10-K
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tm214229d1_10k.htm
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark One)
☒ Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2020
or
☐ Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For transition period from
to
Commission File Number: 001-39577
Aziyo
Biologics, Inc.
(Exact name of registrant as specified in its charter)
12510 Prosperity Drive, Suite 370
Silver Spring, MD 20904
(Address of principal executive offices and Zip Code)
(240) 247-1170
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Securities Exchange Act of 1934:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Class A Common Stock, par value $0.001 per share AZYO The Nasdaq Global Market
Securities registered
pursuant to Section 12(g) of the Act: None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☒
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No
☐
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated Filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth
company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No
☒
The registrant was
not a public company as of the last business day of its most recently completed second fiscal quarter and, therefore, cannot calculate
the aggregate market value of its voting and non-voting common equity held by non-affiliates as of such date.
As of March 12, 2021,
there were 7,091,982 shares of the registrant’s Class A common stock and 3,134,162 shares of the registrant’s Class
B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
registrant’s definitive proxy statement for its 2021 annual meeting of stockholders, which the registrant intends to file
pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal
year ended December 31, 2020, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
FORWARD-LOOKING STATEMENTS 1
RISK FACTOR SUMMARY 3
PART I 5
Item 1. Business 5
Item 1A. Risk Factors 34
Item 1B. Unresolved Staff Comments 91
Item 2. Properties 91
Item 3. Legal Proceedings 91
Item 4. Mine Safety Disclosure 91
Item 6. Selected Financial Data 92
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 106
Item 8. Financial Statements and Supplementary Data 107
Item 9A. Controls and Procedures 108
Item 9B. Other Information 108
Item 10. Directors, Executive Officers and Corporate Governance 109
Item 11. Executive Compensation 109
Item 14. Principal Accounting Fees and Services 110
Item 15. Exhibits, Financial Statement Schedules 111
INDEX TO FINANCIAL STATEMENTS F-1
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FORWARD-LOOKING STATEMENTS
This Annual Report
on Form 10-K (the “Annual Report”) contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical
facts contained in this Annual Report, including statements regarding our results of operations, financial position, projected
growth in total net sales, seasonality, business strategy, policies and approach, including, without limitation, expectations regarding
our products and their targeted effects, plans for our sales and marketing growth and anticipated expansion of our product development
and clinical and research activities, expectations regarding competition, our competitive advantages, regulations that impact our
business, and overall clinical and commercial success, expectations regarding the forgiveness of all or a portion of our loan pursuant
to the CARES Act and the potential impact of COVID-19 pandemic on our business are forward-looking statements. These statements
involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements expressed or implied by the forward-looking
statements.
Without limiting the
foregoing, in some cases, you can identify forward-looking statements by terms such as “aim,” “believe,”
“may,” “will,” “should,” “expect,” “exploring,” “plan,”
“anticipate,” “could,” “intend,” “target,” “project,” “contemplate,”
“believe,” “estimate,” “predict,” “potential,” “seeks,” or “continue”
or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words.
No forward-looking statement is a guarantee of future results, performance, or achievements, and one should avoid placing undue
reliance on such statements.
Forward-looking
statements are based on our management’s beliefs and assumptions and on information currently available to us. Such beliefs
and assumptions may or may not prove to be correct. Additionally, such forward-looking statements are subject to a number of
known and unknown risks, uncertainties and assumptions, and actual results may differ materially from those expressed or implied
in the forward-looking statements due to various factors, including, but not limited to, those identified in Part I, Item 1A.
“Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in this Annual Report. These risks and uncertainties include, but are not limited to:
• our ability to achieve or sustain profitability;
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• the continued and future acceptance of our products by the medical community;
Moreover, we operate
in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management
to predict all risk factors and uncertainties.
You should read this
Annual Report and the documents that we reference in this Annual Report completely and with the understanding that our actual future
results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary
statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements
contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
As used in this Annual
Report, unless otherwise specified or the context otherwise requires, references to “we,” “us,” “our,”
the “Company” and “Aziyo” refer to the operations of Aziyo Biologics, Inc. and its consolidated subsidiaries.
