UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 001-08597
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(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(925 ) 460-3600
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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).
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On November 30, 2019, there were 48,773,952 shares of the registrant's common stock held by non-affiliates with aggregate market value of $14.1 billion based on the closing price of a share of the registrant's common stock on April 30, 2019, the last day of the registrant's most recently completed fiscal second quarter.
Number of shares outstanding of the registrant's common stock, as of November 30, 2019: 49,062,354
Documents Incorporated by Reference:
Document | Part of Form 10-K | |
Portions of the Proxy Statement for the Annual Meeting of Stockholders scheduled to be held in March 2020 | Part III | |
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Annual Report on Form 10-K
for the Fiscal Year Ended October 31, 2019
Table of Contents
PART I | Page | |
Item 1. | Business | |
Item 1A. | Risk Factors | |
Item 1B. | Unresolved Staff Comments | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
PART II | ||
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
Item 6. | Selected Financial Data | |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A. | Quantitative and Qualitative Disclosure about Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
Item 9A. | Controls and Procedures | |
Item 9B. | Other Information | |
PART III | ||
Item 10. | Directors, Executive Officers and Corporate Governance | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
Item 14. | Principal Accounting Fees and Services | |
PART IV | ||
Item 15. | Exhibits and Financial Statement Schedules | |
Item 16. | Form 10-K Summary | |
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PART I
Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These include statements relating to plans, prospects, goals, strategies, future actions, events or performance and other statements which are other than statements of historical fact, including all statements regarding acquisitions including the acquired companies' financial position, market position, product development and business strategy, expected cost synergies, expected timing and benefits of the transaction, difficulties in integrating entities or operations, as well as estimates of the Cooper Companies, Inc. and the acquired entities' future expenses, sales and earnings per share are forward-looking. In addition, all statements regarding anticipated growth in our revenue, anticipated effects of any product recalls, anticipated market conditions, planned product launches and expected results of operations and integration of any acquisition are forward-looking. To identify these statements, look for words like “believes,” “outlook,” “probable,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates” or “anticipates” and similar words or phrases. Forward-looking statements necessarily depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Among the factors that could cause our actual results and future actions to differ materially from those described in forward-looking statements are:
• | Adverse changes in global political and economic conditions, and related uncertainty caused by the United Kingdom’s election to withdraw from the European Union and its potential impact on, among other things, the movement of goods and materials in our supply chain, additional regulatory approvals and requirements, and increased tariffs and duties. |
• | Adverse changes in the global or regional general business, political and economic conditions, including the impact of continuing uncertainty and instability of certain countries, that could adversely affect our global markets, and the potential adverse economic impact and related uncertainty caused by these items, including but not limited to, escalating global trade barriers including additional tariffs, by countries such as China. |
• | Changes in tax laws or their interpretation and changes in statutory tax rates, including but not limited to, the U.S., the United Kingdom and other countries may affect our taxation of earnings recognized in foreign jurisdictions and/or negatively impact our effective tax rate. |
• | Foreign currency exchange rate and interest rate fluctuations including the risk of fluctuations in the value of foreign currencies or interest rates that would decrease our revenues and earnings. |
• | Our existing indebtedness and associated interest expense, most of which is variable and impacted by rate increases, which could adversely affect our financial health or limit our ability to borrow additional funds. |
• | Acquisition-related adverse effects including the failure to successfully obtain the anticipated revenues, margins and earnings benefits of acquisitions, integration delays or costs and the requirement to record significant adjustments to the preliminary fair value of assets acquired and liabilities assumed within the measurement period, required regulatory approvals for an acquisition not being obtained or being delayed or subject to conditions that are not anticipated, adverse impacts of changes to accounting controls and reporting procedures, contingent liabilities or indemnification obligations, increased leverage and lack of access to available financing (including financing for the acquisition or refinancing of debt owed by us on a timely basis and on reasonable terms). |
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• | Compliance costs and potential liability in connection with U.S. and foreign laws and health care regulations pertaining to privacy and security of third- party information, such as HIPAA in the U.S. and the General Data Protection Regulation requirements in Europe, including but not limited to those resulting from data security breaches. |
• | A major disruption in the operations of our manufacturing, accounting and financial reporting, research and development, distribution facilities or raw material supply chain due to integration of acquisitions, natural disasters or other causes. |
• | A major disruption in the operations of our manufacturing, accounting and financial reporting, research and development or distribution facilities due to technological problems, including any related to our information systems maintenance, enhancements or new system deployments, integrations or upgrades. |
• | Market consolidation of large customers globally through mergers or acquisitions resulting in a larger proportion or concentration of our business being derived from fewer customers. |
• | Disruptions in supplies of raw materials, particularly components used to manufacture our silicone hydrogel lenses. |
• | New U.S. and foreign government laws and regulations, and changes in existing laws, regulations and enforcement guidance, which affect areas of our operations including, but not limited to, those affecting the health care industry, including the contact lens industry specifically and the medical device or pharmaceutical industries generally, including but not limited to the EU Medical Devices Regulation (MDR), the EU In Vitro Diagnostic Medical Devices Regulation (IVDR), and the medical device excise tax under the U.S. Affordable Care Act. |
• | Legal costs, insurance expenses, settlement costs and the risk of an adverse decision, prohibitive injunction or settlement related to product liability, patent infringement or other litigation. |
• | Limitations on sales following product introductions due to poor market acceptance. |
• | New competitors, product innovations or technologies, including but not limited to, technological advances by competitors, new products and patents attained by competitors, and competitors' expansion through acquisitions. |
• | Reduced sales, loss of customers and costs and expenses related to product recalls and warning letters. |
• | Failure to receive, or delays in receiving, regulatory approvals for products. |
• | Failure of our customers and end users to obtain adequate coverage and reimbursement from third-party payors for our products and services. |
• | The requirement to provide for a significant liability or to write off, or accelerate depreciation on, a significant asset, including goodwill, other intangible assets and idle manufacturing facilities and equipment. |
• | The success of our research and development activities and other start-up projects. |
• | Dilution to earnings per share from acquisitions or issuing stock. |
• | Impact and costs incurred from changes in accounting standards and policies. |
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• | Environmental risks, including increasing environmental legislation and the broader impacts of climate change. |
• | Other events described in our Securities and Exchange Commission filings, including the “Business”, “Risk Factors” and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections in this Annual Report on Form 10-K for the fiscal year ended October 31, 2019, as such Risk Factors may be updated in quarterly filings. |
We caution investors that forward-looking statements reflect our analysis only on their stated date. We disclaim any intent to update them except as required by law.
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Item 1. Business.
The Cooper Companies, Inc. (Cooper, we or the Company), a Delaware corporation organized in 1980, is a global medical device company publicly traded on the NYSE (NYSE: COO). Cooper operates through two business units, CooperVision and CooperSurgical.
CooperVision is a global manufacturer providing products for contact lens wearers. CooperVision develops, manufactures and markets a broad range of single-use, two-week and monthly contact lenses, featuring advanced materials and optics. CooperVision designs its products to solve vision challenges such as astigmatism, presbyopia, myopia, ocular dryness and eye fatigues; with a broad collection of spherical, toric and multifocal contact lenses. Acquisitions also expanded CooperVision's access to myopia management and specialty eye care markets with new products, such as orthokeratology (ortho-k) and scleral lenses. In November 2019, CooperVision received United States Food & Drug Administration (FDA) approval for its MiSight® 1day lens, which is the first and only FDA-approved product indicated to slow the progression of myopia in children with treatment initiated between the ages of 8-12 and is expected to be available in the United States in 2020. Further, CooperVision offers contact lenses in a variety of materials including silicone hydrogel Aquaform® technology and phosphorylcholine technology (PC) Technology™. CooperVision’s major manufacturing and distribution facilities are located in the United Kingdom, Puerto Rico, Hungary, Costa Rica, Belgium and the United States, with other smaller locations also existing in multiple locations around the world.
CooperSurgical's business competes in the general health care market with a focus on advancing the health of women, babies and families through a diversified portfolio of products and services including medical devices, fertility, diagnostics and contraception. CooperSurgical has established its market presence and distribution system by developing products and acquiring companies, products and services that complement its business model. We categorize CooperSurgical product sales based on the point of health care delivery, which includes products used in medical office and surgical procedures, primarily by Obstetricians/Gynecologists (OB/GYN); and fertility products/equipment and genetic testing services used primarily in fertility clinics and laboratories. CooperSurgical's major manufacturing and distribution facilities are located in the United States, Costa Rica, the Netherlands, and the United Kingdom with other smaller locations also existing in multiple locations around the world.
CooperVision and CooperSurgical each operate in highly competitive environments. Both of Cooper's businesses compete predominantly on the basis of product quality and differentiation, technological benefit, price, service and reliability.
COOPERVISION
CooperVision competes in the worldwide soft contact lens market and services three primary regions: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific. The contact lens market has two major product categories:
• | Spherical lenses including lenses that correct near- and farsightedness uncomplicated by more complex visual defects. |
• | Toric and multifocal lenses including lenses that, in addition to correcting near- and farsightedness, address more complex visual defects such as astigmatism and presbyopia by adding optical properties of cylinder and axis, which correct for irregularities in the shape of the cornea. |
In order to achieve comfortable and healthy contact lens wear, products are sold with recommended replacement schedules, often defined as modalities, with the primary modalities being single-use lenses and frequently replaced lenses, which are designed for two-week and monthly replacement.
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CooperVision offers spherical, toric, multifocal and toric multifocal lens products in most modalities. We believe that in order to compete successfully in the numerous categories of the contact lens market, companies must offer differentiated products that are priced competitively and manufactured efficiently. CooperVision believes that it is the only contact lens manufacturer to use three different manufacturing processes to produce its lenses: lathing, cast molding and FIPS™, a cost-effective combination of lathing and molding. We believe this manufacturing flexibility allows CooperVision to compete in its markets by:
• | Producing high, medium and low volumes of lenses made with a variety of materials for a broader range of market niches: single-use, two-week, monthly and quarterly disposable sphere, toric and multifocal lenses and custom toric lenses for patients with a high degree of astigmatism. |
• | Offering a wide range of lens parameters, leading to a higher rate of successful fitting for practitioners and better visual acuity for patients. |
The market for spherical lenses is growing with the addition of new value-added products, such as spherical lenses to alleviate dry eye symptoms, reduce eye fatigue from use of digital devices and add aspherical optical properties and/or higher oxygen permeable lenses such as silicone hydrogels.
Sales of contact lenses utilizing silicone hydrogel materials continue to grow. Silicone hydrogel materials supply a higher level of oxygen to the cornea, as measured by the transmissibility of oxygen through a given thickness of material, or “dk/t,” than traditional hydrogel lenses. We believe our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving success in our business. Silicone hydrogel lenses represent a significant portion of CooperVision's contact lens sales and our Biofinity® brand is CooperVision's leading product line. Under the Biofinity® brand, CooperVision markets monthly silicone hydrogel spherical, toric and multifocal lens products.
CooperVision markets single-use silicone hydrogel lenses with a complete line of spherical, toric and multifocal lenses under our clariti® 1day brand and single-use silicone hydrogel spherical and toric lenses under our MyDay® brand. We also compete in the traditional hydrogel single-use product segment with several lenses including our Proclear® 1 day lenses. We believe the global market for single-use contact lenses will continue to grow and that our competitive silicone hydrogel and traditional hydrogel product offerings represent an opportunity for our business.
We manufacture silicone hydrogel Biofinity brand spherical, toric and multifocal contact lenses, Avaira Vitality brand spherical and toric lenses and MyDay brand spherical and toric lenses using proprietary Aquaform technology to increase oxygen transmissibility for longer wear.
In addition to its silicone hydrogel product offerings, CooperVision competes in the contact lens market with other traditional hydrogel products.
CooperVision believes that our key accounts which include optical chains, global retailers, certain buying groups and mass merchandisers are growing faster than the overall market. We are focused on supporting the growth of all our customers by investing in selling, promotional and advertising activities. Further, we are increasing investment in our distribution and packaging capabilities to support the growth of our business and to continue providing quality service with our industry leading SKU range and customized offerings.
CooperVision is focused on greater worldwide market penetration of recently introduced products, and we continue to expand our presence in existing and emerging markets, including through acquisitions. In fiscal 2019, CooperVision acquired Blanchard Contact Lenses, a privately-held scleral lens company, which expands CooperVision's specialty and scleral lens portfolio. In fiscal 2018, CooperVision acquired Paragon Vision services, a leading provider of ortho-k, specialty contact lenses and oxygen permeable rigid contact lens material, and Blueyes Ltd. (Blueyes), a long-standing distribution partner, with a leading position in the distribution of contact lenses to the Optical and Pharmacy sector in Israel.
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Contact Lens Product Sales
CooperVision Competition
The contact lens market is highly competitive. CooperVision's largest competitors in the worldwide market and its primary competitors in the spherical, toric and multifocal lens categories of that market are Johnson & Johnson Vision Care, Inc., Bausch Health Companies Inc. and Alcon Inc.
CooperVision's competitors may have greater financial resources, larger research and development budgets, larger sales forces, greater market penetration and/or larger manufacturing volumes. CooperVision seeks to offer a high level of customer service through its direct sales organizations around the world and through telephone sales and technical service representatives who consult with eye care professionals about the use of our lens products.
CooperVision also competes with manufacturers of eyeglasses and with refractive surgical procedures that correct visual defects including laser vision correction. CooperVision believes that laser vision correction is not a significant threat to its sales of contact lenses based on the growth of the contact lens market over the past decade.
CooperVision competes in the silicone hydrogel segment of the market with its following products: Biofinity monthly spherical, toric and multifocal lenses; Avaira VitalityTM two-week spherical and toric lenses; clariti 1day brand of single-use sphere, toric and multifocal lenses; and MyDay single-use spherical and toric lenses. CooperVision believes the clariti 1day and MyDay brands of single-use contact lenses provide the broadest product portfolio in the single-use silicone hydrogel market.
In addition to a broad offering of silicone hydrogel lenses, CooperVision competes with different manufacturing processes which allow it to produce a broad range of spheres, toric and multifocal lens parameters, which we believe provides wide choices for patient and practitioner and a high level of visual acuity. We also compete based on our customer and professional services. CooperVision believes that there are opportunities for contact lenses to gain market share, particularly in markets where the penetration of contact lenses in the vision correction market is low.
COOPERSURGICAL
CooperSurgical offers a broad array of products and services focused on advancing the health of women, babies and families through a diversified portfolio of products and services including medical devices, fertility, genomics, diagnostics and contraception. We offer quality products, innovative technologies and superior services to clinicians and patients worldwide. CooperSurgical collaborates with clinicians to
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identify products and new technologies from disposable products to diagnostic tests to sophisticated instruments and equipment, to bring new products to market. The result is a broad portfolio of products and services that are intended to aid in the delivery of improved clinical outcomes that health care professionals use routinely in the diagnosis and treatment of a wide spectrum of family and women's health and reproductive issues.
Since its inception in 1990, CooperSurgical has established its market presence and distribution system by developing products and acquiring products and companies that complement its business model.
CooperSurgical competes in the global in-vitro fertilization (IVF) market with a product portfolio of IVF media and assisted reproductive technology solutions including genetic testing designed to enhance the work of fertility professionals to the benefit of women, babies and families.
We have continued to invest in CooperSurgical's business through the acquisition of companies and product lines for new or complementary products and services for the IVF process and within the OB/GYN space.
