We are an early-stage diagnostics company focused on developing and commercializing
proprietary genomic tests and services to improve and personalize the diagnosis, prognosis and response to treatment (theranosis) of cancer. Our proprietary tests target cancers that are difficult to prognose and predict treatment outcomes by using
currently available mainstream techniques. These cancers include hematological, urogenital and HPV-associated cancers. We provide our proprietary tests and services, along with a comprehensive range of non-proprietary oncology-focused tests and
laboratory services, to oncologists and pathologists at hospitals, cancer centers, and physician offices, as well as biotech and pharmaceutical companies to support their clinical trials To date, we have generated most of our revenue through sales
of our non-proprietary testing services to oncologists, pathologists and community hospitals located mostly in the eastern and mid-western United States, as well as to biopharmaceutical companies and clinical research organizations for their
clinical trials. In the fourth quarter of 2013, we have begun to expand our geographic reach into the western and southern United States. Our non-proprietary laboratory testing services include molecular testing, sequencing mutational analysis, flow
cytometry testing, histology testing and cytology testing. These tests are described in more detail in the section entitled Item 1- Business. We are currently offering our tests and laboratory services from our 17,936 square foot
state-of-the-art laboratory located in Rutherford, New Jersey, which has been accredited by the College of American Pathologists, which is an approved accreditation method under the Clinical Laboratory Improvement Amendments of 1988
(CLIA), to perform high complexity testing. CLIA certification and accreditation are required before any laboratory, including ours, may perform testing on human specimens for the purpose of obtaining information for the diagnosis,
prevention, treatment of disease, or impairment of, or assessment of health.
Our proprietary tests are based principally on our expertise in specific
cancer types, test development methodologies and proprietary algorithms correlating genetic events with disease specific information. During the first quarter of 2011, we commercially launched
MatBA
®
-CLL, our first proprietary microarray test for chronic lymphocytic leukemia (CLL). In January 2012, we received CLIA approval for MatBA
®
-SLL, our proprietary microarray for risk stratification in small lymphocytic lymphoma (SLL), and we are currently offering
MatBA
®
-SLL in our laboratory. In 2013, we received CLIA approval for MatBA
®
-DLBCL, our proprietary microarray for diagnosis, prognosis
and patient monitory in diffuse large-B-cell lymphoma (DLBCL), MatBA
®
-MCL, our proprietary microarray for diagnosis, prognosis and patient monitoring in mantle cell lymphoma
(MCL) and UroGenRA-Kidney, our proprietary microarray for patient management and treatment protocols in kidney cancer (UroGenRA-Kidney), as well as FHACT
TM
,
our proprietary FISH-based HPV-associated Cancer Test for screening of women with HPV-positive abnormal cervical lesions. In addition, we are developing a series of other proprietary genomic tests in our core oncology markets.
We have established collaborative relationships with key thought leaders in oncology, which enable us to develop and validate the effectiveness and utility of
our tests in a clinical setting and which provide us access to clinically robust patient data. For example, we formed the joint venture OncoSpire Genomics in 2013 with Mayo Foundation for Medical Education and Research (Mayo)
which will focus on developing oncology diagnostic services and tests utilizing next-generation sequencing. We are a 50% owner of the joint venture, contributing capital, commercial experience and other guidance, while Mayo will contribute
laboratory resources, research expertise and other operational resources. Additionally, we have research collaborations with Memorial Sloan-Kettering Cancer Center and the Cleveland Clinic to further demonstrate UroGenRA-Kidneys value to
renal cancer patients and further validate the test in the clinical setting.
The non-proprietary testing services we offer are focused in part on
specific oncology categories where we are developing our proprietary arrays and probe panels. We believe that there is significant synergy in developing and marketing a complete set of tests and services that are disease-focused and delivering those
tests and services in a comprehensive manner to help with treatment decisions. The insight that we develop in delivering the non-proprietary services are often leveraged in the development of our proprietary programs and now increasingly in the
validation of our proprietary programs (such as MatBA
®
) for clinical use.
2
We believe that we can be successful by offering cancer professionals a fully-integrated menu of oncology-focused
proprietary tests and customized laboratory services. Based on our discussions with leading researchers in the oncology field and our interactions with our collaborators, as well as information we learn through performing the non-proprietary genetic
diagnostic testing services, which are focused on the specific oncology categories where we are developing our proprietary tests we provide to our customers, we believe that our proprietary tests provide superior diagnostic and prognostic values
than currently available tests and services. In particular, our proprietary tests deliver a level of genomic information not provided by other currently available tests. We believe our ability to rapidly translate research insights about the
genetics and molecular mechanisms of cancer into the clinical setting will improve patient treatment and management and that this approach can become a key component in the standard of care for personalized cancer treatment.
We currently offer our proprietary tests in conjunction with our comprehensive panel of laboratory services in our CLIA-accredited laboratory. Our current
laboratory services include:
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Proprietary Oncology Testing Services
. These services are based on our proprietary microarray tests and are currently available only in our clinical laboratory. After completing the testing, we provide our
customers with a comprehensive analysis of all tests performed for a specific patient, designed to help the physician make an informed and definitive diagnosis and guide the treatment of the patient. We are now in the process of migrating and
validating microarray tests to a Next Gen Sequencing-based platform.
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Esoteric Oncology Testing Services.
We offer a comprehensive suite of esoteric oncology testing services for hematological, urogenital and HPV-associated cancers, including conventional and molecular cytogenetic
techniques such as Next Gen Sequencing, G-banding and FISH, mutation and sequencing analysis, flow-cytometry and immunohistochemistry (IHC).
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Clinical Trial Services.
We also utilize our clinical laboratory to provide clinical trial services to biopharmaceutical companies and clinical research organizations to improve the efficiency and economic
viability of clinical trials. Our clinical trials services leverage our knowledge of clinical oncology and molecular diagnostics and our laboratorys fully integrated capabilities. We launched our Select One
TM
program, integrating clinical information into the drug discovery process in order to provide customized solutions for patient stratification and treatment. By utilizing biomarkers, we intend to
optimize the clinical trial patient selection. This may result in an improved success rate of the clinical trial and may eventually help biopharmaceutical companies to select patients that are most likely to benefit from a therapy based on their
genetic profile.
|
We intend to continue offering our proprietary tests in the United States as laboratory-developed tests (LDTs)
offered in our laboratory and internationally as CE-marked in vitro diagnostic medical devices. In addition, as part of our long-term strategy, we may seek Food and Drug Administration (FDA) clearance or approval to expand the commercial
use of our tests to other laboratories and testing sites. We believe it would likely take two years or more to conduct the studies and trials necessary to obtain approval from FDA to commercially launch our proprietary tests outside of our clinical
laboratory. Our sales strategy is focused on direct sales to oncologists and pathologists at hospitals, cancer centers, and physician offices in the United States, and expanding our relationships with leading distributors and medical facilities in
emerging markets. We intend to continue to focus on partnering with community hospitals, where nearly 85% of all cancers are initially diagnosed, through our program called Expand Dx, which was specifically designed to meet the needs of
community hospitals. We believe our proprietary tests and services will enable community hospitals to optimize and expand their oncology services to better serve their cancer patients and reduce costs associated with cancer care.
Market Overview
Cancer Market Overview
Despite many advances in the treatment of cancer, it remains one of the greatest areas of unmet medical need. In 2012, the World Health
Organization attributed 8.2 million deaths worldwide to cancer-related causes. The
3
World Health Organization projects that by 2030 this number will rise to 11 million deaths per year. Within the United States, the North Carolina Central Cancer Registry projects cancer to
surpass cardiovascular disease as the leading cause of death by 2015. The incidence and deaths caused by the major cancers are staggering. The following table published by The American Cancer Society shows estimated new cases and deaths in 2013 in
the United States for the major cancers:
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Cancer Type
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Estimated New Cases For 2013
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Estimated Deaths For 2013
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Bladder*
|
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|
72,570
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15,210
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Breast
|
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234,580
|
|
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40,030
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Cervical*
|
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12,340
|
|
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4,030
|
|
Colorectal
|
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142,820
|
|
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50,830
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Endometrial*
|
|
|
49,560
|
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8,190
|
|
Kidney*
|
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65,150
|
|
|
|
13,680
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|
Leukemia*
|
|
|
48,610
|
|
|
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23,720
|
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Lung
|
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228,190
|
|
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159,480
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Melanoma
|
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|
76,690
|
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9,480
|
|
Multiple Myeloma
|
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22,350
|
|
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10,710
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Non-Hodgkins Lymphomas*
|
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69,740
|
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19,020
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Ovarian*
|
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22,240
|
|
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14,030
|
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Pancreatic
|
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45,220
|
|
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38,460
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Prostate*
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238,590
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29,720
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Thyroid
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60,220
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1,850
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*
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Areas where we currently have active development programs.
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In addition to the human toll, the financial cost
of cancer is overwhelming. An independent study published in 2010 and conducted jointly by the American Cancer Society and LIVESTRONG ranked cancer as the most economically devastating cause of death in the worldestimated to be as high as $895
billion globally in 2008. According to the National Institutes of Health, the direct cost of cancer care in the United States was approximately $125 billion in 2010.
Cancer is a Genetically Driven Disease
Cancer
constitutes a heterogeneous class of diseases characterized by uncontrollable cell growth, and results from a combination of both environmental and hereditary risk factors. It has only been in recent years that technology has progressed far enough
to enable researchers to understand many cancers at a molecular level and attribute specific cancers to genetic bases.
Cancer cells contain modified
genetic material compared to normal human cells. Common genetic abnormalities correlated to cancer include gains or losses of genetic material on specific chromosomal regions (loci) or changes in specific genes (mutations) that ultimately result in
detrimental cellular changes followed by cancerous or pre-cancerous conditions. For example, multiple gains or losses on various chromosomes and movement of genetic material among chromosomes (chromosomal translocations), collectively called copy
number variation, have been often observed in various lymphomas and leukemias. Such genetic alterations can be caused by multiple factors, including genetic predisposition, environmental or lifestyle factors or viral infections, such as with
HPV-associated cancers. Understanding the differences in these genomic changes helps clinicians to identify and stratify different forms of cancer in order to optimize patient treatment and patient management. Therefore, understanding and analysis
of cancer at the molecular level is not only useful for diagnostic purposes, but also plays an important role in prognosis and disease management. We believe technology that can apply this predictive information has the potential to dramatically
improve treatment outcomes for patients suffering from cancer.