TRADEMARKS, TRADE NAMES AND SERVICE
MARKS
This Annual Report
includes our trademarks, trade names and service marks, including, without limitation, “Aziyo®,”
“CanGaroo®,” “ProxiCor®,”
“Tyke®,” “VasCure®,”
“FiberCel®,” “ViBone®,”
“OsteGro®,” “SimpliDerm®”
and our logo, which are our property and are protected under applicable intellectual property laws. This Annual Report also contains
trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience,
trademarks, trade names and service marks may appear in this Annual Report without the ®,
TM and SM symbols, but such references are not intended
to indicate, in any way, that we or the applicable owner forgo or will not assert, to the fullest extent permitted under applicable
law, our rights or the rights of any applicable licensors to these trademarks, trade names and service marks. We do not intend
our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not
be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
INDUSTRY AND OTHER DATA
Unless otherwise indicated,
information contained in this Annual Report concerning our industry and the markets in which we operate, including our general
expectations, market position and market opportunity, is based on our management’s estimates and research, as well as industry
and general publications and research, surveys and studies conducted by third parties. We believe the information from these third-party
publications, research, surveys and studies included in this Annual Report is reliable. Management’s estimates are derived
from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge,
which we believe to be reasonable. This data involves a number of assumptions and limitations which are necessarily subject to
a high degree of uncertainty and risk due to a variety of factors, including those described in this Annual Report under “Forward
Looking Statements” and Part I, Item IA “Risk Factors.” These and other factors could cause our future performance
to differ materially from our assumptions and estimates.
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RISK FACTOR SUMMARY
Our business is subject
to numerous risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in this Annual Report.
You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties
affecting our business include the following:
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PART I
Item 1. Business.
Overview
We are a commercial-stage
regenerative medicine company focused on creating the next generation of differentiated products and improving outcomes in patients
undergoing surgery, concentrating on patients receiving implantable medical devices. From our proprietary tissue processing platforms,
we have developed a portfolio of advanced regenerative medical products that are designed to be very similar to natural biological
material. Our proprietary products, which we refer to as our Core Products, are designed to address the implantable electronic
device/cardiovascular, orthopedic/spinal repair and soft tissue reconstruction markets, which represented a combined $3 billion
market opportunity in the United States in 2020. To expand our commercial reach, we have commercial relationships with major medical
device companies, such as Boston Scientific and Medtronic, to promote and sell some of our Core Products. We believe our focus
on our unique regenerative medicine platforms and our Core Products will ultimately maximize our probability of continued clinical
and commercial success and will create a long-term competitive advantage for us.
We estimate that more
than two million patients were either implanted with medical devices, such as pacemakers, defibrillators, neuro-stimulators,
spinal fusion and trauma fracture hardware or tissue expanders for breast reconstruction, in the United States in 2019. This number
is driven by advances in medical device technologies and an aging population with a growing incidence of comorbidities, including
diabetes, obesity and cardiovascular and peripheral vascular diseases. These comorbidities can exacerbate various immune responses
and other complications that can be triggered by a device implant.
Our Core Products
are targeted to address unmet clinical needs with the goal of promoting healthy tissue formation and avoiding complications associated
with medical device implants, such as scar-tissue formation, capsular contraction, erosion, migration, non-union of implants
and implant rejection. We believe that we have developed the only biological envelope, which is covered by a number of patents,
that forms a natural, systemically vascularized pocket for holding implanted electronic devices. We have a proprietary processing
technology for manufacturing bone regenerative products for use in orthopedic/spinal repair that preserves a cell’s ability
to regenerate bone and decelerates cell apoptosis, or programmed cell death. We have a patented cell removal technology that produces
undamaged extracellular matrices for use in soft tissue reconstruction. In pre-clinical and clinical studies, our products
have supported and, in some cases, accelerated tissue healing, and thereby improved patient outcomes. Our Core and Non-Core
product portfolio is highlighted in the table below.
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Our growth strategy
is focused on increasing penetration in our target markets. We believe we can expand our commercial penetration in these markets
and thereby grow our business by increasing our direct sales force and developing and launching more clinically relevant products
from our pipeline and, when possible and appropriate, from acquisitions.
Our go-to-market
strategy includes a hybrid of a direct sales force, commercial partners and independent sales agents. As of December 31, 2020,
we had 33 direct sales representatives who focus on gaining additional market access and driving market penetration, not only by
selling our products, but also, where appropriate, by managing our commercial partners and providing technical assistance for selling
our products. By growing our direct sales force and leveraging our existing commercial partners, we believe we can expand our customer
base and further strengthen our existing customer relationships and increase penetration in our target markets.
We have a well-established
and scalable manufacturing platform, consisting of two facilities that are supported by our corporate headquarters. Our Silver
Spring, Maryland location is our headquarters and functions as a research and development and corporate support center. Our Roswell,
Georgia location is our processing, production and distribution facility for all our implantable electronic device/cardiovascular
products. Our Richmond, California location is our human tissue products facility. We believe we have sufficient operating capacity
at both our Roswell and Richmond facilities to support future growth.