In fiscal 2019, CooperSurgical acquired Incisive Surgical Inc., a privately-held U.S. medical device company that develops mechanical surgical solutions for skin closure. In fiscal 2018, CooperSurgical acquired the assets of PARAGARD, which is an Intrauterine System (IUS) from Teva Pharmaceuticals Industries Limited (Teva). This acquisition broadens and strengthens CooperSurgical's women's health product portfolio in office and surgical procedures. PARAGARD® is the only hormone-free, long lasting, reversible contraceptive option approved by FDA available in the United States, and IUSs represent a large and growing segment of the contraceptive market. CooperSurgical also acquired in fiscal 2018, The LifeGlobal Group (LifeGlobal) which was a privately held company that specializes primarily in the IVF media marketplace. We intend to continue investing in CooperSurgical's business with the goal of expanding our integrated solutions model within the areas of family health, fertility and diagnostics.
Market for Women's and Family Reproductive Health Care
CooperSurgical participates in the market for family health care with its diversified product lines in three major categories based on the point of health care delivery: hospitals and surgical centers, OB/GYN medical offices and fertility clinics.
CooperSurgical expects patient visits to OB/GYN offices in the United States to increase over the next decade. Office visit activity related to menopause, abnormal bleeding, incontinence and osteoporosis, are expected to increase slightly over the next decade. Driving the growth is a growing population of women over the age of 65 (according to the United States Census estimates), a large and stable middle-aged population, and a steady number of reproductive age women with increasing fertility issues as well as women interested in contraception that is reversible such as with the PARAGARD® IUS. CooperSurgical expects growth in fertility treatments as more women choose to delay childbearing to the mid-thirties and beyond.
Another trend in the market for women's health care includes the migration of OB/GYN clinicians away from private practice ownership and toward aligning with group practices or employment with hospitals and health care systems. This trend includes the increasing influence of supply chain controls, such as value analysis committees, on product evaluation and procurement. CooperSurgical believes that the market factors that are driving this trend will continue in the near term. We believe our broad product portfolio can be a benefit in this changing environment as health systems look to standardize and consolidate vendors.
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Recent trends in the United States market include the development of more cost-effective health care delivery models, including moving treatment out of hospitals and surgery centers and into the office setting without compromising care. We expect this trend to continue.
While general medical practitioners play an important role in women's primary care, the OB/GYN specialist is the primary market for our medical devices.
Some significant features of this market are:
• | Patient visits are for annual checkups, cancer screening, menstrual disorders, vaginitis (inflammation of vaginal tissue), treatment of abnormal Pap smears, osteoporosis (reduction in bone mass) and the management of menopause, pregnancy and reproductive management. |
• | We believe that approximately one-third of the office visits to OB/GYN are patients seeking diagnosis and treatment for the symptoms of abnormal uterine bleeding. |
• | A high proportion of office visits are for contraceptive management. |
• | OB/GYN traditionally provide the initial evaluation for women and their partners who seek infertility assistance. Ovulatory drugs and intrauterine insemination (IUI) are common treatments in these cases. |
• | IVF is performed by reproductive endocrinologists, a subgroup of OB/GYN, along with partner embryologists. |
• | Osteoporosis and incontinence have become frequent diagnoses as the female population ages. Early identification and treatment of these conditions will both improve women's health and help reduce overall costs of treatment. |
• | Sterilization is a frequently performed procedure. |
• | Hysterectomy is one of the most commonly performed surgical procedures. |
• | Hysteroscopy is commonly used in the evaluation of abnormal uterine bleeding. |
• | The trend to move hospital-based procedures to an office or clinical setting is continuing as a method to reduce cost to the health care system without compromising clinical outcomes. |
• | Increased awareness of improved IVF outcomes with preimplantation genetic screening will continue. |
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Women's and Family Reproductive Health Care Product Sales
CooperSurgical Competition
CooperSurgical focuses on selected segments of the family and women's health care market, supplying diagnostic products, services, and surgical instruments and accessories. In some instances, CooperSurgical offers all the items needed for a complete procedure. CooperSurgical believes that opportunities exist for continued market consolidation of smaller technology-driven firms that generally offer only one or two product lines. Most are privately owned or divisions of public companies including some owned by companies with greater financial resources than Cooper.
Competitive factors in these segments include technological and scientific advances, product quality, price, customer service and effective communication of product information to physicians, fertility clinics and hospitals. CooperSurgical competes based on our sales and marketing expertise and the technological advantages of our products. Competition in the medical device industry is dynamic and involves the search for technological and therapeutic innovations. CooperSurgical's strategy includes developing and acquiring new products, including those used in new medical procedures. As CooperSurgical expands its product line, we also offer educational programs for medical professionals in the appropriate use of our products.
CooperSurgical continues to expand its presence in the significantly larger hospital and outpatient surgical procedure segment of the market that is at present dominated by bigger competitors such as Johnson & Johnson, Boston Scientific, Hologic, Olympus and Medtronic. These competitors have well-established positions within the operating room environment. CooperSurgical leverages its relationship with gynecologic surgeons and focus on devices specific to gynecologic surgery to facilitate our expansion within the surgical segment of the market.
CooperSurgical also competes in the fertility category of the women's health care market. We have broad product offerings for fertility evaluations and IVF procedures by OB/GYN, reproductive endocrinologists and embryologists. These include products for use by the OB/GYN in their offices for initial evaluations with office-based hysteroscopy and first line treatments such as intrauterine insemination. In fertility clinics, our products include media, micro tools and lab equipment; and to improve IVF outcomes we offer screening testing services intended to increase implantation rates and decrease miscarriages.
CooperSurgical leverages its relationship with fertility clinics to expand its presence in the fertility market against competitors in the media and microtools categories that include Vitrolife, Cook and Irvine Scientific and competitors in fertility and familial reproductive genetic testing that include Natera, Invitae and Igenomix.
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CooperSurgical competes in the IUS market. PARAGARD is the only non-hormonal IUS option in the United States and has a 10-year use indication. In the United States, where all IUSs are regulated as pharmaceuticals, we compete with manufacturers of hormonal IUSs including Bayer and Allergan. Outside of the United States, non-hormonal IUSs are more typically regulated as devices and are sold by a number of manufacturers. Currently, PARAGARD is not sold outside of the United States.
RESEARCH AND DEVELOPMENT
The Company employs approximately 222 people in research and development. CooperVision's product development and clinical research is supported by internal and external specialists in lens design, formulation science, polymer chemistry, clinical trials, microbiology and biochemistry. CooperVision's research and development activities primarily include programs to develop new contact lens designs and manufacturing technology, along with improving formulations and existing products.
CooperSurgical conducts research and development in-house and has consulting agreements with external specialists. CooperSurgical's research and development activities include the design and improvement of surgical procedure devices, the advancement and expansion of CooperSurgical's portfolio of assisted reproductive technology products, genetic screening and testing, as well as products within the general OB/GYN offerings.
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GOVERNMENT REGULATION
Medical Device and Pharmaceutical Regulation
Most of our products are medical devices subject to extensive regulation by the FDA in the United States and other regulatory bodies abroad. The Federal Food, Drug, and Cosmetic Act (FDCA) and FDA regulations govern, among other things, medical device design and development, testing, manufacturing, labeling, storage, record keeping, premarket clearance or approval, advertising and promotion, and sales and distribution. Unless an exemption applies, each medical device we wish to distribute commercially in the United States will require either prior notice to the FDA requesting clearance for commercial distribution under Section 510(k) of the FDCA, or premarket approval (PMA) from the FDA. A majority of the medical devices we currently market have received FDA clearance through the 510(k) process or approval through the PMA process. Because we cannot be assured that any new products we develop, or any product enhancements, will be exempt from the premarket clearance or approval requirements or will be subject to the shorter 510(k) clearance process rather than the PMA process, significant delays in the introduction of any new products or product enhancements may occur.
Device Classification
The FDA classifies medical devices into one of three classes - Class I, II or III - depending on the degree of risk associated with each medical device and the extent of control needed to ensure its safety and effectiveness. Both CooperVision and CooperSurgical develop and market medical devices under different levels of FDA regulation depending on the classification of the device. Class III devices, such as flexible and extended wear contact lenses, require extensive premarket testing and approval, while Class I and II devices require lower levels of regulation. The majority of CooperSurgical's products are Class II devices.
Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA's general regulatory controls for medical devices, which include compliance with the applicable portions of the FDA's Quality System Regulation (QSR), facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials (General Controls). Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below.
Class II devices are subject to the FDA's General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device, such as performance standards, post-market surveillance, FDA guidelines or particularized labeling requirements. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification procedure. Pursuant to the Medical Device User Fee and Modernization Act of 2002 (MDUFMA), unless a specific exemption applies, 510(k) premarket notification submissions are subject to user fees. Certain Class II devices are exempt from this premarket review process.
Class III devices are those devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or certain implantable devices, or which have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device. The safety and effectiveness of Class III devices cannot be assured solely by the General Controls and other special controls such as those listed above. These devices almost always require formal clinical studies to demonstrate safety and effectiveness and must be approved through the PMA process described below. PMA applications (and supplemental PMA applications) are subject to significantly higher user fees under MDUFMA than are 510(k) premarket notifications.
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510(k) Clearance Pathway
When we are required to obtain a 510(k) clearance for a Class I or Class II device that we wish to market, we must submit a premarket notification to the FDA demonstrating that the device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution in the United States before May 28, 1976, for which the FDA has not yet called for the submission of PMA applications. The FDA aims to respond to a 510(k) premarket notification within 90 days of submission of the notification, but as a practical matter, clearance can take significantly longer. Although many 510(k) pre-market notifications are cleared without clinical data, in some cases, the FDA requires additional information to support substantial equivalence. If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is not substantially equivalent to a previously cleared device the device sponsor must fulfill more rigorous PMA requirements, or can request a risk-based classification determination for the device in accordance with the de novo process.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that changes its intended use, will require a new 510(k) clearance or could require premarket approval. The FDA requires each manufacturer to make this determination initially, but 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 may require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. In these circumstances, a manufacturer also may be subject to significant regulatory fines or penalties. We have made and plan to continue to make additional product enhancements and modifications to our devices that we believe do not require new 510(k) clearances.
Premarket Approval Pathway
A PMA application must be submitted if the device cannot be cleared through the 510(k) premarket notification procedures or if the device has been previously classified as Class III. The PMA process is much more demanding than the 510(k) premarket notification process. A PMA application must be supported by extensive data including, but not limited to, technical, non-clinical, clinical trials, manufacturing and labeling to demonstrate to the FDA's satisfaction the safety and effectiveness of the device for its intended use.
Following receipt of a PMA application, the FDA conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for filing and begin the review. The FDA, by statute and regulation, has 180 days to review an accepted PMA 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, including clinical data, non-clinical data or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant's response to deficiencies communicated by the FDA. The FDA considers a PMA or PMA supplement to have been voluntarily withdrawn if an applicant fails to respond to an FDA request for information (e.g., major deficiency letter) within 180 days after the FDA issues such request. 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 preapproval inspection of the manufacturing facility to ensure compliance with the QSR, which requires manufacturers to implement and follow elaborate design, testing, control, documentation and other quality assurance procedures in the device design and manufacturing process.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
The FDA may approve a PMA application with post-approval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution and collection of long-term follow-up data from patients in the clinical study that supported approval. Failure to comply with the conditions of approval can result in materially adverse enforcement action, including the loss or withdrawal of the approval. New PMA applications, amendments to a PMA application or PMA application supplements are required for significant modifications to the manufacturing process, labeling and design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as a PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application, and may not require as extensive clinical data or the convening of an advisory panel.
Clinical Trials for Medical Devices
A clinical trial is almost always required to support a PMA application and is rarely required for a 510(k) premarket notification. These trials generally require submission of an application for an investigational device exemption (IDE) to the FDA. Some types of studies deemed to present "non-significant risk" are deemed to have an approved IDE once certain requirements are addressed and Institutional Review Board approval is obtained. If the device presents a "significant risk" to human health, as defined by the FDA, the sponsor must submit an IDE application to the FDA and obtain IDE approval prior to commencing the human clinical trials. The IDE application which includes a clinical study protocol must be supported by appropriate data, such as animal and laboratory testing results, showing that the potential benefits of testing the device in humans and the importance of the knowledge to be gained outweighs the risks to human subjects from the proposed investigation that the testing protocol is scientifically sound and there is reason to believe that the device as proposed for use will be effective. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated investigational device exemption requirements. Clinical trials for a significant risk device may begin once the IDE application is approved by both the FDA and the appropriate institutional review boards at the clinical trial sites. There can be no assurance that submission of an IDE will result in the ability to commence clinical trials. Additionally, after a trial begins, the FDA may place it on hold or terminate it if, among other reasons, it concludes that the clinical subjects are exposed to unacceptable health risks that outweigh the benefits of participation in the study. During a study, we are required to comply with the FDA's IDE requirements for investigator selection, trial monitoring, reporting, record keeping and prohibitions on the promotion of investigational devices or making safety or efficacy claims for them. We are also responsible for the appropriate labeling and distribution of investigational devices. All of Cooper's currently marketed products have been cleared by all appropriate regulatory agencies, and Cooper has no product currently being marketed under an IDE.
Continuing FDA and Other Government Agency Regulation of Medical Devices
After a device is placed on the market, numerous regulatory requirements apply. These include: establishment registration and device listing with the FDA; the QSR, which requires manufacturers to follow design, testing, production, control, complaint handling, documentation and other quality assurance procedures during the manufacturing process; labeling regulations, which prohibit the promotion of products for uncleared or unapproved or “off-label” uses and impose other restrictions on labeling, advertising and promotion; new FDA unique device identifier regulations, which require changes to labeling and packaging; and medical device reporting 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. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections for cause by the FDA to determine our compliance with the QSR and other regulations.
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Failure to comply with applicable regulatory requirements, which are subject to new legislation and change, can result in enforcement action by the FDA, or other federal and state government agencies which may include, but may not be limited to, any of the following sanctions or consequences: warning letters or untitled letters; fines, injunctions and civil penalties; recall, seizure or import holds of our products; operating restrictions, suspension or shutdown of production; refusing to issue certificates to foreign governments needed to export products for sale in other countries; refusing our request for 510(k) clearance or premarket approval of new or modified products; withdrawing 510(k) clearance or premarket approvals that are already granted; and criminal prosecution.
Laboratory Developed Tests
Our genetic testing laboratory services are not currently regulated by the FDA, or foreign ministries of health. Although the FDA has statutory authority to regulate In Vitro Diagnostic Products (IVDs) used for clinical purposes as medical devices, and to assure that such products are safe and effective for their intended uses, the FDA has historically exercised its enforcement discretion and not enforced applicable provisions of the FDCA and regulations with respect to Laboratory Developed Tests (LDT), which are a subset of IVDs that are intended for clinical use and designed, manufactured and used within a single laboratory. We believe our genetic laboratory tests fall within the definition of an LDT. As a result, we believe our tests are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. However, the IVDR will regulate the testing of human embryos which will be classified as Class C. In addition, even though we commercialize our tests as LDT, our tests may in the future become subject to more onerous regulation by the FDA.
Pharmaceutical Regulation
Our PARAGARD Intrauterine Copper Contraceptive is regulated by the FDA as a drug.
