not
be available to us on reasonable terms, if at all.
The combined business will continue to require significant
working capital for the manufacture and rental of equipment by
our customers as well as the expansion and integration of
Medisystems’ operations. If our existing resources are
insufficient to satisfy our liquidity requirements, we may need
to sell additional equity or debt securities. Any sale of
additional equity or debt securities may result in additional
dilution to our stockholders, and we cannot be certain that we
will be able to obtain additional public or private financing in
amounts, or on terms, acceptable to us, or at all.
Our
executive officers and directors, together with their affiliates
and related persons, own a large percentage of our voting common
stock and could limit new stockholders’ influence on
corporate decisions or could delay or prevent a change in
corporate control.
Our directors and executive officers, together with their
affiliates and related persons, beneficially own, in the
aggregate, approximately 47.6% of our outstanding common stock
assuming the issuance of 6,500,000 shares of our common
stock to Mr. Utterberg pursuant to the Stock Purchase. The
interests of this group of stockholders may not always coincide
with our corporate interests or the interests of other
stockholders, and they may act in a manner with which you may
not agree or that may not be in the best interests of other
stockholders. This concentration of ownership may have the
effect of:
•
delaying, deferring or preventing, or alternatively,
accelerating or causing, a change in control of our company;
•
entrenching our management
and/or board
of directors;
•
impeding a merger, consolidation, takeover or other business
combination involving our company; or
•
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
This proxy statement contains forward-looking statements that
involve substantial risks and uncertainties. All statements,
other than statements of historical facts, included in this
proxy statement regarding our strategy, future operations,
future financial position, future revenues, projected costs,
prospects and plans and objectives of management are
forward-looking statements. The words “anticipates,”“believes,”“estimates,”“expects,”“intends,”“may,”“plans,”“projects,”“will,”“would” and similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We
have based these forward-looking statements on our current
expectations and projections about future events. Although we
believe that the expectations underlying any of our
forward-looking statements are reasonable, these expectations
may prove to be incorrect and all of these statements are
subject to risks and uncertainties. Should one or more of these
risks and uncertainties materialize, or should underlying
assumptions, projections or expectations prove incorrect, actual
results, performance or financial condition may vary materially
and adversely from those anticipated, estimated or expected. We
have identified below some important factors that could cause
our forward-looking statements to differ materially from actual
results, performance or financial conditions:
•
failure of the home hemodialysis market to expand or expand at
the rate we expect;
•
our inability to grow our customer base and increase the
adoption rate of home hemodialysis;
•
our inability to grow and sustain our critical care business;
•
our inability to adequately grow our operations and attain
sufficient operating scale;
•
our inability to obtain adequate profit margins;
•
changes in Medicare dialysis reimbursement policies, the
composite rate or the reimbursement policies or rates of other
governmental or private payors;
•
regulatory action by the FDA and changes in, or our failure to
comply with, government regulations;
•
our inability to achieve product development milestones or the
introduction of technical innovations or new products by our
competitors;
•
our inability to effectively protect our intellectual property
and not infringe on the intellectual property of others;
•
our inability to raise sufficient capital when necessary;
•
loss of any significant suppliers, especially sole-source
suppliers;
•
loss of key personnel;
•
liability resulting from litigation;
•
failure to complete the Stock Purchase or to realize the
benefits of the proposed Stock Purchase;
•
failure to successfully integrate NxStage and the MDS Entities;
and
•
other factors discussed elsewhere in this proxy statement.
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you
should not place undue reliance on our forward-looking
statements. We have included important factors in the cautionary
statements included in this proxy statement, particularly in the
section entitled “Risk Factors” that we believe could
cause actual results or events to differ materially from the
forward-looking statements that we make. Our forward-looking
statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or
investments we may make. We do not assume any obligation to
update any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required
by law.
We are furnishing this proxy statement to our stockholders in
connection with the solicitation of proxies by our board of
directors for use at the special meeting of stockholders to be
held on October 1, 2007 and at any adjournment,
postponement or continuation thereof. This document is first
being furnished to our stockholders on or about
September 13, 2007.
The special meeting of our stockholders will be held at the
offices of WilmerHale, 60 State Street, Boston, Massachusetts02109, on October 1, 2007 at 10:00 a.m., local time.
At the special meeting, our stockholders will consider and act
upon the following matters:
•
Proposal One — approval of the issuance of
the Stock Purchase Shares; and
•
Proposal Two — approval of an amendment to
our 2005 Plan to increase the number of shares of our common
stock that may be issued under the 2005 Plan by an additional
3,800,000 shares, of which no more than
1,500,000 shares may be issued as restricted stock awards.
Record
Date, Shares of Common Stock Outstanding and Entitled to
Vote
We have fixed the close of business on September 10, 2007
as the record date for determining the holders of our common
stock entitled to notice of and to attend and to vote at the
special meeting or at any adjournment thereof. As of the close
of business on September 10, 2007, there were
30,041,633 shares of our common stock outstanding and
entitled to vote. Each share of our common stock entitles its
holder to one vote on each of the matters presented at the
special meeting.
A quorum of stockholders is necessary to hold a valid meeting. A
quorum will be present at the special meeting if shares of our
common stock representing a majority of the votes entitled to be
cast are represented in person or by proxy. If a quorum is not
present at the special meeting, we expect that the meeting will
be adjourned or postponed to solicit additional proxies.
Abstentions, votes “FOR”, votes “AGAINST”
and “broker non-votes” count as being present to
establish a quorum. A “broker non-vote” occurs when a
broker is not permitted to vote because the broker does not have
instructions from the beneficial owner of the shares of common
stock.
The proposals to be voted on at the special meeting will require
the following approvals:
•
Proposal One — the approval of the Stock
Purchase Shares requires the affirmative vote of a majority of
the votes cast at the special meeting at which a quorum is
present.
•
Proposal Two — the approval of the
proposed amendment to our 2005 Plan requires the affirmative
vote of a majority of the votes cast at the special meeting at
which a quorum is present.
If you do not submit a proxy card or vote at the special
meeting, your shares of common stock will not be counted as
present for the purpose of determining a quorum and will have no
effect on the outcome of the proposal to approve
Proposal One or Proposal Two.
The following section summarizes important information on how to
vote your shares of common stock.
Voting
by Proxy
If you are a record holder, meaning your shares are registered
in your name, you may vote over the Internet, by telephone, by
mail or in person at the special meeting pursuant to the
following instructions:
Over the Internet: Go to the website of our
tabulator, Computershare Investor Services, at
www.investorvote.com. Use the vote control number printed
on your enclosed proxy card to access your account and vote your
shares. You must specify how you want your shares voted or your
Internet vote cannot be completed and you will receive an error
message. Your shares will be voted according to your
instructions.
By Telephone: Call
1-800-652-VOTE
(8683) toll free from the United States, Canada and Puerto Rico,
and follow the instructions on your enclosed proxy card. You
must specify how you want your shares voted and confirm your
vote at the end of the call or your telephone vote cannot be
completed. Your shares will be voted according to your
instructions.
By Mail: Complete and sign your enclosed proxy
card and mail it in the enclosed postage prepaid envelope to
Computershare Investor Services. Your shares will be voted
according to your instructions. If you do not specify how you
want your shares voted, they will be voted as recommended by our
board of directors.
In Person at the Special Meeting: If you
attend the special meeting, you may deliver your completed proxy
card in person or you may vote by completing a ballot, which we
will provide to you at the meeting.
Voting
of Shares Held in Street Name
If your shares are held in “street name”, meaning they
are held for your account by a broker or other nominee, you will
receive instructions from your broker or other nominee regarding
how to vote your shares over the Internet, by telephone or by
mail. You should follow those instructions. If you wish to vote
your shares in person at the special meeting, contact your
broker or other nominee who holds your shares to obtain a
brokers’ proxy card and bring it with you to the special
meeting. You will not be able to vote in person at the
special meeting unless you have a proxy from your broker issued
in your name giving you the right to vote your shares.
Voting
of Proxies at the Special Meeting
All properly executed proxies that we receive prior to the vote
at the special meeting, and that are not revoked, will be voted
in accordance with the instructions indicated on the proxies or,
if no direction is indicated, to approve the issuance of the
Stock Purchase Shares and the amendment to our 2005 Plan.
Properly executed proxies, other than proxies voting against the
issuance of the Stock Purchase Shares
and/or the
amendment to our 2005 Plan, will also be voted for any
adjournment or postponement of our special meeting of
stockholders for the purpose of soliciting additional votes to
approve Proposal One and Proposal Two, if necessary.
Our board of directors does not currently intend to bring any
other business before the special meeting and, so far as
NxStage’s board of directors knows, no other matters are to
be brought before the special meeting. If other business
properly comes before the special meeting, the proxies will vote
in accordance with their own judgment.
Copies of solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their
names shares of our common stock beneficially owned by others to
forward to such beneficial owners. In addition to solicitation
by use of the mails, proxies may be solicited by directors,
officers, employees or agents of NxStage in person or by
telephone, telegram or other means of communication. No
Stockholders may revoke their proxies at any time prior to use
by delivering to our corporate secretary a signed notice of
revocation or a later-dated signed proxy, or by attending the
special meeting in person and revoking the proxy by signing a
notice of revocation. If you vote your shares over the Internet
or by telephone, only your latest Internet or telephone vote
will be counted at the special meeting. Attendance at the
special meeting does not in itself constitute the revocation of
a proxy. Stockholders who have instructed their broker to vote
their shares of common stock must follow their broker’s
directions in order to change those instructions. You may also
attend the special meeting in person instead of submitting a
proxy; however, please see the instructions above under
“Voting of Shares Held in Street-Name” if you wish to
vote such shares in person at the special meeting.
We will pay for all costs incurred in connection with the
solicitation of proxies from our stockholders on behalf of our
board of directors, including assembly, printing and mailing of
this document, its related attachments, and the proxy card. We
have engaged Georgeson Shareholder Communications, Inc., a proxy
solicitation firm, to solicit proxies from our stockholders. For
these services, we expect to pay a fee of approximately $7,500
plus expenses. Our directors, officers and employees may solicit
proxies by telephone, email, facsimile and in person, without
additional compensation. Upon request, we will reimburse
brokerage houses and other custodians, nominees and fiduciaries
for their reasonable out-of-pocket expenses for distributing
proxy materials.
MATTERS
BEING SUBMITTED TO A VOTE OF NxSTAGE STOCKHOLDERS
Proposal One —
Approval of the Issuance of the Stock Purchase Shares
At the special meeting and any adjournment or postponement
thereof, our stockholders will be asked to consider and vote
upon a proposal to approve the issuance of the Stock Purchase
Shares.
Further information with respect to the issuance of the Stock
Purchase Shares, the Stock Purchase, the MDS Entities and
Mr. Utterberg is contained elsewhere in this proxy
statement, including the sections “The Stock Purchase”
beginning on page 55 and “The Stock Purchase
Agreement” beginning on page 68.
OUR BOARD
OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ISSUANCE OF
THE STOCK PURCHASE SHARES TO MR. UTTERBERG IN CONNECTION
WITH THE STOCK PURCHASE
Proposal Two —
Approval of an Amendment to Our 2005 Plan
Overview
At the special meeting and any adjournment thereof, our
stockholders will be asked to consider and vote upon a proposal
to increase by 3,800,000 the number of shares of our common
stock available for issuance under the 2005 Plan. Of the
3,800,000 additional shares, no more than 1,500,000 shares may
be granted as restricted stock awards. Our board of directors
believes that our continued growth and profitability depends, in
large part, on our ability to maintain a competitive position in
attracting, retaining and motivating key employees with
experience and ability. We believe the 2005 Plan furthers these
objectives. As of the date of this proxy statement, the maximum
number of shares we are currently authorized to issue, subject
to adjustment in the event of stock splits and other similar
events, pursuant to awards granted under the 2005 Plan, is
3,601,459. At July 31, 2007, options for the purchase of
465,256 shares of our common stock remained available for
grant under the plan.
If the Stock Purchase is completed, our employee population will
grow from approximately 300 to 1,000. In order for us to be able
to grant equity incentives to these new employees and to support
our continued growth and compensation needs, our board of
directors has amended the 2005 Plan, subject to stockholder
approval, to increase the total number of shares that may be
issued under the plan by 3,800,000 shares, of which no more than
1,500,000 may be granted as restricted stock awards, restricted
stock units, and other stock-based awards.
Our board of directors approved several additional amendments to
the 2005 Plan which did not require the approval of our
stockholders. The 2005 Plan was amended: (1) to remove the
“evergreen” provision, which provided for an annual
automatic increase of the number of shares available under the
plan, (2) to eliminate the return of shares received by us
in connection with the net exercise of options to the available
pool under the plan, (3) to provide that all options and
stock appreciation rights granted under the 2005 Plan must be
granted at fair market value on the date of grant and have a
term no more than 10 years, and (4) to provide that
stock options issued under the plan may not be (a) repriced
by (x) lowering the option exercise price of an option or
(y) canceling an outstanding stock option and replacing it
with a stock option with a lower exercise price, or
(b) cashed out by us, unless such action has been approved
by our stockholders.
Outstanding
Stock Option and Restricted Stock Data
As of June 30, 2007, stock options to purchase
3,153,724 shares of our common stock were outstanding, the
weighted average option grant price for these options was $7.37
and the weighted average contractual life of which was 5.8. In
addition, we had 15,839 shares of restricted stock
outstanding.
The weighted-average fair value of stock options granted during
the six months ended June 30, 2007 was $11.92. The fair
value of stock options at date of grant was estimated using the
Black-Scholes option-pricing model with the following
assumptions:
The expected term was determined using the simplified method for
estimating expected life of “plain-vanilla” options.
(2)
The risk-free interest rate for each grant is equal to the
U.S. Treasury rate in effect at the time of grant for
instruments with an expected life similar to the expected option
term.
(3)
Because we have no options that are traded publicly and because
of its limited trading history as a public company, the stock
volatility assumption is based on an analysis of the volatility
of the common stock of comparable companies in the medical
device and technology industries.
We have estimated expected forfeitures of stock options with the
adoption of SFAS 123R and record stock-based compensation
net of estimated forfeitures. In developing a forfeiture rate
estimate, we considered our historical experience, our growing
employee base and the limited trading history of our common
stock.
Summary
of the 2005 Plan
The following is a brief summary of the material terms of our
2005 Plan.
The 2005 Plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended, or the Code, non-statutory
stock options, stock appreciation rights, restricted stock,
restricted stock units and other stock-based awards as described
below, collectively referred to as Awards.
Incentive Stock Options and Nonstatutory Stock
Options. Optionees receive the right to purchase
a specified number of shares of common stock at a specified
option price and subject to such other terms and conditions as
are specified in connection with the option grant. Options may
be granted at an exercise price equal to or greater than the
fair market value of the common stock on the date of grant.
Under present law, incentive stock options and options intended
to qualify as performance-based compensation under
Section 162(m) of the Code may not be granted at an
exercise price less than 100% of the fair market value of our
common stock on the date of grant (or less than 110% of the fair
market value in the case of incentive stock options granted to
optionees holding more than 10% of the voting power of NxStage).
Options may not be granted for a term in excess of ten years.
The 2005 Plan permits the following forms of payment of the
exercise price of options: (i) payment by cash, check or
through a broker providing for such method of payment,
(ii) subject to certain conditions, surrender to us of
shares of our common stock, (iii) delivery to us of a
promissory note on terms determined by our board of directors,
(iv) any other lawful means, or (v) any combination of
these forms of payment.
Stock Appreciation Rights. A stock
appreciation right, or SAR, is an award entitling the holder,
upon exercise, to receive an amount in our common stock
determined by reference to appreciation, from and after the date
of grant, in the fair market value of a share of common stock.
SARs may not be granted at an exercise price less than 100% of
the fair market value of our common stock on the date of grant
and may be granted independently or in tandem with an option.
Restricted Stock Awards; Restricted Stock
Units. Restricted stock awards entitle recipients
to acquire shares of our common stock, subject to our right to
repurchase all or part of such shares from the recipient in the
event that the conditions specified in the applicable Award are
not satisfied prior to the end of the applicable restriction
period established for such Award. Restricted stock units
entitle recipients to receive shares of common stock to be
delivered at the time such shares of common stock vest.
Other Stock-Based Awards. Under the 2005 Plan,
our board of directors has the right to grant other Awards based
upon our common stock having such terms and conditions as the
board may determine, including the grant of shares based upon
certain conditions, the grant of Awards that are valued in whole
or in part by reference to, or otherwise based on, shares of
common stock, and the grant of Awards entitling recipients to
receive shares of common stock to be delivered in the future.
Transferability
of Awards
Except as our board of directors may otherwise determine or
provide in an Award, Awards may not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to
whom they are granted, either voluntarily or by operation of
law, except by will or the laws of descent and distribution or,
other than in the case of an incentive stock option, pursuant to
a qualified domestic relations order. During the life of the
participant, Awards are exercisable only by the participant.
Eligibility
to Receive Awards
Our employees, officers, directors, consultants and advisors are
eligible to be granted Awards under the 2005 Plan. Under present
law, however, incentive stock options may only be granted to our
employees. The maximum number of shares with respect to which
Awards may be granted to any participant under the 2005 Plan may
not exceed 1,000,000 shares per calendar year.
Plan
Benefits
As of July 31, 2007, approximately 266 persons were
eligible to receive Awards under the 2005 Plan, including our 5
named executive officers and 6 non-employee directors.
All Directors who are not
Executive Officers as a Group
309,499
Each Associate of any of such
Directors or Executive Officers
—
Each Other Person who Received or
is to Receive 5% of Awards under the 2005 Plan
—
All Employees, who are not
Executive Officers, as a Group(1):
3,129,604
(1)
This number excludes stock options that expired prior to being
exercised.
Administration
The 2005 Plan is administered by our board of directors. The
board has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the
2005 Plan and to interpret the provisions of the 2005 Plan.
Pursuant to the terms of the 2005 Plan, the board may delegate
authority under the 2005 Plan to one or more committees or
subcommittees of the board.
Subject to any applicable limitations contained in the 2005
Plan, the board of directors, the compensation committee, or any
other committee to whom the board of directors delegates
authority, as the case may be, selects the recipients of Awards
and determines (1) the number of shares of common stock
covered by options and the dates upon which such options become
exercisable, (2) the exercise price of options,
(3) the duration of options (which may not exceed
10 years), and (4) the number of shares of common
stock subject to any SAR, restricted stock award, restricted
stock unit award or other stock-based Awards and the terms and
conditions of such Awards, including conditions for repurchase,
issue price and repurchase price.
We will be required to make appropriate adjustments in
connection with the 2005 Plan and any outstanding Awards to
reflect stock splits, stock dividends, recapitalizations,
spin-offs and other similar changes in capitalization.
The 2005 Plan also contains provisions addressing the
consequences of any “Reorganization Event”, which is
defined as (a) any merger or consolidation of NxStage with
or into another entity as a result of which all of our common
stock converted into or exchanged for the right to receive cash,
securities or other property, or is cancelled or (b) any
exchange of all of our common stock for cash, securities or
other property pursuant to a share exchange transaction or
(c) any liquidation or dissolution of NxStage. Upon the
occurrence of a reorganization event, all outstanding options
will be assumed or equivalent options substituted by the
successor corporation. If the reorganization event also
constitutes a change in control event (as defined in the 2005
Plan), 50% of the shares that underlie each option outstanding
under the 2005 Plan and that are unvested as of the date of the
reorganization event will become immediately exercisable. If a
change of control event occurs and within one year of the change
in control event an option holder’s employment with us or
our succeeding corporation is terminated by such holder for good
reason (as defined in the 2005 Plan) or is terminated by us or
the succeeding corporation without cause (as defined in the 2005
Plan), each option held by the holder will become immediately
exercisable for the remaining 50% of the shares that had been
unvested as of the date of the change of control event.
Notwithstanding the foregoing, if the acquiring or succeeding
corporation in a reorganization event does not agree to assume
or substitute for outstanding options, our board of directors
will provide that all unexercised options will become
exercisable in full prior to the reorganization event and the
options, if unexercised, will terminate on the date the
reorganization event takes place. If under the terms of
the reorganization event holders of our common stock receive
cash for their shares, our board may instead provide for a
cash-out of the value of any outstanding options less the
applicable exercise price.
Upon the occurrence of a reorganization event, or the signing of
an agreement with respect to a reorganization event, our
repurchase and other rights with respect to shares of restricted
stock will inure to the benefit of our successor and will apply
equally to the cash, securities or other property into which our
common stock is then converted.
Upon the occurrence of a change in control event (as defined in
the 2005 Plan) that does not also constitute a reorganization
event, 50% of the shares that underlie each option outstanding
under the 2005 Plan and that are unvested as of the date of the
change of control event will become immediately exercisable. If
a change of control event occurs and within one year of the
change in control event an option holder’s employment with
us or our succeeding corporation is terminated by such holder
for good reason (as defined in the 2005 Plan) or is terminated
by us or the succeeding corporation without cause (as defined in
the 2005 Plan), each option held by the holder will become
immediately exercisable for the remaining 50% of the shares that
had been unvested as of the date of the change of control event.
Upon the occurrence of a change in control event that does not
also constitute a reorganization event, 50% of the shares of
restricted stock outstanding under any award will become
immediately free of all restrictions and conditions. If within
one year of a change in control event a restricted stock
holder’s employment with us or our succeeding corporation
is terminated by such holder for good reason or is terminated by
us or the succeeding corporation without cause, the remaining
50% of such holder’s restricted stock that had been
unvested as of the date of the change of control event will
become immediately free of all restrictions and conditions.
Our board of directors or the compensation committee may at any
time provide that any Award will become immediately exercisable
in full or in part, free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the
case may be.
If any Award expires or is terminated, surrendered, canceled
without having been fully exercised, or forfeited in whole or in
part, the unused shares of our common stock covered by such
Award will again be available for grant under the 2005 Plan,
subject, however, in the case of incentive stock options, to any
limitations under the Code.
Substitute
Options
In connection with a merger or consolidation of an entity with
NxStage or the acquisition by us of property or stock of an
entity, our board of directors may grant options in substitution
for any options or other stock or stock-based awards granted by
such entity or an affiliate thereof. Substitute options may be
granted on such terms, as the board deems appropriate in the
circumstances, notwithstanding any limitations on options
contained in the 2005 Plan.
Amendment
or Termination
No Award may be made under the 2005 Plan after September 7,2015 but Awards previously granted may extend beyond that date.
The board of directors may at any time amend, suspend or
terminate the 2005 Plan; provided that, no amendment requiring
stockholder approval under any applicable legal, regulatory or
listing requirement will become effective until such stockholder
approval is obtained.
Federal
Income Tax Consequences of the 2005 Plan
The following generally summarizes the U.S. federal income
tax consequences that generally will arise with respect to
awards granted under the 2005 Plan. This summary is based on the
federal tax laws in effect as of the date of this proxy
statement. This summary assumes that all awards are exempt from,
or comply with, the rules under Section 409A of the
Internal Revenue Code, as amended, or the Code, relating to
nonqualified deferred compensation. Changes to these laws could
alter the tax consequences described below.
Incentive Stock Options. A participant will
not have income upon the grant of an incentive stock option.
Also, except as described below, a participant will not have
income upon exercise of an incentive stock option if the
participant has been employed by us or a 50% or more owned
corporate subsidiary at all times beginning with the option
grant date and ending three months before the date the
participant exercises the option. If the participant has not
been so employed during that time, then the participant will be
taxed as described below under “Nonstatutory Stock
Options.” The exercise of an incentive stock option may
subject the participant to the alternative minimum tax.
A participant will have income upon the sale of the stock
acquired under an incentive stock option at a profit (if sales
proceeds exceed the exercise price). The type of income will
depend on when the participant sells the stock. If a participant
sells the stock more than two years after the option was granted
and more than one year after the option was exercised, then all
of the profit will be long-term capital gain. If a participant
sells the stock prior to satisfying these waiting periods, then
the participant will have engaged in a disqualifying disposition
and a portion of the profit will be ordinary income and a
portion may be capital gain. This capital gain will be long-term
if the participant has held the stock for more than one year and
otherwise will be short-term. If a participant sells the stock
at a loss, meaning sales proceeds are less than the exercise
price, then the loss will be a capital loss. This capital loss
will be long-term if the participant held the stock for more
than one year and otherwise will be short-term.
Nonstatutory Stock Options. A participant will
not have income upon the grant of a nonstatutory stock option. A
participant will have compensation income upon the exercise of a
nonstatutory stock option equal to the value of the stock on the
day the participant exercised the option less the exercise
price. Upon sale of the stock, the participant will have capital
gain or loss equal to the difference between the sales proceeds
and the value of the stock on the day the option was exercised.
This capital gain or loss will be long-term if the participant
has held the stock for more than one year and otherwise will be
short-term.