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Net sales from our
Core Products grew from $30.9 million for the year ended December 31, 2019 to $36.2 million for the year ended December 31, 2020,
representing an annual growth rate of 17%. Our total net sales decreased from $42.9 million for the year ended December 31, 2019
to $42.7 million for the year ended December 31, 2020, representing an annual decline of 0.5%. Our gross margins improved from
46% in the year ended December 31, 2019 to 48% in the year ended December 31, 2020. Our gross margins, excluding intangible asset
amortization, improved from 54% in the year ended December 31, 2019 to 56% in the year ended December 31, 2020. We incurred a net
loss of $11.9 million for the year ended December 31, 2019 and $21.8 million for the year ended December 31, 2020.
Gross margin, excluding
intangible asset amortization, is a non-GAAP financial measure. See “Non-GAAP Financial Measures” under Part
II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion
regarding our use of gross margin, excluding intangible asset amortization, including its limitations and a reconciliation to the
most directly comparable GAAP financial measure.
Our Competitive
Strengths
Our mission is to
provide advanced regenerative care products that improve the outcomes in patients primarily undergoing implantable device-related
surgery. To accomplish this mission, we intend to establish our Core Products as the standard of care for treating patients undergoing
such procedures. We believe our key competitive strengths position us well to execute on our growth strategy. Our key competitive
strengths are:
Well-positioned
in Large, Attractive and Growing Markets. We believe that the implantable electronic devices/cardiovascular, the orthopedic/spinal
repair and the soft tissue reconstruction markets, which represented a combined $3 billion market opportunity in the United States
in 2020, will continue to experience accelerated growth, given advancements in implantable medical device technologies to treat
more medical conditions and shifting global demographics that include an aging population; a greater incidence of comorbidities,
such as diabetes, obesity and cardiovascular and peripheral vascular diseases; and increasing numbers of mastectomies and lumpectomies.
We believe there is growing adoption of regenerative medicine products by the medical community as physicians become aware of the
benefits of natural products, including reduced inflammation, scar-tissue formation and foreign body response, as compared
to using traditional products made from synthetic materials.
Regenerative Medicine
Technology Focus. Our scientific expertise and know-how in regenerative medicine technology has allowed us to develop our
proprietary platforms to create differentiated biomaterials, including our Core Products: CanGaroo, ProxiCor, Tyke, VasCure, FiberCel,
ViBone, OsteGro V and SimpliDerm. These types of products, which are designed to more closely resemble natural products than similar
traditionally processed products, have enabled us to advance the science of regenerative medicine as well as to process tissue
and produce products at commercial scale.
Broad Portfolio
of Core Products to Address the Needs of Physicians, Patients and Providers. Physicians use our broad portfolio of regenerative
medicine products to meet the needs of individual patients. The breadth of our current portfolio, which includes products used
in implantable electronic devices/cardiovascular, orthopedic/spinal repair and soft tissue reconstructive procedures, gives us
the flexibility to target a broad set of procedures, each with a full suite of products to accommodate both the clinical and economic
factors that may affect purchasing decisions. Our experienced contracting and direct sales force teams are highly trained to assist
clinicians in effectively using the full complement of our products.
Large and Growing
Body of Clinical Data and FDA Cleared Products. We have significant regulatory experience in obtaining FDA clearance for regenerative
medicine products requiring 510(k) clearance and in navigating the comprehensive regulatory framework that applies to human cells,
tissues and cellular and tissue-based products, or HCT/Ps. We have and continue to develop a body of pre-clinical, clinical
and patient outcomes data, including third-party publications that reviewed the technical and clinical attributes of our products.
We believe that our extensive in vivo and clinical data give us a competitive advantage.
Relationships
with Care Providers. Our medical and commercial teams have established extensive customer relationships in the healthcare industry.
We have developed excellent relationships with physicians, nurses and hospital administrators. We believe we are well-positioned
to leverage these relationships to increase our penetration in our target markets.
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Commercial Relationships
with Major Medical Device Companies. We have commercial agreements with major medical device companies, including Boston Scientific,
Biotronik, Medtronic, Surgalign Holdings and others, which we collectively refer to as our commercial partners, to promote or commercialize
some of our products. Our commercial partners use their own network of more than 2,000 sales representatives, clinical specialists
and independent sales agents, including approximately 1,400 of which are focused on our CanGaroo product and more than 800 of which
are focused on our FiberCel, ViBone and OsteGro V products. We leverage this additional presence in targeted markets to significantly
increase our opportunity to cost-effectively penetrate these large markets.