4
Limitations of Traditional Cancer Diagnostic Approaches
Cancer is difficult to diagnose and manage due to its heterogeneity at morphologic, genetic and clinical levels. Traditional methods of diagnosis, routinely
used as the initial step in cancer detection, involve a pathologist examining a thin slice of potentially cancerous tissue under a microscope or smear of blood or bone marrow. A relatively new tissue sample must be used along with chemical staining
techniques to view the biopsy. Through visual inspection, the pathologist determines whether the biopsy contains normal or cancerous cells; those that are deemed cancerous are graded on a level of aggressiveness. After the diagnosis, a clinical
workup is performed according to established guidelines for the specific cancer type. From there, the physician determines the stage of progression of the cancer based on a series of clinical measures (i.e., size, grade, metastasis rates, symptoms
and patient history) and decides on a treatment plan (i.e., surgery, watchful waiting, chemotherapy, radiation, stem cell transplant).
When deciding
treatment and management options for the particular cancer, the physician uses a combination of clinical and pathological features (i.e., the tumors assigned grade and stage) which depend heavily upon human interpretation and can suffer from
inter-institutional variability. Due to the relatively subjective nature of this diagnostic process, the qualitative results of the analysis may not correlate well to the molecular structure and individual nature of the patients cancer. This
subjectivity creates risk of misclassification that can ultimately prove dangerous, resulting in over-treatment for some patients and under-treatment for others. For example, a patient with a mild form of cancer may be mistakenly assigned to highly
aggressive treatment. Side effects associated with such misaligned treatment can result in detrimental side effects or risks more significant than those posed by the original tumor. In addition, it is now well established that patients respond
differently to the same medication, and multiple studies have linked the differences in patients response to various cancer drugs to differences at the genetic level. As such, the level of personalized treatment required to optimize a
patients treatment regimen is only possible through the use of biomarker analysis and molecular diagnostics.
With the trend in medical practice for
less invasive procedures, overall less specimen material is routinely available for diagnostic purposes and often the specimen type available for genetic analysis is restricted to that used for morphologic analysis (formalin-fixed paraffin-embedded
material). Several adaptations of current procedures are being undertaken to improve diagnostic procedures for these cancer types to allow maximum sensitivity and specificity. For solid tissue specimens, the formalin-fixed paraffin-embedded
(FFPE) diagnostic material is often the only tissue available for study and recent technologies, including MatBA
®
-SLL and
MatBA
®
-DLBCL, have had to accommodate such limitations previously not encountered. Another trend in medical practice is the increased use of fine needle aspiration or core biopsy for
diagnostic purposes, often requiring image guidance. Morphologic analysis of such specimens is challenging especially where the architecture of the specimen has been damaged. Genome-based analysis of such specimens is one method by which diagnostic
results can be obtained.
Use of Genomic-Based Analysis in Cancer Diagnosis and Treatment
Molecular diagnostic tests for cancer aim to remove subjectivity from the diagnostic phase, and add prognostic information, thus enabling personalized
treatments based on cancer analysis at its most basic genetic level. To date, genomic-based testing has produced higher value and more accurate cancer diagnostic information than traditional analytical methods. These tests create a data set that can
both define the cancer subtype and help determine the best course of treatment by detecting mutations, gene fusions and DNA copy number changes, all of which are possible causes of or precursors to malignant growth. As a result of the ability to
produce such genomic data and increased adoption of molecular testing, we believe that genomic-based analysis is becoming the fastest growing segment within oncology testing.
An important method of measuring changes in the genomic profile of cancer cells is copy number variation. This method measures the gain or loss of DNA within
specific regions of chromosomes. Three primary techniques for quantifying copy number variations include the following:
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FISH-based DNA probes
are fluorescently labeled sequences of DNA complementary to a genomic region of interest, which when hybridized to
chromosomes, give rise to signals revealing the presence
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5
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or absence of a specific genomic abnormality with high sensitivity. One probe identifies one specific genomic region. To create higher levels of specificity, multiple probes may be required to
identify multiple genomic aberrations in the same cancer cell. Depending on the color scheme and custom design of each FISH-based DNA probe, genomic gain/loss and rearrangements can be detected in cancer specimens of multiple tissue types.
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Oligonucleotide-based microarrays
are a multiplex technology that allow the attachment of thousands of microscopic spots of DNA onto a surface. The DNA sequences on the microarray can read multiple genetic
aberrations in more than one cancer type following hybridization with DNA from a specific cancer sample and can yield diagnostic and prognostic information of importance to the treatment of the patient. We believe microarrays provide a powerful
approach to distinguishing cancer types and those more or less likely to recur, progress or respond to specific treatments based upon comprehensive sequence analysis and the ability of one microarray to interrogate multiple cancer types in parallel.
Because of the large number of DNA sequences being tested by the microarray, analysis involves bioinformatics-based algorithms. Considering the current clinical and societal demand for minimally invasive procedures, the diagnostic and prognostic
applications of microarrays are highly desirable.
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Next-Generation Sequencing
performs massively parallel sequencing of human cancers effectively permitting a highly sensitive analysis of not only the sequence of the genome in cancer cells to reveal mutations and
other aberrations associated with a cancer, but also other genomic rearrangements previously unknown to occur in the cancer genome. Translation of these findings for clinical implementation can also be achieved with a high degree of sensitivity
using deep-sequencing at specific nucleotide sequences and can be translated where applicable into FISH or microarray-based assays depending on the aberrations that need to be detected. Deep sequencing is a technique by which a segment of
nucleotides is sequenced repeatedly in order to reveal potentially rare genetic changes that may not be discoverable by traditional sequencing methods.
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To date, molecular and genetic detection methods have been successfully utilized to provide diagnostic, prognostic and theranostic information for several
cancers, including breast and colon. The discovery of breast cancer genes
BRCA-1
,
BRCA-2
and
TP53
and colon cancer genes
AXIN2
and
APC
have highlighted cancers underlying genetic component. With the
prognostic nature of next generation genomic tests, physicians and researchers have begun to optimize patient treatment, increase survival rates and reduce healthcare costs in these cancer categories. For example, within the past year, mutations in
genes
KRAS
and
BRAF
have been found to associate with response to therapy in metastatic colon cancer and malignant melanoma, respectively. Meanwhile, there are no equivalent prognostic tests for many other forms of cancer, including
lymphomas, leukemias and urogenital and HPV-associated cancers.
Our Strategy
We seek to provide the cancer professional and cancer patient a fully integrated offering of high-value, proprietary tests and customized services in cancers
where there are no equivalent prognostic tests, including lymphomas, leukemias, and urogenital and HPV-associated cancers. We believe that our integrated approach combined with our ability to rapidly translate research insights about the genetics
and molecular mechanisms of cancer into the clinical setting will improve patient treatment and management and will become a key component in the standard of care for personalized cancer treatment.
Our approach is to develop and commercialize proprietary genomic tests and services to enable us to provide a full service solution to improve the diagnosis,
prognosis and treatment of hematological, urogenital and HPV-associated cancers. To achieve this, we intend to:
Continue investing in our portfolio by
developing and commercializing additional proprietary genomic tests and services.
We intend to continue the development of additional proprietary diagnostic and prognostic tests and services to provide information that is essential to
personalized cancer treatment. To date, we have launched for use in our CLIA-accredited facility the following proprietary genomic-based tests, MatBA
®
- CLL, MatBA
®
-
6
SLL, MatBA
®
-DLBCL, UroGenRA-Kidney and MatBA
®
-MCL. We are also developing a
number of other microarray-based tests, including additional MatBA
®
-based tests for additional hematological malignancies, as well as UroGenRA and UGenRA microarray platforms for
urogenital cancers.
To facilitate the development of additional tests and further demonstrate the clinical value of our existing tests, we will develop
and expand our collaborations with leading universities and research centers
.
We have established research collaborations and joint research initiatives with key thought leaders and clinical research facilities, including Mayo, the National
Cancer Institute, Memorial Sloan-Kettering Cancer Center, the University of Iowa Cancer Center and Cleveland Clinic. Our collaborations enable us to validate the effectiveness and utility of our proprietary tests and service offerings in a clinical
setting and provide us access to clinically well characterized and highly annotated patient data. These data accelerate our validation process and facilitate the testing and refinement of our microarray algorithms.
C
ontinue our focus on translational oncology and drive innovation and cost efficiency in diagnostics by developing next generation sequencing offerings
through our joint venture with Mayo Clinic.
Translational oncology refers to our focus on bringing novel research insights that characterize cancer at the genomic level directly and rapidly into the clinical setting with the overall goal of
improving value to patients in the treatment and management of disease. We believe next generation sequencing will enable significant growth and efficiencies. We will leverage our joint venture with Mayo to advance diagnostic technology. The joint
venture, OncoSpire, was formed in May 2013 and is based in Rochester, MN. The joint venture will initially pursue the development of next generation sequencing panels for lung cancer, multiple myeloma and follicular lymphoma. We actively integrate
the dual disciplines of clinical diagnosis and fundamental research to foster a unique, interdisciplinary approach.
Increase our focus on providing
biopharmaceutical companies and clinical research organizations with our proprietary and non-proprietary genomic tests and services through our SelectOne offering.
Oncology drugs have the potential to be among the most personalized of
therapeutics, and yet oncology trials have one of the worst approval rates, hovering under 7%. In an effort to improve the outcome of these trials, and more rapidly advanced targeted therapeutics, the biotechnology and pharmaceutical community is
increasingly looking to companies that have both proprietary disease insights and comprehensive testing services as they move toward biomarker-based therapeutics. Our SelectOne offering was created specifically to help the biopharmaceutical
community with clinical trials and companion diagnostic development in areas of our core expertise. In our core areas of disease focus, hematologic malignancies, urogenital cancers and HPV-associated cancers, there are over 4500 active trials in the
United States according to clinicaltrials.gov. Based on recent contract growth in this service offering at CGI, we expect to increase our sales and marketing focus in this business as well as seeking additional collaborations and partnerships with
the biopharmaceutical community.
Enhance our efforts to partner with community hospitals.
According to the American Hospital Association, there
are over 4,000 community hospitals in the United States. Community hospitals represent a large target market for our genomic tests and services because approximately 85% of cancer patients in the United States are initially diagnosed in such
hospitals as reported to the National Cancer Database. We intend to continue to focus on partnering with such hospitals by targeting our sales and marketing efforts on this important customer segment. Our branded Expand Dx program is a
suite of diagnostic and consultative services offered on a collaborative basis. Expand Dx is intended to expand and optimize the oncology diagnostics services and personalization of cancer treatment provided by community hospitals so that
such hospitals can optimize and expand their oncology services to better serve their cancer patients.
Increase our geographic coverage by expanding
our scalable sales and marketing capabilities.
