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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-19974
ICU MEDICAL, INC.

(Exact name of Registrant as specified in its charter)

Delaware 33-0022692

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

951 Calle Amanecer

San Clemente, California 92673

(Address of principal executive offices) (Zip Code)

(Registrant's Telephone Number, Including Area Code): (949) 366-2183
Securities registered pursuant to Section 12(b) of the Act:

None
Securities Registered Pursuant to Section 12 (g) of the Act:

Common Stock, $.10 par value
Indicate by check mark whether 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 Registrant

was required to file such reports), and (2) has been subject to such filing

requirements for the past 90 days. Yes X No ______

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Indicate by check mark if disclosure of delinquent filers pursuant to Item

405 of Regulation S-K is not contained herein, and will not be contained, to the

best of Registrant's knowledge, in definitive proxy or information statements

incorporated by reference in Part III of this Form 10-K or any amendment to this

Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of

Registrant as of February 28, 1999 was $145,320,294.*
The number of shares outstanding of Registrant's Common Stock, $.10 par

value, as of February 28, 1999 was 8,184,993.
Portions of the Proxy Statement for Registrant's 1999 Annual Meeting

of Stockholders, filed or to be filed pursuant to Regulation 14A within 120 days

following Registrant's fiscal year ended December 31, 1998, are incorporated by

reference into Part III of this Report.
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* Without acknowledging that any persons other than Dr. George A. Lopez and

Dr. Diana K. Lopez are affiliates, all directors and executive officers have

been included as affiliates solely for purposes of this computation.

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PART I

Item 1. Business.
ICU Medical, Inc., together with its wholly-owned subsidiary Budget Medical

Products, Inc. ("BMP") (collectively, the "Company") is a leader in the

development, manufacture and sale of proprietary, disposable medical connection

systems for use in intravenous ("IV") therapy applications. The Company's IV

connectors are designed to prevent accidental disconnection's of IV lines and to

protect healthcare workers and their patients from the spread of infectious

diseases such as Hepatitis B and Human Immunodeficiency Virus ("HIV") by

significantly reducing the risk of accidental needlesticks. In 1993, the

Company launched the CLAVE(R), an innovative one-piece, needleless IV connection

device that has become the Company's largest selling product. The Company

believes that the CLAVE offers healthcare providers a combination of safety,

ease of use, reliability and cost effectiveness that is superior to any other

protective IV connection system on the market.
Heightened awareness of the risk of infection from needlesticks and the

substantial expense to healthcare providers of complying with regulatory

protocols when needlesticks occur have led to growing demand for safe medical

devices such as the Company's protective IV connectors. In addition, healthcare

regulations promulgated by OSHA mandate that "universal precautions" be observed

to minimize exposure to blood and other body fluids. In September 1998, the

State of California enacted the bloodborne pathogen standard under the state's

occupational safety and health statute. The standard mandates use of

needlestick prevention controls, including needleless systems. Final regulations

are due August 1, 1999.

The Company currently sells its products through IV product manufacturers

and independent distributors.
Background
The Company's first products, the Click Lock(R) and Piggy Lock(R), feature

protected needles to prevent accidental contact with needles and include locking

mechanisms to prevent accidental disconnections. These products were designed

to replace conventional products and methods, such as IV connectors with exposed

needles that are secured by tape or open luer lock connections. Such

conventional products typically do not provide the protection from needlesticks,

accidental disconnection and contamination that are provided by the Company's

products. Although protected needle products manufactured by the Company and by

others significantly reduce the risk of needlesticks, they nevertheless employ

steel needles, which require special disposal procedures.
Recognizing the inherent risks associated with needle handling and

disposal, even with protected needle systems, the Company developed the CLAVE, a

needleless IV connection system that was introduced in 1993. The CLAVE

needleless IV connection system allows protected, secure and sterile IV

connections without needles and without failure-prone mechanical valves used in

the IV connection systems of some competitors. The CLAVE was designed to

eliminate needles from certain applications by acute care hospitals, home

healthcare providers, ambulatory surgical centers, nursing homes, convalescent

facilities, physicians' offices, medical clinics, and emergency services.

Reduction in the use of needles not only decreases needlesticks but also reduces

the number of needles to be disposed of and certain safety risks inherent in

needle handling and disposal. While the Company continues to manufacture and

sell protected needle products, sales of those products are declining as the

market penetration of needleless systems such as the CLAVE and other competitive

needleless products increases.
IV Usage and Infection Control
Primary IV therapy lines, used in hospitals, nursing homes, emergency units

and in home healthcare, consist of a tube running from a bottle or plastic bag

containing an IV solution to a catheter inserted in a patient's vein. The tube

typically has several injection ports or Y sites (conventionally, entry tubes

covered by latex caps) to which a secondary IV line can be connected to permit

constant intravenous administration of medications, fluids and nutrients, and to

allow instantaneous intravenous administration of emergency medication.
In conventional practice, primary IV system connections are made by

inserting an exposed steel needle attached to the primary IV line into an

injection port connected to the catheter. Conventional secondary IV connections,

so called piggyback connections, are made by inserting an exposed steel needle

attached to a secondary IV line into an injection port or other IV connector.

In a conventional IV connection the needle, which typically is
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secured only with tape, can detach from the catheter or injection port resulting

in disconnection and a serious and sometimes fatal interruption of the flow of

the IV solution to the patient. The exposed needles can easily be contaminated

by contact with unsterile objects or through contact with fluid in the IV lines.