Established
and Scalable Manufacturing and Commercial Infrastructure. We have well-established relationships to obtain the human and
animal tissues, which we need to manufacture our products, in the quantity needed and in a manner that preserves their integrity.
We have sufficient capacity to increase the scale of our manufacturing, and the required quality control and regulatory capabilities
to ensure that our products meet established specifications. We have developed rigorous medical, clinical, manufacturing, distribution
and logistics capabilities designed to comply with FDA requirements. We pair our operational capabilities with a strong commercial
team of sales, marketing and contracting professionals. Our established regulatory, operational and commercial infrastructure provides
a firm foundation for growth as we continue to scale our business.
Executive Management
Team with Extensive Experience in Regenerative Medicine. Our executive management team has extensive experience in the regenerative
medicine and medical device industries. This experience allows us to operate with a deep understanding of the underlying trends
in regenerative medicine and the intertwined scientific, clinical, regulatory, commercial and manufacturing functions that drive
success in this industry. We believe our team has the necessary experience to lead us through our continued commercial expansion
and the development and launch of our pipeline products.
Our Growth Strategy
The key elements of
our growth strategy are:
Increase Penetration
in Our Target Markets. We believe that the potential for growth in regenerative medicine in our target market segments presents
a long-term opportunity to increase the use of our products. We plan to continue our growth and accelerate our penetration
into our target markets by increasing the size of our direct sales force and by leveraging our relationships with our commercial
partners that have well-established and significant cardiac rhythm and orthopedic/spinal sales infrastructure and experience
in our target markets. We believe the breadth and flexibility of our current portfolio of products provides us with the capability
to address a wider variety of implantable device procedures and soft tissue reconstructions, all of which should offer significant
new growth opportunities.
Additional Growth
through Selective Acquisitions. We have demonstrated our ability to identify acquisition opportunities and integrate assets
that complement our strategy and generate revenue and incremental gross profits. We were created in 2015 through the spin-out
of the musculoskeletal division of Tissue Banks International (“TBI”) now KeraLink International (“KeraLink”),
which provided us with tissue processing capabilities. We created additional value from this transaction by hiring scientific expertise
to enhance these assets and develop a next generation of products. We then formed strategic partnerships to sell these products
and improve our financial performance. Similarly, in 2017, we acquired biomaterial medical device assets, centered around the product
we now sell as CanGaroo, from CorMatrix Cardiovascular. We followed the model that we had developed with the TBI asset acquisition.
We brought in experienced leadership and expanded our clinical and commercial teams, which provided us with the opportunity to
form new partnerships and commercialize CanGaroo. As a result, we again accelerated the growth of our revenue stream. We will continue
to evaluate possible acquisitions that complement our existing portfolio and leverage our established commercial and manufacturing
infrastructure.
Robust Pipeline
of Innovative Core Products from Our Proven Research and Development Capabilities. We have brought to market four commercial
Core Products in the past three years. In addition to our current core commercial products, we have a pipeline of products being
developed for the implantable electronic devices/cardiovascular market, the orthopedic/spinal repair market and the soft tissue
reconstruction market that we expect to launch in the future. We will continue to conduct pre-clinical studies and clinical
trials, gather patient data and perform other research to support the further adoption of our products in the marketplace.
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Continuing to Expand
the Reach of Our Direct Sales Force. As of December 31, 2020, we had 33 direct sales representatives who focus on gaining additional
market access and driving market penetration, not only by selling our products, but also, where appropriate, by managing our commercial
partners and providing technical assistance for selling our products. Our sales team provides the critical knowledge of the advantages
that our biological products provide for patients over those of our competitors. We plan to grow our sales organization in order
to expand our network of hospital and physician customers, drive deeper penetration in current accounts and provide additional
technical assistance to our commercial partners. We believe there is a significant opportunity to grow our business through this
continued expansion of our commercial footprint.
Our Core Products/Solutions
Our portfolio of regenerative
medicine Core Products has been developed to address the following specific markets:
Implantable
Electronic Devices/Cardiovascular Market
Market Opportunity
In 2019, we estimate,
based on industry sources and other third-party estimates, that there were more than 600,000 procedures in the United States
to install or replace implantable electronic devices, such as pacemakers, pulse generators and defibrillators, as well as spinal
cord neuromodulators and vagus nerve, deep brain and sacral nerve stimulators, which represents an estimated $600 million opportunity.