We currently have a specialized team of sales professionals with backgrounds in hematology, pathology, and laboratory services. We intend to expand our sales force in order to provide geographic
coverage throughout the United States. Additionally, we intend to expand internationally, particularly in emerging markets, by seeking additional leading local partners such as Roche Servicios, S.A. in Central Americas and Caribbean, DASA, S. A. in
Brazil and Kamineni Life Sciences in India, to market and sell our tests and services.
7
Continue to reduce the costs associated with the development, manufacture, and interpretation of our
proprietary genomic tests and services.
We intend to work closely with select key suppliers and partners to reduce the costs associated with key material components of our microarrays and DNA probes. We have successfully migrated key components
of our probe manufacturing to India in 2013, which reduced the labor costs involved and increased manufacturing yield and flexibility. We will continue to assess how geographic advantage with help us improve our cost structure.
Continue to work with healthcare providers and payers to demonstrate the value of our testing in providing cost efficient and accountable care.
We have
initiated dialogue with key payers, cost management organizations and insurance providers to demonstrate the value and effectiveness of our approach in genomic assessment of complex tumor systems.
Our Competitive Advantages
We believe that our
competitive advantages are as follows:
Our proprietary and clinically relevant genetic tests are the first to address several complex cancers that are
difficult to prognose and where it is difficult to predict treatment outcomes using currently available technologies.
Two of our marketed tests are the first to address several underserved, complex cancers. MatBA
®
-CLL is, to our knowledge based on our informal communications with New York State Department of Health personnel, the only microarray that has been approved by the New York State Department of
Health for diagnostic treatment and management of CLL. FHACT, our HPV-associated cancer test, is the first multi-region DNA probe to identify and stage HPV-associated cancers, which includes cervical, anal and oropharyngeal cancers.
We have collaborative relationships with Mayo and other leading research centers, medical centers and oncology groups.
Our collaborations with leading
cancer centers provide us with a number of benefits, including valuable access to patient samples. In particular, we entered into an agreement with Mayo whereby we formed a joint venture with Mayo, which will focus on developing oncology diagnostic
services and tests utilizing next-generation sequencing. With respect to marketing, we can leverage the brand name recognition of our collaborators when selling to our customers. With regard to research, our collaborations provide us with the
fundamental science and research that underpin the development of our diagnostic tests. Additionally, these collaborations provide us with insight to maximize the utility of our tests in the clinical setting.
Our tests provide more information than existing tests to enable a more personalized treatment plan.
Our tests are designed to provide an earlier, more
accurate and more complete diagnosis, which potentially leads to better treatment and lower healthcare costs. For example, MatBA
®
-CLL evaluates a set of five biomarkers not previously assessed
in CLL and also allows a more accurate interpretation of the loss at chromosome 13q as a sole abnormality than previously possible.
Our tests are
designed for a wide range of sample types and sample preparation methods and we have the ability to test on FFPE tissue samples which accelerates the time required to validate, develop and patent new tests.
We can currently process specimen
types that include blood, bone marrow and tissue, including fresh, frozen and FFPE tissue samples. The ability to interrogate a wide variety of sample types increases clinical adoption of our tests and allows the health care provider to quickly and
efficiently integrate our tests into its established workflow. This integration with existing oncology and pathology workflow and tissue analysis methods is integral to ensuring near term adoption. For several reasons, we have designed our tests for
FFPE tissue samples. For decades, archival FFPE has routinely been used to preserve cancer samples and offers a wealth of information and collaboration potential in comparison with fresh or freshly prepared samples. Our use of FFPE has three
important consequences. First, it significantly increases the datasets of samples that can be used to validate our products, leading to more robust and reliable diagnostic tools. Second, it permits utilization of FFPE in a clinical setting, where
often it is the only specimen available for study. This is of particular importance to
8
tumors diagnosed using minimally invasive technologies where often very small biopsy material is available for diagnostic and prognostic studies. Third, it affords enrichment, or more specific
targeting within, the sample to be analyzed, increasing the probability with which genomic aberrations will be detected for any given specimen.
Our
genomic tests are not platform dependent.
The biology and algorithms behind our tests are adaptable to multiple instrumentation platforms, allowing us to incorporate our tests into a variety of existing clinical laboratory infrastructures
without additional capital investment. We have currently optimized our tests for the Agilent platform. However, we believe that we can migrate to other similar platforms, including next gen sequencing, without significant modification.
We offer consultative, oncology-centered laboratory and clinical trial services.
Our specimens are tested and interpreted by highly qualified
oncology-focused laboratory professionals, many of whom hold MDs and PhDs. Because our clinical staff is highly specialized in oncology, we are better positioned to consult with our oncologist customers to help them derive maximum value from the
diagnostic and prognostic data generated by our tests.
Our Proprietary Genomic Tests and Services
We currently develop and produce two types of DNA-based genomic tests: microarrays and probes. Both are directed at identifying specific genetic aberrations in
cancer cells that serve as markers for diagnosis, prognosis and prediction of treatment outcomes (called theranosis). In addition, we formed a joint venture with that will focus on developing oncology diagnostic services and tests utilizing
next-generation sequencing.
We offer both microarrays and probes because each serves a unique diagnostic or prognostic function. FISH-based tests, or
probes, offer great sensitivity while microarrays provide a more comprehensive analysis of the cancer genome. While we expect both platforms to be utilized in cancer diagnostics for the foreseeable future, we believe microarrays will become a
significant factor in our growth as they offer a broader range of genomic information, are of a higher resolution and lend themselves to automation. Beyond microarrays, we believe that next generation sequencing will rapidly become a powerful tool
for the personalized diagnosis and management of cancer.
FDA clearance or approval is not currently required to offer these tests in our laboratory once
they have been clinically and analytically validated and approved by the appropriate regulatory bodies. We seek licenses and approvals for our laboratory facility and for our LDTs from the appropriate regulatory authorities, such as the CMS, which
oversees CLIA, and various state regulatory bodies, including the New York State Department of Health. At the federal level, certain proprietary tests must be part of proficiency testing programs approved under CLIA in order for us to be able to
bill government payor program beneficiaries, such as Medicare patients, for such tests. In addition, certain states, such as New York, require us to obtain approval of our proprietary tests in order for us to collect patient specimens from such
state.
Through our subsidiary, Cancer Genetics Italia, S.r.l. (CGI Italia), based in Milan, Italy, we have obtained CE marking for 32 of our
DNA probes, which entitles us to market these probes in the European Economic Area (which includes the 27 Member States of the EU plus Norway, Liechtenstein and Iceland). We anticipate that we will need to conduct additional developmental activities
for each of these tests and to submit these tests for regulatory clearance or approval by FDA or other regulatory agencies prior to commercialization outside of our reference laboratory in each of the markets where we plan to introduce them.
9
The following diagram portrays our proprietary programs:
Hematological Cancer Arrays: Our MatBA
®
Arrays.
MatBA
®
is the first targeted oligonucleotide-based microarray we developed for the analysis of genomic
alterations in mature B-cell neoplasms to determine prognosis and theranosis. MatBA
®
incorporates a common architecture of specific genomic regions that can be applied across the seven major
mature B-cell neoplasms. Mature B-cell neoplasms account for approximately 7% of all cancers diagnosed in the United States annually (approximately 119,760 expected in 2014) and for approximately 6% of all estimated cancer-related deaths
(approximately 35,860 expected in 2014). They are the fifth most common malignancy in both males and females, and the incidence is rising.
As a group,
hematologic cancers (cancers of the blood, bone marrow or lymph nodes) display significant clinical, pathologic and genetic complexity. Current diagnosis relies mostly on pathologic examination, flow cytometry and detection of only a few genetic
markers. Importantly, the clinical course of the six main subtypes of these neoplasms ranges from indolent (follicular lymphoma) to aggressive (diffuse large B-cell lymphoma, mantle cell lymphoma and multiple myeloma), or mixed (chronic lymphocytic
leukemia/small lymphocytic lymphoma, or CLL/SLL). Currently most risk-stratification for treatment decisions is based on clinical features of the disease. Few molecular prognostic biomarkers are utilized in a clinical setting. There is unmet medical
need for robust biomarkers for the diagnosis, prognosis, theranosis and overall patient management in B-cell cancers. Given the higher frequency of these malignancies in the United States than in other countries due to relatively long lifespans and
an aging population, we expect significant clinical demand for MatBA
®
.
10
MatBA
®
is designed to detect genomic copy number changes
in mature B-cell neoplasms either solely or in a unique combination, thus assisting the clinician in the management of a patients disease. The test relies on the comparative genomic hybridization of fluorescently differentially-labeled normal
DNA and DNA extracted from the cancer specimen (array-CGH). Array-CGH utilizes minimal biopsy material and uses DNA as the analyte (the component whose properties are being measured), which is more stable, as compared to RNA used in other array
detection methodologies. Both are important considerations for the ever increasing demand for less invasive procedures for diagnostic and prognostic purposes. Additionally, we have optimized the utility of the MatBA
®
array-CGH so that it can be routinely applied to the study of a range of specimen types including blood and bone marrow and FFPE biopsy specimens, which are often the only specimen available for
analysis of FL, DLBCL and MCL. With the exception of CLL, biopsy/surgical procedures are rarely performed for B-cell neoplasms prior to the initiation of treatment, thus limiting the amount of tissue available for testing prior to deciding on the
initial treatment regimen.
MatBA
®
was custom-designed to represent 80 regions of the human
genome which have diagnostic and/or prognostic value in one or more of the mature B-cell neoplasm subtypes as identified through our research and analysis efforts. Unlike other technologies such as FISH, array-CGH using MatBA
®
simultaneously permits the detection of genomic gains and losses at multiple locations on a chromosome (loci) that characterize the mature B-cell neoplasm subtypes. For each subtype of B-cell
neoplasm, cohorts of specimens with full clinical annotation are evaluated using MatBA
®
to identify novel associations between single and weighted combinations of genomic gains/losses and
clinically relevant endpoints, including time to first treatment, treatment response, progression-free survival and overall survival, and to validate previously known associations. It is these associations, we believe, that provide valuable
assistance to clinicians in risk stratification and guiding treatment plans for patients with these cancers.
MatBA
®
Microarrays offered as LDTs
We offer the first application of MatBA
®
for prognostication in one subtype of mature B-cell neoplasm, CLL, where about half of patients experience indolent disease, or slow progression, and the remaining half, a relatively aggressive
progression. MatBA
®
-CLL provides important genetic-based information to guide clinical management of this disease. The test results are reported out in a unique format that allows ease of
interpretation by the hematologist or oncologist. MatBA
®
-CLL is included in the tests we can provide under our New York laboratory and CLIA licenses, effective April 2011. New York is one
of only a few states that separately reviews LDTs for clinical and analytical validity. To date there are only a few companies that have commercially available oncology microarrays and, to our knowledge based on our informal communications with New
York State Department of Health, MatBA
®
-CLL was the first oncology microarray approved for commercial use by the New York State Department of Health.