In the United States, the FDA regulates drugs under the FDCA and its implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending New Drug Applications (NDA), withdrawal of an approval, imposition of a clinical hold, untitled letters, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.
Any drug products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including manufacturing, periodic reporting, product sampling and distribution, advertising, promotion, drug shortage reporting, compliance with any post-approval requirements imposed as a conditional of approval such as Phase 4 clinical trials, a Risk Evaluation and Mitigation Strategy (REMS), and surveillance, recordkeeping and reporting requirements, including adverse experiences.
After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to further testing to new clinical investigation requirements and prior FDA review and approval. There also are continuing, annual program fee requirements for any approved products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies and to list their drug products and are subject to periodic announced and unannounced inspections by the FDA and these state agencies for compliance with Good Manufacturing Practices, or cGMPs, and other requirements, which impose procedural and documentation requirements upon us and our third-party manufacturers.
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Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented, or FDA notification. FDA regulations also require investigation and correction of any deviations from cGMPs specifications and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in withdrawal of marketing approval, mandatory revisions to the approved labeling to add new safety information or other limitations, imposition of post-market studies or clinical trials to assess new safety risks, or imposition of distribution or other restrictions under a REMS program, among other consequences.
The FDA closely regulates the marketing and promotion of drugs. A company can make only those claims relating to safety and efficacy, purity and potency that are approved by the FDA. Physicians, in their independent professional medical judgement, may prescribe legally available products for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. We, however, are prohibited from marketing or promoting drugs for uses outside of the approved labeling.
In addition, the distribution of prescription pharmaceutical products, including samples, is subject to the Prescription Drug Marketing Act (PDMA), which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution. The Drug Supply Chain Security Act also imposes obligations on manufacturers of pharmaceutical products related to product and tracking and serialization.
Failure to comply with any of the FDA’s requirements, which are subject to new legislation and change, could result in significant adverse enforcement actions. These include a variety of administrative or judicial sanctions, such as refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, imposition of a clinical hold or termination of clinical trials, warning letters, untitled letters, cyber letters, modification of promotional materials or labeling, product recalls, product seizures or detentions, refusal to allow imports or exports, total or partial suspension of production or distribution, debarment, injunctions, fines, consent decrees, corporate integrity agreements, refusals of government contracts and new orders under existing contracts, exclusion from participation in federal and state healthcare programs, restitution, disgorgement or civil or criminal penalties, including fines and imprisonment. It is also possible that failure to comply with the FDA’s requirements relating to the promotion of prescription drugs may lead to investigations alleging violations of federal and state healthcare fraud and abuse and other laws, as well as state consumer protection laws. Any of these sanctions could result in adverse publicity, among other adverse consequences.
Foreign Regulation
Health authorities in foreign countries regulate Cooper's clinical trials and medical device sales. The regulations vary widely from country to country. Even if the FDA has cleared or approved a product in the United States, the regulatory agencies in other countries must approve new products before they may be marketed there. The time required to obtain approval in another country may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. There is a trend towards harmonization of quality system standards among the European Union, United States, Canada and various other industrialized countries. Japan has one of the most rigorous regulatory systems in the world and requires in-country clinical trials. The Japanese quality and regulatory standards remain stringent even with the more recent harmonization efforts and updated Japanese regulations. China is also updating its regulations and is requiring rigorous in-country product testing.
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These regulatory procedures require a considerable investment in time and resources and usually result in a substantial delay between new product development and marketing. If the Company does not maintain compliance with regulatory standards or if problems occur after marketing, product approval may be withdrawn.
In addition to FDA regulatory requirements, CooperVision maintains ISO 13485 certification and CE mark approvals for its products and CooperSurgical maintains ISO 13485 certification for medical devices and ISO 15189 certification for the Genomics laboratories. A CE mark is an international symbol of adherence to certain standards and compliance with applicable European medical device requirements. These quality programs and approvals are required by the European Medical Device Directive and must be maintained for all products intended to be sold in the European market. The ISO 13485 Quality Measurement System registration is now also required for registration of products in Asia Pacific and Latin American countries. In order to maintain these quality benchmarks, the Company is subjected to rigorous biannual reassessment audits of its quality systems and procedures.
In May 2017, the MDR (Regulation 2017/745) was adopted. The MDR will, however, only become applicable three years after publication (in May 2020). Once applicable, the new regulations will bring significant new requirements for many medical devices, including enhanced requirements for clinical evidence and documentation, increased focus on device identification and traceability, and additional post market surveillance and vigilance. Compliance with the MDR will require re-certification of many of our products to the enhanced standards. Further, products sold as IVDs in Europe will be regulated under the In Vitro Diagnostics Directive (98/79/EC). A new regulation, the IVDR (EU) 2017/746, the IVDR, has been released and will become fully enforceable in 2022. These regulations include requirements for both presentation and review of performance data and quality-system requirements.
Both CooperVision and CooperSurgical have been actively deploying regulatory and compliance initiatives designed to allow the continued ability to sell and market their respective products in the EU under the MDR and the IVDR.
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Other Health Care Regulation
We may be subject to various federal, state and foreign laws pertaining to health care fraud and abuse, including anti-kickback laws and physician self-referral laws, physician payment transparency laws, and laws pertaining to health information privacy and security. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state health care programs, including Medicare, Medicaid, Veterans Administration health programs and TRICARE. Similarly, if the physicians or other providers or entities with whom we do business are found to be noncompliant with applicable laws, they may be subject to sanctions, which could indirectly have a negative impact on our business, financial conditions and results of operations. While we believe that our operations are in material compliance with such laws, as applicable to us, because of the complex and far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws.
In addition, the federal government, as part of the Affordable Care Act (the ACA), as well as certain state governments have enacted laws aimed at increasing transparency in relationships between medical device companies and health care professionals. We are now required by the federal Physician Payments Sunshine Act and similar state and foreign laws to report annually many types of payments made and items of value provided to licensed health care professionals. Certain states also mandate implementation of commercial compliance programs, impose restrictions on device manufacturer marketing practices and tracking and/or require the reporting of gifts, compensation and other remuneration to physicians. In addition, certain foreign jurisdictions have adopted, or are currently acting to implement, similar laws. Failure to adhere to our policies, comply with required laws or implement adequate policies and practices to address changes to legal and regulatory requirements could result in sanctions such as fines, injunctions and civil penalties.
The impact to our businesses of the ACA provisions related to coverage expansion, payment reforms and delivery system changes remains uncertain. The ACA imposes a 2.3 percent excise tax, with limited exceptions, on any entity that manufactures or imports Class I, II and III medical devices offered for sale in the United States that began on January 1, 2013. CooperVision's products are not subject to this tax because contact lenses are excluded from the tax. However, United States sales of CooperSurgical's products are subject to this tax which is recorded in selling, general and administrative expense on our Statement of Income. The Consolidated Appropriations Act of 2016 imposed a two-year moratorium of the device excise tax for device sales in calendar years 2016 and 2017. On January 22, 2018, the moratorium was extended for two more years. Absent further legislative action, the device excise tax will be reinstated on medical device sales starting January 1, 2020.
We cannot predict at this time the full impact of the ACA, or the impact of any U.S. legislation enacted in the future will have on our revenues, profit margins, profitability, operating cash flows and results of operations. For example, the Trump Administration recently narrowed the ACA mandate for employers and insurers to cover birth control pills and other contraceptives by expanding the types of entities that could invoke religious or moral beliefs to avoid the ACA requirement. The Trump Administration and the U.S. Congress may take further action regarding the ACA, including, but not limited to, repeal or replacement. Additionally, all or a portion of the ACA and related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge.
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RAW MATERIALS
Our businesses utilize various chemicals, packaging materials, components, parts and raw materials which are generally available from more than one source. However, in certain instances we acquire components and materials from sole suppliers to make our silicone hydrogel contact lens, certain medical devices and IVF products. Supply of these materials is protected by contractual agreements and safety stocks. However, if current raw material suppliers fail to supply sufficient materials on a timely basis, or at all for any reason, we could experience inventory shortages and disruption in the supply of products if we were required to use an alternative supplier on short notice.
MARKETING AND DISTRIBUTION
CooperVision markets our products through our own field sales representatives, who call on optometrists, ophthalmologists, opticians, optical chains and distributors. CooperVision also sells to distributors and to mass merchandisers who offer eye care services. To support the sale and use of CooperVision products, CooperVision engages in various activities and offers a variety of services. These include clinical training, digital marketing for the customer, e-commerce, telemarketing, social media, and journal advertisements. CooperVision also invested in tools that allow our customers to offer their patients monthly purchase and delivery subscriptions. In certain smaller countries, CooperVision often uses distributors and leverages our distributors' sales and marketing resources to attract major customers to CooperVision.
CooperSurgical's products are marketed by a network of dedicated field sales representatives, independent agents and distributors. CooperSurgical augments its sales and marketing activities by participating in national and regional industry trade shows, professional educational programs and internet promotions including e-commerce, social media and collaborative efforts with professional organizations, telemarketing, direct mail and advertising in professional journals. With the addition of PARAGARD, CooperSurgical expanded its awareness campaigns to include direct to consumer elements including print, internet/social media, radio and television.
PATENTS, TRADEMARKS AND LICENSING AGREEMENTS
Cooper owns or licenses a variety of domestic and foreign patents, which, in total, are material to our overall business. The names of certain Cooper's products are protected by trademark registrations in the United States Patent and Trademark Office and, in some cases, also in foreign trademark offices. Applications are pending for additional trademark and patent registrations. Cooper intends to protect our intellectual property rights aggressively.
In addition to trademarks and patent licenses, we own certain trade secrets, copyrights, know-how and other intellectual property.
DEPENDENCE ON CUSTOMERS
No customers accounted for 10% or more of our consolidated net revenue in fiscal 2019 and 2018. One customer, a CooperVision contact lens distributor, accounted for approximately 10% of our consolidated net revenue in fiscal 2017. See Note 12. Business Segment Information of the Consolidated Financial Statements for additional information.
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GOVERNMENT CONTRACTS
Neither of our business units is materially subject to profit renegotiation or termination of contracts or subcontracts at the election of the United States government.
BACKLOG
Backlog is not a material factor in either of Cooper's business units.
SEASONALITY
CooperVision and CooperSurgical net sales in the fiscal first quarter, which runs from November 1 through January 31, are typically lower than subsequent quarters, as patient traffic to practitioners' offices, fertility clinics, and hospitals/surgical centers for surgical procedures is relatively light during the holiday season.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Federal, state and local provisions that regulate the discharge of materials into the environment, or relate to the protection of the environment, do not currently materially affect Cooper's capital expenditures, earnings or competitive position.
In addition, the Company continues to monitor and comply with environmental health and safety regulations in countries in which it operates throughout the world, in particular, European Union and China Restrictions on the use of certain Hazardous Substances in electrical and electronic equipment (RoHS) and Registration, Evaluation, Authorization and Restriction of Chemical substances, or REACH.
EMPLOYEES
As of October 31, 2019, we had approximately 12,000 employees. We believe we have good relations with our employees.
NEW YORK STOCK EXCHANGE CERTIFICATION
We submitted our 2019 annual Section 12(a) CEO certification with the New York Stock Exchange. The certification was not qualified in any respect. Additionally, we filed with the Securities and Exchange Commission as exhibits to this Annual Report on Form 10-K for the year ended October 31, 2019, the CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.
AVAILABLE INFORMATION
The Cooper Companies, Inc. Internet address is http://www.coopercos.com. The information on the Company's website is not part of this or any other report we file with, or furnish to, the Securities and Exchange Commission (SEC). Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with all other reports and amendments filed with or furnished to the SEC, are publicly available free of charge on our website as soon as reasonably practicable. The SEC maintains a website that contains such reports, proxy and information statements and other information whose Internet address is http://www.sec.gov. The Company's Corporate Governance Principles, Ethics and Business Conduct Policy and charters of each standing committee of the Board of Directors are also posted on the Company's website.
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Item 1A. Risk Factors.
Our business faces significant risks. These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem immaterial. Our business, financial condition and results of operations could be materially adversely affected by any of these risks, and the trading prices of our common stock could decline by virtue of these risks. These risks should be read in conjunction with the other information in this report.
Risks Relating to Our Business
We operate in the highly competitive health care industry and there can be no assurance that we will be able to compete successfully.
Each of our businesses operates within a highly competitive environment. In our soft contact lens business, CooperVision faces intense competition from competitors' products, in particular silicone hydrogel contact lenses, and may face increasing competition as other new products enter the market. Our largest competitors in the contact lens business, Johnson & Johnson Vision Care, Inc. and Alcon Inc. may have substantially greater financial resources, larger research and development budgets, larger sales forces, greater market penetration and/or larger manufacturing volumes than CooperVision. They offer competitive products and differentiated materials, plus a variety of other eye care products including lens care products and ophthalmic pharmaceuticals, which may give them a competitive advantage in marketing their lenses. The market for contact lenses is intensely competitive and is characterized by declining sales volumes for older product lines and growing demand for silicone hydrogel based products. Our ability to respond to these competitive pressures will depend on our ability to decrease our costs and maintain gross margins and operating results and to introduce new products successfully, on a timely basis in the Americas, EMEA and Asia Pacific, and to achieve manufacturing efficiencies and sufficient manufacturing capacity and capabilities for such products. Any significant decrease in our costs per lens will depend, in part, on our ability to increase sales volume and production capabilities. Our failure to respond to competitive pressures in a timely manner could have a material adverse effect on our business, financial condition and results of operations.
To a lesser extent, CooperVision also competes with manufacturers of eyeglasses and providers of other forms of vision correction including ophthalmic surgery.
There can be no assurance that we will not encounter increased competition in the future, for example with increased product entries from Asia Pacific contact lens manufacturers, or that our competitors' newer contact lens products will not successfully erode CooperVision's contact lens business, which could have a material adverse effect on our business, financial condition and results of operations.
The contact lens industry also continues to evolve with respect to the introduction of new distribution and fulfillment models and service technologies which may conflict with CooperVision’s strategy or interfere with its customers’ relationships and loyalty. For example, more contact lenses are being fulfilled directly to the consumer by manufacturers and wholesalers via online platforms, telemedicine is gaining popularity and more vision correction prescriptions are being provided through online refractive exams rather than in office by an eye care practitioner. CooperVision’s failure to adapt to the threats posed by these new and emerging distribution models and Internet driven services may have a material adverse impact on our business, financial condition and results of operations.
In the women's health care market, competitive factors include technological and scientific advances, product quality, access to local markets based on regulatory clearances, price and effective communication of product information to physicians, hospitals, patients and IVF clinics. CooperSurgical competes with a number of manufacturers in each of its niche areas, some of which have substantially
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greater financial and personnel resources and sell a much broader range of products, which may give them an advantage in marketing competitive products.
Acquisitions that we have made and may make in the future involve numerous risks.
