Overview
We are a leading molecular diagnostic company dedicated to making a difference in patients lives through the discovery and commercialization of
novel, transformative tests across major diseases. We believe in improving healthcare for patients by providing physicians with important information to solve unmet medical needs. Through our proprietary technologies, we believe we are
positioned to identify important disease genes, the proteins they produce, and the biological pathways in which they are involved to better understand the genetic basis of human disease and the role that genes and their related proteins may play in
the onset and progression of disease. We believe that identifying biomarkers (DNA, RNA and proteins) will enable us to develop novel molecular diagnostic tests.
Our goal is to provide physicians with critical information to guide the healthcare management of their patients by addressing four major questions a patient may have about their healthcare: (1) what
is the likelihood of my getting a disease, (2) do I have a disease, (3) how aggressively should my disease be treated, and (4) which therapy will work best to treat my disease. We are developing new molecular diagnostic tests that are
designed to assess an individuals risk for developing disease later in life (predictive medicine), accurately diagnose disease (diagnostic medicine), identify a patients likelihood of responding to a particular therapy and assess if a
patient will benefit from a particular drug (personalized medicine), and assess a patients risk of disease progression and disease recurrence (prognostic medicine).
Our business strategy for future growth is focused on three key initiatives. First, we are working to grow and expand our existing products and markets. Second, we are developing our business
internationally with an international direct sales force. Finally, we are launching and intend to continue to launch new potentially transformative products across a diverse set of disease indications, complementing our current businesses in
oncology, womens health, urology, dermatology and rheumatology.
In February 2014, we completed the acquisition of
privately-held Crescendo Bioscience, Inc. (Crescendo) for $270 million in cash, which was reduced by the repayment of a loan made to Crescendo and other customary adjustments in accordance with the acquisition agreement. We believe that
the acquisition of Crescendo facilitates our entry into the high growth autoimmune and inflammatory disease market, diversifies our product revenues and enhances our strength in protein-based diagnostics. The business of Crescendo, including its
Vectra
®
DA blood test for rheumatoid arthritis disease management, is operated as a wholly owned subsidiary.
We offer 13 commercial molecular diagnostic tests, consisting of seven predictive medicine tests, three personalized medicine tests, two
prognostic medicine tests and one diagnostic medicine test. We market these tests in the United States through our own sales force of approximately 470. We have also established commercial laboratory operations in Munich, Germany and international
headquarters in Zurich, Switzerland. We currently market our products through our own sales force in Europe and Canada and have entered into distributor agreements with organizations in selected Latin American, Middle Eastern, Asian and African
countries. We also generate revenue by providing pharmaceutical and clinical services to the pharmaceutical and biotechnology industries and medical research institutions utilizing our multiplexed immunoassay technology. Total revenue was $778.2
million for the year ended June 30, 2014, an increase of 27% over the prior fiscal year.
During the fiscal year ended June 30,
2014, we devoted our resources to supporting (i) our predictive medicine, diagnostic medicine, personalized medicine and prognostic medicine tests, (ii) our pharmaceutical and clinical services business, and (iii) our research and
development efforts supporting our existing tests and our future molecular diagnostic candidate tests. For the years ended June 30, 2014, 2013 and 2012, we had research and development expense of $67.5 million, $53.7 million and $42.6 million,
respectively. Additional financial information about our three reportable segments is included in Note 10 to our audited financial statements for the fiscal year ended June 30, 2014 included with this Annual Report. For the year ended
June 30, 2014, we had net income of $176.2 million, an increase of 20% over the prior fiscal year.
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Our Business Strategy
Our business strategy is to understand the genetics of human disease in order to develop and administer the next generation of molecular diagnostic tests. Through our proprietary technologies in
discovering DNA, RNA and protein biomarkers, we believe we are positioned to identify important disease genes, the proteins they produce, and the biological pathways in which they are involved to better understand the underlying molecular basis for
the cause of human disease. We believe that identifying these genes, proteins, and pathways has enabled and will continue to enable us to develop novel molecular diagnostic tests. Our business strategy includes the following key elements:
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Discover important DNA, RNA and protein biomarkers and develop novel molecular diagnostic tests.
We plan to continue to use our proprietary DNA
sequencing, RNA expression and protein analysis technologies, including our supporting bioinformatics and robotic technologies, in an effort to efficiently discover important genes and their proteins and to understand their role in human disease.
Based on these biomarkers we plan to develop highly accurate, informative test that may help physicians better manage their patients healthcare. We believe that our technologies provide us with a significant competitive advantage and the
potential for numerous product opportunities.
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Acquire companies, products or promising biomarkers from other organizations.
We intend to continue to take advantage of in-licensing or
acquisition opportunities to augment our internal research and development programs. For example, in February 2014, we acquired Crescendo, a company that is developing and marketing molecular diagnostic tests for patients suffering from autoimmune
disorders, including rheumatoid arthritis. We recognize that we cannot meet all of our research discovery goals internally and can benefit from the research performed by other organizations. We hope to leverage our financial strength, product
development expertise, and sales and marketing presence to acquire new product opportunities in molecular diagnostic areas of focus.
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Independently commercialize new transformative molecular diagnostic tests.
Our goal is to commercialize informative molecular diagnostic tests
that can save lives and improve the quality of life of patients. We plan to sell these tests through our own direct sales force and marketing efforts in the United States and Europe and employ distributors throughout the rest of the world. In
connection with any additional tests that we may launch, we plan to expand our existing oncology, urology, and womens health sales forces and build new sales forces to address other physician specialty groups.
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Diversify our molecular diagnostic business across multiple disease indications.
We plan to continue to expand our markets and increase the
market penetration of our existing molecular diagnostic tests in oncology, womens health, urology, dermatology, autoimmune and rheumatology. Additionally, we plan to pursue new market opportunities in other adult-onset diseases such as
diabetes and the neuroscience diseases to capitalize on our leadership position in the molecular diagnostic industry.
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Expand our molecular diagnostic business internationally.
We believe that the market for our molecular diagnostic products in Europe, Latin
America and Asia represents an attractive commercial opportunity. We have established sales offices in Germany, France, United Kingdom, Spain, Switzerland, Italy, Australia and Canada; laboratory operations in Germany; and international headquarters
in Switzerland. We believe that our predictive medicine, diagnostic medicine, personalized medicine and prognostic medicine products would benefit patients world-wide by assisting physicians in guiding their health care decisions.
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Molecular Diagnostic Testing
Our molecular diagnostic tests are designed to analyze genes, accurately diagnose disease, their expression levels and proteins to assess an individuals risk for developing disease later in life,
determine a patients likelihood of responding to a particular drug, and assess a patients risk of disease progression and disease recurrence. Armed with this valuable information, physicians may more effectively manage their
patients healthcare to prevent or delay the onset of disease and ensure that patients receive the most appropriate treatment for their disease.
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We offer 13 primary commercial molecular diagnostic tests. Our current commercial molecular diagnostic tests
are:
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BRACAnalysis
®
: predictive medicine test for hereditary
breast and ovarian cancer.
Our BRAC
Analysis
test is an analysis of the BRCA1 and BRCA2 genes for assessing a womans risk of developing hereditary breast and ovarian cancer. A woman who tests positive for a deleterious mutation with
the BRAC
Analysis
test has up to an 87% risk of developing breast cancer and up to a 44% risk of developing ovarian cancer by age 70. As published in the
Journal of the National Cancer Institute
, researchers have shown that
pre-symptomatic individuals who have a high risk of developing breast or ovarian cancer can reduce their risk by over 50% with appropriate preventive therapies. Additionally, BRAC
Analysis
may be used to assist patients already diagnosed with
breast or ovarian cancer and their physicians in determining the most appropriate therapeutic interventions to address their disease.
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According to the American Cancer Society, in 2014 there will be approximately 257,000 women in the United States diagnosed with breast cancer or ovarian cancer. BRAC
Analysis
accounted for 66.5% of
our total revenue during the year ended June 30, 2014.
BART
®
:
predictive medicine test for hereditary breast and ovarian cancer.
Our BART test is based on proprietary technology for detecting large genomic
rearrangements in the genes involved in hereditary breast and ovarian cancer patients. As published in the journal Cancer, researchers have shown that up to 10% of hereditary breast and ovarian cancer susceptibility is due to large rearrangement
mutations that cant be detected using conventional sequencing technology. BART may be used to identify these mutation carriers. BART accounted for 11.5% of our total revenue during the year ended June 30, 2014.
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COLARIS
®
: predictive medicine test for hereditary
colorectal and uterine cancer.
Our COLARIS test is an analysis of the MLH1, MSH2, MSH6, PMS2, EPCAM and MYH genes for assessing a persons risk of developing colorectal and uterine cancer. Individuals who carry a deleterious mutation in one
of the colon cancer genes in the COLARIS test have a greater than 80% lifetime risk of developing colon cancer and women have up to a 71% lifetime chance of developing uterine cancer. Colon cancer is a preventable disease if high-risk individuals
diligently have colonoscopies and remove any precancerous polyps.
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According to the American Cancer Society,
approximately 189,000 new cases of colorectal cancer or uterine cancer will be diagnosed in the United States in 2014. According to the American Society of Clinical Oncologists, familial forms of colorectal cancer are estimated to account for 10% to
30% of all cases.
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COLARIS AP
®
: predictive medicine test for hereditary
colorectal cancer.
Our COLARIS AP test detects mutations in the APC and MYH genes, which cause a colon polyp-forming syndrome such as familial adenomatous polyposis (FAP), a more common variation of the syndrome known as attenuated FAP, and the
MYH-associated polyposis signature (MAP). Individuals who carry a deleterious mutation in the APC or MYH gene may have a greater than 90% lifetime risk of developing colon cancer. Effective preventive measures include colonoscopy and the removal of
pre-cancerous polyps and prophylactic surgery.
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COLARIS and COLARIS AP accounted for 7.6% of
our total revenue during the year ended June 30, 2014.
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EndoPredict
: personalized medicine test for breast cancer
. Our EndoPredic test is a next generation RNA expression test used to
determine which women with breast cancer would benefit from chemotherapy. EndoPredict detects the likelihood of late metastases, metastases occurring after five years, to guide treatment decisions for chemotherapy and extended anti-hormonal therapy.
EndoPredict has been shown to accurately predict cancer-specific disease progression and metastases with no confusing intermediate results in 13 published clinical studies with more than 2,200 patients and is CE marked.
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EndoPredict revenues are included in Other Revenue which accounted for 1.8% of our total
revenue for the year ended June 30, 2014.
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MELARIS
®
: predictive medicine test for hereditary
melanoma.
Our MELARIS test analyzes mutations in the p16 gene to determine genetic susceptibility to malignant melanoma. Individuals who test positive with a MELARIS test have a 75-fold increased risk of developing melanoma during their
lifetimes as compared to the general population. Melanoma is lethal within five years in 84% of cases where it has spread to another site in the body. However, when melanoma is diagnosed at an early stage, fewer than 10% of patients die within five
years. Melanoma may be prevented through appropriate screening and a specific threshold of action for mutation carriers in which pre-cancerous lesions are removed before cancer can develop.
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According to the American Cancer Society, approximately 76,000 new cases of melanoma will be diagnosed in the United States in 2014.
MELARIS revenues are included in Other Revenue which accounted for 1.8% of our total revenue for the year ended June 30, 2014.
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myPath Melanoma
: diagnostic medicine test for melanoma.