Approximately 15,720 new cases of CLL are expected to be diagnosed in the United States this year, and importantly, over time these cases undergo evolution,
requiring risk stratification and guidance on patient management issues at multiple points during the course of the disease. Prior to the introduction of MatBA
®
, clinicians relied on the
assessment of the gain or loss on only four chromosomal regions and potentially one gene mutation when testing for and stratifying a CLL patient. MatBA
®
improves on this by identifying
information on five additional chromosomal regions, providing more valuable diagnostic data and critical information about the risk of progression and overall prognosis of the patient. In particular, because MatBA
®
has greater resolution than that available with prior tests, we can interrogate two different regions or loci on the 13q chromosome. Loss of one specific locus or loss of both loci are in some
circumstances believed to have differing prognostic value, hence the importance of being able to evaluate both loci. Also, loss of 13q as a sole abnormality is associated with a lower risk of progression and overall favorable outcome. With the
increased capacity of MatBA
®
to assess abnormalities in multiple regions of the genome not usually assessed by other technologies, our studies have indicated that up to 23% of cases that would
have shown 13q loss as a sole abnormality when assessed by FISH technologies do in fact have additional abnormalities. For these cases, the favorable outcome that would have been reported to the clinician was not accurate, leading to a
change in the prognosis and consequently decision-
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making by the clinician regarding the management of these patients. We believe this type of genomic assessment of the patients cancer also saves the health care system thousands of dollars
per year per patient as a result of improved patient management and more targeted therapeutic intervention. In addition we have identified novel biomarkers using MatBA
®
that are associated
with a poor outcome in CLL. These include gains at 2p, 3q and 8q and a loss at 8p. Additional prognostic regions have been identified and are undergoing validation. These will be reported, further driving the value of more comprehensive genomic
assessment of the patients cancer.
We performed validation of these important new biomarkers in 317 CLL specimens in conjunction with
Dr. Kanti Rai at Long Island Jewish / North Shore Hospital. We presented this data at the 2011 International Workshop on Chronic Lymphocytic Leukemiais and the American Society of Hematologys 2011 Annual Meeting and Exposition. In 2011,
we also presented a poster on the key methods involved in enabling the usage of DNA from FFPE material involved in certain sub-types of MatBA
®
at the Association for Molecular Pathology. In
the poster, results from over 360 samples were reviewed and demonstrated highly accurate aberration detection as confirmed using Quantitative Polymerase Chain Reaction, an industry standard in molecular diagnostic measurement.
We validated MatBA
®
-SLL for risk stratification in SLL. In January 2012, MatBA
®
-SLL was approved under CLIA and accordingly may now be offered as an LDT by our laboratory. This adaptation of MatBA
®
for SLL has allowed
us to develop a robust mechanism to analyze DNA that is derived from FFPE biopsy material and has been a critical development that we believe will accelerate the development of our microarrays for other solid tumors or cancers that present
themselves as a mass.
We validated MatBA
®
-DLBCL for diagnosis, prognosis and clinical management
of DLBCL patients. In January 2013, this assay received approval by CLIA and New-York State for clinical use, and accordingly may now be offered as an LDT by our reference laboratory. This application of MatBA
®
for DLBCL allowed us to offer what we believe to be the only CLIA and New-York State approved microarray for the genomic assessment of DLBCL. In addition, the microarray will be included in the
DLBCL CompleteSM Program offered by us, which includes a suite of esoteric tests used in the diagnosis, prognosis and monitoring of DLBCL patients.
We
validated MatBA
®
-MCL for diagnosis and treatment selection of mantle cell lymphoma (MCL). In May 2013, this microarray received approval by CLIA for clinical use and may now be offered as an
LDT by our laboratory.
MatBA
®
Microarray in Development
We are now undergoing similar development of MatBA
®
as a prognostic tool in another main subtypes of
mature B-cell lymphomas, namely FL. FL is characterized by a slow progression that in up to approximately 60% of cases transforms to DLBCL, an aggressive lymphoma. Prognostic and theranostic biomarkers of therapeutic options are required for this
disease. We have identified several additional loci which we believe are relevant to the prognosis of FL, which cannot be assessed by currently available FISH tests alone. We are currently validating this extension of MatBA
®
. We believe MatBA
®
will provide increased management insight for patients with this type of lymphoma based on a more complete genomic
assessment of the lymphoma.
Urogenital cancer arrays: UroGenRA, UGenRA
There is a unmet clinical and patient need for improved diagnosis, prognosis and theranosis, including more detailed and staging information, in urogenital
cancers, where biopsy materials are increasingly scarce. The cumulative number of annual new reported cases for kidney, prostate and bladder cancers is estimated at 374,610 for 2014 according to the American Cancer Society. Gynecologic neoplasms
contribute substantially to female mortality and morbidity in the United States and are an area where nearly 95,000 new cases are expected to be diagnosed this year. Although generally characterized by early stage detections, these cancers still
represent a major health risk, a significant variability in patient outcome, which can be better managed through genomic assessment of the tumor(s), and a substantial medical cost burden to the public with the high rates of incidence and ongoing
patient management needs.
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Developing sophisticated, state-of-the-art molecular tests that enable more accurate diagnosis and/or prognosis
of these cancers will not only benefit the patients by offering more appropriate treatments, but also effectively reduce the unnecessary medical cost associated with surgery, long-term follow-up surveillance, or therapy after the treatment.
The UroGenRA microarray, which is being validated in collaboration with Memorial Sloan-Kettering Cancer Center, will provide diagnostic and prognostic
analysis for kidney, bladder and prostate cancer. Our first UroGenRA assay to launch was the kidney cancer-targeting UroGenRA-Kidney in May 2013, validated in collaboration with Drs. Eric Klein and Magi Galluzzi at the Cleveland Clinic.
We are also developing extensions of UroGenRA for bladder and prostate cancers. UGenRA will provide diagnostic, prognostic and theranostic information for the primary gynecological cancers, cervical, ovarian and endometrial.
UroGenRA for Kidney, Prostate and Bladder Cancers
UroGenRA is a proprietary CGH-based array which will serve as a platform for the diagnosis, prognosis and theranosis of kidney, prostate and bladder
cancers. It was designed to detect gains and losses that frequently occur in genetic material in these three cancer types and has the potential to differentially diagnose and/or stratify patients to assist and guide clinical management. It
represents 101 regions of the human genome potentially with diagnostic, prognostic and/or theranostic value in one or more of these types of cancers.
UroGenRA
-Kidney
For kidney cancer, UroGenRA is specifically designed to classify renal tumors into the four
main subtypes (clear cell, papillary, chromophobe and oncocytoma), which is critical to patient management and treatment protocols. This allows the clinician, especially in cases where there is limited biopsy material, to (i) diagnose renal
cancer and accurately classify it into the correct subtype, (ii) provide rationale for selection among surgical and non-surgical intervention or ablation, (iii) stratify patients based on prognostic information for the advancement of renal
cancer into local or regional cancer which then guides decisions on surgical intervention, and (iv) guide drug trial decisions in those with metastatic disease or unclassified renal cancers.
We developed a study with two leading academic cancer centers for which we obtained and used a group of 200 specimens comprising four kidney cancer subtypes
to further develop and validate the algorithm of copy number variation known to be associated with these tumors that gives the best ability to differentiate among these four subtypes. These copy number changes are already known to minimally include
loss in six regions of chromosomes among these four types and gain in three other regions and we were able to define additional and specific regional copy number variations. The derived proprietary renal cancer diagnostic algorithm or decision tree
based on UroGenRA copy number alterations was validated for diagnostic potential in the IRB-approved study of over 50 image-guided needle biopsies and compared with the sensitivity and specificity obtained by our proprietary FISH-based assay,
FReCaD.
UroGenRA-Kidney is now available as a LDT. At the current time, validation of the clinical utility of UroGenRA is further
advanced for kidney cancers than for prostate and bladder cancers, because we are able to leverage research and insights used in the clinical validation of FReCaD in our development activity for the UroGenRA indication for kidney cancer.
UroGenRA
-Prostate
For prostate cancer, UroGenRA has the potential to use prostate core/needle biopsy to
assess genomic variability of the cancer and help in the identification of biomarkers for assessment of the risk of recurrence, to assess treatment options for intermediate risk patients, and to explore the genomic aberrations of circulating tumor
cells. In the case of recurrence, gain or loss in a limited number of regions represented on UroGenRA is considered informative. Application of the UroGenRA to circulating tumor cell genome scanning would require a modified version of
the regions represented on UroGenRA, but we believe it could be implemented considering the plasticity of the array platform. UroGenRA-Prostate is in the commercial development stage.
13
UroGenRA
-Bladder
Newly diagnosed bladder cancers are defined by the
fact or extent of invasion of the muscle. For non-muscle invasive bladder cancers, there is clinical need to identify the high proportion of patients in which the cancer will recur. The need in muscle-invasive tumors is to identify those patients
most likely to benefit from treatment, considering that the survival benefit of peri-operative chemotherapy for such patients is only 5-10%. Genomic copy number alterations likely to be involved in the response of tumor cells to such therapy have
been incorporated in UroGenRA for this specific application, and we are currently attempting to validate this microarray for this use. UroGenRA-Bladder is in the clinical development stage.
UGenRA for Endometrial, Ovarian and Cervical Cancers
UGenRA was designed as a platform to detect gains and losses of genomic material in 83 regions of the chromosome associated with responses to particular
therapies in patients with endometrial, ovarian and cervical cancers. We are committed to the development of UGenRA as a diagnostic tool that will assist in the screening, diagnosis and/or prognosis of these cancers. The use of UGenRA
can be easily integrated into current clinical management protocols because it requires only small amounts of genetic material to test and can be performed on FFPE specimens.
UGenRA-Endometrial
Endometrial cancer is the fourth most common cancer in women in the United States representing approximately 6% of all
newly diagnosed cancers in women in 2011. In this disease, endometrial hyperplasia is a precursor lesion of endometrioid endometrial carcinoma and since about 50% of women with atypical hyperplasia also have concurrent endometrioid endometrial
carcinoma, it is important to identify those precursor lesions more likely to progress to cancer. UGenRA offers the opportunity to identify such specimens and potentially guide clinical management. Five regions of the chromosome interrogated
by UGenRA have already been implicated to harbor gains and losses that, if detected in hyperplastic lesions, have a high likelihood of progression to cancer. We are in the process of clinically validating the use of UGenRA for these
purposes, along with any novel regions that may be identified in the planned studies. Another potential application in endometrial cancer is to stratify those tumors likely to recur, permitting the identification of patients most likely to benefit
from therapy. UGenRA Endometrial is in the clinical development stage.