We have a history of acquiring businesses and products that have significantly contributed to our growth in recent years. As part of our growth strategy, particularly at CooperSurgical and at CooperVision, we intend to continue to consider acquiring complementary technologies, products and businesses. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and an increase in amortization and/or impairments of goodwill and other intangible assets, which could have a material adverse effect upon our business, financial condition and results of operations. CooperVision acquired Blanchard Contact Lenses in fiscal 2019; Paragon Vision Sciences and Blueyes in fiscal 2018. CooperSurgical acquired Incisive Surgical Inc. in fiscal 2019; PARAGARD and LifeGlobal in fiscal 2018. Risks we could face with respect to these acquisitions include:
• | failure to successfully obtain the anticipated revenues, margins and earnings benefits; |
• | difficulties in, and expenses related to, the integration of the operations, technologies, products and personnel of the acquired company and establishment of appropriate accounting controls and reporting procedures and other regulatory compliance procedures, including but not limited to third party compliance and due diligence; |
• | increased leverage and the risk of lack of access to available financing, including financing for the acquisition or refinancing of debt owed by us on a timely basis and on reasonable terms; |
• | risks of entering markets in which we have no or limited prior experience; |
• | potential loss of employees; |
• | an inability to identify and consummate future acquisitions on favorable terms or at all; |
• | diversion of management's attention away from other business concerns; |
• | expenses of any undisclosed or potential liabilities, contingent liabilities or indemnification obligations of the acquired company; |
• | expenses, including restructuring expenses, to shut-down our own locations or terminate our employees; |
• | application of and compliance with new and unfamiliar regulatory frameworks such as pharmaceutical regulation applicable to our PARAGARD IUS; |
• | Failure to successfully obtain or maintain reimbursements under the third party payor plans, including but not limited to governmental programs, due to complex reporting and payment obligations; |
• | a dilution of earnings per share; and |
• | risks inherent in accounting allocations and the risk that we are required to record significant adjustments to the preliminary fair value of assets acquired and liabilities assumed within the measurement period. |
Product innovations are important in the industry in which we operate, and we face the risk of product obsolescence if we are unable to develop new products or gain regulatory approvals or if our competitors introduce new products.
Product innovations are important in the contact lens market in which CooperVision competes and in the areas of the health care industry in which CooperSurgical competes. CooperSurgical has historically purchased, leveraged or licensed the technology developments of others. Over the past few years, CooperSurgical has invested in expanding the internal research and development function with the goal of
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organic growth and to complement our acquisitions strategy. CooperVision, both internally and externally with third parties, invests in new product development, including the development of silicone hydrogel-based contact lenses. While much of CooperVision’s research and development activities are performed internally, it also uses external research and development investment in collaborations and joint development with third parties. Research and development time commitments, higher feasibility risk with longer term projects, greater dependence on, and reduced control over, third party deliverables, the cost of obtaining necessary regulatory approval and other costs related to product innovations can be substantial. There can be no assurance that we will successfully obtain necessary regulatory approvals or clearances for our new products or that our new products will successfully compete in the marketplace and, as a result, justify the expense involved in their development and regulatory approval. In addition, our competitors may have developed or may in the future develop new products or technologies, such as contact lenses with anti-microbial or anti-allergenic features, or “smart” contact lenses which incorporate electronics that could lead to the obsolescence of one or more of our products. Competitors may also introduce new uses for contact lenses, such as for drug delivery or the control of myopia. Failure to develop new product offerings and technological changes and to offer products that provide performance that is at least comparable to competing products could have a material adverse effect on our business, financial condition, or results of operations.
If our products are not accepted by the market, we will not be able to sustain or expand our business.
Certain of our proposed products have not yet been clinically tested or commercially introduced, and we cannot assure that any of them, assuming they receive necessary regulatory approvals, will achieve market acceptance or generate operating profits. The development of a market for our products may be influenced by many factors, some of which are out of our control, including:
• | acceptance of our products by eye care and health care practitioners; |
• | the cost competitiveness of our products; |
• | consumer reluctance to try and use a new product; |
• | regulatory and legislative requirements; |
• | adequate coverage and reimbursement by third party payors; |
• | the earlier release of competitive products, such as new silicone hydrogel products, into the market by our competitors; and |
• | the emergence of newer and more competitive products. |
New medical and technological developments may reduce the need for our products.
Technological developments in the eye care, family and women's health care, and diagnostics testing industries, such as new surgical procedures or medical devices, and genetic testing technology may limit demand for our products and services. Corneal refractive surgical procedures such as Lasik surgery and the development of new pharmaceutical products may decrease the demand for our optical products. If these new advances provide a practical alternative to traditional vision correction, the demand for contact lenses and eyeglasses may materially decrease. We cannot assure that medical advances and technological developments will not have a material adverse effect on our businesses.
Our substantial and expanding international operations are subject to uncertainties which could affect our operating results.
A significant portion of our current operations are conducted and located outside the United States, and our growth strategy involves expanding our existing foreign operations and entering into new foreign jurisdictions. We have significant manufacturing and distribution sites in North America, Latin America
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and Europe. Over half of our net sales for the fiscal years ended October 31, 2019 and 2018, were derived from the sale of products outside the United States. We believe that sales outside the United States will continue to account for a material portion of our total net sales for the foreseeable future. International operations and business expansion plans are subject to numerous additional risks, including:
• | we may have difficulty enforcing intellectual property rights in some foreign countries; |
• | we may have difficulty gaining market share in countries such as Japan and China because of regulatory restrictions and customer preferences; |
• | we may find it difficult to grow in emerging markets such as China, India, Russia, Brazil and other developing nations due to, among other things, customer acceptance, undeveloped and/or unfamiliar distribution channels, regulatory restrictions and changes, and business knowledge of these new markets; |
• | tax rates in some foreign countries may exceed those of the United States, and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions, including the tariffs enacted by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods, the scope and duration of which remain uncertain; |
• | we may find it difficult to comply with a variety of United States and foreign legal, compliance and regulatory requirements such as the Foreign Corrupt Practices Act, the Dodd-Frank Act, the U.K. Bribery Act and international data security and privacy laws and MDR and IVDR; |
• | we may find it difficult to manage a large organization spread throughout various countries; |
• | fluctuations in currency exchange rates could adversely affect our results; |
• | foreign customers may have longer payment cycles than customers in the United States; |
• | failure to comply with United States Department of Commerce and other nations' import-export controls may result in fines and/or penalties; |
• | general economic and political conditions in the countries where we operate may have an adverse effect on our operations in those countries or not be favorable to our growth strategy; |
• | foreign governments may adopt regulations, including those similar to MDR and IVDR or take other actions that would have a direct or indirect adverse impact on our business and market opportunities, including but not limited to increased enforcement of potentially conflicting and ambiguous anti-bribery laws; |
• | we may have difficulty enforcing agreements and collecting receivables through some foreign legal systems; and |
• | we may be subject to unforeseen economic or political events in certain countries that may have an impact on our customers' ability or preferences to buy our products. |
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could adversely affect our international operations and, consequently, our operating results.
Current market conditions and recessionary pressures in one or more of our markets could impact our ability to grow our business.
Over the last few years in the United States and globally, market and economic conditions have been challenging with tighter credit conditions and slower economic growth. Foreign countries, in particular the Euro zone, have experienced recessionary pressures and face continued concerns about the systemic impacts of adverse economic conditions and geopolitical issues. Concerns about the Euro zone’s
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sovereign debt in recent years have caused uncertainty and disruption in the financial markets globally. While the global financial markets have showed general signs of improvement, uncertainty remains.
Any negative impact on economic conditions and international markets, continued volatility or deterioration in the debt and equity capital markets, inflation, deflation or other adverse economic conditions may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers. It may limit our ability, and the ability of our customers, to replace maturing liabilities and to access the capital markets to meet liquidity needs, which could have a material adverse effect on our financial condition and results of operations.
Global markets continued to face threats and uncertainty during fiscal 2019. Uncertain economic and financial market conditions may also adversely affect the financial condition of our customers, suppliers and other business partners. If our customers’ financial conditions are adversely affected, customers may reduce their purchases of our products or we may not be able to collect accounts receivable, each of which could have a material adverse impact on our business operations or financial results.
CooperVision and CooperSurgical are encountering consolidation in their customer bases and emergence of more centralized large customer groups and retail chains. Due to this trend, global and regional key account customers now represent a larger proportion or concentration of our business and any disruption to these relationships may have a material adverse impact on our business, financial conditions and results of operations.
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
We are a multinational company headquartered in the United States with worldwide operations, with significant business operations in Europe, including in the United Kingdom. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. In March 2017, the government of the United Kingdom formally gave notice of its intent to withdraw from the European Union. Serving this notice began a two-year period for the United Kingdom to negotiate terms for its withdrawal from the European Union. The European Union and the United Kingdom have agreed to delay the United Kingdom’s withdrawal from the European Union multiple times. Currently, January 31, 2020 is the deadline to reach an agreement regarding the terms of the United Kingdom’s withdrawal from the European Union and their relationship following such a withdrawal. If an agreement is not reached, or the deadline not postponed, prior to January 31, 2020, the United Kingdom may withdraw from the European Union without an agreement in place. There is significant uncertainty regarding the terms of any agreement between the United Kingdom and the European Union and the potential for a “no-deal” withdrawal.
These developments have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets. Given the lack of comparable precedent, it is unclear what implications the withdrawal of the United Kingdom from the European Union will have and how such withdrawal could affect, or whether it could have a material adverse effect on, our business, financial condition and operating results.
Our indebtedness could adversely affect our financial health and prevent us from fulfilling our debt obligations.
We have now and expect to continue to have a significant amount of indebtedness.
Our indebtedness could:
• | increase our vulnerability to general adverse economic and industry conditions; |
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• | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development efforts and other general corporate purposes; |
• | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
• | place us at a competitive disadvantage compared to our competitors that have less debt; |
• | result in greater interest rate risk and volatility; |
• | limit our ability to borrow additional funds; and |
• | make it more difficult for us to satisfy our obligations with respect to our debt, including our obligation to repay our credit facilities under certain circumstances, or refinance our indebtedness on favorable terms or at all. |
Our credit facilities contain financial and other restrictive covenants that could limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt, which could adversely affect our business, earnings and financial condition.
We are vulnerable to interest rate risk with respect to our debt.
We are subject to interest rate risk in connection with the issuance of variable and fixed-rate debt. In order to maintain a desired mix of fixed-rate and variable-rate debt, we may use interest rate swap agreements and exchange fixed and variable-rate interest payment obligations over the life of the arrangements, without exchange of the underlying principal amounts. We may not be successful in structuring such swap agreements to manage our risks effectively and, which could adversely affect our business, earnings and financial condition.
The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. We have multiple debt facilities which bear interest at a variable rate based on the Eurodollar LIBOR rate in effect from time to time. A change or transition away from LIBOR as a common reference rate in the global financial market could have a material, adverse effect on our business. Management continues to monitor the status and discussions regarding LIBOR. We are not yet able to reasonably estimate the expected impact.
Exchange rate fluctuations and our foreign currency hedges could adversely affect our financial results.
As a result of our international operations, currency exchange rate fluctuations may affect our results of operations and financial position. Our most significant currency exposures are the British pound sterling, euro and Japanese yen. We are also exposed to the Danish krone, Swedish krona, Australian dollar and Canadian dollar among other currencies. We expect to generate an increasing portion of our revenue and incur a significant portion of our expenses in currencies other than U.S. dollars. To the extent we are unable to materially offset non-nonfunctional currency flows, exchange rate fluctuations could have a positive or negative impact on our financial condition and results of operations. Because our consolidated financial results are reported in U.S. dollars, if we generate sales or earnings in other currencies, the translation of those results into U.S. dollars can result in a significant increase or decrease in the amount of those sales or earnings and can make it more difficult for our shareholders to understand the relative strengths or weaknesses of the underlying business on a period-over-period comparative basis. Although from time to time we enter into foreign exchange agreements with financial institutions to reduce our net exposure to fluctuations in foreign currency values relative to our non-functional currency obligations or balances, these hedging transactions do not eliminate that risk entirely.
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We face risks associated with disruption of our manufacturing and distribution operations including possible failure to develop necessary manufacturing processes, or constrained, idle or excess capacity could adversely affect our profitability or competitive position.
We manufacture a significant portion of the medical device products we sell. Any prolonged disruption in the operations of our existing manufacturing or distribution facilities, whether due to technical or labor difficulties, integration difficulties, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events), enforcement action by the FDA or other regulatory body if we are found to be in non-compliance with current Good Manufacturing Practices (cGMP) or other reasons, could have a material adverse effect on our business, financial condition and results of operations. In addition, materials such as silicone hydrogel require improvements to our manufacturing processes to make them cost effective. While we have improved our manufacturing capabilities for our silicone hydrogel products, our failure to continue to develop improvements to our manufacturing processes and reduce our cost of goods could significantly impact our ability to compete. Conversely, constrained, excess or idle capacity, which could result from acquisitions, unexpected demand, inaccurate sales forecasting or unexpected manufacturing efficiencies, could significantly impact our profitability, capital investments, customer service levels and near term financial condition.
CooperVision manufactures molded contact lenses, which represent the majority of our contact lens revenues, primarily at our facilities in the United Kingdom, Puerto Rico, Hungary, Costa Rica, Belgium and the United States with other smaller locations also existing in multiple locations around the world. CooperSurgical manufactures the majority of its products in the United States, Costa Rica, the Netherlands and the United Kingdom with other smaller locations also existing in multiple locations around the world. In November 2017, CooperSurgical purchased a manufacturing facility in Costa Rica to consolidate a portion of global manufacturing. We manufacture certain products at only one manufacturing site for certain markets, and certain of our products are approved for manufacturing only at one site. Before we can use a second manufacturing site, we must obtain the approval of regulatory authorities, and because this process is expensive, we generally have not sought approvals needed to manufacture at an additional site. If there were any prolonged disruption in the operations of the approved facility, it could take a significant amount of time to validate a second site and replace lost product, which could result in lost customers and thereby reduce sales, profitability and market share.
CooperVision distributes products out of the United States, the United Kingdom, Belgium and various smaller international distribution facilities. CooperSurgical's products are primarily distributed out of its facilities in United States and the Netherlands. Any prolonged disruption in the operations of our existing distribution facilities, whether due to technical or labor difficulties, challenges related to system implementation, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events) or other reasons, could have a material adverse effect on our business, financial condition and results of operations.
If our manufacturing operations fail to comply with applicable regulations, our manufacturing could be delayed or disrupted, our products could be subject to recall, and sales and profitability could suffer.
Our manufacturing operations and processes are required to comply with numerous federal, state and foreign regulatory requirements, including the FDA's cGMP for medical devices, known as the QSR regulations, which govern the procedures related to the design, testing, production processes, controls, quality assurance, labeling, packaging, storage, importing, exporting and shipping of our products. We also are subject to state requirements and licenses applicable to manufacturers of medical devices. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic unscheduled inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. Failure to comply with QSR requirements and other applicable domestic or international regulatory requirements or to respond to
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any adverse inspectional observations or product safety issues could result in disruption of our operations and manufacturing delays in addition to, among other things, warning letters, significant fines, injunctions, suspension of approvals, seizures, recalls or import holds of products, operating restrictions and criminal prosecutions. As a result, any failure to comply with applicable requirements could adversely affect our product sales and profitability.
We rely on independent suppliers in our supply chain for raw materials, packaging materials and components, mechanical equipment and some finished goods; we could experience inventory shortages if any of these suppliers encounter a manufacturing or distribution disruption
Our businesses utilize various chemicals, packaging materials, components, parts and raw materials which are generally available from more than one source. However, in certain instances we acquire components and materials from sole or primary suppliers to make our silicone hydrogel contact lens, certain medical devices and IVF products. We also source mechanical equipment and in certain instances finished goods from OEM suppliers. Supply of these goods, items and materials is protected by contractual agreements, availability of alternative suppliers and/or safety stocks. However, if current suppliers fail to supply sufficient goods, items or materials to us on a timely basis, or at all for any reason, we could experience inventory shortages and disruption in our supply of products. For example, among other situations, some of the primary material used to make our silicone hydrogel contact lens products, including MyDay, Biofinity, Avaira and clariti, are supplied by a sole supplier, and the failure of a key or sole supplier to timely supply sufficient items and materials necessary for the manufacture of our silicone hydrogel contact lenses could in turn disrupt our supply of those lenses to the market, which would have a material adverse effect on our business, financial condition and results of operations.