Our myPath Melanoma test is a gene expression based profile that is
performed on biopsy tissue for the purpose of aiding a dermatopathologist in the diagnosis of melanoma. Every year in the United States, there are approximately two million skin biopsies performed specifically for the diagnosis of melanoma.
Approximately 14% of these biopsies are classified as indeterminate where a dermatopathologist cannot make a definitive call of whether the biopsy is benign or malignant. Outcomes for patients are poor if melanoma is not caught in early stages with
five year survival rates dropping from 98% for stage 1 cancer to less than 20% for stage 4 cancer based upon data from the American Cancer Society. We believe myPath Melanoma may provide an accurate tool to assist physicians in correctly diagnosing
indeterminate skin lesions.
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There are approximately 280,000 indeterminate diagnosis of melanoma every year
in the United States. myPath Melanoma was released through an early access launch which began in November 2013.
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myPlan Lung Cancer
: prognostic medicine test for lung cancer.
Our myPlan Lung Cancer test is a gene expression based profile
that may aid a physician in making a determination as to the aggressiveness of a patients lung cancer and based upon this determination more accurately guide patient therapy. Most early stage lung cancer patients do not see added benefit from
chemotherapy. In a clinical study presented at the International Association for the Study of Lung Cancer meeting in 2013, 18% of patients with a myPlan Lung Cancer low-risk score died of lung cancer within five years of diagnosis compared to 35% of
the patients with a high-risk score. We believe this test may be clinically applicable in the approximately 30,000 new lung cancer diagnoses every year that are early stage lung cancer.
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Based on American Lung Association data, approximately 34,000 new early stage cancer cases will be diagnosed in the United States in 2014.
myPlan Lung Cancer was released through an early access launch which began in October 2013.
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myRisk Hereditary Cancer
: predictive medicine test for hereditary cancer.
Our myRisk Hereditary Cancer test represents the
next generation of our existing hereditary cancer franchisem which we anticipate will eventually replace our current predictive medicine test offerings (BRAC
Analysis
, Colaris, Colaris AP, Melaris, and Panexia) with a single comprehensive
test. myRisk Hereditary Cancer is designed to determine a patients hereditary cancer risk for breast cancer, ovarian cancer, colon cancer, uterine cancer, melanoma, pancreatic cancer, prostate cancer and gastric cancer. The test analyzes 25
separate genes to look for deleterious mutations which would put a patient at a substantially higher risk than the general population for developing one or more of the above cancers. All 25 genes in the panel are well documented in clinical
literature for the role they play in hereditary cancer and have been shown to have actionable clinical interventions for the patient to lower disease risk or risk of cancer recurrence.
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Based on current American Cancer Society data, in the United States there are over 600,000
new cancer diagnoses in the six cancers covered by myRisk Hereditary Cancer every year. myRisk Hereditary Cancer accounted for 6.9% of our total revenue during the year ended June 30, 2014 . myRisk Hereditary Cancer was initially released
through an early access launch which began in September 2013.
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PANEXIA
: predictive medicine test for pancreatic cancer.
Our PANEXIA test is a comprehensive analysis of the
PALB2
and
BRCA2
genes for assessing a persons risk of developing pancreatic cancer later in life. Individuals with a mutation detected by the PANEXIA test have up to an 8.6-fold higher risk than the general population of developing pancreatic
cancer. If an individual with a family history of pancreatic cancer receives the PANEXIA test and is identified as having a deleterious mutation, increased surveillance and other predictive steps can be taken in an effort to detect the cancer at an
early stage where it may be more treatable.
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According to the American Cancer Society, pancreatic cancer is
estimated to affect approximately 46,000 men and women in the United States in 2014. PANEXIA revenues are included in Other Revenue which accounted for 1.8% of our total revenue for the year ended June 30, 2014.
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PREZEON
®
: personalized medicine test for cancer.
Our PREZEON test is an immunohistochemistry test that analyzes the PTEN gene and assesses loss of PTEN function in cancerous tumors. The PTEN gene is one of the most important tumor suppressor genes and its loss of function is associated with
more aggressive disease progression and poorer survival. The PTEN gene plays a role in the disease progression of all four of the major cancersbreast, prostate, colon, and lung cancer. The PTEN gene also plays a critical role in cell signaling
pathways that are the target of a number of cancer drugs such as EGFR, mTOR and PIK3CA inhibitors. Analysis of PTEN function may help oncologists in identifying patients who will likely respond to these classes of cancer drugs.
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According to the American Cancer Society, approximately 789,000 new cases of these cancers will be diagnosed
this year in the United States. PREZEON revenues are included in Other Revenue which accounted for 1.8% of our total revenue for the year ended June 30, 2014.
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Prolaris
®
:
prognostic medicine test for prostate
cancer.
Our Prolaris test is a gene expression assay that assesses whether a patient is likely to have a slow growing, indolent form of prostate cancer that can be safely monitored through active surveillance, or a more aggressive form of the
disease that would warrant aggressive intervention such as a radical prostatectomy or radiation therapy. The Prolaris test was developed improve physicians ability to predict disease outcome and to thereby optimize patient treatment. As
published in the British Journal of Cancer, the Prolaris test was the strongest predictor of prostate cancer death and was highly statistically significant. The Prolaris test outperformed both the Gleason and PSA score in this study.
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According to the American Cancer Society, in the United States approximately 233,000 men are expected to be
diagnosed with prostate cancer in 2014. Prolaris revenues are included in Other Revenue which accounted for 1.8% of our total revenue for the year ended June 30, 2014.
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Vectra
®
DA
;
personalized medicine test for rheumatoid
arthritis.
Our Vectra DA test is a quantitative, objective multi-biomaker blood test validated to measure rheumatoid arthritis (RA) disease activity. Vectra DA assesses multiple mechanisms and pathways associated with RA disease activity and
integrates the concentrations of 12 serum proteins into a single score reported on a scale of 1 to 100. The test may be used throughout the course of a patients disease and provides clinicians with expanded insight on disease severity, risk of
radiographic progression, response to therapy and the effect of comorbidities.
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According to the Arthritis
Foundation, there are over 1.3 million Americans with rheumatoid arthritis. Vectra DA accounted for 1.8% of our total revenue during the year ended June 30, 2014.
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Pharmaceutical and Clinical Services (formerly Companion Diagnostic Services)
In May 2011, we completed the acquisition of the privately-held molecular diagnostic company, Rules-Based Medicine, Inc. of Austin, Texas, for a cash
purchase price of approximately $80.0 million. As of June 30, 2014, Rules-Based Medicine is operating as a wholly-owned subsidiary of Myriad under the name of Myriad RBM, Inc. (Myriad RBM). The acquisition expanded our test pipeline
into new disease states, including neuroscience disorders, infectious diseases and inflammatory diseases. We believe that the tests being developed by Myriad RBM will complement the tests that we are developing using our strength in nucleic acid
(DNA and RNA) analysis with proprietary multiplex immunoassay (protein) technology. Myriad RBM has strategic collaborations with approximately 20 major pharmaceutical and biotechnology companies, which we believe, coupled with our industry-leading
position in PARP inhibitor and PI3K inhibitor pharmaceutical and clinical services, creates a leading franchise in pharmaceutical and clinical services. In addition, our acquisition of Myriad RBM has provided us with access to samples from
additional patient cohorts for new molecular diagnostic test development and clinical validation activities.
Through Myriad RBM, we provide
biomarker discovery and pharmaceutical and clinical services to the pharmaceutical, biotechnology, and medical research industries utilizing our multiplexed immunoassay technology. Our technology enables us to efficiently screen large sets of
well-characterized clinical samples from both diseased and non-diseased populations against our extensive menu of biomarkers. During the year ended June 30, 2014, Myriad RBM generated $30.0 million in revenue from providing its pharmaceutical
and clinical services. In addition to the fees received from analyzing these samples, we also use this information to create and validate potential companion diagnostic test panels.
Our pharmaceutical and clinical services consist of the following:
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Multi-Analyte Profile (MAP):
We have compiled a library of over 550 individual human and rodent immunoassays for use in our
multi-analyte profile (MAP) testing services and we are continuously adding new assays to this library. We have assembled what we believe are the most clinically relevant human immunoassays from this library into our DiscoveryMAP
®
assay panel, which we typically employ with pharmaceutical collaborators in human clinical trials. We have also developed RodentMAP
®
, a proprietary panel for use in pre-clinical animal studies and OncologyMAP
®
, which
measures cancer-related proteins to assist researchers accelerate the pace of discovery, validation and translation of cancer biomarkers for early detection, patient stratification and therapeutic monitoring. Importantly, the data generated through
our pharmaceutical and clinical services business can provide new insights into biological systems and enable us to generate potential new companion diagnostic tests. Under the terms of the agreements with many of our collaborators, we retain the
rights to the companion diagnostic products. We have licensed rights to the Luminex platform used in our MAP testing services.
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TruCulture
®
:
TruCulture is a simple, self-contained whole blood
culture that can be deployed to clinical sites around the world for acquiring cell culture data without specialized facilities. The TruCulture system may allow pharmaceutical and biotechnology companies to identify drug toxicity prior to human
trials, potentially enabling a decision as to whether to continue a drugs development earlier in the development process and thereby save significant research and development costs.
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Multiplexed Immunoassay Kits:
Many of our pharmaceutical and biotechnology customers need bioassay kits for complimentary in-house
testing. Therefore, we have developed multiplexed immunoassay kits that enable our customers to leverage our technology services with their in-house capabilities.
Patents and Proprietary Rights
We own or have license rights to 252 issued patents
as well as numerous patent applications in the United States and foreign countries. These patents and patent applications cover a variety of subject matter including, diagnostic biomarkers, gene expression signatures, antibodies, primers, probes,
assays, disease-associated genetic
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mutations, methods for determining genetic predisposition, methods for disease diagnosis, methods for determining disease progression, methods for disease treatment, and general molecular
diagnostic techniques. For many of the patents, we hold rights through exclusive or non-exclusive license agreements, which are summarized in the following section under the caption License Agreements. We also own additional patent
applications and hold other non-exclusive license rights to patents which cover various aspects of our tests or processes.
BRACAnalysis.
We own or have exclusive license rights to over 500 claims in 25 issued U.S. patents relating to BRAC
Analysis
testing. These
U.S. patents have terms that are expected to expire commencing in 2014, with the last patent expected to expire in 2029. These patents contain multiple claims, including claims relating to compositions of matter on synthetic
BRCA1
and
BRCA2
nucleic acids, probes and primers, methods of detecting genetic mutations in the
BRCA1
and
BRCA2
genes and the use thereof for diagnosing predisposition to breast or ovarian cancer, and general molecular diagnostic technology
relating to BRAC
Analysis
testing.
BART
. We own or have exclusive license rights to seven issued U.S. patents relating to BART
testing. These U.S. patents have terms that are expected to expire commencing in 2015, with the last patent expected to expire in 2025. These patents contain multiple claims, including but not limited to claims relating to composition of matter on
synthetic
BRAC1
and
BRCA2
nucleic acids, composition of matter on probes and primers, methods of detecting genomic rearrangements and methods of determining
BRCA1
and
BRCA2
related predisposition to cancer.