Restricted Stock. A participant will not have
income upon the grant of restricted stock unless an election
under Section 83(b) of the Code is made within 30 days
of the date of grant. If a timely 83(b) election is made, then a
participant will have compensation income equal to the value of
the stock less the purchase price. When the stock is sold, the
participant will have capital gain or loss equal to the
difference between the sales proceeds and the value of the stock
on the date of grant. If the participant does not make an 83(b)
election, then when the stock vests the participant will have
compensation income equal to the value of the stock on the
vesting date less the purchase price. When the stock is sold,
the participant will have capital gain or loss equal to the
sales proceeds less the value of the stock on the vesting date.
Any capital gain or loss will be long-term if the participant
held the stock for more than one year and otherwise will be
short-term.
Other Stock-Based Awards. The tax consequences
associated with any other stock-based award granted under the
2005 plan will vary depending on the specific terms of such
award. Among the relevant factors are whether or not the award
has a readily ascertainable fair market value, whether or not
the award is subject to forfeiture provisions or restrictions on
transfer, the nature of the property to be received by the
participant under the award and the participant’s holding
period and tax basis for the award or underlying common stock.
Tax Consequences to NxStage. There will be no
tax consequences to us except that we will be entitled to a
deduction when a participant has compensation income. Any such
deduction will be subject to the limitations of
Section 162(m) of the Code.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE
AMENDMENT TO THE 2005 PLAN
The following is a description of the material aspects of the
Stock Purchase, including the stock purchase agreement. While we
believe that the following description covers the material terms
of the Stock Purchase, the description may not contain all of
the information that is important to you. We encourage you to
read carefully this entire proxy statement, including the stock
purchase agreement attached to this proxy statement as
Annex A, for a more complete understanding of the Stock
Purchase.
Medisystems has been a significant supplier to NxStage since our
inception. Prior to 2005, Medisystems was the primary supplier
of components for our System One disposable cartridges. Since
2006, Medisystems has supplied the completed disposable
cartridge for our System One. Medisystems is wholly-owned by
Mr. Utterberg, a significant stockholder and director of
NxStage since 1999. Historically, our supply arrangement with
Medisystems was conducted on a purchase order basis. During
2006, we began negotiating a long-term supply agreement with
Medisystems for our disposable cartridges. We and Medisystems
entered into this long-term supply agreement on January 4,2007.
In the course of negotiating the supply agreement, in late
December 2006, Mr. Utterberg approached our chief executive
officer, Jeff Burbank, about our possible acquisition of
Medisystems. On January 3, 2007, our board of directors
authorized Mr. Burbank to pursue preliminary discussions
pertaining to the possible acquisition of Medisystems.
Between January 5 and January 8, 2007, Mr. Burbank and
Mr. Licari, our chief operating officer, accompanied
Mr. Utterberg and Mr. Azel, the Medisystems vice
president of operations, on a facility tour of Medisystems’
manufacturing facilities in Mexico and Italy.
In addition to the trips to Mexico and Italy, we conducted
preliminary financial and contractual due diligence using
materials supplied by Medisystems between January 6 and
January 22, 2007.
On January 23, 2007, at a meeting of the board of
directors, our management and the board of directors, excluding
Mr. Utterberg, discussed our possible acquisition of
Medisystems and reviewed the due diligence completed by our
management to date. Based on the information provided, our board
of directors discussed potential risks and benefits of the
proposed transaction, possible deal structures and next steps,
including engaging appropriate experts to assist in diligence
efforts, valuation estimates and deal structuring. It was agreed
that the board of directors should continue to have outside
counsel present for all discussions regarding a potential
transaction with Medisystems.
On January 30, 2007 at a meeting of the board of directors,
management reviewed with the board of directors, excluding
Mr. Utterberg, financial information received to date from
Medisystems and discussed Medisystems’ corporate structure,
business and financial position, as well as some of the risks
and benefits of a potential Medisystems acquisition. The board
of directors asked management to proceed with its evaluation of
Medisystems as a possible acquisition target and report to the
board of directors on its findings.
On February 5 and 6, 2007, Mr. Brown, our chief financial
officer of NxStage, went to Seattle to review the Medisystems
financial information and talk to members of the Medisystems
management team.
On February 7, 2007, Mr. Burbank and Mr. Brown
met with representatives of Merrill Lynch to discuss Medisystems
and Merrill Lynch’s role as financial advisor to NxStage.
Between February 12, 2007 and February 23, 2007,
representatives of NxStage and Merrill Lynch engaged in a review
of financial information and development of financial
projections for a potential acquisition of Medisystems.
On February 26, 2007, at a special meeting of our board of
directors, excluding Mr. Utterberg, management and
representatives of Merrill Lynch continued discussions regarding
NxStage’s evaluation of a potential acquisition of
Medisystems. Representatives of Merrill Lynch reviewed their
analysis to date of a potential acquisition of Medisystems, and
they summarized business information learned to date about
Medisystems, including historical sales performance and future
growth opportunities as well as certain business rationales for
acquiring Medisystems, including a broader product line, control
of System One cartridge manufacturing and possible acceleration
of profitability. Representatives of Merrill Lynch reviewed
their preliminary valuation analysis of a Medisystems
acquisition, including potential transaction structures. The
directors and management then discussed next steps and proposed
a future negotiation process with Merrill Lynch and management.
Management agreed to proceed according to the process discussed
and to report back to the board of directors.
On March 1, 2007, Mr. Burbank and James Boylan of
Merrill Lynch met with Mr. Utterberg in Seattle to deliver
a term sheet outlining our proposed terms for the transaction,
including the structure of the proposed transaction, the
consideration to be paid in the transaction and other terms and
conditions.
On March 7, 2007, Mr. Burbank and Mr. Boylan met
with Mr. Utterberg in Lawrence, Massachusetts to continue
discussions regarding the terms and conditions and possible
structure of a Medisystems acquisition, including the structure
of the proposed transaction, the type, amount, and timing, of
consideration to be paid in the transaction and the assets to be
acquired.
Between March 7 and March 16, 2007, our management and
Mr. Utterberg continued to negotiate terms and conditions
of a possible acquisition of Medisystems.
On March 26, 2007, Mr. Burbank, Mr. Brown and
Mr. Boylan met with Mr. Utterberg and Ann Kelly,
financial advisor to Mr. Utterberg, in Chicago to discuss
valuation of the Medisystems acquisition.
Between March 26 and April 13, 2007, the Company and
Mr. Utterberg continued to negotiate terms and conditions
of a possible acquisition of Medisystems, including the
structure of the proposed transaction, the type, amount, and
timing of consideration to be paid in the transaction and the
assets to be acquired and the terms of the consulting agreement
with Mr. Utterberg.
On April 13, 2007 at a special meeting of our board of
directors, excluding Mr. Utterberg, management and the
board discussed the summary of key business terms and strategic
rationale for a Medisystems acquisition. Management and the
board of directors reviewed certain preliminary financial
analyses of the proposed transaction and discussed different
structuring alternatives for the transaction. Management and the
board of directors then discussed the process for approving the
proposed acquisition, given its status as a related party
transaction. Pursuant to the requirements of the Audit Committee
Charter, the Audit Committee would be required to vote on all
related party transactions, and it was agreed that the Audit
Committee would follow a process substantially similar to the
process used in approving our supply agreement with Medisystems.
Following the conclusion of these discussions, management
reviewed the ongoing diligence efforts relating to the proposed
acquisition. At the conclusion of these discussions, members
agreed that management should continue to negotiate the proposed
acquisition of Medisystems according to the general terms
reviewed with the board of directors.
Between April 17 and April 20, 2007, Mr. Burbank and
Mr. Brown were in Seattle to meet with Mr. Utterberg
and Ms. Kelly to negotiate terms and conditions of the
acquisition and review financial information related to the
acquisition. Negotiations at this meeting focused primarily on
the timing of the consideration to be paid in the transaction,
the assets to be acquired in the transaction, the terms of an
on-going consulting agreement between the parties and what
restriction, if any, would be placed on any shares issued to
Mr. Utterberg as deal consideration.
On April 19, 2007 at a meeting of our board of directors,
excluding Mr. Utterberg, management and the board of
directors discussed proposed key business terms for the
acquisition and discussed how certain terms had changed from
those previously presented to the board of directors. Members
discussed the proposed deal structure at length, as well as
other key business terms. At the conclusion of these
discussions, members agreed that Mr. Burbank should
continue to negotiate the proposed acquisition of Medisystems
according to the general terms reviewed with the board of
directors.
On April 25, 2007, our Audit Committee met to discuss,
among other things, the status of ongoing diligence and
negotiations with Medisystems. On April 26, 2007, the same
information was shared with our
full board or directors, excluding Mr. Utterberg. Merrill
Lynch also presented information at this meeting regarding its
ongoing valuation analysis of Medisystems and its perceptions
regarding other deal terms, including the timing of deal
consideration and the assets being transferred.
Between April 26, 2007 and May 30, 2007, several
meetings of the Audit Committee were held to review the status
of due diligence efforts and ongoing negotiations as well as any
changes to key business terms arising in the course of ongoing
negotiations.
An initial draft of the stock purchase agreement was delivered
by our counsel, WilmerHale, to Medisystems and its counsel,
Arnold & Porter, on April 27, 2007. We received
Medisystems’ and its counsel’s preliminary comments to
the stock purchase agreement on May 1 and 2, 2007, and we
received a revised draft of the stock purchase agreement on
May 3, 2007. WilmerHale distributed a revised draft of the
stock purchase agreement to Medisystems and its counsel on
May 4th. Arnold & Porter delivered an issues list
in response to the revised draft on May 5, 2007, and the
parties participated in a conference call, with their respective
counsel, on May 6th to discuss the issues list.
Arnold & Porter distributed a revised draft of the
stock purchase agreement responsive to many of the matters
discussed in that conference call on May 7, 2007.
The parties, with their counsel, met in Boston, Massachusetts to
negotiate the stock purchase agreement on May 8th and
9th. WilmerHale distributed a revised draft of the stock
purchase agreement reflective of what the parties had agreed to
during these meetings on May 15, 2007. Arnold &
Porter delivered a draft response to the stock purchase
agreement on May 23, 2007. Mr. Burbank, our Chief
Executive Officer, delivered a revised draft of the stock
purchase agreement to Mr. Utterberg on May 25, 2007,
and Mr. Utterberg delivered a revised draft in response to
Mr. Burbank on May 27, 2007. Mr. Burbank
delivered further revised drafts of the stock purchase agreement
to Mr. Utterberg on May 29, 30 and 31, 2007.
Mr. Utterberg and Mr. Burbank exchanged revised drafts
of the stock purchase agreement to each other on May 31st.
On June 1, 2007, WilmerHale sent revisions to the stock
purchase agreement to Arnold & Porter, and
Arnold & Porter distributed a revised draft of the
stock purchase agreement to WilmerHale on the same day.
Arnold & Porter distributed additional changes to the
stock purchase agreement on June 2, 2007, and final changes
to the stock purchase agreement on June 4, 2007, the date
on which the stock purchase agreement was definitively approved
by our board of directors and signed by both parties.
During April and May 2007, representatives of NxStage and
Medisystems engaged in substantial due diligence in connection
with the proposed business combination, including financial,
intellectual property, regulatory and legal due diligence.
Outside experts were engaged to assist in these efforts.
Diligence reports from all outside experts were obtained and
shared with our Audit Committee and our full board of directors,
other than Mr. Utterberg.
On June 3 and 4, 2007, meetings of our Audit Committee and our
full board of directors, excluding Mr. Utterberg, were held
to review the final documents in detail as well as
management’s recommendations with respect to the
transaction. Representatives of Merrill Lynch and WilmerHale
were present at these meetings. Merrill Lynch reviewed its final
analysis of the transaction and deal structure and delivered its
oral fairness opinion. Merrill Lynch also delivered its written
fairness opinion on June 4, 2007.
On June 4, 2007, our Audit Committee and our full board of
directors, excluding Mr. Utterberg, approved the Stock
Purchase and later that day, we executed the stock purchase
agreement and issued a press release announcing the Stock
Purchase.
Our board of directors has determined that the terms of the
Stock Purchase and the stock purchase agreement are fair to, and
in the best interests of, NxStage and our stockholders. Our
board of directors consulted with senior management, as well as
legal counsel, and financial advisors in reaching its decision
to approve the Stock Purchase. Our board of directors considered
a number of factors in its deliberations, including the
following:
•
historical information concerning NxStage’s and
Medisystems’ respective businesses, prospects, financial
performance and condition, operations, technology, management
and competitive position,
including, without limitation, reports concerning results of
operations during the most recent fiscal year and fiscal quarter
for each corporation;
•
our management’s view of the financial condition, results
of operations and businesses of NxStage and Medisystems before
and after giving effect to the Stock Purchase;
•
current financial market conditions and historical market
prices, volatility and trading information with respect to our
common stock;
•
the relationship between the market value of our common stock
and the consideration to be paid by us in the Stock Purchase and
a comparison of comparable transactions;
•
the terms of the stock purchase agreement, including the
parties’ representations, warranties and covenants, and the
conditions to their respective obligations;
•
detailed financial analysis and pro forma and other information
with respect to the companies presented by Merrill Lynch in
presentations to the board of directors, including Merrill
Lynch’s opinion that the consideration to be paid under the
stock purchase agreement is fair from a financial point of view
to our stockholders;
•
reports from management, financial and tax advisors, independent
auditors, outside legal experts and others as to the results of
the due diligence investigation of Medisystems;
•
the prices paid in comparable transactions involving other
medical device companies, as well as the trading performance for
comparable companies in the industry;
•
beliefs shared by our senior management that the prospects of
the combined entity were more favorable than our prospects as a
separate entity, due to:
−
the benefits associated with gaining manufacturing scale and
controlling the manufacture of our key disposable product;
−
the benefits associated with an expanded product line;
−
the belief that the transaction may accelerate our timeline to
profitability; and
−
the belief that the transaction may enable us to accelerate the
development of additional products in the dialysis market.
•
the cost of acquiring Medisystems’ disposable manufacturing
operations and leadership team compared to the time to
internally develop the same capabilities; and
•
the interests of our officers and directors in the Stock
Purchase, including the matters described under “The Stock
Purchase — Interests of Mr. Utterberg in the
Stock Purchase” on page 65 and the impact of the Stock
Purchase on our stockholders and employees, including the fact
that Mr. Utterberg is a member of our board of directors.
Our board of directors also considered potential negative
factors relating to the Stock Purchase, including:
•
the potential negative effect on our common stock price if
product development expectations for Medisystems are not met;
•
the risk that the Medisystems business will not perform as
expected;
•
the risk that the transaction will not accelerate our timeline
to profitability;
•
the risk that the Medisystems StreamLine2 product will not
achieve commercial acceptance;
•
the risk that the transaction will not result in the anticipated
cost savings;
•
the risk that the Stock Purchase may not be completed in a
timely manner, if at all;
•
the risk that we will be unable to retain and recruit employees
critical to the ongoing success of the combined company’s
operations;
the risk of adverse reactions of Medisystems’ customers and
vendors to the acquisition;
•
the risk that the integration of the Medisystems business could
be more costly and time consuming than anticipated, which could
adversely affect the combined company’s operating results
and preclude the achievement of benefits anticipated from the
Stock Purchase;
•
the risk of Medisystems being acquired by another entity;
•
the risk that our management’s attention will be diverted
from other strategic and operational priorities to implement the
merger; and
•
the other risks and uncertainties discussed above under
“Risk Factors” beginning on page 18
The foregoing discussion of the items that our board of
directors considered is not intended to be exhaustive, but
includes all material items. In view of the complexity and wide
variety of factors, both positive and negative, that our board
of directors considered, our board of directors did not find it
practical to quantify, rank or otherwise weight the factors
considered. In considering the various factors, individual
members of our board of directors considered all of these
factors as a whole and concluded that, on balance, the benefits
of the Stock Purchase to NxStage and our stockholders outweighed
the risks.
After careful consideration, our board of directors, without
Mr. Utterberg, determined that the proposed Stock Purchase
is fair to, and in the best interests of, our company and
stockholders. Our board of directors recommends that our
stockholders vote “FOR” the issuance of our common
stock in the Stock Purchase.
In considering the recommendation of our board of directors with
respect to the Stock Purchase, our stockholders should be aware
that Mr. Utterberg has interests in the Stock Purchase and
the related transactions that are different from the interests
of our stockholders generally. See “— Interests of
Mr. Utterberg in the Stock Purchase” beginning on
page 65.
Our board of directors retained Merrill Lynch to act as its
financial advisor in connection with the proposed Stock
Purchase. Merrill Lynch delivered its oral opinion to our board
of directors, which was subsequently confirmed in writing, that,
as of June 4, 2007, and based upon and subject to the
assumptions, qualifications and limitations set forth in its
written opinion (which are described below), the consideration
to be paid by us in connection with the Stock Purchase was fair,
from a financial point of view, to NxStage.
The full text of the written opinion of Merrill Lynch, dated
June 4, 2007, which sets forth the procedures followed,
assumptions made, matters considered and qualifications and
limitations on the review undertaken by Merrill Lynch, is
attached as Annex B to this proxy statement. The summary of
Merrill Lynch’s opinion set forth below is qualified in its
entirety by reference to the full text of the opinion. Our
shareholders are urged to read the opinion carefully in its
entirety.
The Merrill Lynch opinion was addressed to our board of
directors for its use and benefit and only addresses the
fairness, from a financial point of view, as of the date of the
opinion, of the consideration to be paid by us in connection
with the Stock Purchase. The opinion does not address the merits
of our underlying decision to engage in the Stock Purchase and
does not constitute, nor should it be construed as, a
recommendation as to how any of our stockholders should vote
with respect to the proposed stock issuance or any other matter.
In addition, Merrill Lynch was not asked to address nor does its
opinion address the fairness to, or any other consideration of,
the holders of any class of securities, creditors or other
constituencies of ours.
In preparing its opinion to our board of directors, Merrill
Lynch performed various financial and comparative analyses,
including those described below. The summary set forth below
does not purport to be a complete description of the analyses
underlying Merrill Lynch’s opinion or the presentation made
by Merrill Lynch to our board of directors. The preparation of a
fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those
methods to the particular circumstances and, therefore, a
fairness opinion is not readily susceptible to partial analysis
or summary description. In arriving at its opinion, Merrill
Lynch did not attribute any particular weight to any analysis or
factor considered by it, but rather made its determination as to
fairness on the basis of its experience and professional
judgment after considering the results of all of its analyses.
Accordingly, Merrill Lynch believes that its analyses must be
considered as a whole and that selecting portions of its
analyses and factors, or focusing on information presented in
tabular format, without considering all of the analyses and
factors or the narrative description of the analyses, would
create a misleading or incomplete view of the process underlying
its opinion.
In performing its analyses, Merrill Lynch made numerous
assumptions with respect to industry performance, general
business, economic, market and financial conditions and other
matters, many of which are beyond the control of Merrill Lynch,
us or the MDS Entities. Any estimates contained in the analyses
performed by Merrill Lynch are not necessarily indicative of
actual values or future results, which may be significantly more
or less favorable than those suggested by such analyses.
Additionally, estimates of the value of businesses or securities
do not purport to be appraisals or to reflect the prices at
which such businesses or securities might actually be sold.
Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty. In addition, as described above,
Merrill Lynch’s opinion was among several factors taken
into consideration by our board of directors in making its
determination to approve the stock purchase agreement and the
Stock Purchase. Consequently, Merrill Lynch’s analyses
should not be viewed as determinative of the decision of our
board of directors to enter into the stock purchase agreement or
to engage in the Stock Purchase.
In arriving at its opinion, Merrill Lynch, among other things:
•
reviewed certain publicly available business and financial
information relating to us that Merrill Lynch deemed to be
relevant;
•
reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of us and Medisystems;
•
conducted discussions with members of senior management of
Medisystems and NxStage concerning the matters described in the
preceding two bullet points, as well as their respective
businesses and prospects before and after giving effect to the
Stock Purchase;
•
reviewed the market prices and valuation multiples for our
common stock and for certain publicly traded companies that
Merrill Lynch deemed to be relevant;
•
reviewed the results of operations of Medisystems and compared
them with those of certain publicly traded companies that
Merrill Lynch deemed to be relevant;
•
compared the proposed financial terms of the Stock Purchase with
the financial terms of certain other transactions that Merrill
Lynch deemed to be relevant;
•
participated in certain discussions and negotiations among
representatives of Medisystems and NxStage and their financial
and legal advisors;
•
reviewed the potential pro forma impact of the Stock Purchase on
our business;
•
reviewed the stock purchase agreement, the license agreement
between DSU Medical Corporation and MDS, and the form of
consulting agreement to be entered into by and among us, DSU
Medical Corporation and Mr. Utterberg; and
•
reviewed such other financial studies and analyses and took into
account such other matters as Merrill Lynch deemed necessary,
including its assessment of general economic, market and
monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or
otherwise made available to it, discussed with or reviewed by or
for it, or that was
publicly available. Merrill Lynch did not assume any
responsibility for independently verifying such information and
did not undertake any independent evaluation or appraisal of any
of the assets or liabilities of NxStage or Medisystems and it
was not furnished with any such evaluation or appraisal, nor did
it evaluate the solvency or fair value of NxStage or Medisystems
under any state or federal laws relating to bankruptcy,
insolvency or similar matters. In addition, Merrill Lynch did
not assume any obligation to conduct any physical inspection of
the properties or facilities of NxStage or Medisystems. With
respect to the financial forecast information furnished to or
discussed with Merrill Lynch by Medisystems or NxStage, Merrill
Lynch assumed that this information had been reasonably prepared
and reflected the best currently available estimates and
judgment of NxStage’s or Medisystems’ management as to
the expected future financial performance of NxStage or
Medisystems, as the case may be. Merrill Lynch expressed no
opinion as to such financial forecast information or the
assumptions on which it was based.
The opinion of Merrill Lynch is necessarily based upon market,
economic and other conditions as they existed and could be
evaluated on, and on the information made available to Merrill
Lynch as of, June 4, 2007, the date of its written opinion.
Merrill Lynch has no obligation to update its opinion to take
into account events occurring after the date that its opinion
was delivered to our board of directors. Circumstances could
develop prior to consummation of the Stock Purchase that, if
known at the time Merrill Lynch rendered its opinion, would have
altered its opinion.
Merrill Lynch assumed that in the course of obtaining the
necessary regulatory or other consents or approvals, contractual
or otherwise, for the Stock Purchase, no restrictions, including
any divestiture requirements or amendments or modifications,
will be imposed that will have a material adverse effect on the
contemplated benefits of the Stock Purchase. Merrill Lynch did
not express any opinion as to the prices at which our common
stock would trade following the announcement or the consummation
of the Stock Purchase. Although Merrill Lynch evaluated the
fairness, from a financial point of view, of the consideration,
Merrill Lynch was not requested to, and did not, recommend the
specific consideration payable in the Stock Purchase, which
consideration was determined through negotiations between us and
Mr. Utterberg and approved by our board of directors.
Merrill Lynch assumed that the representations and warranties of
each party contained in the stock purchase agreement were true
and correct as of June 4, 2007, the date of its written
opinion, that each party will perform all of its respective
covenants and agreements contained in the stock purchase
agreement and that the Stock Purchase will be consumed in
accordance with the terms of the stock purchase agreement
without waiver, modification or amendment. Merrill Lynch does
not render accounting, legal, tax or intellectual property
advice and understood that we were relying upon our own
accounting, legal, tax and intellectual property advisors as to
accounting, tax, legal and intellectual property matters in
connection with the Stock Purchase.
The following is a summary of the material analyses performed by
Merrill Lynch in connection with its opinion to our board of
directors dated June 4, 2007. Some of the financial
analyses summarized below include information presented in
tabular format. In order to understand fully Merrill
Lynch’s financial analyses, the tables must be read
together with the text of the summary. The tables alone do not
constitute a complete description of the financial analyses.
Considering the data set forth below without considering the
full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of Merrill Lynch’s
financial analyses.
Analysis of Selected Comparable Publicly Traded Companies.
Using publicly available information, Merrill Lynch compared
financial and operating information and ratios for Medisystems
with the corresponding information for a selected group of
publicly traded companies. Merrill Lynch selected these
companies because they engage in businesses and have operating
profiles reasonably similar to those of Medisystems. The
selected companies were:
Merrill Lynch calculated an equity value for each of these
companies based on their respective closing share prices as of
June 1, 2007 and the number of shares, options and
convertible securities outstanding as reflected in publicly
available information. Using these equity values, Merrill Lynch
calculated an enterprise value for each company by adding to
these equity values the amount of each company’s net debt,
preferred stock and minority interest as reflected in its most
recent publicly available balance sheet.