If we fail to protect our intellectual property adequately, our business could suffer.
We consider our intellectual property rights, including patents, trade secrets, trademarks and licensing agreements, to be an integral component of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.
We also may seek to enforce our intellectual property rights on others through litigation. Our claims, even if meritorious, may be found invalid or inapplicable to a party we believe infringes or has misappropriated our intellectual property rights. In addition, litigation can:
• | be expensive and time consuming to prosecute or defend; |
• | result in a finding that we do not have certain intellectual property rights or that such rights lack sufficient scope or strength; |
• | divert management's attention and resources; or |
• | require us to license our intellectual property. |
We have applied for patent protection in the United States and other foreign jurisdictions relating to certain existing and proposed processes and products. We cannot assure that any of our patent applications will be approved. Patent applications in the United States and other foreign jurisdictions are maintained in secrecy for a period of time, which may last until patents are issued, and since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we will be the first creator of inventions covered by any patent application we make or the first to file patent applications on such inventions. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to
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provide us with any meaningful protection or commercial advantage. We also cannot assure that we will have adequate resources to enforce our patents.
Both CooperVision and CooperSurgical also rely on proprietary technology which is unpatented. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements and assignment agreements, which generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, we cannot assure that these confidentiality agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming and the outcome is unpredictable.
We rely on trademarks to establish a market identity for our products. To maintain the value of our trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our registered or unregistered trademarks. We also might not obtain registrations for our pending or future trademark applications and might have to defend our registered trademark and pending applications from challenge by third parties. Enforcing or defending our registered and unregistered trademarks might result in significant litigation costs and damages, including the inability to continue using certain trademarks.
The laws of foreign countries in which we do business or contemplate doing business in the future may not recognize intellectual property rights or protect them to the same extent as do the laws of the United States. Adverse determinations in a judicial or administrative proceeding could prevent us from manufacturing and selling our products or prevent us from stopping others from manufacturing and selling competing products, and thereby have a material adverse effect on our business, financial condition and results of operations.
Our products or processes could be subject to claims of infringement of the intellectual property of others.
Our competitors in both the United States and foreign countries, some of which have substantially greater resources and have made substantial investments in competing technologies, as well as other third parties,
may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our existing and planned products. In the contact lens industry, CooperVision, its competitors and other third parties hold patents covering contact lens designs, business methods, processes and materials. Claims that our products, business methods or processes infringe upon the proprietary rights of others often are not asserted until after commencement of commercial sales of products incorporating our technology.
Significant litigation regarding intellectual property rights exists in our industries. For example, CooperVision in the past faced significant patent litigation over its silicone hydrogel contact lens products. Third parties have made, and may make in the future, claims of infringement against us or our contract manufacturers in connection with the use of our technology. Any claims, even those without merit, could:
• | be expensive and time consuming to defend; |
• | cause us to cease making, licensing or selling products that incorporate the challenged intellectual property; |
• | require us to redesign or re-engineer our products, if feasible; |
• | divert management's attention and resources; or |
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• | require us to enter into royalty or licensing agreements in order to obtain the right to use a necessary product, component or process. |
We cannot be certain of the outcome of any litigation. Any royalty or licensing agreement, if required, may not be available to us on acceptable terms or at all. Our failure to obtain the necessary licenses or other rights could prevent the sale, manufacture, or distribution of some of our products and, therefore, could have a material adverse effect on our business.
A successful claim of infringement against us or our contract manufacturers in connection with the use of our technology, in particular if we are unable to manufacture or sell any of our planned products in any major market, could adversely affect our business.
We could experience losses from product liability claims or legal claims relating to our service offerings, including such claims and other losses resulting from sales of counterfeit and other infringing products.
We face an inherent risk of exposure to product liability claims in the event that the use of our products results in personal injury. We also face the risk that defects in the design or manufacture of our products or sales of counterfeit or other infringing products might necessitate a product recall and other actions by manufacturers, distributors or retailers in order to safeguard the health of consumers and protect the integrity of the subject brand. Additionally, we face the inherent risk of exposure to legal claims, including negligence, relating to our provision of certain service offerings, including our genetic testing services and their accuracy. Consumers may halt or delay purchases of a product or service that is the subject of a claim or recall or has been counterfeited. We handle some risk with third-party carrier policies that are subject to deductibles and limitations. There can be no assurance that we will not experience material losses due to product liability claims or recalls, legal claims relating to our service offerings, or a decline in sales resulting from sales of counterfeit or other infringing products, in the future.
We face risks related to environmental matters.
Our facilities are subject to a broad range of United States federal, state, local and foreign environmental laws and requirements, including those governing discharges to the air and water, the handling or disposal of solid and hazardous substances and wastes, remediation of contamination associated with the release of hazardous substances at our facilities and offsite disposal locations and occupational safety and health. We have made, and will continue to make, expenditures to comply with such laws and requirements. Future events, such as changes in existing laws and regulations, or the enforcement thereof, or the discovery of contamination at our facilities, may give rise to additional compliance or remediation costs that could have a material adverse effect on our business, financial condition and results of operations. Such laws and requirements are constantly changing, are different in every jurisdiction and can impose substantial fines and sanctions for violations. As a manufacturer of various products, we are exposed to some risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with any such claims.
We continue to evaluate the necessary steps for compliance with regulations as they are enacted. These regulations include, for example, regulations enacted in the European Union such as the Registration, Evaluation, Authorization and Restriction of Chemical Substances, or REACH, which requires the registration of and regulates use of certain chemicals, the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive, or RoHS, which regulates the use of certain hazardous substances in certain products our CooperSurgical division manufactures. These and similar legislation that has been or is in the process of being enacted in Japan, China and various states of the U.S. may require us to re-design certain products to ensure compliance with the applicable.
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Increases in our effective tax rates or adverse outcomes resulting from examination of income tax returns could adversely affect our results.
Determination of the Company’s effective tax rate and evaluation of its tax positions is uncertain with rapidly changing enactment, interpretation and enforcement of tax regulations by taxing authorities globally. When tax matters arise, several years may elapse before such matters are audited and finally resolved. Unfavorable resolution of any tax matter in any of the jurisdictions in which we operate could increase the effective tax rate, which would have an adverse effect on the Company’s operating results. Any resolution of a tax matter may require the use of cash in the year of resolution. Our future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where we have higher statutory rates or lower than anticipated in countries where we have lower statutory rates, by changes in valuation of our deferred tax assets and liabilities, or by changes in tax laws or interpretations of those laws. We are also subject to the examination of our income tax returns by other tax authorities and the outcome of these examinations could have an adverse effect on our operating results and financial condition.
We recently faced an inquiry by the United Kingdom tax authorities regarding the application of the United Kingdom Diverted Profits Tax (DPT) related to the transfer out of the United Kingdom of certain intellectual property rights in connection with the 2014 acquisition of Sauflon Pharmaceutical Ltd., which we resolved in the second quarter of fiscal 2019.
We operate globally and changes in tax laws could adversely affect our results.
We are subject to income taxes in the United States and various jurisdictions outside of the United States. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits of stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes and effects from acquisitions.
We are subject to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in accounting principles, and changes in U.S. federal and state or international tax laws applicable to corporate multinationals. The U.S. enacted the Tax Cuts and Jobs Act (the 2017 Act) on December 22, 2017, as a result of which we recognized in fiscal 2018 a provisional amount of $214.6 million as reasonable estimate of the impact of the provisions of the 2017 Act. As of October 31, 2019, we have completed our accounting for the tax effects of the enactment of the 2017 Act and did not recognize any material adjustments to the provisional tax expense previously recorded; however, certain provisions of the 2017 Act and the regulations issued thereunder could have a significant impact on our future results of operations.
In addition, government agencies in non-U.S. jurisdictions where we and our affiliates do business and the Organization for Economic Co-operation and Development (OECD), have recently focused on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” where profits are claimed to be earned for tax purposes in low-tax jurisdictions, or payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. The OECD has released several components of its comprehensive plan to create an agreed set of international rules for fighting base erosion and profit shifting. As a result, the tax laws in the U.S. and other countries in which we and our affiliates do business could change and any such change could be materially and adversely affect our business.
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We may also be subject to additional tax liabilities and penalties due to changes in non-income based taxes resulting from changes in federal, state or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements
or judicial decisions, changes in accounting principles, changes to the business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
Volatility in the securities markets, interest rates, and other factors could substantially increase our defined benefit pension costs.
We sponsor a defined benefit pension plan for employees in the United States. This defined benefit pension plan is funded with trust assets invested in a diversified portfolio of securities and other investments. Changes in interest rates, mortality rates, early retirement rates, investment returns, discount rates and the market value of plan assets can affect the funded status of our defined benefit pension plan and cause volatility in the net periodic benefit cost and future funding requirements of the plan. A significant increase in our obligations or future funding requirements could have a negative impact on our results of operations and cash flows from operations.
We manage our businesses utilizing complex integrated software and hardware information technology operating systems that are regularly maintained and upgraded; an interruption or disruption to these systems could disrupt our business or force us to incur excessive costs.
We utilize complex integrated software and hardware operating systems, including enterprise resource planning and warehouse management systems, to support our business units and we have a continuous improvement strategy in place to keep our systems and overarching technology stable and in line with business needs and growth. Regular upgrades of our computer hardware and software revisions are typical and expected. We employ controlled change management methodologies to plan, test and execute all such system upgrades and improvements, and we believe that we assign adequate staffing and other resources to projects to ensure successful implementation. However, we cannot assure that our systems will meet our future business needs or that upgrades will operate as designed. We cannot assure that there will not be associated excessive costs or disruptions in portions of our business in the course of our maintenance, support and/or upgrade of these systems.
We are in the midst of a multiyear process of implementing new enterprise resource planning (ERP) systems at CooperVision and CooperSurgical. Implementing a new ERP system is not only costly but complex and difficult. Implementing a new ERP system can negatively affect not only financial accounting and reporting processes but also external commercial activities such as order receipt and product delivery. There can be no assurance that we will successfully implement our new ERP system or that we will avoid these and other negative impacts from our implementation efforts.
Cybersecurity threats continue to increase in frequency and sophistication; a successful cybersecurity attack could interrupt or disrupt our information technology systems or cause the loss of confidential or protected data which could disrupt our business, force us to incur excessive costs or cause reputational harm.
The size and complexity of our information systems make such systems potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees or vendors, or from attacks by malicious third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives and expertise. While we have invested in the protection of data and information technology, there can be no assurance that our efforts will prevent or quickly identify service interruptions or security breaches. Any such interruption or breach of our systems could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or intellectual property, and could result in financial, legal, business and
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reputational harm to us. We maintain cyber liability insurance; however, this insurance may not be sufficient to cover the financial, legal, business or reputational losses that may result from an interruption or breach of our systems.
If we do not retain our key personnel and attract and retain other highly skilled employees, our business could suffer.
If we fail to recruit, develop and retain the necessary personnel, our business and our ability to obtain new customers, develop new products and provide acceptable levels of customer service could suffer. The success of our business is heavily dependent on the leadership of our key management personnel. Our success also depends on our ability to recruit, develop and retain and motivate highly skilled sales, marketing, engineering and scientific personnel. Competition for these persons in our industry is intense, and we may not be able to successfully recruit, train or retain qualified personnel.
Provisions of our governing documents and Delaware law, may have anti-takeover effects.
Certain provisions of our Second Restated Certificate of Incorporation and Amended and Restated By-Laws may inhibit changes in control of the Company not approved by our Board of Directors. These provisions include advance notice requirements for stockholder proposals and nominations. We also have the protections of Section 203 of the Delaware General Corporation Law, which could have anti-takeover effects.
Risks Relating to Government Regulation of Manufacture and Sale of Our Products and Services.
Our failure to comply with regulatory requirements or to receive regulatory clearance or approval for our products or operations could adversely affect our business.
Our products and operations are subject to rigorous regulation by the FDA, and numerous other federal, state and foreign governmental authorities. In the United States, the FDA regulates virtually all aspects of medical device and pharmaceutical design, development, testing, manufacture, safety, labeling (including, for example, unique device identifier regulations), storage, recordkeeping, reporting, marketing, promotion, advertising and distribution, as well as product import and export. Our failure to comply with FDA regulations could lead to the imposition of administrative or judicial sanctions, including injunctions, fines, warning letters, suspensions or the loss of regulatory approvals, product recalls, termination of distribution or product seizures. In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible.
Our medical devices and pharmaceutical products require clearance or approval by the FDA before they can be commercially distributed in the United States and may require similar approvals by foreign regulatory agencies before distribution in foreign jurisdictions. Medical devices and drug products may only be marketed for the indications for which they are approved or cleared. The process of obtaining, renewing and maintaining regulatory clearances and approvals to market a medical device, particularly from the FDA, can be costly and time consuming. There can be no assurance that such clearances and approvals will be granted on a timely basis, if at all, and significant delays in the introduction of any new products or product enhancements may occur, which could adversely affect our competitive position and results of operations. In addition, the FDA and authorities in foreign jurisdictions may change their policies, adopt additional regulations or revise existing regulations, each of which could prevent or delay premarket approval or clearance of our products, increase the cost of compliance, impose additional regulatory requirements on us, or otherwise impact our ability to market our currently approved or cleared products.
Modifications and enhancements to medical devices and drug products also require a new FDA clearance or approval if they could significantly affect its safety or effectiveness or would constitute a major change
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in its intended use, design or manufacture. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer's decision. We have made modifications and enhancements to our medical devices that we do not believe require a new clearance or application, but we cannot confirm that the FDA will agree with our decisions. If the FDA requires us to seek clearance or approval for a modification of a previously cleared product for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties, which could have a material adverse effect on our financial results and competitive position. We also cannot assure that we will be successful in obtaining clearances or approvals for our modifications, if required.
Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenue from our product candidates. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results may be adversely affected.
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations. We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States, such as new policies introduced by the Trump Administration, or abroad.
Increased regulatory scrutiny of genetic testing may adversely affect our business through increased costs and risks associated with gaining marketing approvals and potential decreased demand for our genetic testing services.
We offer certain genetic testing services to help identify the likelihood of pregnancy as well as identify possible disorders or diseases of a child prior to birth. Regulatory and legislative proposals addressing oversight of genetic testing have been introduced in the United States, and we expect that new proposals will be introduced from time to time both in the United States and in foreign countries in the future. Although the FDA has statutory authority to assure that medical devices, including IVDs, are safe and effective for their intended uses, the FDA has historically exercised its enforcement discretion and not enforced applicable provisions of the FDCA and regulations with respect to LDT. We believe our tests fall within the definition of an LDT. As a result, we believe our tests are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. However, our tests may in the future become subject to more onerous regulation by the FDA. Legislative proposals addressing the FDA’s oversight of LDT have been introduced by Congress in the past and new legislative proposals may be introduced from time to time in the future. The likelihood that Congress will pass such legislation and the extent to which such legislation may affect the FDA’s ability to enforce its medical device regulations with respect to certain LDT is difficult to predict at this time. If the FDA ultimately begins to enforce its medical device requirements with respect to LDT, our genetic tests may be subject to additional regulatory requirements imposed by the FDA, the nature and extent of which would depend upon applicable final guidance or regulation by the FDA or instruction by Congress. If the FDA imposes significant changes to the regulation of LDT it could reduce our revenue or increase our costs and adversely affect our business, prospects, results of operations or financial condition.