COLARIS
. We own or have exclusive or non-exclusive license rights to 19 issued U.S. patents relating to COLARIS testing. These U.S. patents have
terms that began to expire commencing in 2013, with the last patent expected to expire in 2023. These patents contain multiple claims, including but not limited to claims relating to
MLH1
,
MSH2, PMS2
and
MYH
compositions of
matter on synthetic
MLH1
,
MSH2, PMS2
and
MYH
nucleic acids, methods of detecting mutations in the
MLH1, MSH2
and
MYH
genes, methods for determining
MLH1-
,
MSH2-, PMS2-,
and
MYH-
related
predisposition to cancer, such as Lynch Syndrome cancers, and general molecular diagnostic technology applicable to COLARIS testing.
COLARIS AP.
We own or have exclusive license rights to 11 issued U.S. patents relating to COLARIS AP testing. These U.S. patents have terms that
are expected to expire commencing in 2017, with the last patent expected to expire in 2026. These patents contain multiple claims, including claims relating to
MYH
compositions of matter on synthetic
MYH
nucleic acids, methods of
detecting
MYH
mutations and methods of detecting a predisposition to colorectal cancer using
MYH
, and general molecular diagnostic technology applicable to COLARIS AP testing.
myRisk Hereditary Cancer.
We own or have exclusive license rights to 54 issued U.S. patents and 3 pending U.S. patent
applications relating to myRisk Hereditary Cancer
TM
testing. Subject to applicable extensions, we anticipate that the expiration dates of these patents will commence in 2014, with the last patent, if issued from the currently pending applications, expected to expire in 2029. These patents and patent
applications disclose and claim varied subject matter, including claims relating to compositions of matter on synthetic nucleic acids, probes and primers, methods of detecting genetic mutations in the 25 genes that comprise the test (individually
and in numerous combinations) and the use thereof for diagnosing predisposition to various cancers, and general molecular diagnostic technology relating to myRisk Hereditary.
We intend to seek patent protection in the United States and major foreign jurisdictions for synthetic nucleic acids, antibodies, biomarker signatures, assays, probes, primers, technologies, methods,
processes and other inventions which we believe are patentable and where we believe our interests would be best served by seeking patent protection. However, any patents issued to us or our licensors may not afford meaningful protection for our
products or technology or may be subsequently circumvented, invalidated or narrowed or found unenforceable, such as occurred in the U.S. Supreme Court case of
Association for Molecular Pathology et al. v. Myriad Genetics, Inc. et al.
, in
which the court ruled that a naturally occurring DNA segment is a product of
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nature and not patent eligible merely because it has been isolated. Any patent applications which we have filed or will file or to which we have licensed or will license rights may not issue, and
patents that do issue may not contain commercially valuable claims. In addition, others may obtain patents having claims which cover aspects of our tests or processes which are necessary for or useful to the development, use or performance of our
diagnostic products. Should any other group obtain patent protection with respect to our discoveries, our commercialization of our molecular diagnostic tests could be limited or prohibited.
Others may offer clinical diagnostic genomic laboratory testing services which may infringe patents we control. We may seek to negotiate a license to use our patent rights or decide to seek enforcement of
our patent rights through litigation. Patent litigation is expensive and the outcome is often uncertain and we may not be able to enforce our patent rights against others. For example, as discussed in Item 3, Legal Proceedings, we have filed
complaints against seven companies who are offering laboratory testing services which we believe infringe our patent rights.
Our tests and
processes may also conflict with patents which have been or may be granted to competitors, academic institutions or others. In addition, third parties could bring legal actions against us seeking to invalidate our owned or licensed patents, claiming
damages, or seeking to enjoin clinical testing, developing and marketing of our tests or processes. If any of these actions are successful, in addition to any potential liability for damages, we could lose patent coverage for our tests, be required
to cease the infringing activity or obtain a license in order to continue to develop or market the relevant test or process. We may not prevail in any such action, and any license required under any such patent may not be made available on
acceptable terms, if at all. Our failure to maintain patent protection for our test and processes or to obtain a license to any technology that we may require to commercialize our tests and technologies could have a material adverse effect on our
business.
We also rely upon unpatented proprietary technology, and in the future may determine in some cases that our interests would be
better served by reliance on trade secrets or confidentiality agreements rather than patents or licenses. These include some of our genomic, proteomic, RNA expression, mutation analysis, IHC, robotic and bioinformatic technologies which may be used
in discovering and characterizing new genes and proteins and ultimately used in the development or analysis of molecular diagnostic tests. We also maintain a database of gene mutations and their status as either harmful or benign for all of our
predictive medicine tests. To further protect our trade secrets and other proprietary information, we require that our employees and consultants enter into confidentiality and invention assignment agreements. However, those confidentiality and
invention assignment agreements may not provide us with adequate protection. We may not be able to protect our rights to such unpatented proprietary technology and others may independently develop substantially equivalent technologies. If we are
unable to obtain strong proprietary rights to our processes or tests, competitors may be able to market competing processes and tests.
License Agreements
We are a party to
multiple license agreements which give us the rights to use certain technologies in the research, development, testing processes, and commercialization of our molecular diagnostic tests and pharmaceutical and clinical services. We may not be able to
continue to license these technologies on commercially reasonable terms, if at all. Additionally, patents underlying our license agreements may not afford meaningful protection for our technology or tests or may be subsequently circumvented,
invalidated or narrowed, or found unenforceable. Our failure to maintain rights to this technology could have a material adverse effect on our business.
In October 1991, we entered into a license agreement with the University of Utah Research Foundation (the University), for the exclusive rights to utilize certain intellectual property rights
of the University, including issued patents that relate to the
BRCA1
gene, on a world-wide basis. Under this license agreement we pay the University a royalty based on net sales of our BRAC
Analysis
test. This license agreement ends on
the last to expire patent covered by the license agreement which presently is not anticipated to expire until April 2015. The University has the right to terminate the license agreement for the uncured breach of any material term of the license
agreement.
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We entered into separate license agreements with the University, Endorecherche, Inc., The Hospital for Sick
Children and The Trustees of the University of Pennsylvania (collectively referred to as the BRCA2 Licensors) in November 1994, January 1995, March 1995 and March 1996, respectively, for exclusive rights to utilize certain
intellectual property rights of the respective BRCA2 Licensors, including issued patents that relate to the
BRCA2
gene, on a world-wide basis. Under these license agreements we pay each of the BRCA2 Licensors a royalty based on net sales of
our BRAC
Analysis
test and myRisk Herediatry Cancer test. Each of these license agreements ends on the expiration date of the last to expire patent covered by the respective license agreements which presently is not anticipated to expire until
December 2015. The BRCA2 Licensors have the right to terminate the license agreements for the uncured breach of any material term of the license agreements.
In April 2000, we entered into license agreements with Genzyme Corporation and with Dana-Farber Cancer Institute, Inc., Oregon Health Sciences University, University of Vermont and State Agricultural
College and Yale University (collectively the COLARIS Licensors) for the non-exclusive rights to utilize certain intellectual property rights of the COLARIS Licensors, including issued patents that relate to the MLH1, MSH2 and PMS2
genes, on a world-wide basis. Under these license agreements we pay the COLARIS Licensors a royalty based on net sales of our COLARIS test and our myRisk Hereditary Cancer test. This license agreement ends on the expiration date of the last to
expire patent covered by the license agreement, which presently is not anticipated to expire until October 2023. The COLARIS Licensors have the right to terminate the license agreement for the uncured breach of any material term of the license
agreement.
Competition
Competition is intense in our existing and potential markets. Our competitors in the United States and abroad are numerous and include, other molecular
diagnostic companies, diagnostic reference laboratories, large multi-national healthcare companies, and universities and other research institutions. For instance, some laboratories provide a test intended to predict the cancers aggressiveness
among patients with prostate cancer and other laboratories provide hereditary cancer testing for melanoma, breast, ovarian, colorectal and uterine cancer. Some of our potential competitors have considerably greater financial, technical, marketing
and other resources than we do. We expect competition to intensify in our current fields as technical advances occur and become more widely known. For example, following our Supreme Court case discussed in Item 3, Legal Proceedings, a number of
companies commenced offering certain clinical diagnostic testing for hereditary breast and ovarian cancer that compete with our BRACAnalysis testing and future molecular diagnostic testing we plan to launch. We anticipate that others may also launch
their own molecular diagnostic tests which may compete with our testing products and services.
The technologies for discovering the
underlying cause of major diseases, patients response to therapies, and disease progression, as well as the approaches for commercializing those discoveries are rapidly evolving. Rapid technological developments could result in our potential
tests or processes becoming obsolete before we recover a significant portion of our related research and development costs and associated capital expenditures. If we do not discover biomarkers, develop molecular diagnostic tests and related
information services based on such discoveries, obtain regulatory and other approvals, and launch such services before our competitors, we could be adversely affected. Moreover, any molecular diagnostic tests that we may develop could be made
obsolete by less expensive or more effective tests or methods that may be developed in the future.
Governmental Regulation
The services that we provide are regulated by federal, state and foreign governmental authorities. Failure to comply with the applicable laws and
regulations can subject us to repayment of amounts previously paid to us, significant civil and criminal penalties, loss of licensure, certification, or accreditation, or exclusion from government health care programs. The significant areas of
regulation are summarized below.
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Clinical Laboratory Improvement Amendments of 1988 and State Regulation
Each of our clinical laboratories must hold certain federal, state and local licenses, certifications and permits to conduct our business. Laboratories in
the United States that perform testing on human specimens for the purpose of providing information for the diagnosis, prevention, or treatment of disease are subject to the Clinical Laboratory Improvement Amendments of 1988, or (CLIA).
CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services
are accurate, reliable and timely. CLIA certification also is a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. Our laboratories in Salt Lake City, Utah,
Austin, Texas and South San Francisco, California are CLIA certified to perform high complexity tests.
In addition, CLIA requires our
certified laboratories to enroll in an approved proficiency testing program if it performs testing in any category for which proficiency testing is required. Our laboratories periodically test specimens received from an outside proficiency testing
organization and then submit the results back to that organization for evaluation. If our laboratories fails to achieve a passing score on a proficiency test they lose their right to perform testing. Further, failure to comply with other proficiency
testing regulations, such as the prohibition on referral of a proficiency testing specimen to another laboratory for analysis, can result in revocation of our laboratories CLIA certification.
As a condition of CLIA certification, each of our laboratories is subject to survey and inspection every other year, in addition to being subject to
additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services (CMS), a CMS agent (typically a state agency), or, a CMS-approved accreditation organization. Our laboratories are
accredited by the College of American Pathologists (CAP), which is a CMS-approved accreditation organization.
CLIA provides that
a state may adopt laboratory regulations that are more stringent than those under federal law. Our laboratories are licensed by the appropriate state agencies in the states in which they operate, if such licensure is required. In addition, our
laboratories hold state licenses from California, Florida, New York, Pennsylvania, Rhode Island and Maryland, to the extent that they accept specimens from one or more of these states, each of which require out-of-state laboratories to obtain
licensure. If a laboratory is out of compliance with state laws or regulations governing licensed laboratories, penalties for violation vary from state to state but may include suspension, limitation, revocation or annulment of the license,
assessment of financial penalties or fines, or imprisonment. We believe that we are in material compliance with all applicable licensing laws and regulations.
Food and Drug Administration
Although the Food and Drug Administration (FDA) has
consistently claimed that it has the authority to regulate laboratory-developed tests (LDTs) that are developed, validated and performed only by a CLIA certified laboratory, it has historically exercised enforcement discretion in not
otherwise regulating most LDTs. Nevertheless, the FDA recently indicated that it is promulgating draft guidance for FDA regulation of most LDTs in the future.