Using estimates of earnings before interest, taxes, depreciation
and amortization, or EBITDA, and earnings per share, or EPS, for
each of these companies derived from estimates published by
selected Wall Street research analysts, Merrill Lynch calculated
the following multiples for each company:
•
Enterprise value as a multiple of revenue based on calendar year
2006 or CY 2006, revenue and calendar year 2007 and 2008, or CY
2007 and CY 2008, respectively, estimated revenues;
•
Enterprise value as a multiple of EBITDA based on CY 2006 EBITDA
and CY 2007 and 2008 estimated EBITDA;
•
Price/earnings, or P/E multiples, based on CY 2007 and 2008
estimated EPS and the closing share price as of June 1,2007; and
•
Price/earnings to growth, or PEG multiples, based on CY 2007 and
2008 estimated EPS, the closing share price as of June 1,2007 and the Long-term EPS Growth Rate.
Merrill Lynch also calculated similar implied multiples for us
using an enterprise value and a share price for us based on our
closing share price of $12.09 as of June 1, 2007, the last
trading day before the meeting of the board of directors at
which the board of directors approved the Stock Purchase and the
stock purchase agreement, and estimates of revenue reflected in
Wall Street research.
Merrill Lynch compared the maximum, mean, median and minimum
implied multiples it calculated for the comparable companies to
the implied multiples it calculated for us. The results of
Merrill Lynch’s comparison are reflected in the following
table:
CY 2006
CY 2007E
CY 2008E
CY 2006
CY 2007E
CY 2008E
Revenue
Revenue
Revenue
EBITDA
EBITDA
EBITDA
CY 2007E
CY 2008E
CY 2007E
CY 2008E
Multiple
Multiple
Multiple
Multiple
Multiple
Multiple
P/E Multiple
P/E Multiple
PEG
PEG
Maximum
2.65x
2.34x
2.12x
13.2x
10.8x
8.5x
27.0x
22.2x
2.07x
1.71x
Mean
1.69x
1.44x
1.61x
11.9x
9.5x
8.2x
23.2x
18.4x
1.50x
1.33x
Median
1.43x
1.20x
1.61x
11.9x
9.4x
8.2x
21.6x
17.5x
1.38x
1.30x
Minimum
1.34x
1.06x
1.09x
10.8x
7.9x
8.0x
20.2x
16.8x
1.17x
0.97x
NxStage
15.06x
7.13x
3.55x
NA
NA
NA
NA
NA
NA
NA
Based on the foregoing and Merrill Lynch’s analyses of the
various comparable companies and on qualitative judgments
involving non-mathematical considerations, Merrill Lynch applied
multiples ranging from:
•
1.35x to 1.65x to the fiscal 2006 revenue and calculated implied
enterprise values for Medisystems ranging from $89 million
to $109 million as compared to the $79 million
transaction value;
•
11.0x to 13.0x to the fiscal 2006 EBITDA and calculated implied
enterprise values for Medisystems ranging from $83 million
to $98 million as compared to the $79 million
transaction value;
•
1.10x to 1.50x to our management’s estimates of fiscal 2007
revenue and calculated implied enterprise values for Medisystems
ranging from $79 million to $107 million based on the
fiscal 2007 revenue estimate derived from the management
projections as compared to the $79 million transaction
value; and
8.0x to 11.0x to our management’s estimates of fiscal 2007
EBITDA and calculated implied enterprise values for Medisystems
ranging from $110 million to $151 million based on the
fiscal 2007 EBITDA estimate derived from the management
projections as compared to the $79 million transaction
value.
None of the selected comparable companies is identical to
Medisystems. Accordingly, a complete analysis of the results of
the foregoing calculations cannot be limited to a quantitative
review of the results and involves complex considerations and
judgments concerning differences in financial and operating
characteristics of the selected comparable companies and other
factors that could affect the public trading dynamics of the
selected comparable companies.
Analysis of Selected Comparable
Acquisitions. Using publicly available
information, Merrill Lynch calculated the multiple of revenue
and EBITDA for Medisystems reflected by the transaction value of
each of the transactions listed below.
Date Announced
Acquiror
Target
4/30/2007
Greatbatch
Enpath Medical
6/30/2006
Blackstone Group
Encore Medical
4/20/2006
Integra LifeSciences
Miltex, Inc.
3/8/2006
Philips
Witt Biomedical
2/27/2006
Orthopedics, Inc.
Aircast Inc.
2/21/2006
Coherent
Excel Technology
9/7/2005
Integra LifeSciences
Radionics
6/16/2005
Gyrus Corp
ACMI Corp
1/18/2005
Elekta AB
Impac Medical Systems
8/9/2004
Encore Medical
Empi, Inc.
Merrill Lynch calculated the transaction value for each
transaction by multiplying the amount of the announced per share
consideration paid or payable in each transaction by the number
of fully-diluted outstanding shares of the target company based
upon publicly available information and adding to the result the
amount of the company’s net debt as of the date of the
target company’s most recent balance sheet prior to
announcement of the transaction.
For each of the transactions, Merrill Lynch calculated the
transaction value as a multiple of revenue and EBITDA for the
most recently reported 12 months prior to the date of
announcement of the transaction, which we refer to as the LTM
Revenue Multiple and the LTM EBITDA Multiple. The average LTM
Revenue Multiple for all the transactions was 2.46x and the
average LTM EBITDA Multiple for all the transactions, was 14.2x.
Based on the foregoing and Merrill Lynch’s analyses of the
various transactions and on qualitative judgments involving
non-mathematical considerations, Merrill Lynch applied multiples
ranging from:
•
1.60x to 2.60x to the revenue for the last 12 months as of
March 31, 2007 and calculated implied enterprise values for
Medisystems ranging from $106 million to $173 million
as compared to the $79 million transaction value; and
•
9.0x to 18.0x to the LTM EBITDA as of March 31, 2007 to
derive a range of implied enterprise values for Medisystems and
calculated implied enterprise values for Medisystems ranging
from $77 million to $154 million as compared to the
$79 million transaction value.
None of the transactions analyzed by Merrill Lynch is identical
to the proposed transaction. Accordingly, a complete analysis of
the results of the foregoing calculations cannot be limited to a
quantitative review of the results and involves complex
considerations and judgments concerning differences in financial
and operating characteristics of the companies party to those
transactions as well as the transactions and other factors that
could affect the proposed Stock Purchase.
Discounted Cash Flow Analysis. Merrill Lynch
performed a discounted cash flow analysis of the estimated free
cash flows of Medisystems’ business (exclusive of its
contract with us described below) reflected in the management
projections. Merrill Lynch also performed a discounted cash flow
analysis of the estimated free cash flows expected to be derived
from the contract between Medisystems and us pursuant to which
Medisystems has agreed to provide disposable cartridges to us
for a seven-year term reflected in the management projections.
In performing its discounted cash flow analysis of
Medisystems’ business (exclusive of our contract with
Medisystems), Merrill Lynch calculated ranges of the present
value as of June 30, 2007 of the estimated free cash flows
of Medisystems’ business (exclusive of our contract with
Medisystems) over the period from the third quarter of 2007
through fiscal 2014 by applying discount rates ranging from
12.5%-15.0% to those estimates. In addition, Merrill Lynch
calculated ranges of the present value as of June 30, 2007
of the estimated Terminal Value of the Medisystems’
business (exclusive of our contract with Medisystems), based on
applying a perpetuity growth rate of 0.0% to the fiscal 2014
free cash flow and applying discount rates ranging from
12.5%-15.0%. In performing its discounted cash flow analysis of
our contract with Medisystems, Merrill Lynch calculated ranges
of the present value as of June 30, 2007 of the estimated
free cash flows of our contract with Medisystems over the period
from the third quarter of 2007 through fiscal 2014 by applying
discount rates ranging from 15.0%-17.5%. No Terminal Value was
calculated for our contract with Medisystems because the
agreement exists for a finite period of seven years.
Merrill Lynch added together the net present value ranges as of
June 30, 2007 that it derived for Medisystems’
business (exclusive of the NxStage Contract) and for our
contract with Medisystems. Based upon the foregoing, Merrill
Lynch calculated an implied net present value of the estimated
future cash flows of Medisystems ranging from $126 million
to $150 million as compared to the $79 million
transaction value.
The discount rates utilized in these analyses were based on
Merrill Lynch’s estimates of the weighted average cost of
capital of both Medisystems and us, based on its review of
publicly available business and financial information of
Medisystems and us, and the respective business and financial
characteristics of comparable companies, respectively. In
performing its weighted average cost of capital analysis of
Medisystems, Merrill Lynch compared financial and business
characteristics of comparable mature, steady growth medical
device companies. In performing its weighted average cost of
capital analysis of NxStage, Merrill Lynch compared financial
and business characteristics of comparable high growth medical
device companies.
Pro Forma Stock Purchase Analysis. Merrill
Lynch analyzed the pro forma impact of the proposed Stock
Purchase on our EPS for the fiscal years ending
December 31, 2007, 2008, 2009, 2010 and 2011. For purposes
of this analysis Merrill Lynch used the financial information
and projections provided by our management. Based on this
analysis, Merrill Lynch concluded that the proposed Stock
Purchase would be accretive to our EPS in 2007 and subsequent
years.
Other Factors.In the course of
preparing its opinion, Merrill Lynch also reviewed and
considered other information and data, including the following:
•
our trading characteristics;
•
historical market prices for our common stock;
•
our financial, operating and stock market data and selected
publicly traded companies in the specialty medical technology
industry; and
•
selected research analysts reports on NxStage, including stock
price estimates of those analysts.
General. Merrill Lynch is an internationally
recognized investment banking and advisory firm. As part of its
investment banking business, Merrill Lynch is continuously
engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and
valuations for corporate and other purposes. The board of
directors selected Merrill Lynch as its financial adviser
because of Merrill Lynch’s qualifications, expertise and
reputation.
Under the terms of its engagement, we have agreed to pay Merrill
Lynch a fee for its services, which is contingent upon the
consummation of the Stock Purchase. In addition, we have agreed
to reimburse Merrill Lynch for its reasonable out-of-pocket
expenses incurred in connection with providing its services and
to indemnify Merrill Lynch, its affiliates and related parties
against certain liabilities arising out of Merrill Lynch’s
engagement.
Merrill Lynch has, in the past, provided financial advisory and
financing services to us and our affiliates and may continue to
do so and has received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of its
business, Merrill Lynch may actively trade our common stock and
our other securities for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short
position in such securities.
When considering the recommendation of our board of directors,
you should be aware that Mr. Utterberg, a NxStage director,
has interests in the Stock Purchase that are different from
yours. Mr. Utterberg owns, directly or indirectly, all of
the equity interests that we are purchasing in the MDS Entities.
Accordingly, Mr. Utterberg will receive
6,500,000 shares of our common stock, subject to a
post-closing working capital adjustment, if the Stock Purchase
is approved and completed. As a result,
Mr. Utterberg’s aggregate ownership of our outstanding
stock will increase to approximately 23.4% of our outstanding
common stock if he receives 6,500,000 shares. As of
June 4, 2007, the last trading day prior to the
announcement of the Stock Purchase, the aggregate market value
of the 6,500,000 shares of common stock issuable to
Mr. Utterberg was $78.7 million, based on a per share
price of $12.11, which was the last sales price of our common
stock on the NASDAQ Global Market on that day.
We have agreed that following the Stock Purchase,
Mr. Utterberg will have “piggyback” registration
rights if we propose to register shares of our common stock
under the Securities Act of 1933, as amended. We will provide
Mr. Utterberg with notice of a registration of our shares
and provide Mr. Utterberg with the opportunity to include
the shares he received in the Stock Purchase in the
registration, subject to certain cut back and lock-up
restrictions. In addition, we have agreed to register for resale
the shares issued to Mr. Utterberg as consideration for the
Stock Purchase in the event that he ceases to be an affiliate of
NxStage prior to the time the holding period under
Rule 144(k) lapses as to such shares.
Additionally, in connection with the Stock Purchase we will
enter into a two-year consulting agreement with
Mr. Utterberg. Under the consulting agreement,
Mr. Utterberg will receive aggregate payments from us of
$200,000 per year, plus expenses. The terms of the consulting
agreement are more fully detailed in this proxy statement under
the heading “License Agreement and Consulting
Agreement” beginning on page 75.
Following the Stock Purchase, Mr. Utterberg will continue
to serve on our board of directors. In addition, the stock
purchase agreement provides that, if Mr. Utterberg is no
longer a director of NxStage, our board of directors will
nominate for election to our board any director nominee proposed
by Mr. Utterberg, subject to certain conditions.
Our board of directors took into account these interests in
considering whether to approve the Stock Purchase.
Mr. Utterberg did not participate in discussions held by
our board of directors concerning these transactions, nor did he
participate in the board votes authorizing these transactions.
Currently, Medisystems supplies the completed disposable
cartridges used with our System One product. We purchased
approximately $4.6 million of goods and services during
fiscal 2006 from Medisystems. In January 2007, we entered into a
seven-year agreement with Medisystems pursuant to which
Medisystems will supply to us no less than 90% of our North
American requirements for disposable cartridges for use with the
System One. If the Stock Purchase is approved by our
stockholders, following the closing we intend to terminate this
supply agreement.
We will not acquire patents in connection with the Stock
Purchase. All patented intellectual property presently used in
connection with the business of the MDE Entities is licensed by
MDS from DSU under a perpetual, royalty-free, fully paid license
agreement entered into between the parties on June 1, 2007.
For a description of the license agreement, see “License
Agreement and Consulting Agreement” on page 75.
Upon the closing of the Stock Purchase, we will issue
Mr. Utterberg 6,500,000 shares of our common stock.
The total number of shares payable by us to Mr. Utterberg
is also subject to a post-closing working capital adjustment as
discussed below.
Working
Capital Adjustment Following Closing
Following the closing of the Stock Purchase, we and
Mr. Utterberg will determine the amount of working capital
held by the MDS Entities as of the closing. We and
Mr. Utterberg have agreed to a targeted working capital
amount as of closing equal to negative $1,850,000, which amount
will be increased by the sum of the amount of Medisystems’
net income, plus depreciation and amortization for the period
from January 1, 2007 through the closing of the Stock
Purchase, and decreased by the sum of the amounts of
(1) the royalties payable under the license agreement
between MDS and DSU, described below, (2) cash dividends
equal to $55,000 per month for each month from January 1,2007 through the closing of the Stock Purchase, (3) cash
dividends payable to Mr. Utterberg pursuant to the stock
purchase agreement for reimbursement of tax liability with
respect to Medisystems and (4) the amount of
Medisystems’ capital expenditures permitted under the terms
of the stock purchase agreement for the period from
January 1, 2007 through the closing of the Stock Purchase.
The base purchase price payable by us to Mr. Utterberg will
be adjusted depending on whether the amount of working capital
at closing is greater than or less than this targeted working
capital amount by $250,000 or more. The amount of the working
capital adjustment will not be known until at least 60 days
following the closing and, therefore, the total amount of the
shares of our common stock to be paid to Mr. Utterberg will
not be known until following the closing.
Escrow
Arrangements
At the closing of the Stock Purchase, 1,000,000 of the
6,500,000 shares payable by us to Mr. Utterberg will
be placed into escrow to cover potential indemnification claims
we may have against Mr. Utterberg. The escrow fund will
have a duration of two years following the closing of the Stock
Purchase, with 500,000 shares released after the first
year. For further information about the parties’ respective
indemnification obligations, see ‘‘The Stock Purchase
Agreement — Indemnification” beginning on
page 74.
All of the assets held by the MDS Entities are currently subject
to a lien. In January 2003, the Medisystems Group entered into a
credit agreement with KeyBank National Association, pursuant to
which all of the assets of each Medisystems Group company have
been pledged as collateral. The credit agreement provides for a
$3.5 million revolving line of credit and a
$1.5 million demand line of credit. As of July 25,2007, there were no amounts outstanding under the revolving line
of credit and Medisystems Group had issued approximately
$812,000 of standby letters of credit. We expect that at or
prior to the closing of the Stock Purchase, any surviving
obligations against the Medisystems Groups’ credit
commitments will be resolved by Medisystems and the credit
commitments, other than the currently issued KeyBank letters of
credit, which are securing guarantees of VAT refunds made to MDS
Italy by one of the Italian banks. Medisystems has indicated
that it will amend the KeyBank credit commitment prior to the
closing of the Stock Purchase to remove from the commitment the
Medisystems Group companies that we are not acquiring. However,
removal of these entities from the KeyBank credit commitment is
not within our control and is not a condition to closing.
Medisystems Group companies that are not MDS Entities may borrow
under the credit facility, and, if they default on any such
obligation, we could be required to satisfy their obligations.
The closing of the Stock Purchase shall occur, and the Stock
Purchase shall be effective, no later than two business days
after the satisfaction or waiver of all the conditions and the
obligations of NxStage and Mr. Utterberg to the
transactions contemplated by the stock purchase agreement,
including approval of the issuance of shares of NxStage common
stock to Mr. Utterberg by our stockholders.
We are not aware of any governmental or regulatory approval
required for completion of the Stock Purchase, other than
compliance with the Hart-Scott Rodino Act, compliance with
applicable corporate laws of Delaware, compliance with state
securities laws and the filing with the NASDAQ Global Market of
a Notification Form for Listing Additional Shares and a
Notification Form for Change in the Number of Shares
Outstanding, with respect to the shares of our common stock to
be issued to Mr. Utterberg pursuant to the stock purchase
agreement.
If any other governmental approvals or actions are required, we
intend to try to obtain them. We cannot assure you, however,
that we will be able to obtain any such approvals or actions.
With respect to the shares of common stock issuable as
consideration for the Stock Purchase, we have agreed with
Mr. Utterberg to file with the NASDAQ Global Market a
Notification Form for Listing Additional Shares and a
Notification Form for Changes in the Number of Shares
Outstanding.
Restrictions
on the Resale of the Stock Purchase Shares
Mr. Utterberg has agreed to certain resale restrictions on
the Stock Purchase Shares. Notably, he may not sell or otherwise
dispose of shares of our common stock acquired by him in short
sales or in trades to a single party exceeding
250,000 shares, without our prior written consent. These
restrictions will apply to the shares of our common stock
acquired by Mr. Utterberg until the earlier of (1) a
change in control of NxStage and (2) two years following
the closing of the Stock Purchase.
In addition, Mr. Utterberg is currently a director of
NxStage and, therefore, subject to the volume limitation on
resales pursuant to Rule 144. Mr. Utterberg will
continue to be subject to such restrictions for as long as he is
a director
and/or
affiliate of NxStage.
We have agreed that following the Stock Purchase,
Mr. Utterberg will have “piggyback” registration
rights if we propose to register shares of our common stock
under the Securities Act of 1933, as amended. We will provide
Mr. Utterberg with notice of a registration of our shares
and provide Mr. Utterberg with the opportunity to include
the shares he received in the Stock Purchase in the
registration, subject to certain cut back and lock-up
restrictions. In addition, we have agreed to register for resale
the shares issued to Mr. Utterberg as consideration for the
Stock Purchase in the event that he ceases to be an affiliate of
NxStage prior to the time the holding period under
Rule 144(k) lapses as to such shares.
The following is a summary of the material terms of the stock
purchase agreement, which is attached as Annex A to this
proxy statement and is incorporated herein by reference. The
stock purchase agreement has been attached to this document to
provide you with information regarding its terms. It is not
intended to provide any other factual information about us,
Mr. Utterberg or the MDS Entities. The following
description does not purport to be complete and is qualified in
its entirety by reference to the stock purchase agreement. You
should refer to the full text of the stock purchase agreement
for details of the Stock Purchase and the terms and conditions
of the stock purchase agreement.
Under the stock purchase agreement, we will acquire from
Mr. Utterberg:
•
all of the issued and outstanding shares of MDS;
•
all of the issued and outstanding shares of MDS Services;
•
90% the issued and outstanding shares of MDS Italy (the
remaining equity of which is held by MDS); and
•
0.273% of the issued and outstanding equity participation of MDS
Mexico (the remaining equity of which is held by MDS).
The closing of the Stock Purchase will occur no later than the
second business day after the last of the conditions to the
Stock Purchase have been satisfied or waived, or at another time
as the parties mutually agree. However, because the Stock
Purchase is subject to a number of conditions, we cannot predict
exactly when the closing will occur or if it will occur at all.
At the closing of the Stock Purchase, Mr. Utterberg will
receive 6,500,000 shares of our common stock as
consideration for the Stock Purchase. Following the closing of
the Stock Purchase, we and Mr. Utterberg will work to
determine the amount of working capital held by the MDS Entities
as of the closing. We and Mr. Utterberg have agreed to a
targeted working capital amount as of closing equal to negative
$1,850,000, subject to adjustment as provided in the stock
purchase agreement. The base purchase price payable by us to
Mr. Utterberg will be adjusted depending on whether the
amount of working capital at closing is greater than or less
than this targeted working capital amount by $250,000 or more.
The amount of the working capital adjustment will not be known
until at least 60 days following the closing and,
therefore, the total amount of the shares of our common stock to
be paid to Mr. Utterberg will not be known until following
the closing.
Each party’s obligation to complete the Stock Purchase is
subject to the satisfaction or waiver by each of the parties, at
or prior to the closing, of various conditions, which include
the following:
•
all applicable waiting periods, and any extensions thereof,
under the
Hart-Scott-Rodino
Act will have expired or otherwise been terminated;
•
each party will have obtained all of the waivers, permits,
consents, approvals or other authorizations, and effected all of
the registrations, filings and notices, required on the part of
each party in the stock purchase agreement;
•
certain of the representations and warranties by the other party
in the stock purchase agreement, and any representations and
warranties by the other party set forth in the stock purchase
agreement that are qualified as to materiality will be true and
correct in all respects, and all other representations and
warranties of the other party set forth in the stock purchase
agreement will be true and correct in all material respects, in
each case as of the date of the stock purchase agreement and as
of the date of the closing as though made as of the date of the
closing, except to the extent such representations and
warranties are specifically made as of a particular date (in
which case such representations and warranties will be true and
correct as of such date);
•
the other party will have performed or complied with the
agreements and covenants required to be performed or complied
with in the stock purchase agreement as of or prior to the
closing;
•
no legal proceeding will be pending or threatened in writing
wherein an unfavorable judgment, order, decree, stipulation or
injunction would (1) prevent consummation of the
transactions contemplated by the stock purchase agreement,
(2) cause the transactions contemplated by the stock
purchase agreement to be rescinded following consummation or
(3) have, individually or in the aggregate, a material
adverse effect, and no such judgment, order, decree, stipulation
or injunction will be in effect;
•
the parties will have received (1) a duly executed escrow
agreement; and (2) a duly executed consulting
agreement; and
•
each party will have delivered the documents required under the
stock purchase agreement for the closing, including good
standing certificates and certificates from certain officers.
Our obligation to complete the Stock Purchase is subject to the
satisfaction or waiver, at or prior to the Stock Purchase, of
various additional conditions, which include the following:
•
our stockholders will have approved the issuance of shares of
our common stock to Mr. Utterberg pursuant to the terms of
the stock purchase agreement;
•
we will have received the financial statements, information and
other documents required to be provided by the stock purchase
agreement;
•
Mr. Utterberg will have caused each MDS Entity to hold a
meeting of its stockholder(s) to approve the resignation of the
outgoing directors and officers of each respective MDS Entity
and the appointment of incoming directors and officers, as
specified by us, effective as of the closing; and
•
we will have received copies of the resignations, effective as
of the closing, of each director and officer (in the case of MDS
Italy, this will include the board of statutory auditors), of
each of the MDS Entities, and such other documentation that may
be required under relevant local law or reasonably requested by
NxStage to implement the resignation of the outgoing directors
and officers and the appointment of the incoming directors and
officers, including full waivers from the outgoing directors
releasing the MDS Entities from any claims.
Mr. Utterberg’s obligation to complete the Stock
Purchase is subject to the satisfaction or waiver, at or prior
to the Stock Purchase, of various additional conditions, which
include the following:
•
NxStage will have filed with NASDAQ (1) a notification form
for listing of additional shares and (2) a notification
form for change in the number of shares outstanding, with
respect to the shares of our common stock issuable pursuant to
the terms of stock purchase agreement.
Mr. Utterberg has agreed he will not, and will cause each
of the MDS Entities not to, and will cause each of the MDS
Entities to require each of its officers, directors, employees,
representatives and agents not to, directly or indirectly:
•
initiate, solicit, encourage or otherwise facilitate any
inquiry, proposal, offer or discussion with any party (other
than NxStage) concerning any merger, reorganization,
consolidation, recapitalization, business combination,
liquidation, dissolution, share exchange, sale of stock, sale of
material assets or similar business transaction involving any of
the MDS Entities or any division of any of the MDS Entities;
•
furnish any non-public information concerning the business,
properties or assets of any of the MDS Entities or any division
of any of the MDS Entities to any party (other than
NxStage); or
engage in discussions or negotiations with any party (other than
NxStage) concerning any such transaction.
Mr. Utterberg has also agreed to, and to cause each of the
MDS Entities to, immediately notify any party with which
discussions or negotiations of the nature described above were
pending that Mr. Utterberg or the MDS Entities, as the case
may be, is terminating such discussions or negotiations. If
Mr. Utterberg or any of the MDS Entities receives any
inquiry, proposal or offer of the nature described above,
Mr. Utterberg has agreed to, or cause the MDS Entities to,
as the case may be, to, within one business day after receipt,
notify us of such inquiry, proposal or offer, including the
identity of the other party and the terms of the inquiry,
proposal or offer.