Any new FDA enforcement policies affecting LDT or new legislation, regulations such as IVDR or guidance may result in increased regulatory burdens on our ability to continue marketing our products and
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to develop and introduce new products in the future, which could reduce our revenue or increase our costs and adversely affect our business, prospects, results of operations or financial condition.
If we fail to comply with applicable federal, state, local and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.
We are subject to the Clinical Laboratory Improvement Amendments of 1988 (CLIA), UK Human Fertilization & Embryology Association (HFEA) regulating IVF, a federal law regulating clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. Our clinical laboratories must be certified under CLIA and ISO 15189 in order for us to perform testing on human specimens. In addition, our proprietary tests must also be recognized as part of our accredited programs under CLIA so that we can offer them in our laboratory. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The law also requires us to maintain a state laboratory license to conduct testing in that state. Our laboratories are located in the United States, and internationally in Canada and the United Kingdom, and we must maintain the requisite licenses in each jurisdiction.
Development and marketing of our products are subject to strict governmental regulation by foreign regulatory agencies, and failure to receive, or delay in receiving, foreign qualifications could have a material adverse effect on our business.
In many of the foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, the reporting of certain payments to health care practitioners in certain markets (for example, the French Sunshine Act of 2013), duties and tax requirements. Many of the regulations applicable to our devices and products in such countries are similar to those of the FDA.
In many countries, the national health or social security organizations require our products to be qualified before they can be marketed with the benefit of reimbursement eligibility. To date, we have not experienced difficulty in complying with these regulations. However, our failure to receive, or delays in the receipt of, relevant foreign qualifications could have a material adverse effect on our business, financial condition and results of operations.
Our products are subject to reporting requirements and recalls, even after receiving regulatory clearance or approval, which could harm our reputation, business and financial results.
After a device is placed on the market, numerous regulatory requirements apply, including the FDA's QSR regulations, which require manufacturers to follow, among other things, design, testing, production, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and medical device reporting regulations that require us to report to FDA or similar governmental bodies in other countries if our products may have caused or contributed to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental bodies in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Medical device manufacturers, such as CooperVision and CooperSurgical, may, under their own initiative, recall a product if a reasonable possibility of serious injury or any material deficiency in a device is found, or withdraw a product to improve device performance or for other reasons. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Recalls of any of our products may divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. A recall could harm our reputation with customers and consumers which could reduce the sales of our products. In addition, the FDA or other foreign governmental agencies may implement enforcement actions in connection with a recall which could impair our product offerings and be harmful to our business and financial results.
Changes in legislation and government regulation of the health care industry both in the United States and internationally, as well as third-party payors' efforts to control the costs of health care could materially adversely affect our business.
The ACA made extensive changes to the delivery of health care in the United States. Among the provisions of the ACA, of greatest importance to the medical device industry and pharmaceutical industry are the following:
• | Establishment of the Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; |
• | Reporting and disclosure requirements on medical device and pharmaceutical manufacturers for certain payments or other “transfers of value” made to physicians and physicians family members, certain healthcare facilities, and any ownership and investment interests held by physicians and physician family members, and any payments or other “transfers of value” to such owners. Manufacturers are required to submit reports to the Centers for Medicare & Medicaid Services (CMS) by the 90th day of each calendar year; |
• | Absent new legislation, a 2.3% excise tax, currently suspended, will be reinstated as of January 1, 2020, on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, which exceptions include all contact lenses; |
• | Payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain health care services through bundled payment models; |
• | Creation of the Independent Payment Advisory Board which has authority to recommend certain changes to reduce Medicare spending and those recommendations could have the effect of law even if Congress doesn't act on the recommendations; |
• | Establishment of a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending; and |
• | An increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively. |
These measures could result in decreased net revenues or increased expenses from our fertility, office and surgical products and decrease potential returns from our development efforts. There have been judicial and Congressional challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA in the future. Additionally, recent reform proposals have introduced greater uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the United States and other countries. Major developments in tax policy or trade relations could have a material effect on our balance sheet and results of operations.
Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. The Budget Control Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reductions to several government programs. These reductions
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
include aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will remain in effect until 2025 unless additional action is taken by Congress. The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers. In addition, the Medicare Access and CHIP Reauthorization Act of 2015, among other things, repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments scheduled to begin in 2019 that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations.
We expect that additional state and federal health care reform measures will be adopted in the future, including those initiatives affecting coverage and reimbursement for our products, any of which could limit the amounts that federal and state governments will pay for health care products and services, which could adversely affect the growth of the market for our products or demand for our products, or result in additional pricing pressures. Also, any adoption of health care reform proposals on a state-by-state basis could require us to develop state-specific marketing and sales approaches. We cannot predict the effect such reforms or the prospect of their enactment may have on our business.
In addition, third-party payors, whether governmental or commercial, whether inside the United States or abroad, increasingly attempt to contain or reduce the costs of health care. These cost-control methods include prospective payment systems, capitated rates, group purchasing, redesign of benefits, requiring pre-authorizations or second opinions prior to certain medical procedures, encouragement of healthier lifestyles and exploration of more cost-effective methods of delivering health care. Although cost controls or other requirements imposed by third-party payors have not historically had a significant effect on contact lens prices or distribution practices, this could change in the future and could adversely affect our business, financial condition and results of operations.
We may enroll as in-network providers and suppliers with certain payors. Although, becoming an in-network provider or enrolling as a supplier means that we have agreed with these payors to provide certain of our tests at negotiated rates, it does not obligate any physicians to order our tests or guarantee that we will receive reimbursement for our tests from these or any other payors at adequate levels. Thus, these payor relationships, or any similar relationships we may establish in the future, may not result in acceptable levels of reimbursement for our tests or meaningful increases in our physician customer base. We cannot predict whether, under what circumstances, or at what payment levels payors will cover and reimburse for our tests. If we fail to establish and maintain broad coverage and reimbursement for our tests, our ability to generate increased revenue and grow our test volume and customer base could be limited and our future prospects and our business could suffer.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation, which repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the European Economic Area (EEA) member states, the regulations would be directly applicable (i.e., without the need for adoption of EEA member State laws implementing them) in all EEA member states and are intended to eliminate current differences in the regulation of medical devices among EEA member states. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and In Vitro Diagnostic Devices and ensure a high level of safety and health while supporting innovation.
MDR will become applicable in 2020 and IVDR will become applicable in 2022. Once applicable, the new regulations will, among other things:
• | strengthen the rules on placing devices on the market and reinforce surveillance once they are available; |
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
• | establish explicit provisions on manufacturers' responsibilities for the follow-up of the quality, performance and safety of devices placed on the market; |
• | improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number; |
• | set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and |
• | strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts before they are placed on the market. |
These modifications may have an impact on the way we conduct our business in the EEA and an adverse impact on our overall business operations and financial results.
The costs of complying with the requirements of federal and state laws pertaining to the privacy and security of health information and the potential liability associated with failure to do so could materially adversely affect our business and results of operations.
State and federal laws and regulations, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA) govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of individually identifiable information, including protected health information (PHI). HIPAA establishes basic national privacy and security standards for protection of PHI by covered entities such as our genetics testing subsidiaries and the business associates with whom such entities contract for services, including another one of our subsidiaries, Eye Care Prime LLC, which offers value-added software solutions for eye care professionals. HIPAA requires both covered entities and business associates to develop and maintain policies and procedures for PHI that is used or disclosed, and to adopt administrative, physical and technical safeguards to protect PHI. When we are acting as a business associate, our clients that are covered entities are mandated by HIPAA to enter into written agreements with us - known as business associate agreements - that require us to safeguard PHI in accordance with HIPAA. Our genetics testing subsidiaries are likewise required to enter into business associate agreements with any of their business associates.
Mandatory penalties for HIPAA violations can be significant. A single breach incident can result in violations of multiple standards. If a person knowingly or intentionally obtains or discloses PHI in violation of HIPAA requirements, criminal penalties may also be imposed.
We maintain safeguards that we believe are reasonable and appropriate to protect the privacy and security of PHI and other personally identifiable information consistent with applicable law and our contractual obligations; however, our systems may be vulnerable to physical break-ins, viruses, hackers, and other potential sources of security breaches. In addition, we may not be able to prevent incidences of inappropriate use or unauthorized access to PHI by our employees or contractors. Any such breaches could result in exposure to liability under federal and state laws and/or under our contractual arrangements and could adversely impact our business.
We are also subject to laws and regulations in countries other than United States covering data privacy and the protection of health-related and other personal information. EU member states and other jurisdictions have adopted data protection laws and regulations, which impose significant compliance obligations. For example, the EU Data Protection Directive, as implemented into national laws by the EU member states, imposes strict obligations and restrictions on the processing of personal data. The new EU-wide General Data Protection Regulation (GDPR) became applicable on May 25, 2018, replacing the current data protection laws of each EU member state. The GDPR implemented more stringent operational requirements for processors and controllers of personal data, including, for example,
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
expanded disclosures about how personal information is to be used, limitations on retention of information, increased requirements pertaining to health data and pseudonymized (i.e., key-coded) data, mandatory data breach notification requirements, handling data subject access requests and higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities.
Any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally identifiable information may result in governmental enforcement actions and investigations including by European Data Protection Authorities, fines and penalties (for example, of up to 20.0 million Euros or up to 4% of the total worldwide annual turnover of the preceding financial year (whichever is higher) under the GDPR and ePrivacy Regulation), litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Such failures could have a material adverse effect on our financial condition and operations. If the third parties we work with violate applicable laws, contractual obligations or suffer a security breach, such violations may also put us in breach of our obligations under privacy laws and regulations and/or could in turn have a material adverse effect on our business.
Laws pertaining to health care fraud and abuse could materially adversely affect our business, financial condition and results of operations.
We may be subject to various federal, state and foreign laws pertaining to health care fraud and abuse, including anti-kickback laws, physician self-referral laws and false claims laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state health care programs, including Medicare, Medicaid, Veterans Administration health programs and TRICARE. Similarly, if the physicians or other providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could indirectly have a negative impact on our business, financial condition and results of operations. While we believe that our operations are in material compliance with such laws, because of the complex and far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws.
Massachusetts issued regulations governing the conduct of pharmaceutical and medical device manufacturers with respect to health care practitioners that sets forth what medical device manufacturers may and may not permissibly do with respect to providing meals, sponsoring continuing medical education and otherwise providing payments or items of economic benefit to health care practitioners located within the state. Additionally, the regulation requires medical device manufacturers to have in place robust fraud and abuse compliance programs. Other states (e.g., California, Vermont and Nevada) have adopted similar laws. These laws and regulations act to limit our marketing practices, require the dedication of resources to ensure compliance, and expose us to additional liabilities.
In addition, the ACA, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal health care fraud statutes so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. The ACA also provides that the government may assert that a claim including items or services resulting from a violation of these statutes constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute. In addition, federal government price reporting laws, changed by the ACA to, among other things, increase the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program and offer such rebates to additional populations, that require us to calculate and report complex pricing metrics to government programs, where such reported prices may be used in the calculation of reimbursement and/or discounts on our marketed drugs. Participation in these programs and compliance with the applicable requirements may subject us to potentially significant
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
discounts on our products, increased infrastructure costs and potentially limit our ability to offer certain marketplace discounts.
Any violations of these laws or regulations could result in a material adverse effect on our business, financial condition and results of operations. In addition, changes in these laws, regulations, or administrative or judicial interpretations, may require us to further change our business practices or subject our existing business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations.
Ethical, legal and social concerns related to the use of genetic information could reduce demand for our tests.
Genetic testing has raised ethical, legal and social issues regarding privacy and the appropriate uses of the resulting information. Government authorities could, for social or other purposes, limit or regulate the use of genetic information or genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these concerns may lead patients to refuse to use, or physicians to be reluctant to order, genetic tests even if permissible. These and other ethical, legal and social concerns may limit market acceptance and adoption of our tests or reduce the potential markets for our tests, either of which could have an adverse effect on our business, financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
None.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Properties.
The following is a summary of Cooper's principal facilities as of October 31, 2019. We generally lease our office and operations facilities but own several manufacturing and research and development facilities, including 224,533 square feet in the United Kingdom, 164,946 square feet in Costa Rica, 63,787 square feet in Denmark, 76,778 square feet in New York, 33,630 square feet in Texas and 9,000 square feet in Virginia. Our lease agreements expire at various dates through the year 2045. We believe our properties are suitable and adequate for our businesses.
Location | Approximate Square Feet | Operations | ||
AMERICAS | ||||
United States: | ||||
California | 93,594 | Executive offices; CooperVision research & development and administrative offices; CooperSurgical laboratory | ||
New York | 423,175 | CooperVision manufacturing, marketing, distribution and administrative offices; CooperSurgical manufacturing, office and distribution | ||
Connecticut | 301,962 | CooperSurgical manufacturing, marketing, distribution, research & development and administrative offices | ||
Texas | 36,113 | CooperSurgical manufacturing | ||
Puerto Rico | 527,285 | CooperVision manufacturing, research & development and distribution | ||
Costa Rica | 167,066 | CooperVision and CooperSurgical manufacturing and office | ||
Brazil | 16,580 | CooperVision marketing and distribution | ||
Canada | 30,625 | CooperVision and CooperSurgical office and laboratory | ||
Other Americas | 157,243 | CooperVision marketing and distribution; CooperSurgical manufacturing marketing and laboratory | ||
EMEA | ||||
United Kingdom | 791,754 | CooperVision manufacturing, marketing, distribution, research & development and administrative offices; CooperSurgical marketing and manufacturing | ||
Hungary | 330,269 | CooperVision manufacturing and marketing | ||
Belgium | 273,609 | CooperVision distribution | ||
Spain | 180,058 | CooperVision distribution and administrative offices; CooperSurgical marketing | ||
Denmark | 63,787 | CooperSurgical manufacturing, marketing, administrative, research and development offices | ||
Other EMEA | 228,811 | CooperVision and CooperSurgical marketing and distribution | ||
ASIA PACIFIC | ||||
Japan | 113,555 | CooperVision marketing, distribution and administrative offices; CooperSurgical marketing | ||
Australia | 38,435 | CooperVision marketing, distribution and administrative offices; CooperSurgical laboratory | ||
Other Asia Pacific | 77,357 | CooperVision and CooperSurgical marketing and distribution | ||
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 3. Legal Proceedings
Since March 2015, over 50 putative class action complaints were filed by contact lens consumers alleging that contact lens manufacturers, in conjunction with their respective Unilateral Pricing Policy (UPP), conspired to reach agreements between each other and certain distributors and retailers regarding the prices at which certain contact lenses could be sold to consumers. The plaintiffs are seeking damages against CooperVision, Inc., other contact lens manufacturers, distributors and retailers, in various courts around the United States. In June 2015, all of the class action cases were consolidated and transferred to the United States District Court for the Middle District of Florida. In August 2017, CooperVision entered into a settlement agreement with the plaintiffs, without any admission of liability, to settle all claims against CooperVision. In July 2018, the Court approved the plaintiffs’ motion for preliminary approval of the settlement, and the Company paid the $3.0 million settlement amount into an escrow account. The settlement remains subject to final Court approval at a future hearing currently scheduled for February 25, 2020.