We are developing companion diagnostic tests for use with drug products in development by pharmaceutical companies, such as our collaborations with pharmaceutical companies on PARP inhibitors for the
treatment of ovarian, breast and other cancers. Companion diagnostic tests are subject to regulation by the FDA as medical devices. The FDA issued Guidance on In-Vitro Companion Diagnostic Devices in July 2014, which is intended to assist companies
developing in vitro companion diagnostic devices and companies developing therapeutic products that depend on the use of a specific in vitro companion diagnostic for the safe and effective use of the product. The FDA defined an in-vitro companion
diagnostic device (IVD) Companion Dx, as a device that provides information that is essential for the safe and effective use of a corresponding therapeutic product. The
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FDA expects that the therapeutic sponsor will address the need for an approved or cleared IVD Companion Dx in its therapeutic product development plan and that, in most cases, the therapeutic
product and its corresponding companion diagnostic will be developed contemporaneously. We have submitted portions of a premarket approval (PMA) for BRAC
Analysis
CDx to the FDA. The premarket approval process is a complex, costly
and time consuming procedure. PMAs must be supported by valid scientific evidence, which typically requires extensive data, including quality technical, preclinical, clinical and manufacturing data to demonstrate to the FDAs satisfaction the
safety and effectiveness of the companion diagnostic.
After a medical device is placed on the market, numerous regulatory requirements apply.
These include:
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compliance with the QSR, which require manufacturers to follow stringent design, testing, control, documentation, record maintenance, including
maintenance of complaint and related investigation files, and other quality assurance controls during the manufacturing process;
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labeling regulations, which prohibit the promotion of products for uncleared, unapproved or off-label uses and impose other restrictions on
labeling; and
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medical device reporting obligations, which require that manufacturers investigate and report to the FDA adverse events, including deaths, or serious
injuries that may have been or were caused by a medical device and malfunctions in the device that would likely cause or contribute to a death or serious injury if it were to recur.
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Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not
limited to, warning letters; fines, injunctions, and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices;
withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution. To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced
inspections by the FDA.
HIPAA and other privacy laws
The Health Insurance Portability and Accountability Act of 1996 (HIPAA), established comprehensive federal protection for the privacy and security of health information. The HIPAA standards
apply to three types of organizations: health plans, healthcare clearing houses, and healthcare providers which conduct certain healthcare transactions electronically (Covered Entities). Title II of HIPAA, the Administrative
Simplification Act, contains provisions that address the privacy of health data, the security of health data, the standardization of identifying numbers used in the healthcare system and the standardization of certain healthcare transactions. The
privacy regulations protect medical records and other protected health information by limiting their use and release, giving patients the right to access their medical records and limiting most disclosures of health information to the minimum amount
necessary to accomplish an intended purpose. The HIPAA security standards require the adoption of administrative, physical, and technical safeguards and the adoption of written security policies and procedures.
On February 17, 2009, Congress enacted Subtitle D of the Health Information Technology for Economic and Clinical Health Act, or HITECH, provisions
of the American Recovery and Reinvestment Act of 2009. HITECH amends HIPAA and, among other things, expands and strengthens HIPAA, creates new targets for enforcement, imposes new penalties for noncompliance and establishes new breach
notification requirements for Covered Entities. Regulations implementing major provisions of HITECH were finalized on January 25, 2013 through publication of the HIPAA Omnibus Rule (the Omnibus Rule).
Under HITECHs new breach notification requirements, Covered Entities must report breaches of protected health information that has not been
encrypted or otherwise secured in accordance with guidance from the
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Secretary of the U.S. Department of Health and Human Services (the Secretary). Required breach notices must be made as soon as is reasonably practicable, but no later than 60
days following discovery of the breach. Reports must be made to affected individuals and to the Secretary and in some cases, they must be reported through local and national media, depending on the size of the breach. Breach reports can lead to
investigation and enforcement.
We are currently subject to the HIPAA regulations and maintain an active compliance program that is designed
to identify security incidents and other issues in a timely fashion and enable us to remediate, mitigate harm or report if required by law. We are subject to prosecution and/or administrative enforcement and increased civil and criminal
penalties for non-compliance, including a new, four-tiered system of monetary penalties adopted under HITECH. We are also subject to enforcement by state attorneys general who were given authority to enforce HIPAA under HITECH. To
avoid penalties under the HITECH breach notification provisions, we must ensure that breaches of protected health information are promptly detected and reported within the company, so that we can make all required notifications on a timely
basis. However, even if we make required reports on a timely basis, we may still be subject to penalties for the underlying breach.
In
addition to the federal privacy regulations, there are a number of state laws regarding the privacy and security of health information and personal data that are applicable to our clinical laboratories. Many states have also implemented genetic
testing and privacy laws imposing specific patient consent requirements and protecting test results by strictly limiting the disclosure of those results. State requirements are particularly stringent regarding predictive genetic tests, due to the
risk of genetic discrimination against healthy patients identified through testing as being at a high risk for disease. We believe that we have taken the steps required of us to comply with health information privacy and security statutes and
regulations, including genetic testing and genetic information privacy laws in all jurisdictions, both state and federal. However, we may not be able to maintain compliance in all jurisdictions where we do business. Failure to maintain compliance,
or changes in state or federal laws regarding privacy or security, could result in civil and/or criminal penalties and could have a material adverse effect on our business.
We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and
hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (OSHA), has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S.
This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some
biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the United States
Postal Service and the International Air Transport Association. We generally use third-party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials and contractually require them to comply with applicable laws and
regulations.
International regulations
We market our tests outside of the United States and are subject to foreign regulatory requirements governing laboratory licensure, human clinical testing, use of tissue, privacy and data security, and
marketing approval for our tests. These requirements vary by jurisdiction, differ from those in the United States and may require us to implement additional compliance measures or perform additional pre-clinical or clinical testing. On
September 26, 2012, the European Commission released the first drafts of the new European Union (EU) regulations for medical devices and IVDs that if finalized will impose additional regulatory requirements on IVDs used in the EU.
In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. We are also required to maintain accurate information and control over sales and distributors activities that may fall within the
purview of the Foreign Corrupt Practices Act, its books and records provisions and its anti-bribery provisions.
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Reimbursement and Billing
Reimbursement and billing for diagnostic services is generally highly complex. Laboratories must bill various payors, such as private third-party payors, including MCOs and state and federal health care
programs, such as Medicare and Medicaid, and each may have different billing requirements. Additionally, the audit requirements we must meet to ensure compliance with applicable laws and regulations, as well as our internal compliance policies and
procedures, add further complexity to the billing process. Other factors that complicate billing include:
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variability in coverage and information requirements among various payors;
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missing, incomplete or inaccurate billing information provided by ordering physicians;
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billings to payors with whom we do not have contracts;
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disputes with payors as to which party is responsible for payment; and
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disputes with payors as to the appropriate level of reimbursement.
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Depending on the reimbursement arrangement and applicable law, the party that reimburses us for our services may be:
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a third party who provides coverage to the patient, such as an insurance company or MCO;
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a governmental payor; or
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Presently,
approximately 85% of our revenue comes from third party payors.
In February 2011, the American Medical Association CPT Editorial Panel
approved 101 new molecular pathology codes to describe molecular diagnostic tests that currently require multiple CPT codes for billing purposes. The new reimbursement rates for the new codes went into effect on January 1, 2013.
Federal and State Fraud and Abuse Laws
A variety of federal laws prohibit fraud and abuse involving state and federal health care programs, such as Medicare and Medicaid. These laws are interpreted broadly and enforced aggressively by various
state and federal agencies, including CMS, the Department of Justice, the Office of Inspector General for the Department of Health and Human Services (OIG), and various state agencies. In addition, the Medicare and Medicaid programs
increasingly use a variety of contractors to review claims data and to identify improper payments as well as fraud and abuse. Any overpayments identified must be repaid to the Medicare program unless a favorable decision is obtained on appeal. In
some cases, these overpayments can be used as the basis for an extrapolation, by which the error rate is applied to a larger universe of claims, and which can result in even higher repayments.
Anti-Kickback Laws
The
Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the
furnishing, arranging for or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program. Remuneration is broadly defined to include anything of value, such as, for example, cash
payments, gifts or gift certificates, discounts, or the furnishing of services, supplies or equipment. The Anti-Kickback Statue is broad and prohibits many arrangements and practices that are lawful in businesses outside of the health care industry.
Recognizing the breadth of the Anti-Kickback Statute and the fact that it may technically prohibit many innocuous or beneficial arrangements
within the health care industry, the OIG has issued a series of regulations, or safe harbors. Compliance with all requirements of a safe harbor immunizes the parties to the business
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arrangement from prosecution under the Anti-Kickback Statute. The failure of a business arrangement to fit within a safe harbor does not necessarily mean that the arrangement is illegal or that
the OIG will pursue prosecution. Still, in the absence of an applicable safe harbor, a violation of the Anti-Kickback Statute may occur even if only one purpose of an arrangement is to induce referrals. The penalties for violating the Anti-Kickback
Statute can be severe. These sanctions include criminal and civil penalties, imprisonment and possible exclusion from the federal health care programs. Many states have adopted laws similar to the Anti-Kickback Statute, and some apply to items and
services reimbursable by any payor, including private third-party payors.
Physician Self-Referral Bans
The federal ban on physician self-referrals, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare
patients to an entity providing certain designated health services, which include laboratory services, if the physician or an immediate family member of the physician has any financial relationship with the entity. Several Stark Law exceptions are
relevant to arrangements involving clinical laboratories, including: (1) fair market value compensation for the provision of items or services; (2) payments by physicians to a laboratory for clinical laboratory services; (3) certain
space and equipment rental arrangements that satisfy certain requirements; and (4) personal services arrangements. Penalties for violating the Stark Law include the return of funds received for all prohibited referrals, fines, civil monetary
penalties and possible exclusion from the federal health care programs. In addition to the Stark Law, many states have their own self-referral bans, which may extend to all self-referrals, regardless of the payor.
State and Federal Prohibitions on False Claims
The federal False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal
government. Under the False Claims Act, a person acts knowingly if he has actual knowledge of the information or acts in deliberate ignorance or in reckless disregard of the truth or falsity of the information. Specific intent to defraud is not
required. The qui tam provisions of the False Claims Act allow a private individual to bring an action on behalf of the federal government and to share in any amounts paid by the defendant to the government in connection with the action. Penalties
include payment of up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 and $11,000 for each false claim, as well as possible exclusion from the federal health care programs. In addition, various
states have enacted similar laws modeled after the False Claims Act that apply to items and services reimbursed under Medicaid and other state health care programs, and, in several states, such laws apply to claims submitted to any payor.
Civil Monetary Penalties Law
The federal Civil Monetary Penalties Law, or the CMP Law, prohibits, among other things (1) the offering or transfer of remuneration to a Medicare or state health care program beneficiary if the
person knows or should know it is likely to influence the beneficiarys selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care program, unless an exception applies;
(2) employing or contracting with an individual or entity that the provider knows or should know is excluded from participation in a federal health care program; (3) billing for services requested by an unlicensed physician or an excluded
provider; and (4) billing for medically unnecessary services. The penalties for violating the CMP Law include exclusion, substantial fines, and payment of up to three times the amount billed, depending on the nature of the offense.