We are obligated under the stock purchase agreement to hold and
convene a special meeting of our stockholders for purposes of
considering the issuance of the Stock Purchase Shares. We are
required to prepare and file a proxy statement with the SEC and
distribute it to our stockholders for the purpose of convening
the special meeting and obtaining stockholder approval.
Mr. Utterberg has agreed to cause each of the MDS Entities
to conduct its operations in the ordinary course of business and
in compliance with all applicable laws and regulations and, to
the extent consistent therewith, use its reasonable best efforts
to preserve intact its current business organization, keep its
physical assets in good working condition, keep available the
services of its current officers and employees and preserve its
relationships with customers, suppliers and others having
business dealings with it to ensure that its goodwill and
ongoing business will not be impaired in any material respect.
Prior to the closing, Mr. Utterberg has agreed to prevent
each of the MDS Entities from doing any of the following without
our written consent:
•
issue or sell any stock, or equity participation or other
securities of any MDS Entity or any options, warrants or rights
to acquire any such stock, or equity participation or other
securities, or repurchase or redeem any stock, or equity
participation or other securities of any MDS Entity;
•
split, combine or reclassify any shares of or equity
participation in its capital stock; or declare, set aside or pay
any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital
stock;
•
create, incur or assume any indebtedness (including obligations
in respect of capital leases); assume, guarantee, endorse or
otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other
person or entity; or make any loans, advances or capital
contributions to, or investments in, any other person or entity;
•
enter into, adopt or amend any employee benefit plan or any
employment or severance agreement or arrangement described in
the stock purchase agreement or (except for normal increases in
the ordinary course of business for employees who are not
affiliates) increase in any manner the compensation or fringe
benefits of, or materially modify the employment terms of, its
directors, officers or employees, generally or individually, or
pay any bonus or other benefit to its directors, officers or
employees (except for certain existing payment obligations set
forth in the stock purchase agreement) or hire any new officers
or (except in the ordinary course of business) any new employees;
•
acquire, sell, lease, license or dispose of any assets or
property (including any shares or other equity interests in or
securities of any subsidiary or any corporation, partnership,
association or other business organization or division thereof),
other than purchases and sales of assets in the ordinary course
of business;
•
mortgage or pledge any of its property or assets or subject any
property or assets to any security interest;
discharge or satisfy any security interest or pay any obligation
or liability other than in the ordinary course of business;
•
amend its charter, bylaws or other organizational documents;
•
change its accounting methods, principles or practices, except
as may be required by a generally applicable change in GAAP or
make any new elections, or changes to any current elections,
with respect to taxes;
•
enter into, amend, terminate, take or omit to take any action
that would constitute a violation of or default under, or waive
any rights under, any contract or agreement of a nature
described in the stock purchase agreement;
•
make or commit to make any capital expenditure in excess of
$10,000 per item or $50,000 in the aggregate, other than amounts
set forth in the capital budget of the MDS Entities for 2007;
•
institute or settle any legal proceeding;
•
take any action or fail to take any action permitted by the
stock purchase agreement with the knowledge that the action or
failure to take action would result in (1) any of the
representations and warranties of Mr. Utterberg set forth
in stock purchase agreement becoming untrue or (2) certain
conditions set forth in the stock purchase agreement not being
satisfied; or
•
agree in writing or otherwise to take any of the above actions.
We and Mr. Utterberg have agreed to use reasonable best
efforts to:
•
take all actions necessary to complete the Stock Purchase;
•
obtain all waivers, permits, consents, approvals or
authorizations from governmental entities required in connection
with the transactions; and
•
effect all registrations, filings and notices with or to
governmental entities required in connection with the
transactions.
We and Mr. Utterberg have agreed that:
•
Mr. Utterberg will use reasonable best efforts to obtain
all waivers, consents or approvals from third parties and give
all notices to third parties as specified in the stock purchase
agreement;
•
Mr. Utterberg will cause each of the MDS Entities to
provide us with access to certain information relating to the
MDS Entities;
•
Mr. Utterberg will cause the MDS Entities to provide
information and otherwise assist in the preparation of certain
financial statements relating to the MDS Entities and us;
•
Each party will provide the other with notice of any changes
that would make the representations and warranties untrue or
inaccurate, cause a breach of any covenant, or cause a material
adverse effect on the MDS Entities or us, respectively;
•
We will make certain filings with NASDAQ to list the shares of
our common stock issued to Mr. Utterberg in connection with
the Stock Purchase;
•
Mr. Utterberg will cause the MDS Entities to satisfy
certain obligations and liabilities identified in the stock
purchase agreement;
•
Mr. Utterberg and his affiliates will maintain in
confidence certain information about the MDS Entities;
•
Mr. Utterberg will not solicit or hire former employees of
the MDS Entities for two years following the closing;
We have agreed that following the Stock Purchase,
Mr. Utterberg will have “piggyback” registration
rights if we propose to register shares of our common stock
under the Securities Act of 1933, as amended. We will provide
Mr. Utterberg with notice of a registration of our shares
and provide him with the opportunity to include the shares he
received in the Stock Purchase in the registration, subject to
certain cut back and lock-up restrictions. In addition, we have
agreed to register for resale the shares issued to
Mr. Utterberg as consideration for the Stock Purchase in
the event he ceases to be an affiliate of NxStage prior to the
time the holding period under Rule 144(k) lapses as to such
shares.
The stock purchase agreement may be terminated at any time prior
to the closing, whether before or after we have obtained
stockholder approval:
•
by mutual written consent of us and Mr. Utterberg;
•
by us by giving written notice to Mr. Utterberg in the
event he is in breach of any representation, warranty or
covenant contained in the stock purchase agreement, and such
breach (1) individually or in combination with any other
such breach, would cause certain conditions not to be satisfied
and (2) is not cured within 20 days following delivery
by us to Mr. Utterberg of written notice of such breach;
•
by Mr. Utterberg by giving written notice to us in the
event we are in breach of any representation, warranty or
covenant contained in the stock purchase agreement, and such
breach (1) individually or in combination with any other
such breach, would cause certain conditions not to be satisfied
and (2) is not cured within 20 days following delivery
by Mr. Utterberg to us of written notice of such breach;
•
by either us or Mr. Utterberg by giving written notice to
the other party at any time after our stockholders have voted on
whether to approve the issuance of our common stock in the event
the proposed issuance of our common stock failed to receive the
approval of our stockholders; or
•
by either of us by giving written notice to the other if the
closing will not have occurred on or before December 31,2007 by reason of the failure of any condition precedent
required by the stock purchase agreement (unless the failure
results primarily from a breach of any representation, warranty
or covenant contained in the stock purchase agreement by the
party providing notice).
If the stock purchase agreement is terminated as a result of our
board of directors’ decision to modify or withdraw its
recommendation to our stockholders, we agree to reimburse
Mr. Utterberg up to $600,000 for reasonable expenses
incurred by him relating to the stock purchase agreement.
Except as set forth in the preceding sentence, all fees and
expenses incurred in connection with the Stock Purchase, the
stock purchase agreement and the transactions contemplated by
the stock purchase agreement will be paid by the party incurring
such fees or expenses.
The stock purchase agreement contains customary representations
and warranties of Mr. Utterberg on behalf of himself and
the MDS Entities relating to, among other things:
•
title;
•
noncontravention;
•
appropriate approvals;
•
residency;
•
corporate organization, qualification and corporate power;
•
capital structure;
•
authorization, due execution and delivery of the stock purchase
agreement;
the validity of material contracts to which the parties or their
subsidiaries are a party and the absence of any violation,
default or breach to such contracts;
the absence of any conflicts or violations of each party’s
agreements as a result of the Stock Purchase or the stock
purchase agreement.
The stock purchase agreement contains certain customary
representations and warranties of NxStage relating to, among
other things:
•
corporate organization, qualification and corporate power;
•
capital structure;
•
authorization, due execution and delivery of the stock purchase
agreement;
•
the absence of any conflicts or violations as a result of the
stock purchase agreement or the Stock Purchase;
•
the absence of required consents, other than those specified;
•
compliance with reporting obligations;
•
financial statements; and
•
absence of material changes.
The representations and warranties are subject to materiality
and knowledge qualifiers in many respects. With certain
exceptions, the representations and warranties, will survive the
Stock Purchase closing for 24 months. Certain of the
representation and warranties will survive the closing beyond
24 months.
This description of the representations and warranties is
included to provide investors with information regarding the
terms of the stock purchase agreement. It is not intended to
provide any other factual information about us,
Mr. Utterberg or the MDS Entities. The assertions embodied
in the representations and warranties are subject to
qualifications and exceptions. Accordingly, you should not rely
on the representations and warranties as characterizations of
the actual state of facts at the time they were made or
otherwise.
The stock purchase agreement and consulting agreement,which are
described below, require Mr. Utterberg and us to indemnify
each other in the event of certain breaches and failures under
such agreements. Subject to certain limited exceptions, each
party’s aggregate indemnification liability is limited to a
maximum amount equal to 50% of the value of the shares of our
common stock received in the Stock Purchase, measured as of the
consummation of the Stock Purchase, minus $1,250,000. The
agreements further provide that any amounts payable by either
party in connection with any such indemnification claim be paid
by delivery of additional shares of our common stock, valued at
the time of payment. However, we will not be required to issue
shares for indemnification purposes that in the aggregate would
exceed 20% of the then outstanding shares of our common stock
without stockholder approval. Any shares issued by us for
indemnification purposes will not be registered under the
Securities Act of 1933, as amended. Mr. Utterberg has
agreed to place 1,000,000 of the shares he will receive as
consideration for the Stock Purchase into escrow to secure his
indemnification obligations to us and to satisfy any purchase
price adjustments following the closing.
In connection with the Stock Purchase and as a result of MDS,
one of the MDS Entities, becoming a direct or indirect
wholly-owned subsidiary of ours, we will acquire rights under an
existing license agreement between MDS and DSU Medical
Corporation, a Nevada corporation, wholly-owned by
Mr. Utterberg, or DSU. Additionally, as a condition to the
parties’ obligations to consummate the Stock Purchase,
Mr. Utterberg and DSU will enter into a consulting
agreement with us. The license agreement and the consulting
agreement are detailed further below.
Under the license agreement dated as of June 1, 2007 by and
between MDS and DSU, MDS received an exclusive, irrevocable,
sublicensable, royalty-free, fully paid license to certain DSU
patents, or the Licensed Patents, in exchange for a one-time
payment of $2,661,000. The Licensed Patents fall into two
categories, those patents that are used exclusively by the MDS
Entities, referred to as the Class A Patents, and those
patents that are used by the MDS Entities and other companies
owned by Mr. Utterberg, referred to as the Class B
Patents. Pursuant to the terms of the license agreement, MDS has
a license to (1) the Class A Patents, to practice in
all fields for any purpose and (2) the Class B
Patents, solely with respect to certain defined products for use
in the treatment of Extracorporeal Fluid Treatments
and/or Renal
Insufficiency Treatments. The license agreement further provides
that MDS’ rights under the agreement are qualified by
certain sublicenses previously granted to third parties. We have
agreed that Mr. Utterberg will retain the right to the
royalty income under one of these sublicenses.
Under this consulting agreement, Mr. Utterberg and DSU will
provide consulting, advisory and related services to us for a
period of two years following the consummation of the Stock
Purchase. In addition, under the terms of the consulting
agreement, Mr. Utterberg and DSU will agree during the term
of the agreement not to compete with us in the field defined in
the consulting agreement and not to encourage or solicit any
employees, customers or suppliers of ours to alter its
relationship with us. The consulting agreement will further
provide that (1) Mr. Utterberg and DSU will assign to
us certain inventions and proprietary rights received by him/it
during the term of the agreement and (2) we will grant
Mr. Utterberg and DSU an exclusive, worldwide, perpetual,
royalty-free irrevocable, sublicensable, fully paid license
under such assigned inventions and proprietary rights for any
purpose outside the inventing field, as defined in the
consulting agreement. Under the terms of the consulting
agreement, Mr. Utterberg and DSU will receive an aggregate
of $200,000 per year, plus expenses, in full consideration for
the services and other obligations provided for under the terms
of the consulting agreement. The consulting agreement also
requires us and Mr. Utterberg to indemnify each other in
the event of certain breaches and failures under the agreement
and requires that any such indemnification liability be
satisfied with shares of our common stock, valued at the time of
payment.
In March 2006, we received clearance from the FDA to market our
PureFlow SL module as an alternative to the bagged fluid
presently used with our System One in the chronic care market,
and we commercially launched the PureFlow SL module in July
2006. This accessory to the System One allows for the
preparation of high purity dialysate in the patient’s home
using ordinary tap water and dialysate concentrate.
We closed a follow-on public offering of our common stock on
June 14, 2006, which resulted in the issuance of
6,325,000 shares of common stock at $8.75 per share.
We received net proceeds from the offering of approximately
$51.3 million.
At December 31, 2006, 1,022 ESRD patients were using the
System One at 174 dialysis clinics, compared to 292 ESRD
patients at 70 dialysis clinics at December 31, 2005. In
addition, at December 31, 2006, 77 hospitals were using the
System One for critical care therapy, compared to 50 hospitals
at December 31, 2005.
Medisystems. In January 2007, we entered into
a seven-year agreement with Medisystems Corporation pursuant to
which Medisystems will supply to us no less than 90% of our
North American requirements for disposable cartridges for use
with the System One. The agreement may be terminated upon a
material breach, generally following a
120-day cure
period. Medisystems is a related party to NxStage. David
Utterberg, the president and sole stockholder of Medisystems, is
a director and significant stockholder of the Company.
On June 4, 2007 we entered into a stock purchase agreement
with Mr. Utterberg, who is a member of our board of
directors and owns 6.7% of our outstanding common stock,
pursuant to which we will acquire all of the outstanding equity
of each MDS Entity and each MDS Entity will become a direct or
indirect wholly-owned subsidiary of ours. Mr. Utterberg
will receive 6,500,000 shares of our common stock, subject
to a post-closing working capital adjustment as consideration
for the Stock Purchase.
Membrana. In January 2007, we entered into a
long-term supply agreement with Membrana pursuant to which
Membrana has agreed to supply, on an exclusive basis, capillary
membranes for use in the filters used with the System One for
ten years. In exchange for Membrana’s agreement to pricing
reductions based on volumes ordered, we have agreed to purchase
a base amount of membranes per year. The agreement may be
terminated upon a material breach, generally following a
60-day cure
period.
DaVita. On February 7, 2007, we entered
into a National Service Provider Agreement with DaVita, our
largest customer. Pursuant to the terms of the agreement, we
granted to DaVita certain market rights for the System One and
related supplies for home hemodialysis therapy. We granted
DaVita exclusive rights in a small percentage of geographies,
which geographies collectively represent less than 10% of the
U.S. ESRD patient population, and limited exclusivity in
the majority of all other U.S. geographies, subject to
DaVita’s meeting certain requirements, including patient
volume commitments and new patient training rates. Under the
agreement, we can continue to sell to other clinics in the
majority of geographies. If certain minimum patient numbers or
training rates are not achieved, DaVita can lose all or part of
its preferred geographic rights. Under the agreement, DaVita
commits to purchase all of its existing System One equipment
currently being rented from us (for a purchase price of
approximately $5.0 million) and to buy a significant
percentage of its future System One equipment needs.
The agreement has an initial term of three years, terminating on
December 31, 2009, and DaVita has the option of renewing
the agreement for four additional periods of six months if
DaVita meets certain patient volume targets.
In connection with the National Service Provider Agreement, on
February 7, 2007, DaVita purchased 2,000,000 shares of our
common stock for a purchase price of $10.00 per share.
Entrada. During the six months ended
June 30, 2007, we entered into a long-term agreement with
the Entrada Group, or Entrada, to establish manufacturing and
service operations in Mexico, initially for our cycler and
PureFlow SL disposables and later for our PureFlow SL hardware.
The agreement obligates Entrada
to provide us with manufacturing space, support services and a
labor force through 2012. The agreement may be terminated upon
material breach, generally following a 30-day cure period.
Product Reliability Issue. In the second
quarter of 2007, we started to experience an increased incidence
of reported dialysate leaks associated with our System One
cartridges. The reported incidence of leaks is higher than we
have historically observed. When the System One is used in
accordance with its instructions, these leaks present no risk to
patient health. System One device labeling anticipates the
potential for leaks to occur and specifically warns against
leaks and alerts users of the need to observe treatments in
order to detect leaks. Four patients with reported leaks, that
were unobserved by these patients or their partners until after
their treatments were terminated, reported hypotension, or low
blood pressure, resolved by a fluid bolus, with no lasting
clinical effect. In early August 2007, we sent a letter to our
patients and customers informing them of the increased incidence
in leaks and reminding them of existing System One labeling
alerting users of the potential for leaks and instructing them
to observe treatments in order to detect any leaks. We have
characterized this notification as a voluntary recall. On
August 24, 2007, we elected to initiate a second step in
our recall actions, and decided to physically recall the
affected lots of cartridge inventory being held by chronic
market customers and patients, and replace the affected
inventory with newer lots of cartridges at no charge. We have
instructed patients and customers to destroy all inventory of
affected cartridges they have on hand, and we expect to
write-off up to all of the inventory of affected cartridges we
have in-house. It is possible that we may be able to rework this
cartridge inventory, or reuse certain components of this
inventory, but we have not made a final determination related to
this recovery.
Based on these facts, we determined on August 24, 2007 that
we would incur total charges in connection with this recall in
the range of $1.9 million to $2.5 million, the
principal component of which relates to the write-off of
inventory in the range of $1.8 million to
$2.2 million. Other charges primarily relate to increased
shipping for replacement product and cycler servicing costs.
Substantially all of these charges would be recorded in the
quarter ending September 30, 2007.
The increased incidence in leaks has also been associated with
increased cycler service requirements, which have led to
increased service costs as well as imposed additional service
pool requirements on our cycler inventory. In the short term,
this may impede our ability to meet customer demand.
Resignation of Chief Operating Officer. On
August 28, 2007, Philip R. Licari, our Senior Vice
President and Chief Operating Officer, announced his intention
to resign from NxStage effective upon the completion of the
Stock Purchase.
We are a medical device company that develops, manufactures and
markets innovative systems for the treatment of ESRD and acute
kidney failure. Our primary product, the System One, is a small,
portable,
easy-to-use
hemodialysis system designed to provide physicians and patients
improved flexibility in how hemodialysis therapy is prescribed
and delivered. Given its design, the System One is particularly
well-suited for home hemodialysis and more frequent, or
“daily,” dialysis, which clinical literature suggests
provides patients better clinical outcomes and improved quality
of life. The System One is specifically cleared by the FDA
for home hemodialysis as well as hospital and clinic-based
dialysis. We believe the largest market opportunity for our
product is the home hemodialysis market for the treatment of
ESRD.
ESRD, which affects approximately 472,000 people in the
United States, is an irreversible, life-threatening loss of
kidney function that is treated predominantly with dialysis.
Dialysis is a kidney replacement therapy that removes toxins and
excess fluids from the bloodstream and, unless the patient
receives a kidney transplant, is required for the remainder of
the patient’s life. Over 70% of ESRD patients in the United
States rely on life-sustaining dialysis treatment. Hemodialysis,
the most widely prescribed type of dialysis, typically consists
of treatments in a dialysis clinic three times per week, with
each session lasting three to five hours. Approximately 8% of
U.S. ESRD dialysis patients receive some form of dialysis
treatment at home, most of whom treat themselves with peritoneal
dialysis, or PD, although surveys of physicians and healthcare
professionals suggest that a larger proportion of patients could
take responsibility for their own care. We
believe there is an unmet need for a hemodialysis system that
allows more frequent and easily administered therapy at home and
have designed our system to address this and other kidney
replacement markets.
Measuring 15x15x18 inches, the System One is the smallest,
commercially available hemodialysis system. It consists of a
compact, portable and
easy-to-use
cycler, disposable drop-in cartridge and high purity premixed
fluid. The System One has a self-contained design and simple
user interface making it easy to operate by a trained patient
and his or her trained partner in any setting prescribed by the
patient’s physician. Unlike traditional dialysis systems,
our System One does not require any special disinfection and its
operation does not require specialized electrical or plumbing
infrastructure or modifications to the home. Patients can bring
the System One home, plug it in to a conventional electrical
outlet and operate it, thereby eliminating what can be expensive
plumbing and electrical household modifications required by
other traditional dialysis systems. Given its compact size and
lack of infrastructure requirements, the System One is portable,
allowing patients freedom to travel. We believe these features
provide patients and their physicians new treatment options for
ESRD.
We market the System One to dialysis clinics for chronic
hemodialysis treatment, providing clinics with improved access
to a developing market, the home hemodialysis market, and the
ability to expand their patient base by adding home-based
patients without adding clinic infrastructure. The clinics in
turn provide the System One to ESRD patients. For each month
that a patient is treated with the System One, we bill the
clinic for the purchase of the related disposable cartridges and
treatment fluids necessary to perform treatment. Typically, our
customers have rented the System One equipment on a month to
month basis, although early in 2007, two of our dialysis chain
customers have elected to purchase rather than rent System One
equipment. Clinics receive reimbursement from Medicare, private
insurance and patients for dialysis treatments. We commenced
marketing the System One for chronic hemodialysis treatment in
September 2004. As of June 30, 2007, 1,615 ESRD
patients were using the System One at 200 different dialysis
clinics. Substantially all of these patients are treated at home
or are in training to treat themselves at home; the remaining
patients are doing therapy in a clinic.
We are not responsible for, and do not provide, patient
training. Training is provided by the patient’s dialysis
clinic and takes place at the clinic primarily during the
patient’s prescribed, often daily, two to three hour
treatment sessions. Patient training, which typically takes two
to three weeks, includes basic instruction on ESRD, operation of
the System One and insertion by the patient or their partner of
needles into the patient’s vascular access site. Clinics
provide testing to patients and their partners at the conclusion
of training to verify skills and an understanding of System One
operation. Training sessions are reimbursed by Medicare, and
there may be a co-payment requirement to the patient associated
with this training.
Medicare reimburses the same amount per treatment for home and
in-center hemodialysis treatments, up to three treatments per
week. Payment for more than three treatments per week is
available with appropriate medical justification. The adoption
of our System One for more frequent therapy for ESRD could be
slowed if Medicare is reluctant or refuses to pay for these
additional treatments.
We also market the System One in the critical care market to
hospitals for treatment of acute kidney failure and fluid
overload. It is estimated that there are over 200,000 cases of
acute kidney failure in the United States each year. The System
One provides an effective,
simple-to-operate
alternative to dialysis systems currently used in the hospital
to treat these acute conditions. We commenced marketing the
System One to the critical care market in February 2003. As of
June 30, 2007, 93 hospitals were using the System One to
deliver acute kidney failure and fluid overload therapy.
We were incorporated in Delaware in 1998 under the name QB
Medical, Inc., and later changed our name to NxStage Medical,
Inc. Our principal executive offices are located at 439 South
Union Street, Fifth Floor, Lawrence, Massachusetts01843.
Our primary product, the System One, is a small, portable,
easy-to-use
hemodialysis system, which incorporates multiple design
technologies and design features.
The System One includes the following components:
•
The NxStage Cycler. A compact portable
electromechanical device containing pumps, control mechanisms,
safety sensors and remote data capture functionality.
•
The NxStage Cartridge. A single-use,
disposable, integrated treatment cartridge that loads simply and
easily into the cycler. The cartridge incorporates a proprietary
volumetric fluid management system and includes a pre-attached
dialyzer.
•
Premixed Dialysate. The System One uses
high-purity premixed dialysate for hemodialysis applications.
The volume of fluids used varies with treatment options and
prescription, but typical weekly volumes are similar to the
amount of dialysate used by a patient on PD. We supply our
premixed dialysate in sterile five liter bags or through the use
of our PureFlow SL module, which received FDA clearance in March
2006 and was made available to our customers beginning in July
2006. The PureFlow SL module allows for the preparation of
dialysate fluid in the patient’s home using ordinary tap
water and dialysate concentrate thereby eliminating the need for
bagged fluids.
For the ESRD market, the System One is designed to make home
treatment and more frequent treatment easier and more practical.
Although most are not performed using our product, clinical
studies suggest that therapy administered five to six times per
week, commonly referred to as daily therapy, better mimics the
natural functioning of the human kidney and can lead to improved
clinical outcomes, including reduction in hypertension, improved
anemia status, reduced reliance on pharmaceuticals, improved
nutritional status, reduced hospitalizations and overall
improvement in quality of life. Other published literature also
supports the clinical and quality of life benefits associated
with home dialysis therapy.