A contaminated needle can result in infection to healthcare workers and, less

frequently, patients, as a result of accidental needlesticks. Increasing

awareness of the risk of infection from needlesticks and the substantial and

increasing expense to healthcare providers of complying with regulatory

protocols when needlesticks occur have led to a growing demand for safe medical

devices such as the Company's protective IV connectors.
Hepatitis B and HIV are transmitted through blood and other body fluids,

and workers who come in contact with such infectious materials are at risk of

contracting these diseases. Transmissions may occur from needlesticks by

contaminated needles or exposure of mucous membranes to infectious body fluids

containing blood traces. Following each needlestick, the healthcare employer is

required to perform a series of tests on the healthcare worker for both

Hepatitis B and HIV, as well as track and record each needlestick incident.

Thus, needlesticks result in time lost from work and substantial expense

regardless of whether an infectious disease is transmitted. The Company's

protective IV connectors are designed to prevent accidental needlesticks from

needles originating from primary and secondary IV connections.
Products
CLAVE Products
A conventional IV line terminates with a male luer connector to which a

needle would be attached to penetrate a latex or non-latex rubber covered

injection port to make a primary or secondary IV connection. With the CLAVE

system, instead of attaching a needle to the male luer, a CLAVE is used in place

of the injection port and the male luer, without a needle, is simply threaded

into the CLAVE with a half turn. The CLAVE consists of a cylindrical housing,

which contains a silicone compression seal and a recessed plastic piercing

element. As the luer tip enters the CLAVE housing, it depresses the silicone

seal back into the housing and slides over the piercing element, which

penetrates through the compressed silicone. Fluid channels in the piercing

element create a continuous fluid pathway from the IV line, through the CLAVE

into the primary IV line and into the catheter. The luer tip creates a tight

seal against the top of the silicone thereby preventing contaminants from

entering the fluid pathway. When the IV line is disconnected from the CLAVE, the

silicone compression seal expands to again fill the housing and reseal the

opening. When the CLAVE is not in use, the silicone compression seal fills the

opening in the housing and covers the plastic piercing element, thus completely

sealing the connector and presenting a flush surface which can be cleansed with

an alcohol swab. The CLAVE contains no natural rubber latex.
Emergency medications can be administered through the CLAVE by using a

standard syringe without a hypodermic needle attached. The CLAVE can be used

with any conventional primary IV system, acute and chronic central venous IV

system, acute care catheter, multi-lumen catheter, peripheral catheter and a

variety of other standard devices. The resilience of the silicone compression

seal permits repeated connections and disconnections without replacing the

CLAVE.
The CLAVE Integrated Y site is designed to be integrated directly into

primary and secondary IV sets, thus eliminating the need for special adapters,

pre-slit injection ports, or metal needles when making piggyback IV connections.

Currently, virtually all popular IV connection systems that compete with the

Company's systems require either a metal needle, a pre-slit injection port or a

special adapter to make piggyback connections. The original CLAVE can be used to

make a piggyback connection, but it also requires a special adapter when used in

piggyback applications. The Company believes the CLAVE Integrated Y site offers

a lower cost alternative to existing systems by eliminating the need for

multiple parts. The healthcare professional simply inserts the male luer of any

secondary IV set, without a needle, into the CLAVE Integrated Y site and twists

to make the connection. The CLAVE Integrated Y site will not replace CLAVE

products used in non-piggyback connections. Unlike the original CLAVE site, the

CLAVE Integrated Y site is marketed exclusively to IV set manufacturers, such as

B.Braun/McGaw division of B.Braun Medical, Inc. ("B.Braun/McGaw") and Abbott

Laboratories ("Abbott") to build directly into their IV sets. Sales of the CLAVE

Integrated Y site to date have only been to Abbott and accounted for

approximately 11% of the Company's net sales in 1998.
The CLAVE is the Company's largest selling product line, and accounted for

69% of the Company's net sales in 1998.
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Click Lock and Piggy Lock Products
The Company's first products, the Click Lock and Piggy Lock, were designed

to overcome the limitations of conventional IV connections which use exposed

needles. The needles in the Click Lock and Piggy Lock systems are completely

recessed into a clear plastic cylindrical housing to reduce the risk of

needlesticks and contamination by preventing contact between the needle and

other objects. Locking devices which snap closed with an audible click are

designed to prevent accidental disconnection but permit immediate and easy

disconnection when desired.
The Click Lock housing locks onto the Company's matching injection port

located on either piggyback IV sets or extension IV sets manufactured by the

Company. The Piggy Lock was developed as a less expensive, more convenient

alternative to using a Click Lock and related IV set combination to make a

secondary or piggyback IV connection.
With the availability of the CLAVE and other needleless products sold by

competitors, the market is shifting rapidly away from protected needle products

to needleless connection systems. Sales of Click Lock and Piggy Lock products

are declining both absolutely and as a percentage of net sales.
McGaw Protected Needle and SafeLine Products
The Company has a Manufacture and Supply Agreement with McGaw, Inc.

("McGaw"), predecessor to B.Braun Medical, Inc. doing business as B.Braun/McGaw

("B.Braun/McGaw"), (the "McGaw MPN Agreement"), which grants the Company

exclusive rights to perform certain assembly of the McGaw Protected Needle which

is marketed and distributed by B.Braun/McGaw. The McGaw Protected Needle is

similar to the Click Lock, and competes with the Company's IV connection

systems. The McGaw MPN Agreement provides that the Company release McGaw from

any claims for patent infringement resulting from the sale of McGaw Protected

Needles prior to the effective date of the McGaw MPN Agreement, and for as long

as the McGaw MPN Agreement is in effect. The Company began assembly of the
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