Human Resources
As of June 30,
2014, we had 1,649 full-time equivalent employees. Most of our employees are engaged directly in research, development, production, sales and marketing activities. We believe that the success of our business will depend, in part, on our ability to
attract and retain qualified personnel. Our employees are not covered by a collective bargaining agreement, and we consider our relations with our employees to be good.
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Available Information
We are a Delaware corporation with our principal executive offices located at 320 Wakara Way, Salt Lake City, Utah 84108. Our telephone number is (801) 584-3600 and our web site address is
www.myriad.com. We make available free of charge through the Investor Relations section of our web site our Corporate Code of Conduct and Ethics, our Audit Committee and other committee charters and our other corporate governance policies, as well
as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and
Exchange Commission. We include our web site address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our web site.
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Risks Related to Our
Business and Our Strategy
We may not be successful in transitioning from our existing product portfolio to our new products, such as
our myRisk Hereditary Cancer test, which represents the next generation of our existing hereditary cancer franchise. We may not be able to generate sufficient revenue from our existing tests and our new tests or develop new tests to maintain
profitability.
Although we have developed and marketed several molecular diagnostic tests to date, we believe our future success is
dependent upon our ability to successfully market our existing molecular diagnostic tests to additional patients within the United States, to expand into new markets outside the United States, and to develop and commercialize new molecular
diagnostic and companion diagnostic tests. Importantly, in 2014 we launched our myRisk Hereditary Cancer test, which represents the next generation of our existing hereditary cancer franchise. We anticipate that the myRisk Hereditary Cancer test
will eventually replace our current predictive medicine test offerings (BRAC
Analysis
, Colaris, Colaris AP, Melaris, and Panexia) with a single comprehensive test. However, we may not be successful in transitioning from our existing product
portfolio to our new tests and in launching and commercializing our new tests. The demand for our existing molecular diagnostic tests may decrease or may not continue to increase at historical rates due to sales of the myRisk Hereditary Cancer test
and our other new tests that are replacing our existing product portfolio, or for other reasons. For example, because most of our molecular diagnostic tests are only utilized once per patient, we will need to sell our services through physicians to
new patients or develop new molecular diagnostic tests in order to continue to generate revenue. Our pipeline of new molecular diagnostic and companion diagnostic test candidates is in various stages of development and may take several more years to
develop and must undergo extensive clinical validation. We may be unable to discover or develop any additional molecular diagnostic or companion diagnostic tests through the utilization of our technologies or technologies we license or acquire from
others. Even if we develop tests or services for commercial use, we may not be able to develop tests or services that:
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meet applicable regulatory standards, in a timely manner or at all;
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successfully compete with other technologies and tests;
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avoid infringing the proprietary rights of others;
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are adequately reimbursed by third-party payors;
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can be performed at commercial levels or at reasonable cost; or
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can be successfully marketed.
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We must generate significant revenue to maintain profitability. Even if we succeed in marketing myRisk Hereditary Cancer and our existing molecular diagnostic tests to physicians for use in new patients
and in developing and commercializing any additional molecular diagnostic tests and companion diagnostic tests, we may not be able to generate sufficient revenue and we may not be able to maintain profitability.
We may not be able to sustain or increase profitability on a quarterly or annual basis.
In order to develop and commercialize our molecular diagnostic and companion diagnostic test candidates, we expect to incur significant expenses over the
next several years as we increase our research and development activities, expand clinical validation trials for our molecular diagnostic tests and companion diagnostic tests currently in development, potentially license or acquire additional
companies or technologies and engage in commercialization activities in anticipation of the launch of additional molecular diagnostic tests companion diagnostic tests. Because of the numerous risks and uncertainties associated with developing our
tests and their potential for commercialization, we are unable to predict the extent of any future profits. If we are unable to sustain or increase profitability, the market value of our common stock will likely decline. Our ability to maintain
profitability will depend upon numerous factors, including:
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our ability to transition from our existing product portfolio to our new products, such as our MyRisk Hereditary Cancer test, and to commercialize
these new tests;
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our ability to obtain full or partial reimbursement for new products;
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our ability to sell our other existing molecular diagnostic tests to new patients;
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our ability to identify biomarkers that may lead to future molecular diagnostic tests and companion diagnostic tests;
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our ability to develop test candidates and receive any required regulatory approvals;
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our ability to successfully commercialize our tests in our existing markets and to extend into new markets outside the United States;
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the approval and introduction of competitive tests;
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reductions in reimbursement by third-party payors or their willingness to provide full or even partial reimbursement for our tests;
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our ability to maintain and enforce our intellectual property rights covering our molecular diagnostic tests and companion diagnostic tests;
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our ability to maintain and grow our sales force and marketing team to market our tests;
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our ability to successfully integrate, develop and grow products and services and the business of any other companies or technologies that we may
license or acquire;
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our ability to increase commercial acceptance of our current molecular diagnostic tests; and
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our ability to maintain or grow our current revenues.
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If we do not continue to generate sufficient revenue from sales of our molecular diagnostic tests and are unable to secure additional funding, we may have to reduce our operations.
As of June 30, 2014, we had $270.6 million in cash, cash equivalents and marketable securities. For the fiscal year ended
June 30, 2014 our consolidated revenues were $778.2 million, and net cash from operating activities was $190.2 million. To develop and bring new molecular diagnostic tests and companion diagnostic tests to market, we must commit substantial
resources to costly and time-consuming research, development testing and clinical testing.
While we anticipate that our existing cash, cash
equivalents and marketable securities and expected net cash to be generated from sales of our molecular diagnostic tests and pharmaceutical and clinical services will be sufficient to fund our current operations for the foreseeable future, changes
could occur that would consume available capital resources more quickly than we currently expect and we may need or want to raise additional financing. If we are unable to secure additional funding, we may be required to reduce research and
development projects, limit sales and marketing activities, scale back our expansion efforts outside the United States, reduce headcount or potentially even discontinue operations. Our future capital requirements will depend on many factors that are
currently unknown to us, including:
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our ability to maintain the existing licenses to our molecular diagnostic tests and enter into collaborations, licensing or other arrangements
favorable to us;
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the scope, progress, results and cost of development, clinical testing and pre-market studies of any new molecular diagnostic tests that we may
discover or acquire;
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the progress, results, and costs to develop additional molecular diagnostic tests;
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the costs by us or our licensors of preparing, filing and prosecuting patent applications, maintaining and enforcing our current issued patents, and
defending intellectual property-related claims;
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the costs of acquiring technologies or businesses, and our ability to successfully integrate and achieve the expected benefits of our business
development activities and acquisitions;
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the progress, cost and results of our international expansion efforts;
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the costs of expanding our sales and marketing functions and commercial operation facilities in the United States and in new markets;
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the costs, timing and outcome of any litigation against us; and
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the costs to satisfy our current and future obligations.
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We may acquire technologies, assets or other businesses that could cause us to incur significant expense and expose us to a number of unanticipated operational and financial risks.
In addition to organic growth, we intend to continue to pursue growth through the acquisition of technology, assets or other
businesses that may enable us to enhance our technologies and capabilities, expand our geographic market, add experienced management personnel and increase our test offerings. For example, in May 2011, we completed the acquisition of Rules-Based
Medicine, Inc., which we renamed Myriad RBM, and are now offering pharmaceutical and clinical services and developing additional product candidates using the acquired technology. Additionally, in February 2014, we completed the acquisition of
Crescendo Bioscience, Inc., and are now offering molecular diagnostic tests for patients suffering from rheumatoid arthritis and developing additional product candidates in the inflammatory and autoimmune disease area. However, these acquisitions
may not achieve profitability or generate a positive return on our investment. Additionally, we may be unable to implement our growth strategy if we cannot identify suitable acquisition candidates, reach agreement on potential acquisitions on
acceptable terms, successfully integrate personnel or assets that we acquire or for other reasons. Our acquisition efforts may involve certain risks, including:
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we may have difficulty integrating operations and systems;
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key personnel and customers of the acquired company may terminate their relationships with the acquired company as a result of the acquisition;
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we may not be successful in launching new molecular diagnostic tests or companion diagnostic tests, or if those tests are launched they may not prove
successful in the market place;
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we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting;
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we may assume or be held liable for risks and liabilities, including for environmental-related costs, as a result of our acquisitions, some of which we
may not discover during our due diligence;
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we may incur significant additional operating expenses;
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our ongoing business may be disrupted or receive insufficient management attention; and
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we may not be able to realize synergies, the cost savings or other financial and operational benefits we anticipated, or such synergies, savings or
benefits may take longer than we expected.
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The process of negotiating acquisitions and integrating acquired tests,
services, technologies, personnel or businesses might result in operating difficulties and expenditures and might require significant management attention that would otherwise be available for ongoing development of our business, whether or not any
such transaction is ever consummated. Moreover, we might never realize the anticipated benefits of any acquisition. Future acquisitions could result in the use of our available cash and marketable securities, potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities, or impairment expenses related to goodwill, and impairment or amortization expenses related to other intangible assets, which could harm our financial condition. In addition, if we are
unable to integrate any acquired businesses, tests or technologies effectively, our business, financial condition and results of operations may be materially adversely affected.
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We may not be able to successfully integrate the operations of businesses that we acquire with our own
or realize the anticipated benefits of the acquisitions, which could adversely affect our financial condition, results of operations and business prospects.
There can be no assurance that we will be able to successfully integrate our recent acquisitions or develop or commercialize products based on recently acquired technologies, or that we will be able to
successfully integrate any other companies, products or technologies that we acquire and may not realize all or any of the expected benefits of any acquisitions as and when planned. Additionally, we may experience increased expenses, distraction of
our management, personnel and customer uncertainty.
The difficulties and risks associated with the integration of any other businesses that
we may acquire include:
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possible inconsistencies in the standards, controls, procedures, policies and compensation structures;
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the increased scope and complexity of the acquired companys operations;
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the potential loss of key employees and the costs associated to retain key employees;
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risks and limitations on our ability to consolidate corporate and administrative infrastructures of the two companies; and
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the possibility of unanticipated delays, costs or inefficiencies associated with the integration of our operations with the operations of any other
companies that we may acquire.
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As a result of these difficulties and risks, we may not accomplish the integration of the
business of any companies we may acquire smoothly, successfully or within our budgetary expectations and anticipated timetable. Accordingly, we may fail to realize some or all of the anticipated benefits of the acquisition, such as increase in our
scale, diversification, cash flows and operational efficiency and meaningful accretion to our diluted earnings per share.
If we were
successfully sued for product liability, we could face substantial liabilities that exceed our resources.
Our business exposes us to
potential liability risks inherent in the testing, marketing and processing of molecular diagnostic products, including possible misdiagnoses. Although we are insured against such risks in amounts that we believe to be commercially reasonable, our
present professional and product liability insurance may be inadequate. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on our business. Any successful product liability claim may prevent
us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product
liability claims could prevent or inhibit the commercialization of our products.
We are dependent on our information technology and
telecommunications systems, and any failure of these systems could harm our business.
We depend on information technology, or IT, and
telecommunications systems for significant aspects of our business. These IT and telecommunications systems support a variety of functions, including sample processing, tracking, quality control, customer service and support, billing, research and
development activities, and various general and administrative activities. Failures or significant downtime of our IT or telecommunications systems could prevent us from processing samples, providing test results to physicians, billing payors,
addressing patient or physician inquiries, conducting research and development activities and conducting general and administrative elements of our business. Any disruption or loss of IT or telecommunications systems on which critical aspects of our
operations depend could have an adverse effect on our business.