UGenRA
-Ovarian
There are
approximately 22,000 cases of ovarian cancer diagnosed in the United States each year and approximately 14,000 women die from ovarian cancer each year in the United States. Risk-stratification of stage III/IV ovarian cancer patients after
cytoreductive surgery (involving removal of only part of a malignant tumor) for a certain type of chemotherapy is a potential application for UGenRA, and the design of UGenRA currently contains the sites of genomic gain/loss with such
prognostic value. We believe we can validate these regions using the publicly available data copy number information from the Center for Applied Genomes for over 300 ovarian cancers with known response and overall outcome. This is a powerful
resource for validation and would serve to confirm our test in a different cohort of patients than those used in the preliminary validations performed at our laboratory. UGenRA Ovarian is in the clinical development stage.
UGenRA-Cervical
There are approximately 12,300 cases of cervical cancer diagnosed and approximately 4,000 deaths from cervical cancer each
year in the United States. With respect to cervical cancer, current clinical tests are unable to distinguish regressive cervical lesions from progressive lesions. Hence low-risk patients are treated the same way as high-risk patients, which
increases health care costs. There is a great need for molecular-based diagnostic assays to address these questions, so that physicians can plan appropriate treatment strategies. We have designed UGenRA-Cervical to distinguish among lesions
which have a high likelihood of progression into cervical cancer versus those that do not have the genomic abnormalities related to progression to cervical cancer. UGenRA Cervical is in the commercial development stage.
Proprietary FISH-based DNA Probes
FHACT
HPV-Associated Cancer Test
We have developed a proprietary, 4-color FISH-based DNA probe designed to identify the gain of the three most important
chromosomal regions that have been implicated in cancers associated with HPV: cervical, anal and
14
oropharyngeal. According to the National Cancer Institute, about 55 million PAP smear tests to detect HPV are performed in the United States each year. It is estimated that approximately
2 million patients have abnormal PAP smear test results and are referred for biopsy/colposcopy as a result of such tests. However, only 0.6%, or approximately 12,000, of these patients will develop cancer. It is believed that early detection of
HPV-associated cancers could eliminate unnecessary biopsies/colposcopies and thereby reduce health care costs.
FHACT is designed to determine copy
number changes of four particular genomic regions by FISH. These regions of DNA give specific information about the progression from HPV infection to cervical cancer, in particular the stage and subtype of disease. FHACT is designed to enable
earlier detection of abnormal cells and can identify the additional biomarkers that allow for the prediction of cancer progression. FHACT is designed to leverage the same PAP smear sample taken from the patient during routine screening, thus
reducing the burden on the patient while delivering greater genomic-based information to the clinician. We in-license a biomarker from the National Cancer Institute that is used in our FHACT probe.
In conjunction with the National Cancer Institute, we completed a blinded study to evaluate the effectiveness of FHACT for both anal and cervical
cancers associated with the HPV virus that involved over 1,000 specimens. We also completed a blinded study of over 300 cervical specimens and the data has been provided to National Cancer Institute. This has been used for validation of the assay
and development of automatic analysis for the FHACT probe. Upon review, National Cancer Institute will provide the remaining samples. We have yet to begin work with anal samples. We continue further clinical validations in collaborations that
have been established with the University of Iowa and with Kamineni Hospital in Hyderabad, India to further strengthen the claims and data for use of FHACT as a staging and prognostic tool for cervical cancer in both the United States and in
emerging markets. The sensitivity of FHACT was presented as a poster at the 27th International Pappillomavirus Conference in Berlin, Germany in September 2011. The publication demonstrated that by using FHACT over 90.9% sensitivity can
be achieved as a screening tool for cervical intraepithelial neoplasia of 2nd degree or higher (known as CIN2+), which is a critical milestone in the development of cervical cancer.
In 2012, we made FHACT available outside the United States as a diagnostic tool in certain emerging market countries, including India. This initial
launch is applicable for detection and staging of cervical cancer, which is the third most common cancer among women worldwide, with one-fifth of the cases originating in India. The World Health Organization projects that cervical cancer deaths will
rise to 320,000 in 2015 and 435,000 in 2030. In many emerging economies, cervical cancer is the most common cancer that affects women, and 80% of deaths from cervical cancer occur in these developing countries. We have accomplished our goal of
making FHACT available in the United States by the end of 2013.
We continue to validate FHACT for anal and oropharyngeal cancers using
specimens from the National Cancer Institute and are actively seeking collaborations to further validate the clinical utility of FHACT for anal and head and neck cancers.
Research for FHACT has been to date funded through a $763,958 grant awarded in 2009 from the National Cancer Institute. In October 2010, we were awarded
a grant in lieu of a federal income tax credit under the Qualifying Therapeutic Discovery Project Program for approximately $244,500 to help in the further validation and commercialization of FHACT.
FISH-based DNA Probes
We also develop FISH-based DNA
probes for sale outside the United States. Our portfolio includes 32 CE-marked probes for hematopoietic neoplasms and solid tumors.
Our strategy is
to sell conventional probes into emerging markets through Cancer Genetics Italia and local or regional partners. We have entered into an agreement with Labomics S.A., based near Brussels, Belgium, which
15
will provide us with the manufacturing support, storage facilities, and fulfillment management of our FISH-based DNA probes to better serve European and global demand. We have moved these
manufacturing operations to Kamineni Life Sciences in India.
We plan for all of our probes to conform to the requirements of the European In Vitro
Diagnostic Medical Devices Directive (98/79/EC IVDD). This entitles them to bear the CE marking, which enables us to market them in the European Economic Area and provides for clinical acceptance in other countries where the CE mark is valued.
Laboratory Services
We provide our complete suite of
oncology-focused laboratory services to hospitals, cancer centers, oncologists and pathologists from our 17,936 square foot state-of-the-art, laboratory in Rutherford, New Jersey. At the federal level, clinical laboratories, such as ours, must be
accredited under CLIA in order for us to perform testing on human specimens. Our laboratory is accredited by the College of American Pathology (CAP) which is one of six approved accreditation methods under CLIA. Our clinical laboratory
is located in New Jersey and we hold the requisite licenses from the New Jersey State Department of Health to operate our laboratory. In addition certain states, such as New York, require out-of-state laboratories to obtain licenses in order to
accept patient specimens from such states. In addition to New Jersey, we hold clinical laboratory licenses from the New York Department of Health, Florida Department of Health, Maryland Department of Health, and Pennsylvania Department of
Health for all of our clinical departments. We are also qualified to accept specimens from all states in the United States, as well as from overseas locations.
Historically we have generated most of our revenue through our laboratory services. In 2013, we generated approximately 92% of our revenue from laboratory
services, approximately 5% from government grants and approximately 3% from sales of our DNA probes. In 2012, we generated approximately 85% of our revenue from laboratory services, approximately 13% from government grants and approximately 2% from
sales of our DNA probes, which are currently only sold outside the United States.
Our comprehensive oncology-focused testing services for hematological,
solid tumor urogenital cancers are utilized in the diagnosis, prognosis and theranosis of cancer patients and are growing rapidly as clinicians demand more precise and more comprehensive diagnostic evaluation of their patients. We utilize highly
skilled scientists, pathologists and hematologists in our laboratory, including 15 individuals with doctorate degrees. These individuals assist our customers in integrating and technically assessing the testing results for their patients.
The non-proprietary testing services that we offer are focused on specific oncology categories where we are developing our proprietary arrays and probe
panels. We believe that there is significant synergy in developing and marketing a complete set of tests and services that are disease focused and delivering those tests and services in a comprehensive manner to help with treatment decisions. The
insight that we develop in delivering non-proprietary services are often leveraged in the development of our proprietary programs and now increasingly in the validation of our proprietary programs (such as MatBA
®
) for clinical use.
We currently offer a range of services in the following areas:
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Proprietary Microarray based testing (MatBA
®
-CLL, MatBA
®
-SLL, MatBA
®
-DLBCL, MatBA
®
-MCL and UroGenRA- Kidney)
: our proprietary microarray tests for the detection of chromosomal abnormalities
observed in Chronic Lymphocytic Leukemia, and Small Lymphocytic Lymphoma Diffuse Large B-cell Lymphoma, Mantle Cell Lymphoma and kidney cancer;
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Molecular testing
: using quantitative methods, such as polymerase chain reaction, sequencing and mutahine analysis, to analyze DNA and RNA to follow progression of disease and response to therapy at the genetic
level;
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Cytogenetics testing
: a series of methods that analyze human chromosomes in order to identify malignancy;
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FISH testing
: analysis of abnormalities at the chromosomal and gene levels using analyte specific reagents and FDA-cleared probes performed on whole specimen or magnehell separated purified plasma cells;
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Flow cytometry testing
: Immuno phenotype analysis of specific markers inside cells including specific cytosolic surface protiens, and on cell surfaces;
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Histology testing
: microscopic examination of stained tissue sections using various special staining techniques;
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Cytology testing
: non-gynecological fluid preparation for microscopic evaluations by a pathologist; and
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IHC testing
: analysis of the distribution of tumor antigens in specific cell and tissue types.
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We have
developed the Summation Report which, we believe, provides an integrated view of a patients test results and diagnosis in a user-friendly, visually appealing format for clinicians. Our hematopathologists and laboratory directors prepare
these Summation Reports based on the clinical information and diagnosis provided by our laboratory professionals. All our testing technologies are integrated into a Summation Report to allow oncologists to efficiently arrive at a
definitive diagnosis and drive complete and effective decisions.
We expect to offer additional proprietary tests as LDTs in other areas of oncology and
will seek the required CLIA and state approvals for these tests.
Clinical Trials Services (Select
One
®
)
Industry research has shown many promising drugs have produced disappointing
results in clinical trials. For example, a study by Princess Margaret Hospital in Toronto estimated that 85% of the phase III trials testing new therapies for solid tumors studied over a five-year period failed to meet their primary endpoint. Given
such a high failure rate of oncology drugs under development, combined with constrained budgets for biopharmaceutical companies, there is a significant need for drug developers to utilize molecular diagnostics to decrease these failure rates. For
specific molecular-targeted therapeutics, the identification of appropriate biomarkers potentially may help to optimize clinical trial patient selection and success rates by helping clinicians identify patients that are most likely to benefit from a
therapy based on their individual genetic profile.