For the critical care market, our System One is designed to
offer clinicians an alternative that simplifies the delivery of
acute kidney replacement therapy and makes longer or continuous
critical care therapies easier to deliver. The ability of our
system to perform hemofiltration
and/or
isolated ultrafiltration, for which the System One is also FDA
cleared, is advantageous, as many clinicians choose to prescribe
this therapy for patients with acute kidney failure.
The dialysis therapy market is mature, consolidated and
competitive. We compete with suppliers of hemodialysis and
peritoneal dialysis devices and certain dialysis device
manufacturers that also provide dialysis services. We currently
face direct competition in the United States primarily from
Fresenius Medical Care AG, or Fresenius, Baxter Healthcare, or
Baxter, Gambro AB or Gambro, B. Braun or B. Braun, and
others. Fresenius, Baxter and Gambro each have large and
well-established dialysis products businesses.
We believe the competition in the market for kidney dialysis
equipment and supplies is based primarily on:
We believe that we compete favorably in terms of product quality
and ease of use due to our System One design, portability,
drop-in cartridge and use of premixed fluids. We believe we also
compete favorably on the basis of clinical flexibility, given
the System One’s ability to work well in acute and chronic
settings and to perform hemofiltration, hemodialysis and
ultrafiltration. We believe we compete favorably in terms of
cost-effectiveness to clinics. Although our product is priced at
a premium compared to some competitive products in the market,
we allow clinics to reduce labor costs by offering their
patients a home treatment alternative. We compete unfavorably in
terms of sales force coverage and branding because we have only
recently commenced commercial sales of our System One in the
chronic care market and have a smaller sales force than most of
our competitors.
Our primary competitors are large, well-established businesses
with significantly more financial and personnel resources than
us. They also have significantly greater commercial
infrastructures than we have. We believe our ability to compete
successfully will depend largely on our ability to:
•
establish the infrastructures necessary to support a growing
home and critical care dialysis products business;
•
maintain and improve product quality;
•
continue to develop sales and marketing capabilities;
•
achieve cost reductions; and
•
access the capital needed to support the business.
Our ability to successfully market the System One, and any
products we may develop in the future, for the treatment of
kidney failure could also be adversely affected by
pharmacological and technological advances in preventing the
progression of chronic ESRD
and/or in
the treatment of acute kidney failure, technological
developments by others in the area of dialysis, the development
of new medications designed to reduce the incidence of kidney
transplant rejection and progress in using kidneys harvested
from genetically-engineered animals as a source of transplants.
There can be no assurance that competitive pressure or
pharmacological or technological advancements will not have a
material adverse effect on our business.
Critical
Care
We believe that competition in the critical care market will be
affected by system functionality,
ease-of-use,
reliability, portability and infrastructure requirements. In the
fluid overload market, we believe competition will be further
affected by physicians’ willingness to adopt
ultrafiltration as a viable treatment alternative to
pharmaceutical therapy. In the critical care market, we face
direct competition from Gambro, Baxter, B. Braun and Fresenius.
In the fluid overload market, drug therapy is currently the most
common and preferred treatment. To date, ultrafiltration has not
been broadly adopted and, if the medical community does not
accept ultrafiltration as clinically useful, cost-effective and
safe, we will not be able to successfully compete against
existing pharmaceutical therapies. Our ability to successfully
market the System One for the treatment of fluid overload
associated with multiple diseases, including congestive heart
failure, or CHF, could also be adversely affected by
pharmacological and technological advances in preventing or
treating fluid overload.
We sell our products in two markets: the chronic care market and
the critical care market. We have separate marketing and sales
efforts dedicated to each market. In 2006, sales to DaVita, Inc.
represented 19.4% of our total revenues, and DaVita is expected
to remain a significant customer of ours in 2007. No other
single customer represented 10% or more of our revenues in 2006.
In 2005, sales to Clarian Health Partners represented 10.0% of
our total revenues, sales to Renal Care Group represented 12.4%
of our total revenues and sales to Wellbound, Inc. represented
10.5% of our total revenues. No other single customer
represented 10% or more of our revenues in 2005.
In the chronic care market, our customers are independent
dialysis clinics as well as dialysis clinics that are part of
national chains. Since Medicare regulations require that all
chronic ESRD patients be under the care of a dialysis clinic,
whether they are treated at-home, in-clinic or with a kidney
transplant, we do not, and cannot, sell the System One directly
to chronic care patients.
We have a chronic care direct sales force that calls on dialysis
clinics. In addition to specialized sales representatives, we
also employ nurses on our chronic care sales force to serve as
clinical educators to support our sales efforts.
Currently, there are approximately 4,500 Medicare-certified
dialysis outpatient facilities in the United States. Ownership
of these clinics is highly consolidated with DaVita controlling
approximately 27% and Fresenius controlling approximately 33%
after giving effect to Fresenius’ acquisition of Renal Care
Group. Smaller chains and independent clinics and hospitals
represent the approximately 40% of remaining clinics. Our
customers include independent clinics as well as large and
smaller chains.
In February 2007, we entered into an agreement with DaVita that
grants DaVita certain market rights for the System One and
related supplies for home hemodialysis therapy. Under this
agreement, we granted DaVita exclusive rights in a small
percentage of geographies, which geographies collectively
represent less than 10% of the U.S. ESRD patient
population, and limited exclusivity in the majority of all other
U.S. geographies, subject to DaVita’s meeting certain
requirements, including patient volume commitments and new
patient training rates. We will continue to sell to other
clinics in the majority of geographies. The agreement limits,
but does not prohibit, the sale by NxStage of the System One for
chronic home hemodialysis therapy to any provider that is under
common control or management of a parent entity that
collectively provides dialysis services to more than 25% of
U.S. chronic dialysis patients and that also supplies
dialysis products. NxStage is, therefore, limited to some extent
in its ability to sell the System One for chronic home
hemodialysis therapy to Fresenius.
After renting or selling a System One to a clinic, our sales
representatives and clinical educators train the clinic’s
nurses and dialysis technicians on the proper use of the system
using proprietary training materials. We then rely on the
trained technicians and nurses to train home patients and other
technicians and nurses using the System One, rather than sending
our sales representatives and nurses back to the clinic to train
each new patient, nurse or technician. This approach also allows
the clinic and physician to select, train and support the
dialysis patients that will use our system, much the same way as
they manage their patients who are on PD therapy.
We began marketing the System One to perform hemodialysis for
ESRD patients in September 2004. As of June 30, 2007, there
were 1,615 patients with chronic ESRD using the System One.
Critical
Care
In the critical care market, because both acute kidney failure
and fluid overload are typically treated in hospital intensive
care units, our customers are hospitals. We are specifically
focusing our sales efforts in the critical care market on those
large institutions that we believe are most dedicated to
increased and improved dialysis therapy for patients with acute
kidney failure and believe in ultrafiltration as an
earlier-stage treatment option for fluid overload associated
with multiple diseases, including CHF.
We have a critical care direct sales force that calls on
hospitals. In addition to specialized sales representatives, we
also employ nurses in our critical care sales force to serve as
clinical educators to support our sales efforts.
The System One for the critical care market has a list price of
$28,000; this price does not include the related disposables
required for each treatment. After selling or placing a System
One in a hospital, our sales representatives and clinical
educators train the hospital’s intensive care unit, or ICU,
and acute dialysis nurses on the proper use of the system using
proprietary training materials. We then rely on the trained
nurses to
train other nurses. By adopting this “train the
trainer” approach, our sales representatives and nurses do
not need to return to the hospital each time a new nurse needs
to be trained.
We began promoting our System One product for use in the
critical care market in February 2003. As of June 30, 2007,
we had 93 hospitals as critical care customers.
Customer
Support Services
We primarily use a depot service model for equipment servicing
and repair for the chronic care market. If a device malfunctions
and requires repair, we arrange for a replacement device to be
shipped to the site of care, whether it is a patient’s
home, clinic or hospital, and for pick up and return to us of
the system requiring service. This shipment is done by common
carrier, and, as there are no special installation requirements,
the patient, clinic or hospital can quickly and easily set up
the new machine. In addition, we ship monthly supplies via
common carrier and courier services directly to chronic care
patients, dialysis clinics and hospitals.
In addition to depot service, the critical care market also
demands field service calls for cycler servicing and repair. The
nature of the hospital environment, coupled with the practices
of other ICU dialysis equipment suppliers, frequently
necessitates
on-site
clinical support for our systems installed in this environment.
We maintain telephone service
coverage 24-hours
a day, seven days a week, to respond to technical questions
raised by patients, clinics and hospitals concerning our System
One product.
Our research and development organization has focused on
developing innovative technical approaches that address the
limitations of current dialysis systems. Our development team
has skills across the range of technologies required to develop
and maintain dialysis systems. These areas include filters,
tubing sets, mechanical systems, fluids, software and
electronics. In response to physician and patient feedback and
our own assessments, we are continually working on enhancements
to our product designs to improve
ease-of-use,
functionality, reliability and safety. We also seek to develop
new products that supplement positively our existing product
offerings and intend to continue to actively pursue
opportunities for the research and development of complementary
products.
For the years ended December 31, 2006, 2005 and 2004, we
incurred research and development expenses of $6.4 million,
$6.3 million and $6.0 million, respectively.
We seek to protect our investment in the research, development,
manufacturing and marketing of our products through the use of
patent, trademark, copyright and trade secret law. We own or
have rights to a number of patents, trademark, copyrights, trade
secrets and other intellectual property directly related and
important to our business.
As of December 31, 2006, we had 25 issued U.S. and
international patents and 49 U.S., international and foreign
pending patent applications.
Patent No.
Regime
Filed
Expiration Date
Description
6,254,567
U.S.
2/23/2000
2/26/2019
Addresses fluids requirement by
regenerating dialysate
6,554,789
U.S.
2/25/2000
2/14/2017
Panels defined by seals and
overlying panels
6,572,576
U.S.
7/7/2001
7/2/2021
Leak detection by flow reversal
6,572,641
U.S.
4/9/2001
4/9/2021
Fluid warmer that removes air
6,579,253
U.S.
2/25/2000
2/14/2017
Balancing chambers are defined by
panels of the circuit
6,582,385
U.S.
2/19/1998
2/19/2018
Addresses fluids requirement by
purifying waste
6,589,482
U.S.
2/25/2000
2/14/2017
Panels form a combination to
mutually displace waste and replacement fluid
6,595,943
U.S.
2/25/2000
2/14/2017
Blood pressure control in filter
to optimize throughput
6,638,477
U.S.
2/25/2000
2/14/2017
Divert part of waste stream to
control ultrafiltration or rinse
6,638,478
U.S.
2/25/2000
2/14/2017
Mechanically coupled flow
assemblies that balance flow of incoming and outgoing fluid
streams, respectively
6,649,063
U.S.
7/12/2001
10/7/2021
Using the filter to generate
sterile replacement fluid
6,673,314
U.S.
2/25/2000
2/14/2017
Supply notification including
third-party notification by network
6,702,561
U.S.
7/12/2001
9/8/2021
Potting distribution channel
molded into filter housing
6,743,193
U.S.
7/17/2001
7/17/2021
Hermetic valve design
6,830,553
U.S.
2/25/2000
2/14/2017
Sterile filter in replacement
fluid line
6,852,090
U.S.
5/24/2001
12/10/2017
Balancing chambers are defined by
circuit portions defined in cooperation with the base
6,872,346
U.S.
3/20/2003
5/14/2023
Manufacturing method for filters
using radiant heat to seal filter fibers
6,955,655
U.S.
6/27/2001
10/7/2017
Frequent treatment with simple
setup
6,979,309
U.S.
1/7/2002
6/19/2017
New frequent hemofiltration
7,004,924
U.S.
10/19/1998
2/11/2018
Methods, systems, and kits for the
extracorporeal processing of blood
7,040,142
U.S.
1/4/2002
2/9/2022
Method and apparatus for leak
detection in blood circuits combining external fluid detection
and air infiltration detection
7,087,033
U.S.
7/8/2002
8/22/2021
Method and apparatus for leak
detection in a fluid line
7,112,273
U.S.
9/26/2003
10/4/2023
Volumetric fluid balance control
for extracorporeal blood treatment
7,147,613
U.S.
3/8/2004
8/29/2020
Measurement of fluid pressure in a
blood treatment device
EP969887
EP (UK)
2/5/1998
2/14/2017
Frequent treatment with simple
setup
Patents for individual products extend for varying periods of
time according to the date a patent application is filed or a
patent is granted and the term of the patent protection
available in the jurisdiction granting the patent. The scope of
protection provided by a patent can vary significantly from
country to country.
In addition to our patents and pending patent applications in
the United States and selected
non-U.S. markets,
we possess trade secrets and proprietary know-how relating to
our products. Any of our trade secrets, know-how or other
technology not protected by a patent could be misappropriated,
or independently developed by, a competitor and could, if
independently invented and patented by a competitor, under some
circumstances, be used to prevent us from further use of such
secrets.
Our strategy is to develop patent portfolios for our research
and development projects. We monitor the activities of our
competitors and other third parties with respect to their use of
intellectual property. We intend to aggressively defend the
patents we hold, and we intend to vigorously contest claims
other patent holders may bring against us.
The medical device industry is characterized by the existence of
a large number of patents and frequent litigation based on
allegations of patent infringement. While we attempt to ensure
that our products and methods do not infringe other
parties’ patents and proprietary rights, our competitors
may assert that our products, or the methods that we employ, are
covered by patents held by them. In addition, our competitors
may assert that future products and methods we may market
infringe their patents.
We require our employees, consultants and advisors to execute
confidentiality agreements in connection with their employment,
consulting or advisory relationship with us. We also require our
employees to agree to disclose and assign to us all inventions
conceived by them during their employment with us. Similar
obligations are imposed upon consultants and advisors performing
work for us relating to the design or manufacture of our
products. Despite efforts taken to protect our intellectual
property, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as
proprietary.
The manufacture of our products is accomplished through a
complementary combination of outsourcing and internal
production. Specifically, we assemble, package and label our
PureFlow SL disposables within our 45,000 square foot
facility in Lawrence, Massachusetts and 24,000 square foot
facility in North Andover, Massachusetts. We recently commenced
manufacture of PureFlow SL disposables in Fresnillo, Mexico. We
also manufacture our dialyzers internally, within our
5,000 square foot facility in Rosdorf, Germany. We
outsource the manufacture of our disposable cartridges, premixed
dialysate and the System One cycler, although we have just
initiated internal manufacture of the cycler as well in
Fresnillo, Mexico.
We have single-source suppliers of components, but in most
instances there are alternative sources of supply available.
Where obtaining a second source is more difficult, we have tried
to establish supply agreements that better protect our
continuity of supply. These agreements, currently in place with
several key suppliers, are intended to establish commitments to
supply product. We do not have supply agreements in place with
all of our single-source suppliers.
We have certain agreements that grant certain suppliers
exclusive or semi-exclusive supply rights. In January 2007, we
entered into a long-term supply agreement with Membrana GmbH
pursuant to which Membrana has agreed to supply, on an exclusive
basis, capillary membranes for use in the filters used with the
System One for ten years. In exchange for Membrana’s
agreement to pricing reductions based on volumes ordered, we
have agreed to purchase a base amount of membranes per year. The
agreement may be terminated upon a material breach, generally
following a 60-day cure period.
In January 2007 we also entered into a seven-year agreement with
MDS pursuant to which MDS will supply to us no less than 90% of
our North American requirements for disposable cartridges for
use with the System One. The agreement may be terminated upon a
material breach, generally following a 120-day cure period. MDS
is a related party to NxStage. David Utterberg, the president
and sole stockholder of MDS, is a director and significant
stockholder of NxStage. In accordance with our Audit Committee
Charter, the MDS supply agreement was approved by our audit
committee as well as our board of directors.
KMC Systems, Inc. manufactures the System One cycler for us
pursuant to an agreement that obligates KMC to continue to
provide product to us at least through mid-2008. This agreement
also allows us the option
to manufacture for ourself an increasing portion of cyclers as
we deem appropriate over the remaining term. The contract may be
terminated upon a material breach, generally following a
30-day cure
period.
We purchase bicarbonate-based premixed dialysate from B. Braun
and our lactate-based premixed dialysate from Laboratorios PISA.
We have a long-term supply agreement with B. Braun that
obligates B. Braun to supply the dialysate to us through 2009 in
exchange for modest minimum purchase requirements of
approximately $100,000 per year. The contract may be terminated
upon a material breach, generally following a
30-day cure
period. We have entered into a supply agreement with PISA that
obligates PISA to supply dialysate to us through 2008 in
exchange for annual purchase commitments of approximately
$1.0 million. The contract may be terminated upon a
material breach, generally following a
30-day cure
period.
We are currently purchasing our PureFlow SL module and chassis
from Enercon. We are operating under a short-term supply
agreement with Enercon that obligates Enercon to supply this
equipment to us through July 2007. There are no minimums or
exclusivity clauses associated with this agreement, and the
agreement renews on a year-to-year basis, unless prior written
notice is given by either party. The contract may be terminated
upon a material breach, generally following a
30-day cure
period.
In the United States, our products are subject to regulation by
the FDA, which regulates our products as medical devices. The
FDA regulates the clinical testing, manufacture, labeling,
distribution, import and export, sale and promotion of medical
devices. Noncompliance with applicable FDA requirements can
result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant
pre-market clearance or pre-market approval for devices,
withdrawal of marketing clearances or approvals and criminal
prosecution.
Unless an exemption applies, all medical devices must receive
either prior 510(k) clearance or pre-market approval from the
FDA before they may be commercially distributed in the United
States. Submissions to obtain 510(k) clearance and pre-market
approval must be accompanied by a user fee, unless exempt. In
addition, the FDA can also impose restrictions on the sale,
distribution or use of devices at the time of their clearance or
approval, or subsequent to marketing.
The FDA classifies medical devices into one of three classes:
Class I, Class II or Class III —
depending on the FDA’s assessment of the degree of risk
associated with the device and the controls it deems necessary
to reasonably ensure the device’s safety and effectiveness.
The FDA has deemed our System One to be a Class II medical
device and we have marketed it as such in the United States.
Class I devices are those for which safety and
effectiveness can be assured by adherence to a set of general
controls, which include compliance with facility registration
and product listing requirements, reporting of adverse events,
and appropriate, truthful and non-misleading labeling,
advertising and promotional materials. Class II devices are
also subject to these same general controls, as well as any
other special controls deemed necessary by the FDA to ensure the
safety and effectiveness of the device. These special controls
can include performance standards, post-market surveillance,
patient registries and FDA guidelines. Pre-market review and
clearance by the FDA for Class II devices is accomplished
through the 510(k) pre-market notification procedure, unless the
device is exempt. When 510(k) clearance is required, a
manufacturer must submit a pre-market notification to the FDA
demonstrating that the proposed device is substantially
equivalent in intended use and in safety and effectiveness to a
legally marketed device that is not subject to pre-market
approval, i.e., a device that was legally marketed prior to
May 28, 1976 and for which the FDA has not yet required
pre-market approval; a device which has been reclassified from
Class III to Class II or I; or a novel device
classified into Class I or II through de novo
classification. If the FDA agrees that the device is
substantially equivalent to the predicate, it will subject the
device to the same classification and degree of regulation as
the predicate device, thus effectively granting clearance to
market it. After a device receives 510(k) clearance, any
modification that could significantly affect its safety or
effectiveness, or that would constitute a major change in its
intended use, requires a new 510(k) clearance or possibly a
pre-market approval. Class III devices are
devices for which insufficient information exists that general
or special controls will provide reasonable assurance of safety
and effectiveness, and the devices are life-sustaining,
life-supporting, or implantable, or of substantial importance in
preventing the impairment of human health, or present a
potential, unreasonable risk of illness or injury.
Class III devices requiring an approved pre-market approval
application to be marketed are devices that were regulated as
new drugs prior to May 28, 1976, devices not found
substantially equivalent to devices marketed prior to
May 28, 1976 and Class III
pre-amendment
devices, which are devices introduced in the U.S. market
prior to May 28, 1976, that by regulation require
pre-market approval.
FDA
Regulatory Clearance Status
We currently have all of the regulatory clearances required to
market the System One in the United States in both the chronic
and critical care markets. The FDA has cleared the System One
for the treatment, under a physician’s prescription, of
renal failure or fluid overload using hemofiltration,
hemodialysis
and/or
ultrafiltration. The FDA has also specifically cleared the
System One for home hemodialysis use under a physician’s
prescription.
We received our first clearance from the FDA for a predecessor
model to the System One in January 2001 for hemofiltration and
ultrafiltration. In July 2003, we received expanded clearance
from the FDA for the System One for hemodialysis, hemofiltration
and ultrafiltration. Most recently, in June 2005, we received
FDA clearance specifically allowing us to promote home
hemodialysis using the System One. We have received a total of
20 product clearances from the FDA since our inception in
December 1998. We continue to seek opportunities for product
improvements and feature enhancements, which will, from time to
time, require FDA clearance before market launch.
FDA
Clearance Procedures
510(k) Clearance Pathway. When we are required
to obtain a 510(k) clearance for a device, which we wish to
market, we must submit a pre-market notification to the FDA
demonstrating that the device is substantially equivalent to a
device that was legally marketed prior to May 28, 1976 and
for which the FDA has not yet required pre-market approval; a
device which has been reclassified from Class III to
Class II or I; or a novel device classified into
Class I or II through de novo classification. The FDA
attempts to respond to a 510(k) pre-market notification within
90 days of submission of the notification (or in some
instances 30 days under what is referred to as
“special” 510(k) submission), but the response may be
a request for additional information or data, sometimes
including clinical data. As a practical matter, pre-market
clearance can take significantly longer, including up to one
year or more.
After a device receives 510(k) clearance for a specific intended
use, any modification that could significantly affect its safety
or effectiveness, or that constitutes a major change in its
intended use, would require a new 510(k) clearance or could
require pre-market approval. In the first instance, the
manufacturer may determine that a change does not require a new
510(k) clearance. The FDA can review any such decision and can
disagree with a manufacturer’s determination. If the FDA
disagrees with a manufacturer’s determination that a new
clearance or approval is not required for a particular
modification, the FDA can require the manufacturer to cease
marketing
and/or
recall the modified device until 510(k) clearance or pre-market
approval is obtained.
Pre-market Approval Pathway. A pre-market
approval application must be submitted if the device cannot be
cleared through the 510(k) process. The pre-market approval
process is much more demanding than the 510(k) pre-market
notification process. A pre-market approval application must be
supported by extensive data and information including, but not
limited to, technical, preclinical, clinical trials,
manufacturing and labeling to demonstrate to the FDA’s
satisfaction the safety and effectiveness of the device.
After the FDA determines that a pre-market approval application
is complete, the FDA accepts the application and begins an
in-depth review of the submitted information. The FDA, by
statute and regulation, has 180 days to review an accepted
pre-market approval application, although the review generally
occurs over a significantly longer period of time, and can take
up to several years. During this review period, the FDA may
request additional information or clarification of information
already provided. Also during the review
period, an advisory panel of experts from outside the FDA may be
convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA will conduct a pre-approval
inspection of the manufacturing facility to ensure compliance
with the Quality System Regulations. New pre-market approval
applications or supplemental pre-market approval applications
are required for significant modifications to the manufacturing
process, labeling, use and design of a device that is approved
through the pre-market approval process. Pre-market approval
supplements often require submission of the same type of
information as a pre-market approval application, except that
the supplement is limited to information needed to support any
changes from the device covered by the original pre-market
approval application, and may not require as extensive clinical
data or the convening of an advisory panel.
Clinical Trials. A clinical trial is almost
always required to support a pre-market approval application and
is sometimes required for a 510(k) pre-market notification.
Clinical trials for devices that involve significant risk,
referred to as significant risk devices, require submission of
an application for an investigational device exemption, or IDE,
to the FDA. 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. Clinical trials for a
significant risk device may begin once the IDE application is
approved by the FDA and the institutional review board, or IRB,
overseeing the clinical trial. If FDA fails to respond to an IDE
application within 30 days of receipt, the application is
deemed approved, but IRB approval would still be required before
a study could begin. Products that are not significant risk
devices are deemed to be “non-significant risk
devices” under FDA regulations, and are subject to
abbreviated IDE requirements, including informed consent, IRB
approval of the proposed clinical trial, and submitting certain
reports to the IRB. Clinical trials are subject to extensive
recordkeeping and reporting requirements. Our clinical trials
must be conducted under the oversight of an IRB at each clinical
study site and in accordance with applicable regulations and
policies including, but not limited to, the FDA’s good
clinical practice, or GCP, requirements.
Continuing
FDA Regulation
After a device is placed on the market, numerous regulatory
requirements apply. These include, among others:
•
Quality System Regulations, which require manufacturers to have
a quality system for the design, manufacture, packaging,
labeling, storage, installation, and servicing of finished
medical devices;
•
labeling regulations, which govern product labels and labeling,
prohibit the promotion of products for unapproved, or off-label,
uses and impose other restrictions on labeling and promotional
activities;
•
medical device reporting, or MDR, regulations, which require
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 recur; and
•
recalls and notices of correction or removal.