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Security breaches, loss of data and other disruptions could compromise sensitive information related
to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we collect and store sensitive data, including legally protected patient health information, credit card information, personally identifiable information about our
employees, intellectual property, and proprietary business information. We manage and maintain our applications and data utilizing on-site systems. These applications and data encompass a wide variety of business critical information including
research and development information, commercial information and business and financial information.
The secure processing, storage,
maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from
unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers, or viruses, breaches or interruptions due to employee error, malfeasance or other disruptions, or lapses in compliance with
privacy and security mandates. Any such virus, breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. We have measures in place that are
designed to detect and respond to such security incidents and breaches of privacy and security mandates. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the
privacy of personal information, such as the Health Insurance Portability and Accountability Act of 1996, government enforcement actions and regulatory penalties. Unauthorized access, loss or dissemination could also disrupt our operations,
including our ability to process samples, provide test results, bill payors or patients, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and
administrative aspects of our business and damage our reputation, any of which could adversely affect our business.
If our current
operating plan changes and we find that our existing capital resources will not meet our needs, we may find it necessary to raise additional funding, which may not be available.
We anticipate that our existing capital resources and expected net cash to be generated from sales of our molecular diagnostic tests will enable us to maintain our currently planned operations for the
foreseeable future. However, we base this expectation on our current operating plan, which may change. We have incurred, and will continue to incur, significant costs in the discovery, development and marketing of current and prospective molecular
diagnostic and companion diagnostic tests. Our ongoing efforts to develop tests and expand our business which may be through internally developed products, in licensing and mergers and acquisitions, will require substantial cash resources. If, due
to changes in our current operating plan, adequate funds are not available, we may be required to raise additional funds. Sources of potential additional capital resources may include, but are not limited to, public or private equity financings,
establishing a credit facility, or selling convertible debt securities. This additional funding, if necessary, may not be available to us on reasonable terms, or at all. If we issue shares of stock or other securities to acquire new companies or
technologies, the ownership interests of our existing stockholders may be significantly diluted.
Because of our potential long-term capital
requirements, we may access the public or private equity or debt markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Under SEC rules, we currently qualify as a well-known seasoned
issuer, or WKSI, and can at any time file a registration statement registering securities to be sold to the public which would become effective upon filing. If additional funds are raised by issuing equity securities, existing shareholders may
suffer significant dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we
raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or tests, or grant licenses on terms that are not favorable to us.
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Our business involves environmental risks that may result in liability for us.
In connection with our research and development activities, we are subject to federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens, chemicals and wastes. Although we believe that we have complied with the applicable laws, regulations and
policies in all material respects and have not been required to correct any material noncompliance, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. Although we believe that
our safety procedures for handling and disposing of controlled materials comply with the standards prescribed by state and federal regulations, accidental contamination or injury from these materials may occur. In the event of such an occurrence, we
could be held liable for any damages that result and any such liability could exceed our resources.
Changes in healthcare policy could
increase our costs, decrease our revenues and impact sales of and reimbursement for our tests.
In March 2010, the Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or the ACA became law. This law substantially changes the way health care is financed by both governmental and private insurers, and significantly
impacts our industry. The ACA contains a number of provisions that are expected to impact our business and operations, some of which in ways we cannot currently predict, including those governing enrollment in federal healthcare programs,
reimbursement changes and fraud and abuse, which will impact existing government healthcare programs and will result in the development of new programs.
In addition to the ACA, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to reduce costs while expanding individual healthcare
benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our tests or the amounts of reimbursement available for our tests from governmental agencies or third-party payors.
We face risks associated with currency exchange rate fluctuations, which could adversely affect our operating results.
We receive a portion of our revenues and pay a portion of our expenses in currencies other than the United States dollar, such as the Euro, the Swiss
franc, the British pound and the Canadian dollar. As a result, we are at risk for exchange rate fluctuations between such foreign currencies and the United States dollar, which could affect the results of our operations. If the U.S. dollar
strengthens against foreign currencies, the translation of these foreign currency denominated transactions will result in decreased revenues, operating expenses and net income. We may not be able to offset adverse foreign currency impact with
increased revenues. We do not currently utilize hedging strategies to mitigate foreign currency risk and even if we were to implement hedging strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to foreign
exchange rate fluctuations and would involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting implications.
Risks Related to Commercialization of Our Tests, Our Services and Test Candidates
We generate most of our revenues from a single product and we may not be able to maintain or increase revenue growth and profitability.
Even though we have experienced double-digit revenue growth in our molecular diagnostic business every year since the initial launch of our first test in
1996; we may not be able to continue this revenue growth or maintain existing revenue levels. Presently, our molecular diagnostic business operates profitably providing a cash contribution to our current funding and operational needs. We may not,
however, be able to continue to operate our molecular diagnostic business on a profitable basis. We launched our first molecular diagnostic test, BRAC
Analysis
, our test for hereditary breast and ovarian cancer, in November 1996.
BRAC
Analysis
test sales
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accounted for approximately two thirds of our revenues for the year ended June 30, 2014, and this percentage has been declining in recent years. An interruption or cessation of
BRAC
Analysis
sample flow would have a material impact on our revenues and future profitability. Moreover, in 2014 we launched our myRisk Hereditary Cancer test, which represents the next generation of our existing hereditary cancer franchise.
We may not be successful in transitioning from our existing product portfolio to our new products, such as MyRisk Hereditary Cancer Test, and in commercializing these tests over time. Other potential events or factors that may have a significant
impact on our ability to sustain revenue growth and profitability for our molecular diagnostic business include the following:
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increased costs of reagents and other consumables required for molecular diagnostic testing;
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increased licensing or royalty costs, and our ability to maintain and enforce the intellectual property rights underlying our tests and services;
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increased personnel and facility costs;
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our inability to hire competent, trained staff, including laboratory directors required to review and approve all reports we issue in our molecular
diagnostic business, and sales personnel;
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our inability to obtain necessary equipment or reagents to perform molecular diagnostic testing;
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our inability to increase production capacity as demand increases;
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our inability to expand into new markets outside the United States;
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the efforts of third party payors to limit or decrease the amounts that they are willing to pay for our tests;
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changes in intellectual propriety law applicable to our patents or enforcement in the United States and foreign countries;
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potential obsolescence of our tests;
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our inability to increase commercial acceptance of our molecular diagnostic tests;
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increased competition and loss of market share; and
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increased regulatory requirements.
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Our international business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
As part of our business strategy, we have expanded into international markets. We have established sales offices in Germany, Switzerland, France, Spain,
the United Kingdom, Italy and Canada; laboratory operations in Germany; and international headquarters in Switzerland. We may establish additional operations or acquire additional properties outside the United States in order to advance our
international sales Doing business internationally involves a number of risks, including:
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failure by us to obtain regulatory approvals or adequate reimbursement for the use of our tests in various countries;
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difficulty in staffing and managing foreign operations;
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managing multiple payor reimbursement and self-pay systems;
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logistics and regulations associated with shipping patient samples, including infrastructure conditions and transportation delays;
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limits in our ability to penetrate international markets if we are not able to process tests locally;
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financial risks, such as longer payment cycles, difficulty collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;
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political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and other
business restrictions;
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multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatory requirements and
other governmental approvals, permits and licenses; and
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regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors activities that may fall
within the purview of the U.S. Foreign Corrupt Practice Act, anti-boycott and other laws.
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Any of these factors could
significantly harm our international operations and, consequently, our revenues and results of operations. In addition, any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are
not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, and restrictions on certain business activities. Also, the
failure to comply with applicable legal and regulatory obligations could result in the disruption of our distribution and sales activities.
Our international operations could be affected by changes in laws, trade regulations, labor and employment regulations, and procedures and actions
affecting approval, production, pricing, reimbursement and marketing of tests, as well as by inter-governmental disputes. Any of these changes could adversely affect our business.
Our success internationally will depend, in part, on our ability to develop and implement policies and strategies that are effective in anticipating and managing these and other risks in the countries in
which we do business. Failure to manage these and other risks may have a material adverse effect on our operations in any particular country and on our business as a whole.
Foreign governments may impose reimbursement standards, which may adversely affect our future profitability.
We market our tests in foreign jurisdictions and as such may be subject to rules and regulations in those jurisdictions relating to our testing. In some foreign countries, including countries in the
European Union, the reimbursement of diagnostic tests is subject to governmental control. In these countries, reimbursement negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a test
candidate. If reimbursement of our future tests is unavailable or limited in scope or amount, or if reimbursement rates are set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
We may experience increased price competition and price erosion, including price decreases from CMS and private payors.
CMS has recently reduced the reimbursement rate for some of our products and as a result we may experience pricing pressures from managed care
organizations and other third-party payors. Any declines in average selling prices of our products due to pricing pressures may have an adverse impact on our business, results of operations and financial condition.
Our pharmaceutical testing services customers may reduce the amount of testing they conduct through us.
If there is a change in the regulatory environment or intellectual property law, or our pharmaceutical testing services customers consolidate, our
customers may divert resources from testing, resulting in a reduced demand for our laboratory testing services. Alternatively, customers may decide to perform their own laboratory testing services in-house.
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We rely on a single laboratory facility to process each of our molecular diagnostic tests in the
United States and Europe and a single laboratory facility to perform our pharmaceutical and clinical services. Failure to maintain the operations of these laboratories in compliance with applicable regulations would seriously harm our business.
We rely on a CLIA-certified laboratory facility in Salt Lake City, Utah to perform most of our molecular diagnostic tests, a
CLIA-certified laboratory in South San Francisco, California to perform our VectraDA test, a single laboratory facility in Munich, Germany to perform our international molecular diagnostic tests, and a CLIA-certified laboratory facility in Austin,
Texas to perform our pharmaceutical and clinical testing services. These facilities and certain pieces of laboratory equipment would be difficult to replace and may require significant replacement lead-time. In the event our clinical testing
facilities were to lose their CLIA certification or other required certifications or licenses or were affected by man-made or natural disasters, we would be unable to continue our molecular diagnostic and pharmaceutical and clinical services
business at current levels to meet customer demands for a significant period of time. Although we maintain insurance on these facilities, including business interruption insurance, it may not be adequate to protect us from all potential losses if
these facilities were damaged or destroyed. In addition, any interruption in our molecular diagnostic or pharmaceutical and clinical services business would result in a loss of goodwill, including damage to our reputation. If our molecular
diagnostic or pharmaceutical and clinical services business were interrupted, it would seriously harm our business.
We depend on a
limited number of third parties for some of our supplies of equipment and reagents. If these supplies become unavailable, then we may not be able to successfully perform our research or operate our business on a timely basis or at all.
We currently rely on a small number of suppliers to provide our gene sequencing equipment, content enrichment equipment, multiplex
protein analysis equipment, robots, and specialty reagents and laboratory supplies required in connection with our research. We believe that currently there are limited alternative suppliers of these equipment, robots, and reagents. The equipment,
robots, or the reagents may not remain available in commercial quantities at acceptable costs. If we are unable to obtain when needed additional or alternative equipment, robots, or an adequate supply of reagents or other ingredients at commercially
reasonable rates, our ability to continue to identify genes and perform molecular diagnostic testing and pharmaceutical and clinical services would be adversely affected.