We launched our clinical trials services offering, which we have branded as Select One
®
, to help increase the efficiency and economic viability of clinical trials for biopharmaceutical companies and clinical research organizations. Our clinical trials services leverage our knowledge
of clinical oncology and molecular diagnostics and our laboratorys fully integrated capabilities. Our clinical trial services are aimed at developing customizable tests and techniques utilizing our proprietary microarrays and laboratory
services to provide enhanced genetic signature and more comprehensive understanding of complex diseases at earlier stages. We leverage our knowledge of clinical oncology and molecular diagnostics and provide access to our genomic database and assay
development capabilities for the development and validation of companion diagnostics. This potentially enables companies to reduce the costs associated with development by determining earlier in the development process if they should proceed with
additional clinical studies. We have been chosen by Gilead Sciences Inc. to provide clinical trial services and molecular profiling of chronic lymphocytic leukemia (CLL) patients. We believe our clinical trial services may allow Gilead and others to
improve patient responder selection, thereby potentially increasing the likelihood our customers product is approved by FDA. Additionally, through our services we gain further insights into disease progression and the latest drug development
that we can incorporate into our proprietary tests and services.
17
Test Development Process
Our proprietary microarrays and DNA probes have been, and continue to be, developed in conjunction with leading academic and clinical research centers to
ensure that the needs of the clinical community are being met with the latest research on genomic alterations that cause, lead to, or are related to the development of cancer. We undergo a thorough research and validation process to ensure we are
providing diagnostic and prognostic information that is clinically relevant and accurate. In our experience the time-frame for this process from design through development and market launch can be between 18 to 40 months based on complexity of the
disease, the specific clinical claims being pursued and the availability of high quality samples with strong clinical correlations. We monitor and review the process in four stages as detailed below:
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Stage 1, Research and Discovery
. We conduct extensive research of peer-reviewed publications and other disease-specific literature and public information databases. We gather the public information regarding
genomic abnormalities as hallmarks and references for particular cancers and clinical correlations. Within a cancer type, the observed gains, losses or other aberrations and rearrangements of genetic material are recorded and noted when reported to
have diagnostic or prognostic potential. During this process, which is technology and platform agnostic, we extensively cross-analyze our findings in the literature with published data sets across a variety of technologies. Finally, we assess the
merits of these findings internally with our research and development teams and with our scientific advisory board, when applicable, so that we can assure robust genomic coverage as we proceed into clinical development.
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Stage 2, Clinical Development
. We design a targeted array or probe panel based on the information gathered from the literature and database searches and review. A team of our scientists then seeks to refute the
evidence compiled in the literature search process, serving as a system of checks and balances. Once that process is complete, we design an array based on its application within a particular cancer. For example, the kidney array is designed to
subtype among the four main types of kidney cancers at various stages in the treatment of the patient. Within one array, we may be assessing three to four different subtypes of a cancer and for different applications, ranging from differential
diagnosis to prognosis to prediction of therapeutic response. During this stage we select and refine the targeted regions and their potential suitability for analysis on the microarray.
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Stage 3, Commercial Development
. This process involves validating the performance characteristics of the microarray, as well as developing protocols for the use of the array or the DNA probe for the intended
specimen. This quality assurance process notes reproducibility, accuracy, sensitivity, and specificity, and potential compliance to ranges of normalcy and reportability. We also compare data obtained for specimens and cell lines across different
technology platforms to ensure accuracy of our processes. In this process, we confirm and validate the genomic biomarkers in independent clinically relevant datasets. During this process we also begin to develop the decision trees and algorithms,
which are core to our intellectual property that guide the diagnostic and prognostic value of the microarray or other DNA probe. Once the initial decision tree and algorithm for the microarray and its use have begun development, we conduct trials
which help to validate the design and usage of the tests. For this validation process, we partner with leading cancer institutions and regional cancer centers.
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Stage 4, Market Entry and Launch
. After commercial development is completed and prior to launch, we take several steps to prepare for marketing
our tests as LDTs. We create standard operating procedures and quality assurance and quality control measures to ensure repeatability and high standards of quality. We train our staff on the interpretation and use of the data. Licenses and approvals
for our laboratory to use LDTs are obtained from the appropriate regulatory authorities, such as the Centers for Medicare and Medicaid Services (CMS), which oversees CLIA, and different state regulatory bodies. Before we CE mark our
tests we also need to assess the conformity of our tests with the essential requirements of the European In Vitro Diagnostic Medical Devices Directive. As part of our long-term strategy, we plan to seek FDA clearance or approval to expand the
commercial use of
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our tests to other laboratories and testing sites in the United States. We will also need to complete additional activities to submit each of these tests for regulatory clearance or approval
prior to commercialization in each of the international markets where we plan to introduce them.
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Research and Development Expenses
We incurred research and development expenses of $2.2 million, which represented 33% of our net revenue, for the year ended December 31, 2013;
$2.1 million, which represented 49% of our net revenue, for the year ended December 31, 2012; and $2.1 million, which represented 69% of our net revenue, for the year ended December 31, 2011. Research and development expenses
represented 22% of our total operating expenses for the year ended December 31, 2013, 26% of our total operating expenses for the year ended December 31, 2012, and 26% for the year ended December 31, 2011. Major components of the
research and development expenses included direct personnel costs, laboratory equipment and consumables and overhead expenses.
Sales and Marketing
Our sales and marketing efforts consist of (i) a direct sales force in the United States focused on developing direct channels to hospitals,
cancer centers, pathologists and oncologists; and (ii) a channel approach outside the United States, specifically in the emerging markets, that is focused on partnering with leading distributors, medical facilities or medical service operators
to develop and serve such regional oncology markets. We also sell our clinical trial services to biopharmaceutical companies and research organizations.
We currently have a dedicated and direct sales force consisting of six sales professionals focused on the eastern and midwestern United States with
backgrounds in hematology, pathology, and laboratory services. Our sales professionals have an average of 20 years of experience in clinical oncology sales, esoteric laboratory sales from leading biopharmaceutical, pharmaceutical or specialty
reference laboratory companies, including Laboratory Corporation of America Holdings, US LABS, Inc., Celgene Corporation and Genzyme, a Sanofi company, among others. We plan on growing this specialized, oncology-focused sales force and supporting it
with clinical specialists who bring deep domain knowledge in the design and use of the microarrays that we plan on offering in the United States as LDTs.
Our sales and marketing efforts are based on a three part go-to-market strategy:
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Collaborate with leading research universities and institutions that enable the validation of our new tests;
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Work with community hospitals and community-based cancer centers that need a reliable and collaborative partner for genomic-based cancer testing; and
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Build relationships with individual thought leaders in oncology, hematology and pathology to provide services that provide value to their patients.
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We also promote our tests and services through marketing channels commonly used by the biopharmaceutical and pharmaceutical industries, such as internet,
medical meetings and broad-based publication of our scientific and economic data. In addition, we provide easy-to-access information to our customers over the internet through dedicated websites. Our customers value easily accessible information in
order to quickly review their patients information and begin developing a treatment protocol.
Expand Dx Program
According to American Hospital Associations 2012 data, there are approximately 5,000 community hospitals registered in the United States, 1,068 of which
are for profit. These hospitals are under pressure to create profitable cancer testing centers. However, community hospitals face numerous barriers, including rising costs of diagnostic technologies and treatments, complexity of new test validations
and laboratory licensing requirements,
19
difficulty in hiring, training and retaining qualified personnel and challenges in integrating new information technology systems. In particular, they generally do not have a dedicated
pathologist or hematopathologist, and are not able to perform tests that provide an understanding of the genetic features of the tumor. Without this information, cancer specialists at these institutions are unable to plan an adequate course of
treatment, which then limits the community hospitals ability to adequately service their cancer patients. While nearly 85% of cancer patients in the United States are initially diagnosed in community hospitals, over half of these cancer
patients are referred out to specialized cancer centers because community hospitals currently lack state-of-the-art oncology and pathology testing capabilities.
Our Expand Dx program for community hospitals is a suite of diagnostic and consultative services offered on a collaborative basis to expand and optimize
the oncology diagnostics services and personalized cancer treatment provided by community hospitals so that such hospitals can retain their cancer patients. Our Expand Dx program focuses on enhancing the quality and increasing the efficiency
of the community hospitals oncology diagnostic process, including billing, turn around time for diagnostic tests, diagnostic procedures and training and assistance in the use of additional biomarkers for their routine cancer testing. We
believe that through our Expand Dx solution, community hospitals and laboratories can get cost-effective access to leading-edge diagnostic tests and specialized testing capabilities of our clinical reference laboratory. Our Expand Dx
solution provides the community hospitals with the necessary skills and services needed for comprehensive management of patients and their treatment while allowing laboratories to focus on efficient delivery of individual tests rather than
comprehensive interpretation of specialized cases. Our focus on oncology allows the Expand Dx customers to intervene earlier and more comprehensively with their patients, thereby improving testing and treatment revenue.
Our sales force works with our laboratory directors as a team to market our Expand Dx solution to community hospitals, geographically focused on the
eastern and mid-western United States.
Emerging Markets
We are initially targeting certain emerging markets, including India, Brazil, Turkey and Mexico, as an area of expansion of sales of our proprietary tests and
probes. We sell in these countries through regional partners that have the ability to service both the cancer laboratories and doctors in that country. In February 2012, we entered an exclusive distribution agreement with Kamineni Life Sciences Pvt.
Ltd for sale of our probes in India. In 2012, we launched FHACT in India and other emerging markets as a tool to provide specific information about the progression from HPV infection to cervical cancer. Cervical cancer is the third most common
cancer among women worldwide, with more than 85% of cervical cancers and related deaths occurring in developing countries. Deaths from cervical cancer in India account for 27% of all deaths from cancer globally.
Roche Servicios, S.A., an affiliate of the Swiss drug maker Roche based in Costa Rica, selected us as their exclusive service provider for biomarker based
cancer testing services. As part of our relationship with Roche Servicios, we will perform a variety of molecular, cytogenetic and immunohistochemistry based testing services to aid Roche Servicios, S.A. in delivering genetic testing results to
hospitals and clinicians based in 14 different locations covering Central America and the Caribbean. Our testing will focus on assessing the biomarkers that are related to a variety of solid tumors and blood borne cancers which are the most
prevalent cancers in those regions and which also correspond to therapeutics and treatments that are offered by Roche and Genentech.