The Company is involved in various lawsuits, claims and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters. The Company does not believe that the ultimate resolution of these proceedings or claims pending against it could have a material adverse effect on its financial condition or results of operations. At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 450, Contingencies. Legal fees are expensed as incurred.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Cooper's common stock, par value $0.10 per share, is traded on the New York Stock Exchange under the symbol “COO.” At November 30, 2019, there were 332 common stockholders of record.
Dividend Policy
Our current policy is to pay annual cash dividends on our common stock of $0.06 per share, in two semiannual payments of $0.03 per share each. In dollar terms, we paid cash for dividends of $3.0 million and $2.9 million in each of fiscal 2019 and 2018 respectively. Dividends are paid when, as and if declared at the discretion of our Board of Directors from funds legally available for that purpose. Our Board of Directors periodically reviews our dividend policy and considers the Company's earnings, financial condition, liquidity needs, business plans and opportunities and other factors in making and setting dividend policy.
Performance Graph
The following graph compares the cumulative total return on Cooper's common stock with the cumulative total return of the Standard & Poor 500 and the Standard & Poor's Health Care Equipment Index for the five-year period ended October 31, 2019. The graph assumes that the value of the investment in Cooper and in each index was $100 on October 31, 2014 and assumes that all dividends were reinvested.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among The Cooper Companies, Inc.,
the S&P 500 Index and the S&P Health Care Equipment Index
*$100 invested on October 31, 2014 in stock or index, including reinvestment of dividends.
Fiscal year ending October 31.
Fiscal year ending October 31.
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
October 2014 | October 2015 | October 2016 | October 2017 | October 2018 | October 2019 | ||||||||||||||||||
The Cooper Companies, Inc. | $ | 100.00 | $ | 92.99 | $ | 107.49 | $ | 146.74 | $ | 157.81 | $ | 177.81 | |||||||||||
S&P 500 | $ | 100.00 | $ | 105.20 | $ | 109.94 | $ | 135.93 | $ | 145.91 | $ | 166.81 | |||||||||||
S&P Health Care Equipment | $ | 100.00 | $ | 109.04 | $ | 123.35 | $ | 154.16 | $ | 180.71 | $ | 223.24 | |||||||||||
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Issuer Purchases of Equity Securities
The Company's share repurchase activity during the three-month period ended October 31, 2019, was as follows:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs | ||||||||||
8/1/19 – 8/31/19 | — | $ | — | — | $ | 557,400,000 | ||||||||
9/1/19 – 9/30/19 | — | $ | — | — | $ | 557,400,000 | ||||||||
10/1/19 – 10/31/19 | 512,472 | $ | 292.68 | 512,472 | $ | 407,400,000 | ||||||||
Total | 512,472 | 512,472 | ||||||||||||
The transactions described in the table above represent the repurchase of the Company’s common stock on the New York Stock Exchange as part of the share repurchase program approved by the Company’s Board of Directors in December 2011 (2012 Share Repurchase Program). The program as amended in December 2012 and December 2013 provides authorization for a total of $500.0 million. In March 2017, the program was amended and approved by the Company's Board of Directors for an increase of $500.0 million, providing authorization for a total of $1.0 billion. Purchases under the 2012 Share Repurchase Program may be made from time-to-time on the open market at prevailing market prices or in privately negotiated transactions and are subject to a review of the circumstances in place at the time and will be made from time to time as permitted by securities laws and other legal requirements. This program has no expiration date and may be discontinued at any time.
During the fiscal year ended October 31, 2019, we repurchased a total of 537 thousand shares of common stock for $156.1 million at an average price of $290.67 per share under the repurchase program. At October 31, 2019, approximately $407.4 million remained authorized under the 2012 Share Repurchase Program.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Equity Compensation Plan Information
The following table sets forth certain information as of October 31, 2019, concerning the shares of our Common Stock that may be issued under any form of award granted under our equity compensation plans in effect as of October 31, 2019:
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1) (A) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (B) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A) (C) | ||
Equity compensation plans approved by shareholders(2) | 1,480,021 | $186.24 | 2,280,407 | ||
Equity compensation plans not approved by shareholders | — | — | — | ||
Total | 1,480,021 | $186.24 | 2,280,407 | ||
(1) The amount of total securities to be issued under Company equity plans upon exercise of outstanding options, warrants and rights shown in Column A includes 429,571 Restricted Stock Units granted pursuant to the Company's equity plans. These awards allow for the distribution of shares to the grant recipient upon the completion of time-based vesting periods. The total also includes 25,698 shares representing the maximum number of shares that may be issued subject to Performance Share Awards outstanding as of the end of the fiscal year. Restricted Stock Units and Performance Share Awards do not have an associated exercise price. Accordingly, these awards are not reflected in the weighted-average exercise price disclosed in Column B.
(2) Includes information with respect to the Third Amended and Restated 2007 Long-Term Incentive Plan for Employees of the Cooper Companies, Inc. (2007 LTIP), which was approved by stockholders on March 17, 2016, and provides for the issuance of up to 6,930,000 shares of Common Stock, the Second Amended and Restated 2006 Long Term Incentive Plan for Non-Employee Directors of the Cooper Companies, Inc. (2006 Directors Plan), which was approved by stockholders on March 16, 2011 and provides for the issuance of up to 950,000 shares of Common Stock , and The Cooper Companies, Inc. 2019 Employee Stock Purchase Plan (2019 ESPP), which was approved by stockholders on March 18, 2019 and provides for the issuance of 1,000,000 shares. As of October 31, 2019, 1,280,407 shares remained available under the 2007 LTIP, and nil shares remained available under the 2006 Directors Plan, and 1,000,000 shares remained available under the 2019 ESPP.
.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 6. Selected Financial Data.
Five Year Financial Highlights
Years Ended October 31, (In millions, except per share amounts) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
Consolidated Operations | |||||||||||||||||||
Net sales | $ | 2,653.4 | $ | 2,532.8 | $ | 2,139.0 | $ | 1,966.8 | $ | 1,797.1 | |||||||||
Gross profit | $ | 1,756.8 | $ | 1,632.3 | $ | 1,365.8 | $ | 1,173.1 | $ | 1,070.3 | |||||||||
Income before income taxes | $ | 477.4 | $ | 331.9 | $ | 394.0 | $ | 295.6 | $ | 215.5 | |||||||||
Net income attributable to Cooper stockholders | $ | 466.7 | $ | 139.9 | $ | 372.9 | $ | 273.9 | $ | 203.5 | |||||||||
Diluted earnings per share attributable to stockholders | $ | 9.33 | $ | 2.81 | $ | 7.52 | $ | 5.59 | $ | 4.14 | |||||||||
Number of shares used to compute diluted earnings per share | 50.0 | 49.7 | 49.6 | 49.0 | 49.2 | ||||||||||||||
Dividends paid per share | $ | 0.06 | $ | 0.06 | $ | 0.06 | $ | 0.06 | $ | 0.06 | |||||||||
Consolidated Financial Position | |||||||||||||||||||
Current assets | $ | 1,163.4 | $ | 1,090.9 | $ | 953.2 | $ | 937.1 | $ | 844.0 | |||||||||
Property, plant and equipment, net | 1,132.1 | 976.0 | 910.1 | 877.7 | 967.1 | ||||||||||||||
Goodwill | 2,428.9 | 2,392.1 | 2,354.8 | 2,164.7 | 2,197.1 | ||||||||||||||
Other intangible assets, net | 1,405.3 | 1,521.3 | 504.7 | 441.1 | 411.1 | ||||||||||||||
Deferred tax assets and other assets | 144.8 | 132.5 | 135.9 | 58.0 | 43.2 | ||||||||||||||
$ | 6,274.5 | $ | 6,112.8 | $ | 4,858.7 | $ | 4,478.6 | $ | 4,462.5 | ||||||||||
Short-term debt | $ | 563.7 | $ | 37.1 | $ | 23.4 | $ | 226.3 | $ | 243.8 | |||||||||
Other current liabilities | 546.9 | 499.4 | 372.7 | 316.9 | 331.7 | ||||||||||||||
Long-term debt | 1,262.6 | 1,985.7 | 1,149.3 | 1,107.4 | 1,105.4 | ||||||||||||||
Long-term tax payable | 124.8 | 141.5 | — | — | — | ||||||||||||||
Other liabilities | 147.9 | 141.3 | 137.5 | 132.1 | 111.8 | ||||||||||||||
Total liabilities | 2,645.9 | 2,805.0 | 1,682.9 | 1,782.7 | 1,792.7 | ||||||||||||||
Stockholders' equity | 3,628.6 | 3,307.8 | 3,175.8 | 2,695.9 | 2,669.8 | ||||||||||||||
$ | 6,274.5 | $ | 6,112.8 | $ | 4,858.7 | $ | 4,478.6 | $ | 4,462.5 | ||||||||||
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Note numbers refer to “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
RESULTS OF OPERATIONS
In this section, we discuss the results of our operations for fiscal 2019 compared with fiscal 2018. We discuss our cash flows and current financial condition under “Capital Resources and Liquidity.” For a discussion related to fiscal 2018 compared with fiscal 2017, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended October 31, 2018, which was filed with the United States Securities and Exchange Commission (SEC) on December 21, 2018, and is available on the SEC's website at www.sec.gov and our Investor Relations website at investor.coopercos.com.
Within the tables presented, percentages are calculated based on the underlying whole-dollar amounts and, therefore, may not recalculate exactly from the rounded numbers used for disclosure purposes.
Outlook
Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and general health care markets. However, events affecting the economy as a whole, including but not limited to the uncertainty and instability of global markets driven by foreign currency volatility, changes in tax legislation, debt concerns, the uncertainty caused by the United Kingdom's planned withdrawal from the European Union, global trade barriers including additional tariffs and the trend of consolidations within the health care industry, impact our current performance and continue to represent a risk to our future performance.
CooperVision - We compete in the worldwide contact lens market with our spherical, toric and multifocal contact lenses offered in a variety of materials including using silicone hydrogel Aquaform® technology and PC Technology™. We believe that there will be lower contact lens wearer dropout rates as technology improves and enhances the wearing experience through a combination of improved designs and materials and the growth of preferred modalities such as single-use and monthly wearing options. Recent acquisitions also expanded CooperVision's access to myopia management and specialty eye care markets with new products, such as ortho-k and scleral lenses. In November 2019, CooperVision received United States Food & Drug Administration (FDA) approval for its MiSight® 1 day lens, which is the first and only FDA-approved product indicated to slow the progression of myopia in children with treatment initiated between the ages of 8-12 and is expected to be available in the United States in 2020. CooperVision is focused on greater worldwide market penetration using recently introduced products, and we continue to expand our presence in existing and emerging markets, including through acquisitions.
CooperVision acquired the following entity during fiscal 2019:
Blanchard Contact Lenses on December 28, 2018 - a privately-held scleral lens company, which expands CooperVision's specialty and scleral lens portfolio.
CooperVision acquired the following entities during fiscal 2018:
Blueyes on January 4, 2018 - a long-standing distribution partner, which had a leading position in the distribution of contact lenses to the optical and pharmacy sector in Israel
• | Paragon Vision Sciences on December 1, 2017 - a leading provider of ortho-k specialty contact lenses and oxygen permeable rigid contact lens materials. |
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving our desired future levels of sales growth and profitability. CooperVision manufactures and markets a wide variety of silicone hydrogel contact lenses. Our single-use silicone hydrogel product franchises, clariti® and MyDay®, remain a focus as we expect increasing demand for these products, as well as future single-use products as the global contact lens market continues to shift to this modality. Outside of single-use, the Biofinity® and Avaira Vitality® product families comprise our focus in the FRP, or frequent replacement product, market which encompasses the 2-week and monthly modalities. Included in this segment are unique products such as Biofinity Energys®, which helps individuals with digital eye fatigue.
CooperSurgical - Our CooperSurgical business competes in the general health care market with a focus on advancing the health of women, babies and families through a diversified portfolio of products and services focusing on women's health, fertility, diagnostics and contraception. CooperSurgical has established its market presence and distribution system by developing products and acquiring companies, products and services that complement its business model.
CooperSurgical acquired the following entity during fiscal 2019:
Incisive Surgical Inc. on December 31, 2018 - a privately-held U.S. medical device company that develops mechanical surgical solutions for skin closure.
CooperSurgical acquired the following entities and assets during fiscal 2018:
LifeGlobal Group on April 3, 2018 - a privately held company that specializes primarily in IVF media. LifeGlobal’s product categories include media products, IVF laboratory air filtration products and dishware
• | PARAGARD on November 1, 2017 - CooperSurgical acquired the assets of the PARAGARD IUS business from Teva for $1.1 billion. PARAGARD broadened and strengthened CooperSurgical's women's health product portfolio and it is the only non-hormonal, long lasting, reversible contraceptive option approved by the FDA and available in the United States. IUS represent a large and growing segment of the Long Acting Reversible Contraceptive market. |
We intend to continue investing in CooperSurgical's business with the goal of expanding our integrated solutions model within the areas of women's health, fertility, diagnostics and contraception.
Capital Resources - At October 31, 2019, we had $89.0 million in unrestricted cash, primarily held outside the United States, and $734.8 million available under our 2016 Revolving Credit Facility (as defined below). Debt outstanding at October 31, 2019 consisted of:
• | $1.0 billion outstanding on a $1.425 billion syndicated Term Loan Agreement (the 2017 Term Loan Agreement) used to fund the acquisition of PARAGARD, which matures on November 1, 2022 |
• | A $500.0 million 364-day senior unsecured term loan agreement (the 2019 Term Loan Agreement), which matures on September 25, 2020 |
• | $264.0 million outstanding on a $1.0 billion multi-currency revolving credit facility (the 2016 Revolving Credit Facility), which matures on March 1, 2021. |
See Note 4. Debt of the Consolidated Financial Statements for additional information.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Transition from LIBOR
The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. We have undertaken an assessment of contracts that will be impacted by the transition away from LIBOR. To date, we have identified that substantially all of our term loan and credit facility agreements include an adjusted LIBOR option. We are continuing to evaluate the scope of impacted contracts and the potential impact. We are also monitoring the developments regarding alternative rates and may amend certain contracts to accommodate those rates if the contract does not already specify a replacement rate. While the notional value of agreements potentially indexed to LIBOR is material, we are not yet able to reasonably estimate the expected impact.