Our molecular diagnostic and companion diagnostic tests in development may never achieve significant commercial market acceptance.
We may not succeed in achieving significant commercial market acceptance of our diagnostic test and clinical service offerings that we have launched in recent years or that we are currently developing.
Our ability to successfully develop and commercialize our current molecular diagnostic and companion diagnostic tests, as well as any future molecular diagnostic and companion diagnostic tests that we may develop, will depend on several factors,
including:
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our ability to convince the medical community of the clinical utility of our tests and their potential advantages over existing tests;
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our ability to collaborate with biotechnology and pharmaceutical companies to develop and commercialize companion diagnostic tests for their
therapeutic drugs and drug candidates;
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the agreement by third-party payors to reimburse our tests, the scope and extent of which will affect patients willingness or ability to pay for
our tests and will likely heavily influence physicians decisions to recommend our tests; and
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the willingness of physicians to utilize our tests, which can be difficult to interpret. This difficulty is caused by the ability of our tests to
predict only as to a probability, not certainty, that a tested individual will develop, have the disease, benefit from a particular therapy or has an aggressive form of the disease that the test is intended to predict.
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These factors present obstacles to commercial acceptance of our tests, which we will have to spend
substantial time and money to overcome, if we can do so at all. Our inability to successfully do so will harm our business.
If we do
not compete effectively with scientific and commercial competitors, we may not be able to successfully commercialize our tests.
The
clinical laboratory and genetics testing fields are intense and highly competitive. Tests that are developed are characterized by rapid technological change. Our competitors in the United States and abroad are numerous and include, among others,
major diagnostic companies, reference laboratories, molecular diagnostic firms, universities and other research institutions. Some of our potential competitors have considerably greater financial, technical, marketing and other resources than we do,
which may allow these competitors to discover important genes and determine their function before we do. We could be adversely affected if we do not discover genes, proteins or biomarkers and characterize their function, develop molecular diagnostic
and pharmaceutical and clinical services based on these discoveries, obtain required regulatory and other approvals and launch these tests and their related services before our competitors. We also expect to encounter significant competition with
respect to any molecular diagnostic and companion diagnostic tests that we may develop or commercialize. Those companies that bring to market new molecular diagnostic and companion tests before we do may achieve a significant competitive advantage
in marketing and commercializing their tests. We may not be able to develop additional molecular diagnostic tests successfully and we or our licensors may not obtain or enforce patents covering these tests that provide protection against our
competitors. Moreover, our competitors may succeed in developing molecular diagnostic and companion diagnostic tests that circumvent our technologies or tests. Furthermore, our competitors may succeed in developing technologies or tests that are
more effective or less costly than those developed by us or that would render our technologies or tests less competitive or obsolete. We expect competition to intensify in the fields in which we are involved as technical advances in these fields
occur and become more widely known and changes in intellectual property laws generate challenges to our intellectual property position.
If our current research collaborators or scientific advisors terminate their relationships with us or develop relationships with a competitor, our
ability to discover genes, proteins, and biomarkers, and to validate and commercialize molecular diagnostic and companion diagnostic tests could be adversely affected.
We have relationships with research collaborators at academic and other institutions who conduct research at our request. These research collaborators are not our employees. As a result, we have limited
control over their activities and, except as otherwise required by our collaboration agreements, can expect only limited amounts of their time to be dedicated to our activities. Our ability to discover genes, proteins, and biomarkers involved in
human disease and validate and commercialize molecular diagnostic and companion diagnostic tests will depend in part on the continuation of these collaborations. If any of these collaborations are terminated, we may not be able to enter into other
acceptable collaborations. In addition, our existing collaborations may not be successful.
Our research collaborators and scientific advisors
may have relationships with other commercial entities, some of which could compete with us. Our research collaborators and scientific advisors sign agreements which provide for the confidentiality of our proprietary information and the results of
studies conducted at our request. We may not, however, be able to maintain the confidentiality of our technology and other confidential information related to all collaborations. The dissemination of our confidential information could have a
material adverse effect on our business.
If we fail to retain our key personnel and hire, train and retain qualified employees and
consultants, we may not be able to successfully continue our business.
Because of the specialized scientific nature of our business,
we are highly dependent upon our ability to attract and retain qualified management, scientific and technical personnel. We are currently recruiting additional qualified management, scientific and technical personnel. Competition for such personnel
is intense. Loss of the
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services of or failure to recruit additional key management, scientific and technical personnel would adversely affect our research and development programs and molecular diagnostic and
pharmaceutical and clinical services business and may have a material adverse effect on our business as a whole.
Our agreements with our
employees generally provide for employment that can be terminated by either party without cause at any time, subject to specified notice requirements. Further, the non-competition provision to which each employee is subject expires for certain key
employees on the applicable date of termination of employment.
As we expand our commercial tests we may be required to incur
significant costs and devote significant efforts to expand our existing tests sales and marketing capabilities.
Our sales and
marketing experience and capabilities consist primarily of our sales force that markets our cancer-related molecular diagnostic tests to oncologists, Ob/Gyns and urologists in the United States. We are currently expanding our sales efforts outside
the United States, which will require us to hire additional personnel and engage in additional sales and marketing efforts. We have limited sales and marketing experience outside the Unites States. As we expand our business operations
internationally, we expect to face a number of additional costs and risks, including the need to recruit a large number of additional experienced marketing and sales personnel.
Risks Related to Our Intellectual Property
If we are not able to protect our
proprietary technology, others could compete against us more directly, which would harm our business.
As of June 30, 2014, our
patent portfolio included 278 issued patents owned or licensed by us and numerous patent applications in the United States and other countries with claims covering our intellectual property rights. Our commercial success will depend, in part, on our
ability to obtain additional patents and licenses and protect our existing patent position, both in the United States and in other countries, for synthetic DNA , antibodies and related technologies, processes, methods and other inventions that we
believe are patentable. Our ability to preserve our trade secrets and other intellectual property is also important to our long-term success. If we do not adequately protect our intellectual property, competitors may be able to use our technologies
and erode or negate any competitive advantage we may have, which could harm our business and ability to maintain profitability. Patents may also issue to third parties which could interfere with our ability to bring our molecular diagnostic tests to
market. The laws of some foreign countries do not protect our proprietary rights to the same extent as U.S. laws, and we may encounter significant problems in protecting our proprietary rights in these countries.
The patent positions of diagnostic companies, including our patent position, are generally highly uncertain and involve complex legal and factual
questions, and, therefore, any patents issued to us may be challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our
proprietary technologies and any future tests are covered by valid and enforceable patents or are effectively maintained as trade secrets. Our patent applications may never issue as patents, and the claims of any issued patents may not afford
meaningful protection for our technology or tests. In addition, any patents issued to us or our licensors may be challenged, and subsequently narrowed, invalidated or circumvented.
Where necessary, we may initiate litigation to enforce our patent or other intellectual property rights, as we have done in the consolidated
BRCA1 & BRCA2 Based Hereditary Cancer Test Patent
Litigation
pending in the U.S. District Court in Utah. Any such litigation may require us to spend a substantial amount of time and money and could distract management from our day-to-day operations. Moreover, there is no assurance that we will
be successful in any such litigation.
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The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
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we or our licensors were the first to make the inventions covered by each of our patent applications;
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we or our licensors were the first to file patent applications for these inventions;
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others will not independently develop similar or alternative technologies or duplicate any of our technologies;
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any of our or our licensors patent applications will result in issued patents;
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any of our or our licensors patents will be valid or enforceable;
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any patents issued to us or our licensors and collaborators will provide a basis for commercially viable tests, will provide us with any competitive
advantages or will not be challenged by third parties;
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we will develop additional proprietary technologies or tests that are patentable;
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the patents of others will not have an adverse effect on our business; or
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our patents or patents that we license from others will survive legal challenges, and remain valid and enforceable.
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If a third party files a patent application with claims to a biomarker we have discovered, the PTO may declare interference between competing patent
applications. If an interference is declared, we may not prevail in the interference. If the other party prevails in the interference, we may be precluded from commercializing services or tests based on the biomarker or may be required to seek a
license. A license may not be available to us on commercially acceptable terms, if at all.
We also rely upon unpatented proprietary
technologies. Although we require employees, consultants and collaborators to sign confidentiality agreements, we may not be able to adequately protect our rights in such unpatented proprietary technologies, which could have a material adverse
effect on our business. For example, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our proprietary technologies or disclose our technologies to our competitors.
If we were sued for patent infringement by third parties, we might incur significant costs and delays in test introduction.
Our tests may also conflict with patents that have been or may be granted to others. Our industry includes many organizations that
have or are seeking to discern biomarkers and develop genomic, proteomic and other technologies. To the extent any patents are issued or have been issued to those organizations, the risk increases that the sale of our molecular diagnostic and
companion diagnostic tests currently being marketed or under development may give rise to claims of patent infringement. Others may have filed and in the future are likely to file patent applications covering biomarkers that are similar or identical
to our tests. Any of these patent applications may have priority over our patent applications and these entities or persons could bring legal proceedings against us seeking damages or seeking to enjoin us from testing or marketing our tests. Patent
litigation is costly, and even if we prevail, the cost of such litigation could have a material adverse effect on us. If the other parties in any such actions are successful, in addition to any liability for damages, we could be required to cease
the infringing activity or obtain a license. Any license required may not be available to us on commercially acceptable terms, if at all. Our failure to obtain a license to any technology that we may require to commercialize our tests could have a
material adverse effect on our business. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in this litigation, it could consume a substantial portion of
our managerial and financial resources.
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We may be unable to adequately prevent disclosure of trade secrets, proprietary databases, and other
proprietary information.
We rely on trade secrets to protect our proprietary technologies and databases, especially where we do not
believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and
others to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy if unauthorized disclosure of confidential information
occurs. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or
maintain trade secret protection could adversely affect our competitive position.
If we fail to comply with our obligations under
license or technology agreements with third parties, we could lose license rights that are critical to our business.
We license
intellectual property that is critical to our business, including licenses underlying the technology in our molecular diagnostic and pharmaceutical and clinical services, and in the future we may enter into additional agreements that provide us with
licenses to valuable intellectual property or technology. These licenses impose various royalty payments, milestones, and other obligations on us. If we fail to comply with any of these obligations, the licensor may have the right to terminate the
license. Termination by the licensor would cause us to lose valuable rights, and could prevent us from distributing our current tests, or inhibit our ability to commercialize future test candidates. Our business would suffer if any current or future
licenses terminate, if the licensors fail to abide by the terms of the license, if the licensors fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to
enter into necessary licenses on acceptable terms.
We may be subject to claims that we or our employees have wrongfully used or
disclosed alleged trade secrets of their former employers.
As is commonplace in our industry, we employ individuals who were
previously employed at other biotechnology or pharmaceutical companies, including our potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees have inadvertently or otherwise used
or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial
costs and be a distraction to management.
Risks Related to Government Regulation
If we fail to comply with the complex federal, state, local and foreign laws and regulations that apply to our business, we could suffer severe
consequences that could materially and adversely affect our operating results and financial condition.