MDR Regulations. The MDR regulations require
that we 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 a death or serious
injury. At December 31, 2006, we had submitted 266 MDRs.
Most of these have been submitted to comply with FDA’s
blood loss policy for routine dialysis treatments. This policy
requires manufacturers to file MDR reports related to routine
dialysis treatments if the patient experiences blood loss
greater than 20cc.
FDA Inspections. We have registered with the
FDA as a medical device manufacturer. The FDA seeks to ensure
compliance with regulatory requirements through periodic,
unannounced facility inspections by the FDA, and these
inspections may include the manufacturing facilities of our
subcontractors. Failure to comply
with applicable regulatory requirements can result in
enforcement action by the FDA, which may include any of the
following:
•
warning letters or untitled letters;
•
fines, injunctions, and civil penalties;
•
administrative detention;
•
voluntary or mandatory recall or seizure of our products;
•
customer notification, or orders for repair, replacement or
refund;
•
operating restrictions, partial suspension or total shutdown of
production;
•
refusal to review pre-market notification or pre-market approval
submissions;
•
rescission of a substantial equivalence order or suspension or
withdrawal of a pre-market approval; and
•
criminal prosecution.
The FDA has inspected our facility and quality systems three
times. In our first inspection, one observation was made, but
was rectified during the inspection, requiring no further
response from us. Our last two inspections, including our most
recent inspection in March 2006, resulted in no observations. We
cannot provide assurance that we can maintain a comparable level
of regulatory compliance in the future at our facilities.
Clearance or approval of our products by regulatory authorities
comparable to the FDA may be necessary in foreign countries
prior to the commencement of marketing of the product in those
countries, whether or not FDA clearance has been obtained. The
regulatory requirements for medical devices vary significantly
from country to country. They can involve requirements for
additional testing and may be time consuming and expensive. We
have not sought approval for our products outside of the United
States, Canada and the European Union. We cannot provide
assurance that we will be able to obtain regulatory approvals in
any other markets.
The System One cycler and related cartridges are regulated as
medical devices in Canada under the Canadian Medical Device
Regulations and in the European Union, or EU, under the Medical
Device Directive. We have received four product licenses from
Canada, although these licenses are not up to date to reflect
the product that is currently being marketed in the United
States. Although we have obtained CE marking approval in the EU
for our System One, this CE marking is not up to date. Before we
would be able to market our current products in the EU, we would
be required to submit additional regulatory documentation. We
are not currently marketing any products in Canada or in the EU.
The federal healthcare program Anti-Kickback Statute prohibits
persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual
for, or the furnishing, arranging for or recommending a good or
service for which payment may be made in whole or part under a
federal healthcare program such as Medicare or Medicaid. The
definition of remuneration has been broadly interpreted to
include anything of value, including for example gifts,
discounts, the furnishing of supplies or equipment, credit
arrangements, payments of cash and waivers of payments. Several
courts have interpreted the statute’s intent requirement to
mean that if any one purpose of an arrangement involving
remuneration is to induce referrals or otherwise generate
business involving goods or services reimbursed in whole or in
part under federal healthcare programs, the statute has been
violated. The law contains a few statutory exceptions, including
payments to bona fide employees, certain discounts and certain
payments to group purchasing organizations. Violations can
result in significant penalties, imprisonment and exclusion from
Medicare, Medicaid and other federal healthcare programs.
Exclusion of a manufacturer would
preclude any federal healthcare program from paying for its
products. In addition, kickback arrangements can provide the
basis for an action under the Federal False Claims Act, which is
discussed in more detail below.
The Anti-Kickback Statute is broad and potentially prohibits
many arrangements and practices that are lawful in businesses
outside of the healthcare industry. Recognizing that the
Anti-Kickback Statute is broad and may technically prohibit many
innocuous or beneficial arrangements, the Office of Inspector
General of Health and Human Services, or OIG, issued a series of
regulations, known as the safe harbors, beginning in July 1991.
These safe harbors set forth provisions that, if all the
applicable requirements are met, will assure healthcare
providers and other parties that they will not be prosecuted
under the Anti-Kickback Statute. The failure of a transaction or
arrangement to fit precisely within one or more safe harbors
does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that
do not fully satisfy each applicable safe harbor may result in
increased scrutiny by government enforcement authorities such as
the OIG. Arrangements that implicate the Anti-Kickback Law, and
that do not fall within a safe harbor, are analyzed by the OIG
on a
case-by-case
basis.
Government officials have focused recent enforcement efforts on,
among other things, the sales and marketing activities of
healthcare companies, and recently have brought cases against
individuals or entities with personnel who allegedly offered
unlawful inducements to potential or existing customers in an
attempt to procure their business. Settlements of these cases by
healthcare companies have involved significant fines
and/or
penalties and in some instances criminal pleas.
In addition to the Federal Anti-Kickback Law, many states have
their own kickback laws. Often, these laws closely follow the
language of the federal law, although they do not always have
the same exceptions or safe harbors. In some states, these
anti-kickback laws apply with respect to all payors, including
commercial health insurance companies.
False
Claims Laws
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government or knowingly making, or
causing to be made, a false statement to get a false claim paid.
Manufacturers can be held liable under false claims laws, even
if they do not submit claims to the government, if they are
found to have caused submission of false claims. The Federal
Civil False Claims Act also includes whistle blower provisions
that allow private citizens to bring suit against an entity or
individual on behalf of the United States and to recover a
portion of any monetary recovery. Many of the recent highly
publicized settlements in the healthcare industry related to
sales and marketing practices have been cases brought under the
False Claims Act. The majority of states also have statutes or
regulations similar to the federal false claims laws, which
apply to items and services reimbursed under Medicaid and other
state programs, or, in several states, apply regardless of the
payor. Sanctions under these federal and state laws may include
civil monetary penalties, exclusion of a manufacturer’s
products from reimbursement under government programs, criminal
fines, and imprisonment.
Privacy
and Security
The Health Insurance Portability and Accountability Act of 1996,
or HIPAA, and the rules promulgated thereunder require certain
entities, referred to as covered entities, to comply with
established standards, including standards regarding the privacy
and security of protected health information, or PHI. HIPAA
further requires that covered entities enter into agreements
meeting certain regulatory requirements with their business
associates, as such term is defined by HIPAA, which, among other
things, obligate the business associates to safeguard the
covered entity’s PHI against improper use and disclosure.
While not directly regulated by HIPAA, a business associate may
face significant contractual liability pursuant to such an
agreement if the business associates breaches the agreement or
causes the covered entity to fail to comply with HIPAA. In the
course of our business operations, we have entered into several
business associate agreements with certain of our customers that
are also covered entities. Pursuant to the terms of these
business associate agreements, we have agreed, among other
things, not to use or further disclose the covered entity’s
PHI except as permitted or required by the agreements or as
required by law, to use reasonable safeguards to prevent
prohibited disclosure of such PHI and to report to the covered
entity
any unauthorized uses or disclosures of such PHI. Accordingly,
we incur compliance related costs in meeting HIPAA-related
obligations under business associate agreements to which we are
a party. Moreover, if we fail to meet our contractual
obligations under such agreements, we may incur significant
liability.
In addition, HIPAA’s criminal provisions could potentially
be applied to a non-covered entity that aided and abetted the
violation of, or conspired to violate HIPAA, although we are
unable at this time to determine conclusively whether our
actions could be subject to prosecution in the event of an
impermissible disclosure of health information to us. Also, many
state laws regulate the use and disclosure of health
information, and are not necessarily preempted by HIPAA, in
particular those laws that afford greater protection to the
individual than does HIPAA. Finally, in the event we change our
business model and become a HIPAA covered entity, we would be
directly subject to HIPAA, its rules and its civil and criminal
penalties.
Medicare regulations require that all chronic ESRD patients be
under the care of a dialysis clinic, whether they are treated at
home or in-clinic. We rent or sell our System One to dialysis
clinics; these clinics are, in turn, reimbursed by Medicare,
Medicaid and private insurers. According to the 2005 USRDS
report, Medicare is the primary payor for approximately 81% of
patients using hemodialysis and PD. It is believed that 15% of
patients are covered by commercial insurance, with the remaining
4% of patients classified by the USRDS as “other” or
“unknown”. Certain centers have reported that the
NxStage daily home dialysis therapy attracts a higher percentage
of commercial insurance patients than other forms of dialysis.
Medicare. Medicare generally provides health
insurance coverage for persons who are age 65 or older and
for persons who are completely disabled. For ESRD patients,
however, Medicare coverage is not dependent on age or
disability. For patients eligible for Medicare based solely on
ESRD, generally patients under age 65, Medicare eligibility
begins three months after the month in which the patient begins
dialysis treatments. During this three-month waiting period
either Medicaid, private insurance or the patient is responsible
for payment for dialysis services. Medicare generally waives
this waiting period for individuals who participate in a
self-care dialysis training program, or are hospitalized for a
kidney transplant and the surgery occurs within a specified time
period.
For ESRD patients under age 65 who have any employer group
health insurance coverage, regardless of the size of the
employer or the individual’s employment status, Medicare
coverage is generally secondary to the employer coverage during
the 30-month
period that follows the establishment of Medicare eligibility or
entitlement based on ESRD. During the period, the patient’s
existing insurer is responsible for paying primary benefits at
the rate specified in the plan, which may be a negotiated rate
or the healthcare provider’s usual and customary rate. As
the secondary payor during this period, Medicare will make
payments up to the applicable composite rate for dialysis
services reimbursed based on the composite rate to supplement
any primary payments by the employer group health plan if the
plan covers the services but pays only a portion of the charge
for the services.
Medicare generally is the primary payor for ESRD patients after
the 30-month
period. Under current rules, Medicare is also the primary payor
for ESRD patients during the
30-month
period under certain circumstances. Medicare remains the primary
payor when an individual becomes eligible for Medicare on the
basis of ESRD if, (1) the individual was already
age 65 or over or was eligible for Medicare based on
disability and (2) the individual’s private insurance
coverage is not by reason of current employment or, if it is,
the employer has fewer than 20 employees in the case of
eligibility by reason of age, or fewer than 100 employees in the
case of eligibility by reason of disability. The rules regarding
entitlement to primary Medicare coverage when the patient is
eligible for Medicare on the basis of both ESRD and age, or
disability, have been the subject of frequent legislative and
regulatory changes in recent years and there can be no assurance
that these rules will not be unfavorably changed in the future.
When Medicare is the primary payor for services furnished by
dialysis clinics, it reimburses dialysis clinics for 80% of the
composite rate, leaving the secondary insurance or the patient
responsible for the remaining 20%. The Medicare composite rate
is set by Congress and is intended to cover virtually all costs
associated with each dialysis treatment, excluding physician
services and certain separately billable drugs and laboratory
services.
There is some regional variation in the composite rate, but, the
national average for the last three quarters of 2007 is
currently approximately $152 per treatment for independent
clinics and $157 per treatment for hospital-based dialysis
facilities. This is an increase from approximately $149 per
treatment for independent clinics and $154 per treatment
for hospital-based dialysis facilities in 2006, due to two
recent changes in Medicare reimbursement. As a result of
legislation enacted in 2003 and first implemented in 2005, the
Centers for Medicare and Medicaid Services, or CMS, shifted a
portion of Medicare reimbursement dollars for dialysis from
separately billable drugs to the composite rate for dialysis
services. This drug add-on to the composite rate is subject to
an increase based on the estimated rate of growth of drugs and
biologicals. For 2007, an additional 0.5% has been shifted from
separately billable drugs to the composite rate. In addition,
Congress recently passed an additional 1.6% increase to the
composite rate for treatments received on or after April, 2007.
Depending upon patient case mix, reimbursement may be further
improved, based on the case-mix adjustment to the composite rate
implemented as a result of the 2003 legislation. Under the
case-mix adjustment, Medicare now pays more for larger patients
and those under the age of 65. This may be beneficial to our
customers, as to date our patient population has tended to be
younger and larger than the ESRD national average.
CMS rules limit the number of hemodialysis treatments paid for
by Medicare to three per week, unless there is medical
justification for the additional treatments. The determination
of medical justification must be made at the local Medicare
contractor level on a
case-by-case
basis. A clinic’s decision as to how much it is willing to
spend on dialysis equipment and services will be at least partly
dependent on whether Medicare will reimburse more than three
treatments per week for the clinic’s patients.
Medicaid. Medicaid programs are
state-administered programs partially funded by the federal
government. These programs are intended to provide coverage for
certain categories of patients whose income and assets fall
below state defined levels and who are otherwise uninsured. For
those who are eligible, the programs serve as supplemental
insurance programs for the Medicare co-insurance portion and
provide certain coverage, for example, self-administered
outpatient prescription medications, that is not covered by
Medicare. For ESRD treatment, state regulations generally follow
Medicare reimbursement levels and coverage without any
co-insurance amounts, which is pertinent mostly for the
three-month waiting period. Certain states, however, require
beneficiaries to pay a monthly share of the cost based upon
levels of income or assets.
Private Insurers. Some ESRD patients have
private insurance that covers dialysis services. Healthcare
providers receive reimbursement for ESRD treatments from the
patient or private insurance during a waiting period of up to
three months before the patient becomes eligible for Medicare.
In addition, if the private payor is an employer group health
plan, it is generally required to continue to make primary
payments for dialysis services during the
30-month
period following eligibility or entitlement to Medicare. In
general, employers may not reduce coverage or otherwise
discriminate against ESRD patients by taking into account the
patient’s eligibility or entitlement to Medicare benefits.
It is generally believed that private insurance pays
significantly more for dialysis services than Medicare and these
patients with private insurance are generally viewed as more
profitable to dialysis service providers.
Critical
Care
For Medicare patients, both acute kidney failure and fluid
overload therapies provided in an in-patient hospital setting
are reimbursed under a traditional diagnosis related group, or
DRG, system. Under this system, reimbursement is determined
based on a patient’s primary diagnosis and is intended to
cover all costs of treating the patient. The presence of acute
kidney failure or fluid overload increases the severity of the
primary diagnosis and, accordingly, could increase the amount
reimbursed. The longer hospitalization stays and higher labor
needs, which are typical for patients with acute kidney failure
and fluid overload, must be managed for care of these patients
to be cost-effective. We believe that there is a significant
incentive for hospitals to find a more cost-efficient way to
treat these patients in order to improve hospital economics for
these therapies.
As of July 31, 2007, we had 260 full-time employees, 3
part-time employees and 61 seasonal or temporary employees.
From time to time we also employ independent contractors to
support our engineering, marketing, sales, clinical and
administrative organizations.
You should read the following discussion and analysis of our
financial condition and results of operations together with our
consolidated financial statements and related notes included
elsewhere in this proxy statement. Some information contained in
this discussion and analysis or set forth elsewhere in this
proxy statement, including information with respect to our plans
and strategy for our business, future events and future
financial performance, includes forward-looking statements that
involve risks and uncertainties. You should review the
“Risk Factors” section of this proxy statement for a
discussion of important factors that could cause actual result
to differ materially from the results described in or implied by
the forward-looking statements contained in the following
discussion and analysis.
Membrana. In January 2007, we entered into a
long-term supply agreement with Membrana, pursuant to which
Membrana has agreed to supply, on an exclusive basis, capillary
membranes for use in the filters used with the System One for
ten years. In exchange, for Membrana’s agreement to pricing
reductions based on volumes ordered, we have agreed to purchase
a base amount of membranes per year. The agreement may be
terminated upon a material breach, generally following a
60-day cure
period.
Entrada. On March 13, 2007, we entered
into a long-term agreement with the Entrada Group, or Entrada,
to establish manufacturing and service operations in Mexico,
initially for our cycler and PureFlow SL disposables and later
for our PureFlow SL hardware. The agreement obligates Entrada to
provide us with manufacturing space, support services and a
labor force through 2012.
MDS Stock Purchase. As discussed above, on
June 4, 2007 we entered into a stock purchase agreement
with Mr. Utterberg, who is a member of our board of
directors and owns 6.7% of our outstanding common stock,
pursuant to which we will acquire all of the outstanding equity
of each MDS Entity and each MDS Entity will become a
wholly-owned subsidiary of ours. Mr. Utterberg will receive
6,500,000 shares of our common stock, subject to a
post-closing working capital adjustment as consideration for the
Stock Purchase. In addition, in connection with the Stock
Purchase, we will enter into a consulting agreement with
Mr. Utterberg, pursuant to which he will receive
$200,000 per year, plus expenses, for a period of
two years following the closing of the Stock Purchase.
Product Reliability Issue. In the second
quarter of 2007, we started to experience an increased incidence
of reported dialysate leaks associated with our System One
cartridges. The reported incidence of leaks is higher than we
have historically observed. When the System One is used in
accordance with its instructions, these leaks present no risk to
patient health. System One device labeling anticipates the
potential for leaks to occur and specifically warns against
leaks and alerts users of the need to observe treatments in
order to detect leaks. Four patients with reported leaks, that
were unobserved by these patients or their partners until after
their treatments were terminated, reported hypotension, or low
blood pressure, resolved by a fluid bolus, with no lasting
clinical effect. In early August 2007, we sent a letter to our
patients and customers informing them of the increased incidence
in leaks and reminding them of existing System One labeling
alerting users of the potential for leaks and instructing them
to observe treatments in order to detect any leaks. We have
characterized this notification as a voluntary recall. On
August 24, 2007, we elected to initiate a second step in
our recall actions, and decided to physically recall the
affected lots of cartridge inventory being held by chronic
market customers and patients, and replace the affected
inventory with newer lots of cartridges at no charge. We have
instructed patients and customers to destroy all inventory of
affected cartridges they have on hand, and we expect to
write-off up to all of the inventory of affected cartridges we
have in-house. It is possible that we may be able to rework this
cartridge inventory, or reuse certain components of this
inventory, but we have not made a final determination related to
this recovery.
Based on these facts, we determined on August 24, 2007 that
we would incur total charges in connection with this recall in
the range of $1.9 million to $2.5 million, the
principal component of which relates to the write-off of
inventory in the range of $1.8 million to
$2.2 million. Other charges primarily relate to increased
shipping for replacement product and cycler servicing costs.
Substantially all of these charges would be recorded in the
quarter ending September 30, 2007.
The increased incidence in leaks has also been associated with
increased cycler service requirements, which have led to
increased service costs as well as imposed additional service
pool requirements on our cycler inventory. In the short term,
this may impede our ability to meet customer demand.
Resignation of Chief Operating Officer. On
August 28, 2007, Philip R. Licari, our Senior Vice
President and Chief Operating Officer, announced his intention
to resign from NxStage effective upon the completion of the
Stock Purchase.
We are a medical device company that develops, manufactures and
markets innovative systems for the treatment of end-stage renal
disease, or ESRD, acute kidney failure and fluid overload. Our
primary product, the System One, is a small, portable,
easy-to-use hemodialysis system designed to provide physicians
and patients improved flexibility in how hemodialysis therapy is
prescribed and delivered. We believe the largest market
opportunity for our product is the home hemodialysis market for
the treatment of ESRD.
From our inception in 1998 until 2002, our operations consisted
primarily of
start-up
activities, including designing and developing the System One,
recruiting personnel and raising capital. Historically, research
and development costs have been our single largest operating
expense. However, with the launch of the System One in the home
chronic care market, selling and marketing costs became our
largest operating expense in 2005 and this trend continued
during the three and six months ended June 30, 2007 as we
expanded our United States sales force to penetrate our markets
and grow revenues.
Our overall strategy since inception has been to (a) design
and develop new products for the treatment of kidney failure,
(b) establish that the products are safe, effective and
cleared for use in the United States, (c) further enhance
the product design through field experience from a limited
number of customers, (d) establish reliable manufacturing
and sources of supply, (e) execute a market launch in both
the chronic and critical care markets and establish the System
One as a preferred system for the treatment of kidney failure,
(f) obtain the capital necessary to finance our working
capital needs and build our business and (g) achieve
profitability. The evolution of NxStage, and the allocation of
our resources since we were founded, reflects this plan. We
believe we have largely completed steps (a) through (d),
and we plan to continue to pursue the other strategic objectives
described above.
We sell our products in two markets: the chronic care market and
the critical care market. We define the chronic care market as
the market devoted to the treatment of patients with ESRD and
the critical care market as the market devoted to the treatment
of hospital-based patients with acute kidney failure or fluid
overload. We offer a different configuration of the System One
for each market. The United States Food and Drug Administration,
or FDA, has cleared both configurations for hemodialysis,
hemofiltration and ultrafiltration. Our products may be used by
our customers to treat patients suffering from either condition,
although the site of care, the method of delivering care and the
duration of care are sufficiently different that we have
separate marketing and sales efforts dedicated to each market.
We received clearance from the FDA in July 2003 to market the
System One for treatment of renal failure and fluid overload
using hemodialysis as well as hemofiltration and
ultrafiltration. In the first quarter of 2003, we initiated
sales of the System One in the critical care market to hospitals
and medical centers in the United States. In late 2003, we
initiated sales of the System One in the chronic care market and
commenced full commercial introduction in the chronic care
market in September 2004 in the United States. At the time of
these early marketing efforts, our System One was cleared by the
FDA under a general indication statement, allowing physicians to
prescribe the System One for hemofiltration, hemodialysis
and/or
ultrafiltration at the location, time and frequency they
considered in the best interests of their patients. Our original
indication did not include a specific home clearance, and we
were not able to promote the System One for home use at that
time. The FDA cleared our System One in June 2005 for
hemodialysis in the home.
In March 2006, we received clearance from the FDA to market our
PureFlow SL module as an alternative to the bagged fluid
presently used with our System One in the chronic care market.
This accessory to the System One allows for the automated
preparation of high purity dialysate in the patient’s home
using ordinary tap water and dialysate concentrate. The PureFlow
SL is designed to help patients with ESRD more conveniently and
effectively manage their home hemodialysis therapy by
eliminating the need for bagged fluids. In July 2006, we
released the PureFlow SL for commercial use and began shipping
the PureFlow SL product. Our experience suggests that our
chronic care home patients will predominantly use our PureFlow
SL module at home and will use bagged fluid for travel and
outside of the home. Bagged fluids will continue to be used in
the critical care market.
Medicare provides comprehensive and well-established
reimbursement in the United States for ESRD. Reimbursement
claims for the System One therapy are typically submitted by the
dialysis clinic or hospital to Medicare and other third-party
payors using established billing codes for dialysis treatment
or, in the critical care setting, based on the patient’s
primary diagnosis. Expanding Medicare reimbursement over time to
cover more frequent therapy could accelerate our market
penetration and revenue growth in the future.
Our System One is produced through internal and outsourced
manufacturing. We purchase many of the components and
subassemblies included in the System One, as well as the
disposable cartridges used in the System One, from third-party
manufacturers, some of which are single source suppliers. In
addition to outsourcing with third-party manufacturers, we
assemble, package and label a quantity of disposable products in
our leased facilities in Lawrence, Massachusetts and North
Andover, Massachusetts as well as in our facilities in Mexico
provided to us by the Entrada Group. NxStage GmbH &
Co. KG, our wholly-owned German subsidiary, is the sole
manufacturer of the dialyzing filter that is a component of the
disposable cartridge used in the System One and the ultrafilter
used in the PureFlow SL.
We market the System One through a direct sales force in the
United States primarily to dialysis clinics and hospitals, and
we expect revenues to continue to increase in the near future.
Our revenues were $10.0 million for the three months ended
June 30, 2007, a 121% increase from revenues of
$4.5 million in the three months ended June 30, 2006,
and a 20% increase from revenues of $8.4 million in the
first quarter of 2007. Our revenues were $18.4 million for
the six months ended June 30, 2007, a 132% increase from
revenues of $7.9 million in the six months ended
June 30, 2006. We have increased the number of sales
representatives in our combined sales force from 27 at
June 30, 2006 to 31 at June 30, 2007. During the
remainder of 2007, we expect to add additional sales and
marketing personnel as needed for the remainder of 2007. As of
June 30, 2007, 1,615 ESRD patients were using the System
One at 265 dialysis clinics, compared to 663 ESRD patients at
126 dialysis clinics as of June 30, 2006, and compared to
1,022 ESRD patients at 174 dialysis clinics as of
December 31, 2006. In addition, as of June 30, 2007,
93 hospitals were using the System One for critical care
therapy, compared to 58 and 77 hospitals as of June 30,2006 and December 31, 2006, respectively.
The following table sets forth the amount and percentage of
revenues derived from each market for the periods indicated:
We have not been profitable since inception, and we expect to
incur net losses for the foreseeable future as we expand our
sales efforts and grow our operations. Our accumulated deficit
at June 30, 2007 was $148.5 million. Our goal is to
increase our sales volume and revenues to gain scale of
operation and to drive product cost reductions, which we
believe, when combined with other design improvements, will
allow us to reach profitability. We expect our revenues in the
chronic care market to increase faster than those in the
critical care market and believe they will continue to represent
the majority of our revenues.