Key Research and
Development Collaborations
We formally and informally collaborate with leading oncology centers and community-based hospitals to develop our
proprietary diagnostic tests, and we work closely with leading cancer researchers at these institutions to develop proprietary tests tailored to their needs and specifications. Additionally, many of these centers have obtained Specialized Programs
of Research Excellence status, as designated by the National Cancer Institute. Our collaborations with these centers give us access to large datasets of information that we use to develop our proprietary tests.
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Below is a summary of our active key collaborations. In certain cases we have formal written agreements with
collaborators and in other cases we have no written agreement with our collaborators or only informal written arrangements.
Joint Venture with Mayo
Foundation for Medical Education and Research Focused on Next-Generation Sequencing and Oncology
On November 7, 2011, we entered into an
affiliation agreement with the Mayo Foundation for Medical Education and Research, pursuant to which we agreed to form a joint venture with Mayo. We funded the joint venture with an initial $1.0 million contribution in October 2013. The objectives
of the joint venture entity will be to try to discover and validate biomarkers in lung cancer, multiple myeloma and follicular lymphoma utilizing next-generation sequencing with a possible expansion into other solid tumors, such as esophageal, head
and neck and breast cancers. Additionally, the joint venture entity will engage in biomarker discovery utilizing Mayos next-generation sequencing facility and the development of commercial products in the form of diagnostic products and
services, as well as early stage therapeutic markers.
The joint venture entity is in the form of a limited liability company named OncoSpire Genomics,
LLC, and is governed by a board of governors consisting of six members, with three members appointed by us and three members appointed by Mayo. Our appointees to the board of governors are Dr. Raju Chaganti, John Pappajohn, and Panna L. Sharma.
It is anticipated that Mr. Sharma will need to devote administrative time to facilitate the initiation of OncoSpire Genomics, LLC. Initially, we hold fifty percent of the issued and outstanding membership interests and Mayo holds fifty percent
of the issued and outstanding membership interests of the new entity. In exchange for our membership interests in the joint venture entity, in addition to the initial $1.0 million capital contribution, we currently anticipate that we will make
capital contributions of $1.0 million in the second quarter of 2014 and $2.0 million each on the first and second anniversaries of the closing date, respectively, with the latter two installments subject to the joint venture entitys
achievement of certain operational milestones agreed upon by the board of governors of the joint venture entity (the Milestones). In addition, on November 14, 2011, we granted Mayo 20,000 shares of common stock and as part of
the May 2013 amendment of the affiliation agreement, we granted to Mayo an additional 10,000 shares of common stock.
We also entered into a three-year
joint development intellectual property agreement with Mayo and the joint venture entity, pursuant to which we and Mayo will grant each other non-exclusive, non-transferable licenses to use certain intellectual property required for the performance
of statements of work to be issued under such agreement. Also pursuant to the joint development agreement, we, Mayo and the joint venture entity will agree that unless otherwise specified in the applicable statement of work any intellectual property
created by the joint venture entity shall be the property of the joint venture entity; however, the joint venture entity will grant us and Mayo licenses to commercialize such intellectual property in the form of diagnostic products and diagnostic
lab services, respectively, at prices to be determined by the board of governors of the joint venture entity. The joint development agreement further provides that the prior written consent of Mayo is required before we or the joint venture entity
can commercialize products or services that contain Mayos pre-existing property and that our prior written consent is required before Mayo or the joint venture entity can commercialize products or services that contain our pre-existing
property.
The board of governors will be advised by a six-member scientific review committee, which will also be composed of three members selected by us
and three members selected by Mayo. The affiliation agreement may be terminated by mutual consent of the parties or by the non-breaching party upon a material breach of the affiliation agreement that remains uncured for a period of 90 days.
North Shore-Long Island Jewish Health System
In
2007, we started working with Drs. Kanti Rai and Nicholas Chiorazzi at the Feinstein Institute for Medical Research at the North Shore-Long Island Jewish Health System. Drs. Rai and Chiorazzi are leading clinicians
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and scientists in the study of chronic lymphocytic leukemia (CLL) and have provided over 300 clinical specimens and associated clinical and laboratory data for panels of CLL
specimens that were used for clinical validation of MatBA
®
-CLL. We analyzed these samples at our clinical laboratory and published the resulting data jointly with Drs. Rai and Chiorazzi. We
will use the same samples for additional collaborative studies involving the search for additional genomic-based biomarkers of CLL. This collaboration is not governed by a formal written agreement.
Memorial Sloan-Kettering Cancer Center
We have
multiple research collaborations with Memorial Sloan-Kettering Cancer Center including
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In March 2008, we entered into a Biological Material Transfer Agreement with Memorial Sloan-Kettering Cancer Center, pursuant to which Dr. Victor Reuter at Memorial Sloan-Kettering Cancer Center provided us with
slides of cells of over 140 renal tumor
ex vivo
core biopsies. These samples were used for validation of our FReCaD assay to evaluate the ability of the FISH-based assay to classify renal cortical neoplasms. In this study, we calculated
the sensitivity and specificity of the core biopsy relative to that obtained by routine pathology of the core biopsy and the specimen proper. These studies are currently being written for joint publication.
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In October 2009, we entered into a Biological Material Transfer Agreement with Dr. Julie Teruya-Feldstein at Memorial Sloan-Kettering Cancer Center, whereby Dr. Teruya-Feldstein provided us with 1,000 lymphoma
specimens of varying histologies and with known clinical outcomes for clinical validations of MatBA
®
in all subtypes of mature B cell neoplasms. Dr. Teruya-Feldstein has provided cores of
FFPE tumor material spear-heading and providing justification for the use of this tissue type in array-CGH. We evaluate the genomic gain or loss using MatBA
®
at our clinical reference
laboratory and we are in the process of analyzing these specimens for clinical correlations. We will jointly publish the results of this collaboration with Dr. Teruya-Feldstein.
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In June 2009 and March 2010, we entered into separate Biological Material Transfer Agreements with Dr. Raju S.K. Chaganti of Memorial Sloan-Kettering Cancer Center. Pursuant to the June 2009 agreement,
Dr. Chaganti provided us with 50 follicular lymphoma and diffuse large B-cell lymphoma specimens. We used the specimens for purposes of validating a comparative genomic hybridization microarray-based assay in the diagnosis and prognosis of
mature B-cell neoplasms. Pursuant to the March 2010, agreement, Dr. Chaganti provided us with 30 DNA samples. We used the samples for purposes of validating a comparative genomic hybridization microarray-based assay in the diagnosis and
prognosis of genitourinary cancers.
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In January 2011, we entered into a Biological Material Transfer Agreement with Dr. Jonathan Coleman at Memorial Sloan-Kettering Cancer Center to evaluate FISH-based and array-CGH tests in the diagnosis of renal
mass aspirates/core biopsies. Dr. Coleman provided us with approximately 50 needle biopsy specimens. We will use the specimens to perform assays of prostate, bladder and kidney specimens using FReCaD and UroGenRA and compare the
classification with that obtained by routine pathology. Any resulting data could be prepared for joint publication.
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In January 2013, we entered in to a Biological Material Transfer Agreement with Dr. Jeremy Durack at Memorial Sloan Kettering cancer center to evaluate FISH-based and array based tests in the diagnosis of renal
Oncocytoma. We will use these specimens to perform our proprietary FReCaD
TM
and UroGenRA
TM
assays and compare the classification with that
obtained by routine pathology. Any resulting data could be prepared for joint publication.
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National Cancer Institute
In July 2009 and December 2009, we entered into Simple Letter Agreements for the Transfer of Materials with the National Cancer Institute and began our
collaboration with Dr. Nicolas Wentzensen at National Cancer Institute, an Institute of the National Institutes of Health, to interrogate the potential role of identification of host
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genomic abnormalities by FISH as a screening tool for the detection of HPV-associated pre-cancerous cells and cancerous cells. Dr. Wentzensen has provided us with liquid biopsy specimens for
analysis by FISH using the FHACT DNA-FISH probe. In our first project together, National Cancer Institute provided cervical liquid biopsy specimens and in later collaborations, National Cancer Institute provided anal liquid biopsy specimens.
We published a poster from the data generated as part of the collaboration at the 27
th
International Papillomavirus conference and clinical workshop held at Berlin, Germany in September 2011.
Kamineni Hospital
In November 2010, we began
collaborating with Dr. Annie Hasan at the Kamineni Hospital in Hyderabad, India, to evaluate the FHACT DNA-FISH Probe as a screening tool for the identification of pre-cancerous and cancerous cervical cells. In this collaboration, we
provide the FHACT DNA-FISH Probe to Dr. Hasans laboratory where the assay is performed on Pap smears obtained during routine health visits. We are analyzing the data from this collaboration jointly with Dr. Hasan and any
resulting publications will be jointly produced. We anticipate providing Dr. Hasan with FReCaD for use as a screening tool in renal cancers to be performed on specimens obtained in Kamineni Hospital. This collaboration is not governed by
a formal written agreement. Any resulting data from the collaboration could be prepared for joint publication.
University of Iowa Hospitals and
Clinics
In 2011, we entered into a Material Transfer Agreement with the University of Iowa Research Foundation, whereby Dr. Aaron Bossler
will provide specimens useful to our studies evaluating the FHACT assay in cervical liquid biopsy specimens with known HPV type and clinical follow-up. In this study, specimens will be sent to us for FISH-based assays and the data analyzed
jointly.
In February 2013, we entered into a biological transfer agreement with Dr. Sergei Syrbu, at University of Iowa for development and
validation of molecular Tests (LDT) to improve the diagnosis, prognosis and management of Diffuse large B-cell lymphoma (DLBCL). The specimens obtained will be used for further validation of our proprietary MatBA
®
- DLBCL array.
Hackensack University Medical Center
In May 2012, we entered into a biological material transfer agreement with Dr. Anthony Mato of the John Theurer Cancer Center at the Hackensack University
Medical center. Under this agreement Dr. Mato provided us with specimens for performing MatBA
®
- CLL array testing. The resulting data can be prepared for joint publication.
Cleveland Clinic
In May 2012, we entered into a
collaborative research agreement and non-exclusive license arrangement with Cleveland Clinic to start development around a renal cell carcinoma diagnostic focused on validating genomic biomarkers from DNA. In connection with this collaboration,
we issued 2,000 shares of our common stock to Cleveland Clinic. In this relationship we worked with Drs. Eric Klein and Magi Galluzzi at the Cleveland Clinic. Drs. Klein and Galluzzi are leading clinicians and scientists in the
study of renal and urogenital cancers and provided over 200 clinical specimens and associated clinical and laboratory data for the validation of our UroGenRA
TM
-Kidney microarray. We analyzed these
samples at our clinical laboratory and will have the opportunity to publish the resulting data jointly with Cleveland Clinic.