Limitations
of Existing Solutions
Implantable electronic
devices are now the standard of care for patients suffering from cardiac arrhythmias and heart failure. Such devices are implanted
in soft tissue, which is not heavily vascularized, and its implantation may trigger a biologic response that results in inflammation
and fibrosis, leading to the device and its wire leads being encased in dense or calcified fibrous material.
In 2015, a group of
third-party researchers published a systematic review and meta-analysis of 60 published reports, consisting of 21 prospective,
nine case-control and 30 retrospective cohort studies published between 1981 and 2013, each of which examined the rate of infection
associated with the implantation of electronic devices. The average rate of infection was between 1.0 and 1.3% and the reported
rates of infection ranged from 0.3 to 16.4%. In 2019, a different group of third-party researchers published the results of
a global, prospective randomized clinical trial focused on infection complications of implantable electronic cardiovascular devices
which identified a 1.2% mean infection rate during 12-month follow-up in the control arm (3,488 patients), and this was
later reported by other third-party researchers in 2020 to rise to 1.9% at the 36 months follow-up. However, infection
is not the only significant complication associated with implantation. Data from third-party studies published in 2011 and
2016 indicated that migration occurred in 0.5 to 10.9% of such procedures, and data from third-party studies published in 2001
and 2007 indicated that erosion of the device through the skin occurred in 0.2 to 5.0% of such procedures. Thus, migration and
erosion have been shown to be similarly frequent and can both result in infection or require replacement of the device. Other complications
include those associated with Twiddler’s syndrome, which is a malfunction of a pacemaker due to manipulation of the device
by the patient, and discomfort at the implant site. In addition, capsular contracture can occur when scar tissue, or a capsule,
around the device tightens and squeezes the implant. Capsular contraction may be more common following infection, collection of
blood, or hematoma, and collection of the watery portion of blood, or seroma.
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As patients with implants
live longer, device reoperations are ever more common, including those to replace or upgrade the device, or to replace or revise
the wire leads. The dense, under-vascularized capsule surrounding a device and its wire leads makes replacement or revision
more difficult, increases the time needed for the extraction and replacement procedure and progressively increases the risk of
infection. An increasing proportion of these cardiovascular electronic devices, that is, cardioverter/defibrillators, are now larger,
heavier and more complex and have a greater frequency of complications associated with them than the smaller, less heavy and less
complex devices. For neurostimulator devices, the common location of these devices, which is in the soft tissue of the abdomen
or back, increases the risk of migration and erosion and that of patient discomfort when sleeping or sitting.
In 1972, Dr. Victor
Parsonnet reported that enclosing pulse generators in a polyester pouch prevented migration and extrusion of the implanted device
through the skin. BARD Vascular Systems manufactured the Parsonnet pouch, which was used in patients with little subcutaneous tissue.
In 2008, TyRx Pharma introduced AIGSRX, a synthetic, permanent mesh envelope, which was intended
to securely hold either a pacemaker pulse generator or defibrillator and provide a safe space for these implants to be acclimated
by the body. To prevent infections associated with the implantation procedure, the non-resorbable mesh was coated with a bioabsorbable
material, which dissolved over a period of seven to ten days, during which time the antibiotics rifampicin and minocycline were
released. In 2013, TyRx replaced the original product with AIGISRXR, a comparable product
with the same two intended uses, but totally bioresorbable. In 2014, Medtronic acquired TyRx and now sells this totally bioresorbable
synthetic product under the name TYRX.
TYRX is a relatively
stiff synthetic mesh with rough edges, which may require the surgeon to make a larger incision than is needed only to implant the
electronic device. The larger incision can lead to longer surgery times and complications at the time of replacement or upgrade
of the implantable device. Third-party studies have shown that the synthetic TYRX mesh is broken down and reabsorbed within
approximately nine weeks. According to published literature, synthetic mesh, unlike biological mesh, is not associated with the
biological signaling needed to mitigate the anticipated and well-documented foreign body response that results in the production
of scar tissue to form a capsule surrounding an implantable device. TYRX’s primary benefit is to dispense antibiotics to
reduce the rate of infection associated with device implantation.
Our Solution
CanGaroo
was designed to mitigate complications deriving from implantable electronic devices and the shortcomings of synthetic envelopes.
We believe that CanGaroo is the only biological product that forms a natural, systemically vascularized pocket that conforms to
and securely holds implantable electronic devices. CanGaroo is cleared for use with pacemaker pulse generators, defibrillators
and other cardiac implantable electronic devices as well as vagus nerve stimulators, spinal cord neuromodulators, deep brain stimulators
and sacral nerve stimulators.