Our product consists of the System One, an electromechanical
device used to circulate the patient’s blood during therapy
(the cycler); a single-use, disposable cartridge, which contains
a preattached dialyzer, and dialysate fluid used in our therapy,
sold either in premixed bags or prepared with our PureFlow SL
module. We distribute our products in two markets: the chronic
care market and the critical care market. We define the chronic
care market as the market devoted to the treatment of ESRD
patients in the home and the critical care market as the market
devoted to the treatment of hospital-based patients with acute
kidney failure or fluid overload. We offer a different
configuration of the System One for each market. The FDA has
cleared both configurations for hemodialysis, hemofiltration and
ultrafiltration. Our product may be used by our customers to
treat patients suffering from either condition and we have
separate marketing and sales efforts dedicated to each market.
We derive our revenue from the sale and rental of equipment and
the sale of the related disposable products. In the critical
care market, we generally sell the System One and disposables to
hospital customers. In the chronic care market, customers rent
or purchase the machine and then purchase the related disposable
products based on a specific patient prescription. We generally
recognize revenue when a product has been delivered to our
customer, or, in the chronic care market, for those customers
that rent the System One, we recognize revenue on a monthly
basis in accordance with a contract under which we supply the
use of a cycler and the amount of disposables needed to perform
a set number of dialysis therapy sessions during a month. For
customers that purchase the System One in the chronic care
market, we recognize revenue from the equipment sale ratably
over the expected service obligation period, while disposable
product revenue is recognized upon delivery.
Our rental contracts with dialysis centers for ESRD patients
generally include terms providing for the sale of disposable
products to accommodate up to 26 treatments per month per
patient and the purchase or monthly rental of System One cyclers
and, in the majority of instances, our PureFlow SL module. These
contracts typically have a term of one year and are cancelable
at any time by the dialysis clinic with 30 days’
notice. Under these contracts, if home hemodialysis is
prescribed, supplies are shipped directly to patient homes and
paid for by the treating dialysis clinic. We also include
vacation delivery terms, providing for the free shipment of
products to a designated vacation destination. We derive an
insignificant amount of revenues from the sale of ancillary
products, such as extra lengths of tubing. Over time, as more
chronic patients are treated with the System One and more
systems are placed in patient homes under monthly agreements
that provide for the rental of the machine and the purchase of
the related disposables, we expect this recurring revenue stream
to continue to grow.
In the first quarter of 2007, we entered into long-term
contracts with three larger dialysis chains, including DaVita,
which was our largest customer during the three months ended
June 30, 2007. Revenues from DaVita represented
approximately 30% of our revenues during the three months ended
June 30, 2007, and we expect revenue from DaVita will
continue to account for a significant portion of our revenues
for the remainder of 2007. Each of these agreements has a term
of at least three years, and may be cancelled upon a material
breach, subject to certain curing rights. These contracts
provide the customer the option to purchase as well as rent the
System One equipment, and, in the case of the DaVita contract,
DaVita has agreed to purchase rather than rent a significant
percentage of its future System One equipment needs. It is not
clear what percentage of our customers, if any, will migrate to
this model, and we expect, at least in the near term, that the
majority of our customers will continue to rent the System One
in the chronic care market.
Cost of revenues consists primarily of direct product costs,
including material and labor required to manufacture our
products, service of System One equipment that we rent and sell
to customers, production overhead and stock-based compensation.
The cost of our products depends on several factors, including
the efficiency of our manufacturing operations, the cost at
which we can obtain labor and products from third party
suppliers, product reliability and related servicing costs and
the design of the products.
We are currently operating at negative gross profit as we
continue to build a base of recurring revenue and reduce product
costs. We expect the cost of revenues as a percentage of
revenues to decline over time for several reasons. First, we
continue to realize increased sales volume and realization of
economies of scale that are bringing improved purchasing terms
and prices, and we are realizing economies of scale that are
providing us with broader options and efficiencies in indirect
manufacturing overhead costs. Second, we have introduced, and
are continuing to introduce, several process and product design
changes, such as our new PureFlow SL module, that are expected
to have inherently lower cost than our current products. Third,
through our relationship with the Entrada Group, we opened a
facility that will move the manufacture of certain of our
products, including the System One cycler and certain
disposables, to lower labor cost markets. Fourth, we are working
to improve product reliability. And finally, we continue to look
for opportunities to vertically integrate the manufacture of our
products that will lead to lower cost, such as with the pending
Medisystems acquisition.
Selling and Marketing. Selling and marketing
expenses consist primarily of salary, benefits and stock-based
compensation for sales and marketing personnel, travel,
promotional and marketing materials and other expenses
associated with providing clinical training to our customers.
Included in selling and marketing are the costs of clinical
educators, usually nurses, we employ to teach our customers
about our products and prepare our customers to instruct their
patients in the operation of the System One. We anticipate that
selling and marketing expenses will continue to increase as we
broaden our marketing initiatives to increase public awareness
of the System One in the chronic care market and as we add
additional sales and marketing personnel.
Research and Development. Research and
development expenses consist primarily of salary, benefits and
stock-based compensation for research and development personnel,
supplies, materials and expenses associated with product design
and development, clinical studies, regulatory submissions,
reporting and compliance and expenses incurred for outside
consultants or firms who furnish services related to these
activities. We expect limited research and development expense
increases in the foreseeable future as we continue to improve
and enhance our core products.
Distribution. Distribution expenses include
the freight cost of delivering our products to our customers or
our customers’ patients, depending on the market and the
specific agreement with our customers, and salary, benefits and
stock-based compensation for distribution personnel. We use
common carriers and freight companies to deliver our products,
and we do not operate our own delivery service. Also included in
this category are the expenses of shipping products from
customers back to our service center for repair if the product
is under warranty, and the related expense of shipping a
replacement product to our customers. We expect that
distribution expenses will increase at a lower rate than revenue
due to expected efficiencies gained from increased business
volume, improvements in product reliability, and the continued
penetration of our PureFlow SL module in the chronic market,
which significantly reduces the weight and quantity of monthly
disposable shipments.
General and Administrative. General and
administrative expenses consist primarily of salary, benefits
and stock-based compensation for our executive management, legal
and finance and accounting staff, fees for outside legal
counsel, fees for our annual audit and tax services and general
expenses to operate the business, including insurance and other
corporate-related expenses. Rent, utilities and depreciation
expense are allocated to operating expenses based on personnel
and square footage usage. We expect that general and
administrative expenses will increase in the near term as we add
additional administrative support for our growing business.
The following table presents, for the periods indicated,
information expressed as a percentage of revenues. This
information has been derived from our condensed consolidated
statements of operations included elsewhere in this proxy
statement. You should not draw any conclusions about our future
results from the results of operations for any period.
Our revenues for the three and six months ended June 30,2007 and 2006 were as follows:
Three Months Ended
June 30,
June 30,
Percentage
2007
2006
Increase
Increase
(In thousands, except percentages)
Revenues
$
10,031
$
4,546
$
5,485
121
%
Six Months Ended
June 30,
June 30,
Percentage
2007
2006
Increase
Increase
(In thousands, except percentages)
Revenues
$
18,405
$
7,947
$
10,458
132
%
The increase in revenues for both the three and six months ended
June 30, 2007 as compared to the same periods in 2006 was
attributable to increased sales and rentals of the System One in
both the critical care and chronic care markets, primarily as a
result of increased sales and marketing efforts as we continue
our commercial launch of the System One. Revenues in the chronic
care market increased to $6.7 million in the three months
ended June 30, 2007 compared to $2.7 million in the
three months ended June 30, 2006, an increase of 153%,
while revenues in the critical care market increased 75% to
$3.3 million in the three months ended June 30, 2007,
compared to $1.9 million in the three months ended
June 30, 2006. Revenues in the
chronic care market increased to $12.2 million during the
six months ended June 30, 2007 compared to
$4.5 million during the six months ended June 30,2006, an increase of 172%, while revenues in the critical care
market increased 80% to $6.2 million during the six months
ended June 30, 2007, compared to $3.5 million during
the six months ended June 30, 2006.
Cost of
Revenues and Gross Profit (Deficit)
Three Months Ended
June 30,
June 30,
Percentage
2007
2006
Increase
Increase
(In thousands, except percentages)
Cost of revenues
$
11,511
$
6,004
$
5,507
92
%
Gross profit (deficit)
$
(1,480
)
$
(1,457
)
$
23
2
%
Gross profit (deficit) percentage
(15
)%
(32
)%
Six Months Ended
June 30,
June 30,
Percentage
2007
2006
Increase
Increase
(In thousands, except percentages)
Cost of revenues
$
21,428
$
10,861
$
10,567
97
%
Gross profit (deficit)
$
(3,023
)
$
(2,914
)
$
109
4
%
Gross profit (deficit) percentage
(16
)%
(37
)%
The increase in cost of revenues was attributable primarily to
our increased revenues. We ended June 30, 2007 with
1,615 patients compared to 663 patients ending
June 30, 2006, contributing to an increase in material cost
of revenues of $4.6 million for the quarter ending
June 30, 2007 compared to the same quarter in 2006. In
addition, cost of revenues increased during the three months
ended June 30, 2007 as compared to the three months ended
June 30, 2006 because of a larger employee base that
resulted in additional salaries, health benefits and payroll
taxes of $647, 000, increased inbound freight costs of $427,000
to support our higher production volume, offset by $392,000 of
favorable materials cost due to volume based supplier contacts.
We added 593 net patients during the six months ended
June 30, 2007 to arrive at 1,615 patients compared to
663 patients ending June 30, 2006, contributing to an
additional material cost of revenues of $8.5 million
compared to the same period in 2006. In addition, cost of
revenues increased during the six months ended June 30,2007 as compared to the six months ended June 30, 2006
because of a larger employee base which resulted in additional
salaries, health benefits and payroll taxes of
$1.5 million, and increased inbound freight costs of
$825,000 to support our higher production volume, offset by
$615,000 of favorable materials cost due to volume based
supplier contracts. We continue to see incremental improvement
in our direct product costs; however, this is currently being
offset somewhat by an increase in disposables per patient due to
product reliability issues. We expect that over time as our
reliability improves, the disposables per patient will decline.
The increase in selling and marketing expenses was the result of
several factors. For the three months ended June 30, 2007
compared to the same period in 2006, approximately
$1.1 million of the increase was due to additional
salaries, health benefits and payroll taxes resulting from
increased headcount and $236,000 related to a higher level of
sales and marketing activity in both the chronic and critical
care markets. We increased our combined sales force from 27
sales representatives as of June 30, 2006 to 31 sales
representatives as of June 30, 2007. For the six months
ended June 30, 2007 compared to the same period in 2006,
approximately $2.4 million of the increase was due to
additional salaries, health benefits and payroll taxes resulting
from increased headcount and $524,000 related to a higher level
of sales and marketing activity in both the chronic and critical
care markets. We anticipate that selling and marketing expenses
will continue to increase in absolute dollars as we broaden our
marketing initiatives to increase public awareness of the System
One in the chronic care market and as we add additional sales
and marketing personnel.
Research
and Development
Three Months Ended
June 30,
June 30,
Percentage
2007
2006
Decrease
Decrease
(In thousands, except percentages)
Research and development
$
1,418
$
1,576
$
(158
)
(10
)%
Research and development as a
percentage of revenues
14
%
35
%
Six Months Ended
June 30,
June 30,
Percentage
2007
2006
Decrease
Increase
(In thousands, except percentages)
Research and development
$
2,854
$
3,355
$
(501
)
(15
)%
Research and development as a
percentage of revenues
16
%
42
%
The decrease in research and development expenses during the
three months ended June 30, 2007 compared to the same
period in 2006 was attributable to $71,000 resulting from lower
clinical trial activities, decrease in salary, benefits and
payroll taxes of $51,000 as a result of decreased headcount, and
a $30,000 decrease in consulting costs relating to the
development of the Pure Flow SL module. The decrease in research
and development expenses during the six months ended
June 30, 2007 compared to the same period in 2006 was
attributable to $247,000 of lower development costs associated
with our PureFlow SL module, decreased salary, benefits and
payroll taxes of $175,000 as a result of decreased headcount,
and a decrease of $54,000 resulting from lower clinical trial
activities. We expect research and development expenses will
increase in the foreseeable future as we seek to further enhance
our System One and related products, and their reliability, but
we do not expect that research and development expenses will
increase as rapidly as other expense categories as we have
substantially completed basic development of the System One. We
expect research and development expenses to continue to decline
as a percentage of revenues.
The increase in distribution expenses for the three and six
month periods ended June 30, 2007 compared to the same
period in 2006 was due to increased volume of shipments of
disposable products to a growing number of patients in the
chronic care market, and due to product reliability issues. We
expect that distribution expenses will increase at a lower rate
than revenues in the second half of 2007 due primarily to
expected shipping efficiencies gained from increased business
volume and density of customers, the reduction of higher cost
deliveries associated with bagged fluid due to the commercial
launch of our PureFlow SL module, which began in July 2006, and
the use of an outsourced logistics provider located in the
central part of the continental United States.
General
and Administrative
Three Months Ended
June 30,
June 30,
Percentage
2007
2006
Increase
Increase
(In thousands, except percentages)
General and administrative
$
2,526
$
2,149
$
377
18
%
General and administrative as a
percentage of revenues
25
%
47
%
Six Months Ended
June 30,
June 30,
Percentage
2007
2006
Increase
Increase
(In thousands, except percentages)
General and administrative
$
5,193
$
4,124
$
1,069
26
%
General and administrative as a
percentage of revenues
28
%
52
%
The increase in general and administrative expenses during the
three months ended June 30, 2007 compared to the same
period in 2006 was primarily due to an increase of $506,000 of
professional fees and corporate expenses offset by $158,000 in
lower salary and benefits. The increase in general and
administrative expenses during the six months ended
June 30, 2007 compared to the same period in 2006 was
primarily due to an increase of $910,000 of professional fees
and corporate expenses and $112,000 in higher salary and
benefits. We expect that general and administrative expenses
will continue to increase in the near term as we add support
structure for our growing business and as a result of costs
related to operating a public company.
Interest
Income and Interest Expense
Interest income is derived primarily from U.S. government
securities, certificates of deposit, commercial paper and money
market accounts. For the three and six month periods ended
June 30, 2007, interest income
increased by $224,000 and $532,000, respectively, due to
increased cash and investment balances resulting from our
follow-on public offering in June 2006 and our sale of stock to
DaVita in February 2007.
For the three and six month periods ended June 30, 2007,
interest expense decreased by $363,000 and $346,000,
respectively, based on the repayment of certain long-term debt
arrangements in the three and six month periods ended
June 30, 2006.
The increase in revenues was attributable to increased sales and
rentals of the System One in both the critical care and chronic
care markets, primarily as a result of an increase in the number
of chronic care patients on therapy resulting from increased
sales and marketing efforts. The number of chronic care patients
on therapy was 1,022 at December 31, 2006 compared to 292
at December 31, 2005. In addition, we added 104 dialysis
clinics in 2006 offering the System One. Revenues in the chronic
care market increased to $12.7 million in 2006 from
$3.2 million in 2005, an increase of 302%, while revenues
in the critical care market increased 186% to $8.1 million
in 2006, compared to $2.8 million in 2005. We added an
additional 27 hospitals in 2006 that offer the System One.
Cost of
Revenues and Gross Profit (Deficit)
Years Ended
December 31,
December 31,
Percentage
2006
2005
Increase
Increase
(In thousands, except percentages)
Cost of revenues
$
26,121
$
9,585
$
16,536
173
%
Gross profit (deficit)
$
(5,309
)
$
(3,591
)
$
1,718
48
%
Gross profit percentage
(25.5
)%
(59.9
)%
The increase in cost of revenues was attributable primarily to
our increased sales volume. For the chronic care market, we
added 730 net patients during 2006, which contributed to a
$12.9 million increase in cost of revenues. In addition,
cost of revenues increased during 2006 because of an increase in
manufacturing personnel which resulted in additional salaries,
health benefits and payroll taxes of $1.6 million, higher
servicing costs of $0.8 million and increased inbound
freight costs of $1.1 million to support our higher
production volume. We are currently operating at negative gross
profit as we continue to build our base of recurring revenues.
The improvement in gross margin during 2006 was attributable to
(i) increased sales volume and realization of economies of scale
that led to better purchasing terms and prices, and efficiencies
in indirect manufacturing overhead costs, (ii) lower labor costs
for the manufacture of certain of our products, and (iii)
continued improvement in product reliability. We expect the cost
of revenues as a percentage of revenues to continue to decline
over time for these same reasons. In addition, we expect the new
PureFlow SL to help reduce future costs of our product
offerings. Inventory at December 31, 2006 and
December 31, 2005 has been reduced to net realizable value
through charges to cost of revenues.
The increase in selling and marketing expenses was the result of
several factors. Approximately $4.6 million of the increase
was due to higher salary and benefits resulting from increased
headcount, $550,000 related to stock-based compensation as a
result of the adoption in January 2006 of Statement of Financial
Accounting Standards, or SFAS, No. 123R,
“Share-Based Payment”. The increase in selling and
marketing expense was also the result of $1.3 million
related to a higher level of sales and marketing activity in
both the chronic and critical care markets. We increased our
combined sales force from 20 sales representatives at
December 31, 2005 to 24 sales representatives at
December 31, 2006. We anticipate that selling and marketing
expenses will continue to increase in absolute dollars as we
broaden our marketing initiatives to increase public awareness
of the System One in the chronic care market and as we add
additional sales and marketing personnel.
Research
and Development
Years Ended
December 31,
December 31,
Percentage
2006
2005
Increase
Increase
(In thousands, except percentages)
Research and development
$
6,431
$
6,305
$
126
2
%
Research and development as a
percentage of revenues
31
%
105
%
The increase in research and development expenses was
attributable to increased salary, benefits and payroll taxes of
$306,000 as a result of increased headcount, approximately
$124,000 of stock-based compensation as a result of the adoption
in January 2006 of SFAS No. 123R, offset by a decrease
of $339,000 of development costs associated with our PureFlow SL
module which we incurred in 2005 that did not recur in 2006. We
expect limited research and development expense increases in the
foreseeable future as a substantial portion of the development
effort on the System One and PureFlow SL has been completed and
future expenditures will be limited to enhancements. We expect
research and development expenses to continue to decline as a
percentage of revenues.
Distribution
Years Ended
December 31,
December 31,
Percentage
2006
2005
Increase
Increase
(In thousands, except percentages)
Distribution
$
7,093
$
2,059
$
5,034
244
%
Distribution as a percentage of
revenues
34
%
34
%
The increase in distribution expenses in 2006 was due to
increased volume of shipments of disposable products to a
growing number of patients in the chronic care market. We expect
that distribution expenses will increase at a lower rate than
revenues during 2007 due to expected shipping efficiencies
gained from increased business volume and density of customers,
and the reduction of higher cost deliveries associated with
bagged fluid due to the commercial launch of our PureFlow SL
module which began in July 2006.
General and administrative as a
percentage of revenues
42
%
81
%
The increase in general and administrative expenses was
primarily due to approximately $2.0 million of stock-based
compensation as a result of the adoption in January 2006 of
SFAS No. 123R, and approximately $1.5 million of
legal and administrative expenses incurred as a result of
operating as a public company. We expect that general and
administrative expenses will continue to increase in absolute
dollars in the near term as we add support structure for our
growing business and as a result of costs related to operating
as a public company.
Interest
Income and Interest Expense
Interest income is derived primarily from U.S. government
securities, certificates of deposit, commercial paper and money
market accounts. For the year ended December 31, 2006,
interest income increased by $2.6 million due to increased
cash and investment balances available for investment resulting
from our initial public offering and follow-on public offering
and, to a lesser degree, higher interest rates.
Interest expense increased during the year ended
December 31, 2006 compared to the same period in 2005 due
to the early payoff of a debt agreement, which resulted in the
early recognition of approximately $434,000 of interest expense
during the second quarter of 2006. We expect interest expense
will continue to increase in the future as a result of our 2006
gross borrowings and continued availability under our equipment
line of credit.
The increase in revenues was attributable to increased sales and
rentals of the System One in both the chronic and critical care
markets, primarily as a result of increased sales and marketing
efforts as we continued our commercial launch of the System One.
Revenues in the chronic care market increased to
$3.2 million in 2005 from $0.6 million in 2004, an
increase of 473%, while revenues in the critical care market
increased 112% to $2.8 million in 2005, compared to
$1.3 million in 2004.
The increase in cost of revenues was attributable to our
increased sales volume. Contributing to the 2005 negative gross
margin was a lower of cost or market valuation allowance in the
amount of $0.3 million relating to disposable cartridge and
fluid inventory designated for the chronic care market, as well
as service costs of approximately $0.5 million to upgrade
100 older cyclers to meet the specifications of our current
product generation.
Selling
and Marketing
Years Ended
December 31,
December 31,
Percentage
2005
2004
Increase
Increase
(In thousands, except percentages)
Selling and marketing
$
7,550
$
3,334
$
4,216
126
%
Selling and marketing as a
percentage of revenues
126
%
177
%
The increase in selling and marketing expenses was the result of
several factors. Approximately $2.7 million of the increase
was due to higher salary and benefits resulting from increased
headcount, approximately $0.8 million of the increase
related to higher travel expenses and the balance of the
increase was due to a generally higher level of sales and
marketing activity in both the chronic and critical care
markets. We increased our sales force from six sales
representatives as of December 31, 2004, to 20 sales
representatives as of December 31, 2005.
Research
and Development
Years Ended
December 31,
December 31,
Percentage
2005
2004
Increase
Increase
(In thousands, except percentages)
Research and development
$
6,305
$
5,970
$
335
6
%
Research and development as a
percentage of revenues
105
%
317
%
The increase in research and development expenses was
attributable to increased salary and benefits of approximately
$840,000 as a result of increased headcount and development
costs associated with our PureFlow SL module, partially offset
by a decrease of approximately $520,000 in clinical trial
expenses due to the completion of the IDE home trial for System
One in 2004.
Distribution
Years Ended
December 31,
December 31,
Percentage
2005
2004
Increase
Increase
(In thousands, except percentages)
Distribution
$
2,059
$
495
$
1,564
316
%
Distribution as a percentage of
revenues
34
%
26
%
The increase in distribution expenses was due to increased
volume of shipments of disposable products to a growing number
of patients in the chronic market. We expect that distribution
expenses will increase at a lower rate than revenues due to
expected efficiencies from increased business volume and the use
of an outsourced logistics provider located in the central part
of the continental United States.
General and administrative as a
percentage of revenues
81
%
191
%
The increase in general and administrative expenses was
primarily due to an increase in salary and benefits as a result
of the addition of four employees to headcount as well as the
adoption of a management bonus plan in 2005.
Interest
Income and Interest Expense
Interest income is derived primarily from U.S. government
securities, certificates of deposit and money market accounts.
For the year ended December 31, 2005, interest income
increased to $0.6 million from $0.1 million in 2004
primarily due to increased cash and investment balances after
our initial public offering and slightly higher interest rates
in 2005.
Interest expense relates to a debt agreement signed in December
2004. Interest expense increased from $15,000 to $763,000, or
approximately $748,000 in 2005 compared to 2004 due to this
indebtedness being outstanding for a full calendar year.
We have operated at a loss since our inception in 1998. As of
June 30, 2007, our accumulated deficit was
$148.5 million and we had cash, cash equivalents and
short-term investments of approximately $53.0 million. On
February 7, 2007, we issued and sold 2,000,000 shares
of common stock to DaVita in which we received net proceeds,
after deducting legal expenses, of approximately
$19.9 million. On June 14, 2006, we closed a follow-on
public offering in which we received net proceeds after
deducting underwriting discounts, commissions and expenses of
approximately $51.4 million from the sale and issuance of
6,325,000 shares of common stock.
On May 15, 2006, we entered into an equipment line of
credit agreement for the purpose of financing field equipment
purchases and placements. The line of credit agreement provides
for the availability of up to $20.0 million through
December 31, 2007, and borrowings bear interest at the
prime rate plus 0.5% (8.4% as of June 30, 2007). Under the
line of credit agreement, $10.0 million is available
through December 31, 2006 and a further $10.0 million
is available from January 1, 2007 through December 31,2007. The availability of the line of credit is subject to a
number of covenants, including maintaining certain levels of
liquidity, adding specified numbers of patients and operating
within net loss parameters. We are also required to maintain
operating
and/or
investment accounts with the lender in an amount at least equal
to the outstanding debt obligation. Borrowings are secured by
all of our assets other than intellectual property and are
payable ratably over a three-year period from the date of each
borrowing. At June 30, 2007, we had outstanding borrowings
of $6.0 million and $11.6 million of borrowings
available under the equipment line of credit.
Net cash provided by (used in)
financing activities
19,801
52,573
Effect of exchange rate changes on
cash
17
44
Net cash flow
$
(8,835
)
$
25,902
Net Cash Used in Operating Activities. For
each of the periods above, net cash used in operating activities
was attributable primarily to net losses after adjustment for
non-cash charges, such as depreciation, amortization and
stock-based compensation expense. Significant uses of cash from
operations include increases in accounts receivable and
increased inventory requirements for production and placements
of the System One, offset by increases in deferred accounts
payable and accrued expenses. Non-cash transfers from inventory
for the placement of rental units with our customers represented
$12.0 million and $7.4 million, respectively, during
the six months ended June 30, 2007 and 2006.