Our operations are subject to
extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among other things:
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CLIA, which requires that laboratories obtain certification from the federal government;
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FDA laws and regulations;
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HIPAA, which established comprehensive federal standards with respect to the privacy and security of protected health information and requirements for
the use of certain standardized electronic transactions; amendments to HIPAA under the Health Information Technology for Economic and Clinical Health Act, or HITECH, which strengthen and expand HIPAA privacy and security compliance requirements,
increase penalties for violators, extend enforcement authority to state attorneys general and impose requirements for breach notification;
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state laws regulating genetic testing and protecting the privacy of genetic test results, as well as state laws protecting the privacy and security of
health information and personal data and mandating reporting of breaches to affected individuals and state regulators;
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the federal anti-kickback law, or the Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, receiving, or
providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal health
care program;
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the federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented,
a false or fraudulent claim for payment to the federal government;
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the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state health
care program beneficiary if the person knows or should know it is likely to influence the beneficiarys selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care program, unless an
exception applies;
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other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, and false claims acts, which may extend to
services reimbursable by any third-party payor, including private insurers; and
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similar foreign laws and regulations that apply to us in the countries in which we operate.
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These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. Our failure to comply could lead to
civil or criminal penalties, exclusion from participation in government health care programs, or prohibitions or restrictions on our laboratories ability to provide services. We believe that we are in material compliance with all statutory and
regulatory requirements, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such
occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payors.
Failure to comply with government laws and regulations related to submission of claims for our services could result in significant monetary
damages and penalties and exclusion from the Medicare and Medicaid programs and corresponding foreign reimbursement programs.
We are
subject to laws and regulations governing the submission of claims for payment for our services, such as those relating to: coverage of our services under Medicare, Medicaid and other state, federal and foreign health care programs; the amounts that
we may bill for our services; and the party to which we must submit claims. Our failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or in attempts by government healthcare
programs, such as Medicare and Medicaid, to recover payments already made. Submission of claims in violation of these laws and regulations can result in recoupment of payments already received, substantial civil monetary penalties, and exclusion
from government health care programs, and can subject us to liability under the federal False Claims Act and similar laws. The failure to report and return an overpayment to the Medicare or Medicaid program within 60 days of identifying its
existence can give rise to liability under the False Claims Act. Further, a government agency could attempt to hold us liable for causing the improper submission of claims by another entity for services that we performed if we were found to have
knowingly participated in the arrangement at issue.
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Our business could be harmed by the loss, suspension, or other restriction on a license,
certification, or accreditation, or by the imposition of a fine or penalties, under CLIA, its implementing regulations, or other state, federal and foreign laws and regulations affecting licensure or certification, or by future changes in these laws
or regulations.
The diagnostic testing industry is subject to extensive laws and regulations, many of which have not been interpreted
by the courts. CLIA requires virtually all laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure
that testing services are accurate, reliable and timely. CLIA certification is also a prerequisite to be eligible to bill state and federal health care programs, as well as many private third-party payors, for laboratory testing services. As a
condition of CLIA certification, each of our laboratories is subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by CMS; a CMS agent (typically a state
agency); or, if the laboratory holds a CLIA certificate of accreditation, a CMS-approved accreditation organization. Sanction for failure to comply with CLIA requirements, including proficiency testing violations, may be suspension, revocation, or
limitation of a laboratorys CLIA certificate, which is necessary to conduct business, as well as the imposition of significant fines or criminal penalties. In addition, we are subject to regulation under state laws and regulations governing
laboratory licensure. Some states have enacted state licensure laws that are more stringent than CLIA. We are also subject to laws and regulations governing our reference laboratory in Germany. Changes in state or foreign licensure laws that affect
our ability to offer and provide diagnostic services across state or foreign country lines could materially and adversely affect our business. In addition, state and foreign requirements for laboratory certification may be costly or difficult to
meet and could affect our ability to receive specimens from certain states or foreign countries.
Any sanction imposed under CLIA, its
implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. If the CLIA
certificate of any one of our laboratories is revoked, CMS could seek revocation of the CLIA certificates of our other laboratories based on their common ownership or operation, even though they are separately certified.
Changes in the way that the FDA regulates tests performed by laboratories like ours could result in delay or additional expense in offering our
tests and tests that we may develop in the future.
While the FDA does not currently regulate the activities or tests performed by
laboratories like our clinical laboratories, the FDA has stated that it has the right to do so. In July, 2010, the FDAs office of In-Vitro Diagnostics held a public meeting to discuss oversight of laboratory developed tests. The FDA
highlighted the lack of standardized clinical validation at the assay level under current CLIA regulatory guidelines and noted that CLIA does not require post-market surveillance or monitoring of laboratory developed tests. The comment period for
providing the FDA with written comments expired on August 15, 2010. On July 31, 2014, the FDA announced its intention to regulate many LDTs and to provide draft guidance in 60 days. If pre-market review is required, our business could be
negatively impacted if we are required to stop selling molecular diagnostic tests pending their clearance or approval or the launch of any new tests that we develop could be delayed by new requirements.
Companion diagnostic tests require FDA approval and we may not be able to secure such approval in a timely manner or at all.
Our companion diagnostic products, marketing, sales and development activities and manufacturing processes are subject to extensive and rigorous
regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic Act (FDC Act), by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Under the FDC Act, companion diagnostics must receive FDA
clearance or approval before they can be commercially marketed in the U.S. The process of obtaining marketing approval or clearance from the FDA or by comparable agencies in foreign countries for new products could:
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take a significant period of time;
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require the expenditure of substantial resources:
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involve rigorous pre-clinical testing, as well as increased post-market surveillance:
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require changes to products; and
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result in limitations on the indicated uses of products.
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If the government and third-party payors fail to provide coverage and adequate payment for our tests and future tests, if any, our revenue and prospects for profitability will be harmed.
In both domestic and foreign markets, sales of our molecular diagnostic tests or any future diagnostic tests will depend in large
part, upon the availability of reimbursement from third-party payors. Such third-party payors include government healthcare programs such as Medicare, managed care providers, private health insurers and other organizations. These third-party payors
are increasingly attempting to contain healthcare costs by demanding price discounts or rebates and limiting both coverage on which diagnostic tests they will pay for and the amounts that they will pay for new molecular diagnostic tests. We have
recently experienced price reductions from CMS for some of our products and may experience future price reductions from managed care organizations and other third-party payors. The fact that a diagnostic test has been approved for reimbursement in
the past, for any particular indication or in any particular jurisdiction, does not guarantee that such a diagnostic test will remain approved for reimbursement or that similar or additional diagnostic tests will be approved in the future. Moreover,
there can be no assurance that any new tests we launch, such as myRisk Hereditary Cancer, myPath Melanoma and myPlan Lung Cancer, will be reimbursed at rates that are comparable to the rates that we historically obtained for our existing product
portfolio. As a result, third-party payors may not cover or provide adequate payment for our current or future molecular diagnostic tests. Adequate third-party reimbursement might not be available to enable us to maintain price levels sufficient to
realize an appropriate return on investment in product development.
U.S. and foreign governments continue to propose and pass legislation
designed to reduce the cost of healthcare. For example, in some foreign markets, the government controls the pricing of many healthcare products. We expect that there will continue to be federal and state proposals to implement governmental controls
or impose healthcare requirements. In addition, the Medicare program and increasing emphasis on managed care in the United States will continue to put pressure on product pricing. Cost control initiatives could decrease the price that we would
receive for any tests in the future, which would limit our revenue and profitability.
Our business could be adversely impacted by the
adoption of the ICD-10-CM Code Set.
CMS has adopted a new coding set for diagnoses, commonly known as
ICD-10-CM,
which significantly expands the current coding set. ICD-10-CM is currently required to be used on all claims with dates of service on or after October 1, 2014. We may be required to incur
significant expense in implementing ICD-10-CM, and, if we do not adequately implement it, our business could be adversely impacted. In addition, if as a result of the new coding set, physicians fail to provide appropriate codes for desired tests, we
may not be reimbursed for tests we perform.
Risks Related to Our Common Stock
Our stock price is highly volatile, and our stock may lose all or a significant part of its value.
The market prices for securities of molecular diagnostic companies have been volatile. This volatility has significantly affected the market prices for these securities for reasons frequently unrelated to
the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. The market price for our common stock has fluctuated significantly since public trading commenced in
October 1995, and it is likely that the market price will continue to fluctuate in the future. Additionally, there is a significant short position in our common stock (over 38 million shares as of June 30,
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2014) and this short position introduces added uncertainty and volatility in our stock price. In the two years ended June 30, 2014, our stock price has ranged from $20.02 per share to $42.50
per share. In addition, the stock market in general has experienced extreme price and volume fluctuations. Events or factors that may have a significant impact on our business and on the market price of our common stock include the following:
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failure of any of our recently launched tests and any new test candidates to achieve commercial success;
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failure to sustain revenue growth or margins in our molecular diagnostic business;
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changes in the structure of healthcare payment systems and changes in the governmental or private insurers reimbursement levels for our molecular
diagnostic tests;
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introduction of new commercial tests or technological innovations by competitors;
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termination of the licenses underlying our molecular diagnostic and pharmaceutical and clinical services;
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delays or other problems with operating our laboratory facilities;
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failure of any of our research and development programs;
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changes in intellectual property laws of our patents or enforcement in the United States and foreign countries;
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developments or disputes concerning patents or other proprietary rights involving us directly or otherwise affecting the industry as a whole;
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missing or changing the financial guidance we provide;
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changes in estimates or recommendations by securities analysts relating to our common stock or the securities of our competitors;
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changes in the governmental regulatory approved process for our existing and new tests:
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failure to meet estimates or recommendations by securities analysts that cover our common stock;
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public concern over our approved tests and any test candidates;
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future sales or anticipated sales of our common stock by us or our stockholders;
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the timing and amount of repurchases of our common stock;
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general market conditions;
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seasonal slowness in sales, particularly in the quarters ending September 30 and March 31, the effects of which may be difficult to
understand during periods of growth;
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economic, healthcare and diagnostic trends, disasters or crises and other external factors; and
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period-to-period fluctuations in our financial results.
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These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our common stock. In addition, securities class action litigation against companies has been on the rise. If any of our stockholders brought a lawsuit against us, we could incur substantial
costs defending the lawsuit regardless of the outcome. Such a lawsuit could also divert the time and attention of our management.
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Anti-takeover provisions of Delaware law, provisions in our charter and bylaws and re-adoption of our
stockholders rights plan, or poison pill, could make a third-party acquisition of us difficult.
Because we are a Delaware
corporation, the anti-takeover provisions of Delaware law could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders. We are subject to the provisions of
Section 203 of the General Corporation Law of Delaware, which prohibits us from engaging in certain business combinations, unless the business combination is approved in a prescribed manner. In addition, our restated certificate of
incorporation and restated bylaws also contain certain provisions that may make a third-party acquisition of us difficult, including:
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a classified board of directors, with three classes of directors each serving a staggered three-year term;
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the ability of the board of directors to issue preferred stock;
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a 70% super-majority shareholder vote to amend our bylaws and certain provisions of our certificate of incorporation; and
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the inability of our stockholders to call a special meeting or act by written consent.
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In the past, we also implemented a stockholders rights plan, also called a poison pill, which could make it uneconomical for a third party to
acquire our company on a hostile basis. Although the plan expired in July 2011, our Board of Directors could adopt a new plan at any time. The provisions in a stockholders rights plan, as well as Section 203, may discourage certain types
of transactions in which our stockholders might otherwise receive a premium for their shares over then current market price, and may limit the ability of our stockholders to approve transactions that they think may be in their best interests.