The CanGaroo
Envelope is constructed from perforated, multi-laminate sheets of decellularized, non-crosslinked, lyophilized SIS ECM,
derived from porcine small intestinal submucosa, a natural biomaterial, which is rich in natural growth factors, structural proteins
and collagens. The ECM is sewn into the shape of a pouch, into which the device is placed. We sell the biological envelope in a
variety of sizes, which allows it to accommodate various sized electronic devices, and it has a shelf life of 30 months.
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CanGaroo
is soft and pliable and is designed to conform to the implantable device for easy handling and implantation. The SIS ECM is designed
to mitigate the biologic foreign body response that normally occurs around the electronic device. CanGaroo is remodeled into a
surrounding layer of vital, vascularized tissue, potentially reducing the risk of capsular formation, migration and erosion of
the implantable device through the skin, and complications associated with Twiddler’s syndrome. CanGaroo may also facilitate
the process of implantation and of device removal during its replacement, as well as enhance patient comfort.
Development
Pipeline
We are currently developing
a version of CanGaroo that combines the envelope with antibiotics and is designed to reduce the risk of infection following surgical
implantation of an electronic device. As a first step, we recently completed a feasibility study that demonstrated the targeted
release of antibiotics for CanGaroo. Based on feedback from the FDA, we believe that this product candidate will require clearance
of a 510(k) submission to be marketed in the United States. In February 2021, we completed the product design for the CanGaroo with
antibiotics.
Commercial
Approach
We sell CanGaroo in
the United States using our direct sales force and our commercial partners, Boston Scientific and Biotronik, which act as sales
agents and give us access to approximately 1,400 sales representatives and clinical specialists to further expand our footprint
and accelerate our sales. Our primary customers are electrophysiologists, cardiac surgeons and neurosurgeons. Our direct sales
force is focused on gaining additional market access and driving market penetration, not only by selling our products, but also,
where appropriate, by managing our commercial partners and providing technical assistance for selling our products. Our sales team
provides the critical knowledge of the advantages that CanGaroo provides for patients over those of our competitors. We ship the
product directly to hospitals.
Additional
Cardiovascular Products
Through our direct
sales force and independent sales agents, we also sell additional cardiovascular products derived from our specialized SIS ECM,
all of which received 510(k) regulatory clearance as medical devices:
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Orthopedic/Spinal
Repair Market
Market Opportunity
According to industry
sources, in the United States in 2019, there were an estimated 1.5 million surgical procedures for orthopedic and spinal repair,
which, excluding the cost for spinal and orthopedic hardware, used bone repair products valued at more than $2 billion. The number
of such surgeries has increased over the last several years, driven, in part, by a higher incidence of comorbidities and chronic
inflammatory and degenerative conditions, including osteoarthritis.
Spinal fusion, the
leading application for bone fusion surgeries in the United States, involves the use of grafting material to cause two vertebrae
to grow together into one. In the United States in 2019, medical facilities performed 695,000 spinal fusion surgeries, of which
approximately 400,000 were lumbar operations. Lower extremity applications, including ankle arthrodesis, or surgical immobilization
of a joint by fusion of the adjacent bones, now represent a bone fusion market of approximately 165,000 fusions. With improving
fixation methods, success rates have improved across these applications.
Limitations
of Existing Solutions
Although success rates
for orthopedic and spinal fusion have improved, inadequate bone healing remains one of the leading causes of failure for any fusion
procedure. Fusion is especially challenging in patients who have underlying healing deficiencies because of such comorbidities
as diabetes and obesity.
The addition of a
bone material to sites of fixation for repair of defects or for creating fusion acts synergistically with hardware devices to enhance
and accelerate the achievement of boney union. Autologous bone, which is harvested from the patient, is considered the gold standard
for bone fusions. However, obtaining sufficient autologous material may not always be possible, may not yield good quality material,
may cause donor site morbidity and pain and has an additional cost associated with its harvest.
Bone morphogenetic
protein-2 (“BMP-2”) is currently the only FDA-approved osteoinductive growth factor for use as a bone graft
substitute. However, with increasing clinical use of BMP-2, a growing and well-documented side effect profile has emerged.
This profile includes postoperative inflammation and associated adverse effects, bone formation in unusual locations, bone resorption
and inappropriate formation of fat cells.
Human graft products,
sourced from a different individual than the patient receiving the tissue, are called allografts. These allograft products are
typically processed using techniques that damage the extracellular matrix and induce cellular apoptosis, which results in premature
cellular death. This cellular death results in less cells, prevents osteogenic differentiation and impedes the activity of osteoblasts,
cells which form new bone. Synthetic materials and damaged allogenic bone lack or have diminished osteogenic properties.