Net Cash Used in Investing Activities. For
each of the periods above, net cash used in investing activities
reflected purchases of property and equipment, primarily for
research and development, information technology, manufacturing
operations and capital improvements to our facilities. Excluded
from these figures is the net cash provided by short-term
investments and marketable securities of $0.9 million
during the six months ended June 30, 2007 and net cash used
of $29.5 million of short-term investments during the six
months ended June 30, 2006.
Net Cash Provided By Financing Activities. Net
cash provided by financing activities reflected
$19.9 million of net proceeds received from the issuance of
common stock to DaVita in February 2007, and $1.3 million
of proceeds from the exercise of stock options and warrants
during the six months ended June 30, 2007, offset by the
net repayment of debt of $1.4 million and $37,000 during
the six months ended June 30, 2007 and 2006, respectively.
We expect to continue to incur net losses for the foreseeable
future. We expect that our current cash position, and the
availability under our equipment line of credit, is sufficient
to support operations at least through 2007. In the longer term,
we expect to fund the working capital needs of our operations
with revenue generated from product placements and sales, but
these resources may prove insufficient. If our existing
resources are insufficient to satisfy our liquidity
requirements, we may need to sell additional equity or issue
debt securities. Any sale of additional equity or issuance of
debt securities may result in dilution to our stockholders, and
we cannot be certain that additional public or private financing
will be available in amounts or on terms acceptable to us, or at
all. If we are unable to obtain this additional financing when
needed, we may be required to delay, reduce the scope of, or
eliminate one or more aspects of our business development
activities, which could harm the growth of our business. We
anticipate that the pending acquisition with Medisystems, if
consummated, will have a positive effect on our working capital.
The following table summarizes our contractual commitments as of
June 30, 2007 (unaudited) and the effect those commitments
are expected to have on liquidity and cash flow in future
periods:
Purchase obligations include purchase commitments for System One
components, primarily for equipment and fluids pursuant to
contractual agreements with several of our suppliers. Certain of
these commitments may be extended and/or canceled at our option.
Summary
of Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of these consolidated financial statements requires
us to make significant estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses.
These items are regularly monitored and analyzed by management
for changes in facts and circumstances, and material changes in
these estimates could occur in the future. Changes in estimates
are recorded in the period in which they become known. We base
our estimates on historical experience and various other
assumptions that we believe to be reasonable under the
circumstances. Actual results may differ substantially from our
estimates.
A summary of those accounting policies and estimates that we
believe are most critical to fully understanding and evaluating
our financial results is set forth below. This summary should be
read in conjunction with our consolidated financial statements
and the related notes included elsewhere in this proxy statement.
Revenue
Recognition
We recognize revenues from product sales and services when
earned in accordance with Staff Accounting Bulletin, or SAB,
No. 104, “Revenue Recognition”, and
Emerging Issues Task Force, or
EITF 00-21,
“Revenue Arrangements with Multiple Deliverables”.
Revenues are recognized when: (a) there is persuasive
evidence of an arrangement, (b) the product has been
shipped or services and supplies have been provided to the
customer, (c) the sales price is fixed or determinable and
(d) collection is reasonably assured.
Chronic
Care Market
Prior to 2007, we derived revenue in the chronic care market
from short-term rental arrangements with our customers as our
principal business model in the chronic care market. These
rental arrangements, which combine the use of the System One
with a specified number of disposable products supplied to
customers for a fixed amount per month, are recognized on a
monthly basis in accordance with agreed upon contract terms and
pursuant to a binding customer purchase order and fixed payment
terms. Rental arrangements continue to represent the majority of
the arrangements we have with our customers in the chronic care
market.
Beginning in 2007, we entered into long-term customer contracts
to sell System One and PureFlow SL equipment along with the
right to purchase disposable products and service on a monthly
basis. Some of these agreements include other terms such as
development efforts, training, market collaborations, limited
market exclusivity, and volume discounts. The equipment and
related items provided to our customers in these arrangements
are considered a multiple-element sales arrangement pursuant to
EITF 00-21.
When a sales arrangement involves multiple elements, the
deliverables included in the arrangement are evaluated to
determine whether they represent separate units of accounting.
We have determined that we cannot account for the sale of
equipment as a separate unit of accounting. Therefore, fees
received upon the completion of delivery of equipment are
deferred, and recognized as revenue on a straight line basis
over the expected term of our obligation to supply disposables
and service, which is five to seven years. We have deferred both
the unrecognized revenue and direct costs relating to the
delivered equipment, which costs are being amortized over the
same period as the related revenue.
We entered into a national service provider agreement and a
stock purchase agreement with DaVita on February 7, 2007.
Pursuant to
EITF 00-21,
we consider these agreements a single arrangement. In connection
with the stock purchase agreement, DaVita purchased
2,000,000 shares of our common stock for $10.00 per share,
which represented a premium of $1.50 per share, or
$3.0 million over the current market price. We have
recorded the $3.0 million premium as deferred revenue and
will recognize this revenue ratably over seven years, consistent
with our equipment service obligation to DaVita. During the
three and six months ended June 30, 2007, we recognized
revenue of $107,000 and $179,000, respectively, associated with
the $3.0 million premium.
Critical
Care Market
In the critical care market, sales are structured as direct
product sales or as a disposables-based program in which a
customer acquires the equipment through the purchase of a
specific quantity of disposables over a specific period of time.
We recognize revenues from direct product sales at the later of
the time of shipment or, if applicable, delivery in accordance
with contract terms. Under a disposables-based program, the
customer is granted the right to use the equipment for a period
of time, during which the customer commits to purchase a minimum
number of disposable cartridges or fluids at a price that
includes a premium above the otherwise average selling price of
the cartridges or fluids to recover the cost of the equipment
and provide for a profit. Upon reaching the contractual minimum
purchases, ownership of the equipment transfers to the customer.
Revenues under these arrangements are recognized over the term
of the arrangement as disposables are delivered. During the
reported periods, the majority of our critical care revenues
were derived from direct product sales.
Our contracts provide for training, technical support and
warranty services to our customers. We recognize training and
technical support revenue when the related services are
performed. In the case of extended warranty, the revenue is
recognized ratably over the warranty period.
Inventory
Valuation
Inventories are valued at the lower of cost or estimated market.
We regularly review our inventory quantities on hand and related
cost and record a provision for excess or obsolete inventory
primarily based on an estimated forecast of product demand for
each of our existing product configurations. We also review our
inventory value to determine if it reflects lower of cost or
market, with market determined based on net realizable value.
Appropriate consideration is given to inventory items sold at
negative gross margins and other factors in evaluating net
realizable value. The medical device industry is characterized
by rapid development and technological advances that could
result in obsolescence of inventory.
Field
Equipment
We amortize field equipment using the straight-line method over
an estimated useful life of five years. We review the estimated
useful life of five years periodically for reasonableness.
Factors considered in determining the reasonableness of the
useful life include industry practice and the typical
amortization periods used for like equipment, the frequency and
scope of service returns, actual equipment disposal rates, and
the impact of planned design improvements. We believe the five
year useful life is appropriate as of June 30, 2007.
We purchase completed cartridges, tubing and certain other
components used in the System One disposable cartridge from
Medisystems Corporation, an entity owned by David S. Utterberg,
a member of our Board of Directors and the owner of
approximately 6.7% of our outstanding common stock. We purchased
approximately $2.1 million and $3.8 million during the
three and six months ended June 30, 2007, and
$1.2 million and $1.9 million for the three and six
months ended June 30, 2006, respectively, of goods and
services from this related party. Amounts owed to Medisystems
Corporation totaled $665,000 and $926,000 at June 30, 2007
and December 31, 2006, respectively, and are included in
accounts payable in the accompanying condensed consolidated
balance sheets. At June 30, 2007, we had commitments to
purchase approximately $3.2 million of products from
Medisystems Corporation.
On January 4, 2007, we entered into a seven-year Supply
Agreement, which we refer to as the Medisystems Supply
Agreement, with MDS that expires on December 31, 2013.
Prior to entering into the Medisystems Supply Agreement, we
purchased products from MDS through purchase orders. Pursuant to
the terms of the Medisystems Supply Agreement, we will purchase
no less than ninety percent (90%) of our North American
requirements for disposal cartridges, or MDS products, for use
with our System One from MDS.
As further described in this proxy statement, on June 4,2007, we entered into a stock purchase agreement with
Mr. Utterberg pursuant to which we will acquire all of the
outstanding equity of each MDS Entity and each MDS Entity will
become a direct or indirect wholly-owned subsidiary of ours.
Consistent with the requirements of our Audit Committee Charter,
these transactions were reviewed and approved by our Audit
Committee, which is comprised solely of independent directors,
as well as our board of directors.
Since inception we have not engaged in any off-balance sheet
financing activities except for leases which are properly
classified as operating leases and disclosed in the
“Liquidity and Capital Resources” section above.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements”, which addresses the
measurement of “fair value” where such measure is
required for recognition or disclosure purposes under GAAP.
Among other provisions, SFAS No. 157 includes
(i) a new definition of fair value, (ii) a fair value
hierarchy used to classify the source of information used in
fair value measurements, (iii) new disclosure requirements
of assets and liabilities measured at fair value based on their
level in the hierarchy, and (iv) a modification of the
accounting presumption that the transaction price of an asset or
liability equals its initial fair value. SFAS No. 157
is effective for fiscal years beginning after November 15,2007 (i.e., beginning in 2008 for NxStage). We are currently
evaluating the impact of SFAS No. 157 on our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and
Financial Liabilities — Including an amendment of FASB
Statement No. 115,”which permits entities to
choose to measure many financial instruments and certain other
items at fair value. SFAS No. 159 is effective as of
the beginning of an entity’s first fiscal year that begins
after November 15, 2007. We are currently evaluating if we
will elect the fair value option for any of our eligible
financial instruments and other items.
Our investment portfolio consists primarily of high-grade
commercial paper, certificates of deposit and debt obligations
of various governmental agencies. We manage our investment
portfolio in accordance with our investment policy. The primary
objectives of our investment policy are to preserve principal,
maintain a high degree of liquidity to meet operating needs and
obtain competitive returns subject to prevailing market
conditions. Investments are made with a maturity of no more than
180 days. These investments are subject to risk of default,
changes in credit rating and changes in market value. These
investments are also subject to interest rate risk and will
decrease in value if market interest rates increase. Due to the
conservative nature of our investments and relatively short
effective maturities of the debt instruments, we believe
interest rate risk is mitigated. Our investment policy specifies
the credit quality standards for our investments and limits the
amount of exposure from any single issue, issuer or type of
investment.
As of December 31, 2006, we had outstanding debt
obligations of $7.4 million with a floating interest rate
equal to one-half percentage point (0.50%) above the prime rate
(8.75% at December 31, 2006). Movements in market interest
rates could impact the fair value of our debt. As of
December 31, 2006, the carrying amount of our debt
approximated fair value.
We operate a manufacturing and research facility in Rosdorf,
Germany. We purchase materials for that facility and pay our
employees at that facility in Euros. In addition, we purchase
products for resale in the United States from foreign companies
and have agreed to pay them in currencies other than the
U.S. dollar. We also have contracts with key suppliers that
expose us to foreign currency risks. As a result, our expenses
and cash flows are subject to fluctuations due to changes in
foreign currency exchange rates. In periods when the
U.S. dollar declines in value as compared to the foreign
currencies in which we incur expenses, our foreign-currency
based expenses increase when translated into U.S. dollars.
Although it is possible to do so, we do not currently hedge our
foreign currency since the exposure has not been material to our
historical operating results. A 10% movement in the Euro would
have had an overall impact to the statement of operations of
approximately $633,000 for 2006, which would have been
approximately 1.1% of total annual expenses.
MDS is a privately held, medical device company that designs,
manufactures, assembles, imports, exports and distributes
disposables used in dialysis and related blood treatments and
procedures, primarily in the United States. MDS is headquartered
in Seattle, Washington and operates its business in conjunction
with the other MDS Entities, which are collectively referred to
as Medisystems and include:
•
MDS Italy, which molds and assembles components for end-products
at a manufacturing facility in Sorbara, Modena, Italy;
•
MDS Mexico, which manufactures and assembles finished goods at a
manufacturing facility located in Tijuana, Baja California,
Mexico; and
•
MDS Services, which provides contract employee services to MDS
from its base operations in Las Vegas, Nevada.
Medisystems is also affiliated with the following entities that
are not being acquired by NxStage in the Stock Purchase:
•
DSU Medical, which holds the intellectual property relating to
Medisystems’ products;
•
MRC, which is a research and development facility with an office
outside Chicago, Illinois;
•
MTC, which merged with DSU Medical in May 2007, and had been
responsible for securing intellectual property licenses for the
components utilized in Medisystems’ products and funding
the research and development activities of MRC; and
•
LSM and ICS, neither of which has operations of significance.
Medisystems products address two markets for use: hemodialysis
and apheresis, with hemodialysis historically being the more
significant market. Products are produced through internal and
outsourced manufacturing and are marketed and sold under the
Medisystems brand name, primarily through distributors, to
clinics in the United States. A portion of products are sold to
distributors for resale under the distributor’s brand name.
Hemodialysis
Market
The market for dialysis equipment and disposables in the United
States has undergone rapid growth since 1972, the year Congress
extended Medicare coverage to all patients, regardless of age,
with ESRD. ESRD, which affects approximately 472,000 people
in the United States, is an irreversible, life-threatening loss
of kidney function that is treated predominantly with dialysis.
Dialysis is a kidney replacement therapy that removes toxins and
excess fluids from the bloodstream and, unless the patient
receives a kidney transplant, is required for the remainder of
the patient’s life. Over 70% of ESRD patients in the United
States rely on life-sustaining dialysis treatment. Demographic
factors, including an aging population and the increasing
incidence of diabetes and hypertension, two diseases that
typically presage the onset of ESRD, along with increasing life
expectancy due to improved treatment methods, have helped grow
the market for dialysis treatment in the United States.
Hemodialysis, the most widely prescribed form of dialysis,
typically consists of treatments in a clinic three times per
week, with each session lasting three to five hours. The process
involves a range of equipment and supplies. Machinery is
required to pump the blood, prepare and deliver dialysate (a
blood cleansing solution containing salts and glucose), and
generally monitor the system for safe operation. In addition,
dialyzers (filters that act like an artificial kidney),
bloodlines, needles and assorted other items are needed in
dialysis. The industry typically makes a distinction between
“equipment,” such as the blood pump and delivery
system used in dialysis, and “disposables,” such as
the dialyzer, blood lines and needles that are usually disposed
of after each use. There is also a range of
“consumables” used during the process, that include
the
dialysate, heparin (a drug used to prevent blood clotting) and
saline (the solution used to prime and rinse the dialyzer).
During the hemodialysis procedure, blood is conducted via
external, single-use, disposable blood tubing, referred to as
bloodlines, through a dialyzer, where toxins and excess fluids
are removed. An arteriovenous, or AV, fistula, which is a
passageway between an artery and a vein, is created using a
special needle set to provide access to the patient’s blood
stream for the procedure.
Prior to 1981, disposables for use in hemodialysis were custom
designed by each dialysis clinic customer. Medisystems’
initial strategy was to create high quality, low cost,
standardized hemodialysis disposables, specifically targeting
the lowest cost disposable bloodlines and needles. In 1981,
Medisystems began offering FDA-approved, standardized blood
tubing sets, AV fistula needle sets and dialysis priming sets.
In 1983, in an effort to control rapidly increasing hemodialysis
costs, the U.S. government changed the reimbursement scheme
for dialysis treatment from a cost-plus reimbursement to the
composite rate structure that remains in place today. The change
had three main effects: shifting the majority of procedure
volumes from hospitals to lower-cost independently-owned
clinics; prompting the consolidation of independently-owned
clinics among a few, large-scale owners as a means of reducing
overhead cost and maximizing profitability; and refocusing the
hemodialysis industry on opportunities to control treatment
delivery costs.
Medisystems, with its focus on high-quality, low-cost,
standardized disposables, was able to take advantage of the
treatment providers’ need to reduce costs and their
resulting shift from custom disposables to standardized
disposables during the mid-1980s and establish itself as a
leading supplier of bloodlines and needle disposables for
hemodialysis.
Products
for the Hemodialysis Market
Medisystems’ hemodialysis bloodlines products include the
Readyset High Performance Blood Tubing sets, the first
integrated bloodline sets on the market; and its latest
generation bloodline set, the StreamLine2 Blood Tubing System,
designed to achieve better patient outcomes at lower costs to
clinics.
Medisystems has offered AV fistula needle sets in the United
States since 1981. In 1991, the Occupational Safety and Health
Administration in the United States, or OSHA, issued a
recommendation that encouraged employers to evaluate and
implement devices to improve workplace safety by minimizing the
risk of blood exposure through needle-stick or other injuries
when dealing with blood borne pathogens. That same year,
Medisystems introduced the AV Fistula Needles with PointGuard
Anti-Stick Needle Protectors, the first safety guard for AV
fistula needles marketed in the United States. In 1995,
Medisystems introduced its second generation safety guard,
MasterGuard, which has been shown in a published study to reduce
needlestick injuries. In 2000, the U.S. Congress passed the
Needlestick Safety and Prevention Act, authorizing OSHA to
require employers, including office-based physicians, to select
safer medical devices, including self-sheathing needles.
Most hemodialysis patients require treatment at least three
times a week for the rest of their lives. Clinical experience
demonstrates that the incidence of pain, hematoma, infection and
infiltrations at the needle insertion site can be reduced by
using what is called the “constant-site
technique” — inserting the fistula needle in the
same place each treatment. Medisystems has developed the
Buttonhole Needle Set, an anti-stick, dull bevel needle set
specifically designed for use with this constant-site technique.
Other hemodialysis products that Medisystems manufactures and
sells include:
•
safety devices and access management devices, including the
ViraGuard patient-transducer protector, a connection device that
includes a membrane providing protection for hemodialysis
pressure monitors and for maintaining the sterility of the fluid
pathway;
•
the Medic plastic anti-stick needle/connector device, designed
to help reduce the risk of accidental needlesticks;
dialysis priming sets, which are used to expel air and set the
solution before connecting to the patient, specifically designed
for hemodialysis that feature needleless access ports, large
inner diameter tubing intended to allow relatively fast and easy
flows, and a unique spike and chamber design to help prevent air
bubbles from entering the line; and
•
the Access Alert Pressure Measurement Filter, for use with
Medisystems’ AV fistula needles, designed to easily measure
static intra-access pressure.
Apheresis
Market
Therapeutic apheresis is a technique for removing harmful
components from a patient’s blood and is used in the
treatment of autoimmune diseases and other disorders.
Therapeutic apheresis services are generally provided upon the
request of a hospital, which has received an order from a
patient’s physician. Therapeutic treatments are
administered using blood cell separator equipment and the
disposables needed to perform the procedure.
Therapeutic apheresis is the primary therapy for patients
suffering from:
•
Goodpasture syndrome — a rare autoimmune disease
affecting the lungs and kidneys;
•
thrombotic thrombocytopenic purpura — a
life-threatening blood disease;
•
sickle cell disease — an inherited blood disorder
affecting the red blood cells;
•
Guillain-Barre syndrome — an autoimmune disorder
affecting the nervous system; and
•
chronic inflammatory demyelinating polyneuropathy — a
rare neurological disorder.
Therapeutic apheresis is also used as a supportive or adjunct
therapy for patients suffering from diseases such as multiple
myeloma, a cancer of the plasma cells; Lambert-Eaton myasthenic
syndrome, an autoimmune disease causing muscle weakness;
systemic lupus erythematosus, an autoimmune disorder causing
chronic inflammation of connective tissues; and systemic
vasculitis, inflammation of the blood vessels. The main
providers of therapeutic apheresis are regional and community
blood banks, although many dialysis clinics also offer these
services.
Medisystems received its first FDA clearance to market needle
sets used during apheresis procedures in 1986. Its primary
apheresis needle is the Apheresis Needle with MasterGuard
Anti-Stick Needle Protector, designed to protect against needle
sticks immediately upon removal and through time of disposal.
Medisystems also designed its Medic plastic anti-stick
needle/connector for use with apheresis procedures.
Medisystems
Strategy
Medisystems’ overall strategy since inception has been to
(1) design, develop, and manufacture high quality, low cost
disposables for use in dialysis and blood treatments and
procedures in the United States; (2) continue to enhance
the function of products by continuously innovating the design
and methods for treatment delivery; (3) protect innovations
by patenting designs and methods in the United States and in key
markets worldwide; (4) educate customers on the value of
enhanced product designs; (5) establish reliable
manufacturing and sources of supply; (6) establish reliable
sources of distribution; and (7) maintain sufficient cash
flow and profitability to fund growth in operations without the
need for significant outside capital.
In January 2007, Medisystems entered into a seven-year agreement
with NxStage to supply no less than 90% of their North American
requirements for disposable cartridges for use with their
primary home hemodialysis product, the System One.
In May 2007, MTC merged into DSU Medical, with DSU Medical being
the surviving entity.
For the period January 1, 2007 through May 31, 2007,
at the discretion of the sole common stockholder,
Mr. Utterberg, and in contemplation of a renegotiation of
existing agreements, DSU Medical did not charge royalty payments
to MTC, and MTC, in turn, did not charge royalty to MDS.
Effective June 1, 2007, DSU Medical and MDS terminated the
royalty sublicense agreement to MDS for consideration of
$2.7 million to be paid to DSU Medical. A new, royalty-free
license agreement between DSU Medical and MDS was entered into
effective June 1, 2007.
In June 2007, Mr. Utterberg, the common stockholder of the
Medisystems Group, entered into an agreement with NxStage,
pursuant to which NxStage has agreed to purchase the issued and
outstanding shares of MDS, MDS Services, MDS Italy and MDS
Mexico in exchange for 6,500,000 shares of NxStage common
stock, subject to adjustment. The transaction is expected to
close in 2007.
Medisystems manufactures and distributes a number of different
products, including private label products, for use
predominantly in hemodialysis. Its primary sources of revenue
are from blood tubing sets, used for hemodialysis, and needle
sets, used in hemodialysis and apheresis. In 2006, revenues from
blood tubing sets accounted for 56% of Medisystems’ gross
revenues. Revenues from needle sets accounted for 29%, and
revenues from the sale of products to NxStage accounted for 7%,
of Medisystems’ gross revenues in 2006.
Readyset
The Readyset High Performance Blood Tubing Sets, which
Medisystems introduced for use in hemodialysis in 1993, feature
a proprietary pump segment and proprietary material designed to
deliver reliable, accurate flows throughout the treatment. The
kink-resistant blood tubing is designed to be easy to handle and
to enable relatively fast priming, or removal of air from the
dialysate solution. These technological advances, along with a
patented process for treatment delivery, are intended to result
in Kt/V, which is the measure for how much waste is removed from
the patient’s blood during dialysis, that better reflects
the Kt/V prescribed by a patient’s physician.
StreamLine2
In 2006, Medisystems introduced its latest generation bloodline
product, StreamLine2. The StreamLine2 product line is covered by
a number of U.S. and foreign patents. Also, a number of U.S. and
foreign patent applications have been submitted, though there
can be no assurance any of these applications will be granted.
StreamLine2’s airless design and other technologies have
been shown in two clinical studies to result in superior
clinical and economic performance. StreamLine also includes
Medisystems patented LockSite needleless access sites,
eliminating the need for dangerous needles and expensive guarded
needles, improving a clinic’s ability to meet OSHA
anti-stick requirements.
AV
Fistula and Apheresis Needles with MasterGuard Anti-Stick Needle
Protectors
Medisystems has designed its AV fistula and apheresis needles to
achieve a smooth blood flow throughout the treatment, intended
to result in less clotting, lower pressure drops, and less
stress on the patient’s blood. In addition, in a published
study, Medisystems’ AV fistula and apheresis needles with
Masterguard anti-stick needle protectors were shown to
significantly reduce needle stick injuries compared to
conventional, unguarded needles.
ButtonHole
Needle Set
The constant-site technique is used worldwide to insert the
needle in the vascular access site for hemodialysis patients
with native, or human, AV fistulaes. Clinical experience
demonstrates that the incidence of pain, hematoma, infection and
infiltrations at the needle insertion site can be reduced by
utilizing the constant-site technique. Medisystems’
ButtonHole AV fistula needle has an anti-stick, dull bevel
design ideally suited for the constant-site technique, while
also reducing the risk of accidental needle sticks.
Transducer protectors are single-use air filter devices used to
protect hemodialysis pressure monitors during treatments.
Medisystems’ transducer protectors include the ViraGuard
membrane, designed to maintain the sterility of the fluid
pathway and act as a