We believe that current cash, cash equivalents and future cash flow from operating activities will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the financial statements included in this annual report. To the extent additional funds are necessary to meet our liquidity needs such as that for acquisitions, share repurchases, cash dividends or other activities as we execute our business strategy, we anticipate that additional funds will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2019 Compared with 2018
Highlights: 2019 vs. 2018
• | Gross margin increased to 66% of net sales compared with 64% in fiscal 2018 |
• | Operating income increased 36% to $546.7 million from $403.1 million |
• | Interest expense decreased to $68.0 million from $82.7 million due to lower average debt balances, partially offset by higher interest rates |
• | Diluted earnings per share increased 232% to $9.33 from $2.81 |
• | Operating cash flow increased 7% to $713.2 million from $668.9 million. |
Selected Statistical Information – Percentage of Net Sales
Years Ended October 31, | 2019 | 2018 | 2019 vs. 2018 % Change in Absolute Values | ||||
Net sales | 100 | % | 100 | % | 5 | % | |
Cost of sales | 34 | % | 36 | % | — | % | |
Gross profit | 66 | % | 64 | % | 8 | % | |
Selling, general and administrative expense | 38 | % | 38 | % | 2 | % | |
Research and development expense | 3 | % | 3 | % | 2 | % | |
Amortization of intangibles | 5 | % | 6 | % | (1 | )% | |
Impairment of intangibles | — | % | 1 | % | — | % | |
Gain on sale of an intangible | 1 | % | — | % | — | % | |
Operating income | 21 | % | 16 | % | 36 | % | |
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Sales Growth by Business Unit
($ in millions) | 2019 | 2018 | Increase | 2019 vs 2018 % Change | ||||||||||
CooperVision | $ | 1,972.9 | $ | 1,882.0 | $ | 90.9 | 5 | % | ||||||
CooperSurgical | 680.5 | 650.8 | 29.7 | 5 | % | |||||||||
Net sales | $ | 2,653.4 | $ | 2,532.8 | $ | 120.6 | 5 | % | ||||||
CooperVision Net Sales
The contact lens market has two major product categories:
• | Spherical lenses including lenses that correct near- and farsightedness uncomplicated by more complex visual defects |
• | Toric and multifocal lenses including lenses that, in addition to correcting near- and farsightedness, address more complex visual defects such as astigmatism and presbyopia by adding optical properties of cylinder and axis, which correct for irregularities in the shape of the cornea. |
CooperVision Net Sales by Category
($ in millions) | 2019 | 2018 | 2019 vs. 2018 % Change | |||||||
Toric | $ | 620.0 | $ | 591.4 | 5 | % | ||||
Multifocal | 202.9 | 196.6 | 3 | % | ||||||
Single-use spheres | 568.2 | 520.1 | 9 | % | ||||||
Non single-use sphere, other | 581.8 | 573.9 | 1 | % | ||||||
$ | 1,972.9 | $ | 1,882.0 | 5 | % | |||||
In the fiscal year ended October 31, 2019:
• | Sales growth in fiscal 2019 was largely organic |
• | Toric lenses grew primarily through the success of Biofinity, clariti and MyDay |
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
• | Multifocal lenses increased in fiscal 2019, compared to fiscal 2018 due to higher Biofinity and clariti sales, partially offset by a decrease in sales of older hydrogel products |
• | Single-use sphere lenses growth was primarily attributed to clariti and MyDay lenses |
• | Non-single-use spheres increased in fiscal 2019, compared to fiscal 2018 due to higher Biofinity sales |
• | "Other" products primarily include lens care which represented approximately 2% of net sales in fiscal 2019 and 2018 |
• | Increased sales of silicone hydrogel products were partially offset by lower sales of older hydrogel products. Total silicone hydrogel products grew 9% in fiscal 2019, representing 72% of net sales in fiscal 2019 compared to 69% in fiscal 2018 |
• | Foreign exchange rates negatively impacted sales by approximately $53.6 million in fiscal 2019 and positively impacted sales by $43.9 million in fiscal 2018, primarily attributable to fluctuations in the Euro and British Pound |
• | Sales growth was primarily driven by increases in the volume of lenses sold. Average realized prices by product did not materially influence sales growth. |
CooperVision Net Sales by Geography
CooperVision competes in the worldwide soft contact lens market and services in three primary regions: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific.
($ in millions) | 2019 | 2018 | 2019 vs. 2018 % Change | |||||||
Americas | $ | 763.8 | $ | 722.9 | 6 | % | ||||
EMEA | 746.5 | 744.3 | — | % | ||||||
Asia Pacific | 462.6 | 414.8 | 12 | % | ||||||
$ | 1,972.9 | $ | 1,882.0 | 5 | % | |||||
CooperVision's regional growth in Americas, EMEA and Asia Pacific was primarily attributable to market gains of silicone hydrogel contact lenses. Refer to CooperVision Net Sales by Category above for further discussion.
CooperSurgical Net Sales by Category
CooperSurgical supplies the family health care market with a diversified portfolio of products and services. Our office and surgical offerings include products that facilitate surgical and non-surgical procedures that are commonly performed primarily by OB/GYN in hospitals, surgical centers, fertility clinics and medical offices. Fertility offerings include highly specialized products and services that target the IVF process, including diagnostics testing with a goal to make fertility treatment safer, more efficient and convenient.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The chart below shows the percentage of net sales of office and surgical products and fertility.
($ in millions) | 2019 | 2018 | 2019 vs 2018 % Change | ||||||||
Office and surgical products | $ | 422.4 | $ | 400.4 | 6 | % | |||||
Fertility | 258.1 | 250.4 | 3 | % | |||||||
$ | 680.5 | $ | 650.8 | 5 | % | ||||||
In the fiscal year ended October 31, 2019:
• | Office and surgical products increased compared to prior year due to continued growth in PARAGARD and surgical products, primarily Uterine Manipulators, Surgical Retractors and recently acquired products of Incisive Surgical, partially offset by a decrease in revenue from sales of the Filshie Clip system. On February 1, 2019, the Company agreed to the early termination of an exclusive distribution agreement which had given CooperSurgical the rights to distribute the Filshie Clip System in the United States |
• | Fertility net sales increased in fiscal 2019 compared to fiscal 2018, primarily due to increased sales of IVF consumables, IVF equipment and LifeGlobal products, partially offset by a decrease in diagnostics revenue and exit of the carrier screening and non-invasive prenatal testing (NIPT) product lines on June 1, 2018 |
• | Unit growth and product mix positively impacted sales growth. |
Gross Margin
2019 | 2018 | ||||
CooperVision | 65 | % | 66 | % | |
CooperSurgical | 69 | % | 61 | % | |
Consolidated | 66 | % | 64 | % | |
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CooperVision's gross margin decreased in fiscal 2019 compared to fiscal 2018 due to:
• | the unfavorable impact to revenue from exchange rate fluctuations, primarily attributable to the Euro and British Pound; and product mix |
• | $14.0 million of costs primarily product transition, integration and manufacturing related costs |
• | partially offset by an increase in sales of higher margin products including Biofinity |
• | fiscal 2018 included $10.1 million of costs primarily product transition and manufacturing related costs. |
CooperSurgical's gross margin increased in fiscal 2019 compared to fiscal 2018 due to:
• | an increase in sales of PARAGARD IUS product and inclusion of LifeGlobal products with higher gross margin |
• | partially offset by $14.2 million of costs, primarily integration and manufacturing related costs |
• | fiscal 2018 included $49.3 million of PARAGARD and LifeGlobal acquisitions inventory step-up charges |
• | fiscal 2018 included $16.2 million of costs primarily integration and manufacturing related costs. |
Selling, General and Administrative Expense (SGA)
($ in millions) | 2019 | % Net Sales | 2018 | % Net Sales | 2019 vs. 2018 % Change | |||||||||||
CooperVision | $ | 682.4 | 35 | % | $ | 657.2 | 35 | % | 4 | % | ||||||
CooperSurgical | 266.2 | 39 | % | 259.3 | 40 | % | 3 | % | ||||||||
Corporate | 47.6 | — | 56.8 | — | (16 | )% | ||||||||||
$ | 996.2 | 38 | % | $ | 973.3 | 38 | % | 2 | % | |||||||
CooperVision's SGA increased in fiscal 2019 compared to fiscal 2018 due to investments to support our long-term objectives, including increased headcount in SGA and higher distribution and selling expenses to support revenue growth. CooperVision's SGA in fiscal 2019 included $7.1 million of acquisition costs, integration costs and costs related to new product launches, including that of MiSight. CooperVision's SGA in fiscal 2018 included $8.7 million of integration and third-party consulting costs.
The increase in CooperSurgical's SGA in fiscal 2019 compared to fiscal 2018 was primarily due to higher PARAGARD advertising and marketing expenses. CooperSurgical's SGA in fiscal 2019, included $19.6 million of acquisition and integration expenses of acquired companies, as well as European Medical Devices Regulation costs. CooperSurgical's SGA in fiscal 2018 included $34.0 million of acquisition and integration expenses of acquired companies and exit costs for the carrier screening and NIPT product lines.
The decrease in Corporate SGA in fiscal 2019 compared to fiscal 2018 was primarily due to $6.2 million of compensation costs related to executives' retirements in fiscal 2018.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Research and Development Expense (R&D)
($ in millions) | 2019 | % Net Sales | 2018 | % Net Sales | 2019 vs. 2018 % Change | ||||||||||||
CooperVision | $ | 55.5 | 3 | % | $ | 54.3 | 3 | % | 2 | % | |||||||
CooperSurgical | 31.2 | 5 | % | 30.5 | 5 | % | 3 | % | |||||||||
$ | 86.7 | 3 | % | $ | 84.8 | 3 | % | 2 | % | ||||||||
CooperVision's R&D increase in fiscal 2019 compared to fiscal 2018 was mainly due to increased costs from clinical studies. As a percentage of sales, R&D expense remained flat. CooperVision's R&D activities are primarily focused on the development of contact lenses, manufacturing technology and process enhancements.
The increase in CooperSurgical's R&D in fiscal 2019 compared to fiscal 2018 was primarily due to acquisitions, increased investment and activities in developing new products and services and upgrades of existing products. As a percentage of sales, R&D expense remained flat. CooperSurgical's R&D activities include diagnostics, IVF product development, design and upgrade of surgical procedure devices.
Amortization Expense
($ in millions) | 2019 | % Net Sales | 2018 | % Net Sales | 2019 vs. 2018 % Change | |||||||||||
CooperVision | $ | 40.9 | 2 | % | $ | 43.6 | 2 | % | (6 | )% | ||||||
CooperSurgical | 104.9 | 15 | % | 103.1 | 16 | % | 2 | % | ||||||||
$ | 145.8 | 5 | % | $ | 146.7 | 6 | % | (1 | )% | |||||||
CooperVision amortization expense decreased in fiscal 2019 compared to fiscal 2018 due to certain intangible assets becoming fully amortized.
CooperSurgical's amortization expense remained relatively flat.
Impairment of Intangible Assets
In the second quarter of fiscal 2018, CooperSurgical recognized an impairment charge of $24.4 million on the intangible assets acquired from Recombine Inc. In fiscal 2016, CooperSurgical acquired Recombine Inc., a clinical genetic testing company specializing in carrier screening. In connection with the impairment charge, on June 1, 2018, CooperSurgical announced the exit of the carrier screening and NIPT product lines. Both product lines were categorized in Fertility. Exit and restructuring charges which were substantially completed at the end of fiscal 2018, consisted primarily of compensation and benefits to terminated employees, which were approximately $10.0 million. The net loss from both product lines were not material to our consolidated results of operations.
Gain on Sale of an Intangible Asset
In the second quarter of fiscal 2019, CooperSurgical sold an exclusive distribution right to distribute Filshie Clip System in the United States for $21.0 million and recognized a gain of $19.0 million.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating Income
($ in millions) | 2019 | % Net Sales | 2018 | % Net Sales | 2019 vs. 2018 % Change | |||||||||||
CooperVision | $ | 506.4 | 26 | % | $ | 479.8 | 25 | % | 6 | % | ||||||
CooperSurgical | 87.9 | 13 | % | (19.9 | ) | (3 | )% | 542 | % | |||||||
Corporate | (47.6 | ) | — | (56.8 | ) | — | 16 | % | ||||||||
$ | 546.7 | 21 | % | $ | 403.1 | 16 | % | 36 | % | |||||||
CooperVision operating income remained relatively flat as a percentage of net sales but increased in absolute dollars in fiscal 2019 compared to fiscal 2018 primarily due to improved sales of higher margin products, including Biofinity, partially offset by the negative impact of foreign exchange rates.
CooperSurgical operating income increased in fiscal 2019 compared to fiscal 2018, due to an increase in sales of higher margin products, gain of $19.0 million on sale of an intangible asset, as discussed above, and recent acquisitions. CooperSurgical operating income in fiscal 2018 included $49.3 million of PARAGARD and LifeGlobal acquisitions inventory step-up charges and an intangible asset impairment charge of $24.4 million.
The decrease of Corporate operating loss in fiscal 2019 compared to fiscal 2018 was primarily due to higher compensation costs related to executives' retirements which impacted the prior year.
On a consolidated basis, operating income increased due to the factors above.
Interest Expense
($ in millions) | 2019 | % Net Sales | 2018 | % Net Sales | 2019 vs. 2018 % Change | |||||||||||
Interest expense | $ | 68.0 | 3 | % | $ | 82.7 | 3 | % | (18 | )% | ||||||
Interest expense remained relatively flat as a percentage of net sales and decreased in absolute dollar, primarily due to lower average debt balances, partially offset by higher interest rates compared to prior year period. Fiscal 2019 interest expense included $0.8 million of write off of debt issuance costs on early repayment of the 2018 term loan. Fiscal 2018 interest expense included $2.5 million write off of debt issuance costs related to partial prepayments of the 2016 term loan and $1.7 million of Bridge Loan Facility fees that were incurred related to the PARAGARD acquisition.
Other Expense (Income), Net
($ in millions) | 2019 | 2018 | |||||
Foreign exchange loss | $ | 2.2 | $ | 3.4 | |||
Other income, net | (0.9 | ) | (14.9 | ) | |||
$ | 1.3 | $ | (11.5 | ) | |||
Foreign exchange loss primarily resulted from the revaluation and settlement of foreign currencies-denominated balances.
Other income in fiscal 2018 is primarily from the realization of a Puerto Rico research and development credit of $14.2 million.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Provision for Income Taxes
The Company’s effective tax rate (ETR) was 2.3%, 57.9%, and 5.3% for fiscal 2019, 2018 and 2017 respectively. The ETR in fiscal 2019 decreased in comparison to fiscal 2018 primarily due to the net charge related to the enactment of the 2017 Act which was recorded in fiscal 2018, tax benefits from audit settlements in fiscal 2019, and additional taxes in the United States from the inclusion of earnings from our foreign subsidiaries pursuant to the GILTI provisions that became effective in fiscal 2019. The ETR in fiscal 2018 increased in comparison to fiscal 2017 primarily due to the net charge related to the enactment of the 2017 Act which was partially offset by a shift in the geographic mix of income.
The ETR for 2019 was less than the U.S. federal statutory tax rate primarily due to a majority of our taxable income being earned in foreign jurisdictions with lower tax rates, discrete tax benefits from settling income tax audits, excess tax benefits from share-based compensation, and additional taxes in the United States from the inclusion of earnings from our foreign subsidiaries pursuant to the GILTI provisions. The ETR for 2018 was greater than the U.S. federal statutory tax rate primarily due to the tax expense related to the enactment of the 2017 Act. The ETR for 2017 was less than the U.S. federal statutory tax rate because a majority of our taxable income was earned in foreign jurisdictions with lower tax rates and excess tax benefits from share-based compensation. The ratio of domestic income to worldwide income significantly impacted our overall tax rate due to the fact that the tax rates in some of the foreign jurisdictions where we operate are significantly lower than the statutory rate in the United States. The foreign jurisdictions with lower tax rates compared to the U.S. federal statutory tax rate