Our Solution
Our bone regenerative
products are processed by a proprietary method designed to protect and preserve the native bone cells (osteogenic) needed for bone
formation and to decelerate cell apoptosis. Our products, besides being osteogenic, are also osteoinductive (ability to recruit
cells and to signal the need for bone formation) and osteoconductive (three-dimensional scaffold appropriate for bone formation).
These products, which have handling properties that support their placement by the surgeon and their integration with the patient’s
bone, are intended for use in patients mainly receiving orthopedic and spinal implants to enhance the bone repair process and include
FiberCel, ViBone and OsteGro V, all of which are viable, cellular bone matrices.
FiberCel is a fiber-based
bone repair product made from human tissue and engineered to be like natural tissue. It is marketed for use in orthopedic or reconstructive
bone grafting procedures in combination with autologous bone or other forms of allograft bone or alone as a bone graft. FiberCel
provides handling properties that are critical for use as a bone void filler in various orthopedic and spinal procedures. FiberCel
contains cancellous bone particles with preserved living cells and demineralized cortical bone fibers to facilitate bone repair
and healing.
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ViBone is a particle-based
bone repair product designed to perform and handle in a manner similar to an autograft and is marketed for use as allograft bone.
ViBone contains cancellous and demineralized cortical bone particles.
OsteGro V, our newest
product, leverages our proprietary process designed to protect and preserve native bone cells. OsteGro V is marketed for use for
the repair, replacement or reconstruction of bone defects and contains cancellous bone particles as well as demineralized cortical
bone particles and fibers designed to enhance product handling.
Development
Pipeline
We are currently developing
new bone fusion and repair products that offer features that we believe are either an improvement to currently available technologies
or offer new features or enhancements, such as improved delivery or handling properties. These products are currently in development,
and we expect these products to be regulated by the FDA as HCT/Ps.
Commercial
Approach
Our commercial approach
to the orthopedic/spinal repair market has been to leverage commercial partners with existing sales and marketing infrastructure
in these areas, while we focus on research and development and the manufacturing of products. We currently have agreements in place
with Medtronic, which acts as our commercial partner for FiberCel, and Surgalign Holdings, which acts as our commercial partner
for ViBone and ViBone Moldable. Under the terms of those agreements, Medtronic and Surgalign Holdings purchase products from us
at specified prices and resell such products in the United States to the primary customers, which are hospitals and other healthcare
facilities. We fulfill all orders from Medtronic and Surgalign Holdings by shipping these products directly to these hospitals
and other healthcare facilities. We have several sales agreements with other commercial partners for OsteGro V, serving the orthopedic,
spinal and dental markets.
Soft Tissue
Reconstruction Market
Market Opportunity
According to certain
third-party estimates, there were more than 100,000 procedures in the United States in 2019 using biologic matrices for plastic
and reconstructive surgery, which constituted an approximately $500 million market. Such surgery is performed to treat structures
of the human body that are affected aesthetically or functionally due to defects, abnormalities, trauma, infection, burns, tumors
or disease. Plastic and reconstructive surgery is generally performed to improve function and ability, but it may also be performed
to achieve a more natural appearance of the affected anatomical structure. Clinical practice of plastic and reconstructive surgery
includes excision of tumors of the skin, vasculature, chest, oral and oropharyngeal cavities and extremities and reconstructions
of the same; debridement, skin grafting and skin flaps for burn reconstructions; trauma surgery for the hands, upper and lower
limbs and facial region; congenital or acquired malformations related to the hands, face, skull and jaw; surgical removal of vascular
abnormalities; a range of aesthetic surgeries; and reconstructions of the breast, which is one of the most common applications
of biologic matrices.
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Limitations
of Existing Solutions
Autologous tissue
repair procedures are options for stabilizing soft tissue defects in various applications. However, these methods have limitations.
The procedure may not be surgically feasible or the patient may decline its use. In addition, autologous tissue reconstruction
may cause complications, such as infection, extended recovery and healing time, loss of sensation or weakness at the donor site
and prolonged time under anesthesia during surgery.
Synthetic products
provide a substitute when autologous reconstruction is not feasible or desired. Yet, they too have their limitations. Implantation
of products not recognized by the body as “self” may trigger a foreign body reaction. The result of this signaling
cascade is encapsulation of the foreign body in fibrotic tissue, which may impede tissue healing and cause pain or other complications.
Other major issues are damage to the surrounding soft tissue, altering of the mechanical properties or appearance of the original
tissue and increased risk of infection. Active infections are also typically a contraindication to using a synthetic graft.
HADM products offer
an “off the shelf” biologic choice for reconstructive procedures, but they have their own limitations. The use of harsh
chemicals to remove the cells can damage the extracellular matrix. The products can lack uniformity as determined by pliability
in each direction, elasticity and non-uniform thickness. Such issues can affect how rapidly and the extent to which the implant
is integrated, as well as the resulting tissue strength. In addition, there is a limited availability in larger sizes for some
of these products.
Our Solution
SimpliDerm was
designed to offer improved biocompatibility and better functioning in the patient. It is marketed for use for the repair or replacement
of damaged or insufficient integumental tissue or for the repair, reinforcement or supplemental support of soft tissue defects
or any other homologous use of human integument. SimpliDerm is a pre-hydrated, HADM manufactured with our patented cell removal
technology, a process that maintains the biological and structural integrity of the tissue’s extracellular matrix components
and is designed to allow for rapid integration, cellular repopulation and revascularization at the surgical site. Its structurally
intact extracellular matrix is designed to closely resemble that which occurs naturally.
Development
Pipeline
One of the most common
applications of biologic matrices in plastic and reconstructive surgery is breast reconstruction surgery during or after mastectomy.
Mastectomy is a method of tumor removal for breast cancer in which all breast tissue, including the cancerous cells, is surgically
removed. In the United States in 2019, there were more than 100,000 post-mastectomy breast reconstructions, of which approximately
68% were bilateral operations, that is, both breasts were reconstructed. Breast reconstruction surgery is a surgical procedure
generally used to restore a breast to near normal shape and appearance, following a mastectomy, and can be performed using either
a prosthetic breast implant, referred to as implant-based reconstruction, or the patient’s own tissue, referred to as
autologous reconstruction. Additional reconstructive surgeries may be required following the initial breast reconstruction, including
breast lift, also known as mastopexy, or breast revision surgery, in which the surgeon adjusts the position and shape of the breast.
In 2019, plastic surgeons
used HADMs in approximately 66,000 women (approximately 109,000 breasts). The use of these materials is well-characterized
in the clinical literature and recommended by recent U.S. and European consensus guidelines for certain surgical techniques. However,
as of March 12, 2021, no biologic matrix or any other soft tissue reinforcement material, including our product, had been
approved or cleared by the FDA specifically for use in breast reconstruction surgery.
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Breast implants are
generally placed below the pectoral muscle, known as subpectoral positioning. This approach has limitations, such as decreased
arm strength, muscle spasms, animation deformities, implant movement and pain. Changes in mastectomy techniques, including the
preservation of more sub-dermal tissue on skin flaps, as well as advances in fat grafting and the availability of acellular
dermal matrix (“ADM”), for augmenting the tissue pocket have all created the opportunity to place the implant above
the pectoral muscle, known as prepectoral positioning, and, in doing so, address complications arising from subpectoral placement.
While the use of ADM is a key enabler for these prepectoral procedures, the sizes of ADMs required for these procedures may be
three to four times the magnitude used for subpectoral reconstructions, exposing the patient to greater quantities of ADM and adding
proportional additional expense to the procedure. Our goal is to develop SimpliDerm for these prepectoral procedures in larger
size pieces with possibly reduced production costs. In addition, we plan to engage in discussions with the FDA regarding an Investigational
Device Exemption (“IDE”) clinical study protocol to study the safety and effectiveness of our SimpliDerm product, with
the goal of obtaining FDA approval for use in prepectoral procedures.
Commercial
Approach
SimpliDerm is sold
through our direct sales force and independent sales agents to plastic and reconstructive surgeons. We ship the product directly
to hospitals.
Our Non-Core
Products: Contract Manufacturing
We fulfill tissue
processing contracts through our contract manufacturing services at our Richmond, California facility in order to utilize as much
as possible of the starting human biological material from which we produce our core orthopedic/spinal repair and soft tissue reconstruction
products, leverage our existing overhead and improve our cash flow. The resulting processed materials, including particulate bone,
precision milled bone, cellular bone matrix, acellular dermis and other soft tissue products, are sold to medical/surgical companies
as finished products and as a subcomponent of their products. Additionally, we process amniotic membrane as finished product for
select customers. We have multiple customers for most of our products and, as of December 31, 2020, more than 80% of our contracts
were for a period of time of two years or more. We are seeking to increase our contract manufacturing sales with the goal that
no one customer constitutes a predominant portion of our sales, that the average customer purchases numerous products and that
the contracts are for multi-years. For the year ended December 31, 2020, our net sales from contract manufacturing was approximately
$6.5 million, representing approximately 15% of our total net sales.