Stanford
University
Stanford University recently granted us a worldwide, non-exclusive license under U.S. Patent No. 7,622,253 and U.S. Patent
No. 7,332,280 directed to a method and an assay for the classification of diffuse large B-cell
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lymphoma (DLBCL) patients based on risk stratification and a predictive model for patient survival. The method and assay covered in these patents have been developed in the lab of Dr. Ronald
Levy, a pioneer researcher in the area of lymphoma. DLBCL is an aggressive form of non-Hodgkins lymphoma with estimated 10,000 deaths annually in the United States. A current method of prognostication for DLBCL is done by using the
International Prognostic Index score. However, a disadvantage to this method is that two individuals with an identical International Prognostic Index score can react differently to treatment thereby affecting their life expectancy and patient
survival. The licensed technology analyzes the expression of six genes by a real-time PCR methodology in conjunction with an algorithm. This method and assay is not currently available in a clinical lab setting to our knowledge. We believe that
developing and commercializing this licensed technology will allow us to provide a more accurate classification, stratification and prediction of the DLBCL patient population and also provide more personalized therapeutic options to this patient
population. This assay will be added to our growing menu of tests (IHC, mutation analysis, etc.) to be offered under our Complete DLBCL program.
Georgia Health Sciences University
In August
2012, we entered into a research collaboration agreement with Drs. Vamsi Kota and Ravindra Kolhe at Georgia Health Sciences University for the development of molecular testing to facilitate diagnosis, prognosis and management of DLBCL cancer
patients. The specimens provided by the investigators will be used for ABC-GCB subtype classification by immunohistochemistry to identify and further validate genomic biomarkers for DLBCL using the proprietary MatBA
®
- DLBCL array.
In September 2012, we entered into a biological material transfer agreement with
Dr. Ravindra Kolhe at Georgia Health Sciences University for validation of the proprietary FHACT
TM
probe in the diagnosis and disease management of head and neck squamous cell carcinoma
(HNSCC). Any data resulting from this collaboration could be prepared for joint publication.
Dana Farber
In April 2013, a research collaboration was initiated with Dr. Jennifer Brown of the Dana Farber Cancer Institute. Dr. Brown will analyze a
microarray dataset of over 100 CLL specimens for clinical validation of the CLL outcome scheme. In this research collaboration, there will be shared publication of results.
Scientific Advisory Board
Our Scientific Advisory Board
is comprised of preeminent scientists and physicians from the fields of cancer biology, cancer pathology, cancer medicine and molecular genetics. We have scientists and clinicians from leading cancer centers, including Memorial Sloan-Kettering
Cancer Center, Mt. Sinai and the Institute for Cancer Genetics at Columbia University. These distinguished scientists and clinicians help oversee and review the scientific innovation, integrity and clinical relevancy of our program. The board of
directors appoints members to the Scientific Advisory Board for terms of one year.
Competition
As a provider of genomic-based tests and services that provide personalized diagnostic and prognostic information for hematological, urogenital and
HPV-associated cancers, we rely extensively on our ability to combine research insights with high-quality, state-of-the art clinical laboratory testing. We believe that we compete principally on the basis of:
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our ability to address complex cancers that are currently difficult to prognose and challenging to predict treatment outcomes using currently available technologies;
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the ability of our proprietary tests and services to provide more information than existing tests with respect to the cancers we address;
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our ability to utilize a wide variety of sample types, accelerating the time-frame for clinical validation of our tests and allowing health care providers to readily integrate our tests into their established workflow;
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our ability to perform clinical studies using FFPE samples to either validate or develop novel insights for our proprietary programs;
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the quality of our services and our ability to collaborate with our customers on a consultative basis;
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our research and clinical collaborations with key academic and clinical study groups;
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the quality of our clinical reference laboratory, which enables consistent, comprehensive and reproducible results;
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the level of disease specific knowledge and customer service we provide, both to academic centers and community based health care professionals; and
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our workplace environment, recognized by being named #20 nationwide by The Scientist in Best Places to Work Industry, 2011, which increases our ability to attract both clinical and research talent.
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We believe that we compete favorably with respect to these factors, although we cannot assure you that we will be able to continue to do so
in the future or that new products or tests that perform better than our proprietary tests and services will be introduced. We believe that our continued success depends on our ability to:
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expand and enhance our MatBA
®
tests to provide clinically meaningful information in additional indications;
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continue to innovate and maintain scientifically advanced technology;
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successfully market and sell our proprietary tests in the United States;
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continue to obtain appropriate regulatory approvals in the United States and abroad;
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continue to validate our pipeline of microarray tests and DNA probes;
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continue to obtain positive reimbursement decisions from payors and from CMS;
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continue to enter into partnerships with local distributors and/or manufacturers to expand into emerging markets, including India, Mexico and Brazil;
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maintain existing and enter into new research and clinical collaborations with key academic and clinical study groups;
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continue to attract and retain skilled scientific and clinical personnel;
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obtain patents or other protection for our proprietary tests and services; and
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obtain and maintain our clinical reference laboratory accreditations and licenses.
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Our principal competition
comes from existing mainstream diagnostic methods that pathologists and oncologists use and have used for many years. It may be difficult to change the methods or behavior of the referring pathologists and oncologists to incorporate our molecular
diagnostic testing in their practices. In addition, companies offering capital equipment and kits or reagents to local pathology laboratories represent another source of potential competition. These kits are used directly by the pathologist, which
can facilitate adoption.
We also face competition from companies that offer products or have conducted research to profile genes, gene expression or
protein biomarkers in various cancers. In particular, Quest Diagnostics market arrays which are competitive to our MatBA
®
-CLL and
MatBA
®
-SLL arrays. Personalized genetic diagnostics is a new area of science, and we cannot predict what tests others will develop that may compete with or provide results superior to the
results we are able to achieve with the tests we develop. Our competitors include public companies such as
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NeoGenomics, Inc., Quest Diagnostics, Abbott Laboratories, Inc., Johnson & Johnson, Roche Molecular Systems, Inc., bioTheranostics, Inc. (part of the bioMérieux S.A.), Genomic
Health, Inc., Myriad Genetics, Inc., Qiagen N.V., Response Genetics, Inc., Rosetta Genomics Ltd., and Foundation Medicine, Inc., and many private companies. We expect that pharmaceutical and biopharmaceutical companies will increasingly focus
attention and resources on the personalized diagnostic sector as the potential and prevalence increases of molecularly targeted oncology therapies approved by FDA along with companion diagnostics. For example, FDA has recently approved two such
agentsXalkori crizotinib from Pfizer Inc. along with its companion anaplastic lymphoma kinase FISH test from Abbott Laboratories, Inc. and Zelboraf vemurafenib from Genentech USA Incorporated and Daiichi-Sankyo Inc. along with its companion
B-RAF kinase V600 mutation test from Roche Molecular Systems, Inc. These two recent FDA approvals are only the second and third instances ever of simultaneous approvals of a drug and companion diagnostic, the first being the 1998 approval of
Genentech, Inc.s Herceptin trastuzumab for HER2 positive breast cancer along with the HercepTest from partner Dako A/S. Our competitors may invent and commercialize technology platforms or tests that compete with ours.
With respect to our clinical laboratory services business we face competition from companies such as Genoptix, Inc. (a Novartis AG company), Clarient, Inc. (a
division of GE Healthcare, a unit of General Electric Company), Bio-Reference Laboratories, Inc. and Genzyme Genetics (a LabCorp Specialty Testing Group).
Additionally, projects related to cancer genomics have received increased government funding, both in the United States and internationally. As more
information regarding cancer genomics becomes available to the public, we anticipate that more products aimed at identifying targeted treatment options will be developed and that these products may compete with ours. In addition, competitors may
develop their own versions of our tests in countries where we did not apply for patents or where our patents have not issued and compete with us in those countries, including encouraging the use of their test by physicians or patients in other
countries.
Third-Party Suppliers and Manufacturers
We maintain control, validation and quality assurance over our DNA microarrays and probes. Our microarrays are designed in our facility by our scientists and
technicians using state of the art genomic mapping and analysis software. The specifications are sent to Agilent for final manufacturing. Agilent manufactures our microarrays under strict quality control and compliance with ISO 9001 and ISO 13485 at
its Santa Clara, California facility. Agilent also has another manufacturing facility in Europe that can be made available for microarray printing. Upon manufacturing our custom, proprietary microarrays, Agilent ships them back to our Rutherford
facility for testing and acceptance.
The DNA component of our DNA FISH probes is produced under strict adherence to regulatory procedures in our
Rutherford facility and also at a third party facility depending on demand and workflow. The DNA is shipped for final manufacture to our partner in India. In February 2012 we entered in to an agreement with Kamineni Life Sciences to supply
outsourced manufacturing for the production of our DNA FISH probes. The manufacturing operations became fully operational in India in the fourth quarter of 2012 and several batches of DNA FISH probes have been successfully manufactured. We control
overall quality and process management and the final quality assurance in a manner that is CE compliant and adheres to our Quality Management System.
Patents and Proprietary Technology
Our business is
dependent upon our ability to develop and protect proprietary tests that enable oncologists and pathologists at hospitals, cancer centers, and physician offices to properly diagnose and inform cancer treatment. We rely on a combination of patents,
patent applications, trademarks, trademark applications, trade secrets, industry know-how, as well as various contractual arrangements, in order to protect the proprietary aspects of our technology.
Our patent portfolio consists of five issued U.S. patents and several pending U.S. and foreign applications. These patents and patent applications are related
to various DNA-based probes and microarrays designed for detecting
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and correlating certain chromosomal markers associated with particular types of cancers. As of the date of this filing, we have five issued U.S. Utility Patents (U.S. Patent Nos. 7,585,964,
7,964,345, 8,557,747, 8,580,713, and 8,603,948), which cover our probe and microarray technologies.
U.S. Patent Nos. 7,585,964 and 7,964,345 cover probes
and methodologies designed to detect and analyze particular chromosomal translocations (genetic lesions) associated with a wide range of cancers using a technique known as FISH and serve as the backbone for several of our other pending patent
applications, which are more specifically geared towards other probes (and methodologies).
U.S. Patent Nos. 8,580,713 and 8,557,747 have recently issued
in the microarray space. These two patents and foreign PCT Application No. US2010/062295 are directed to a microarray for detecting (and distinguishing) particular types of mature B cell neoplasms present in typical non-Hodgkins lymphoma,
Hodgkins lymphoma and chronic lymphocytic leukemia. These patents and foreign application cover our trademarked MatBA
®
microarray and are directed to both the microarray itself as well
as associated methodologies designed to detect the particular type of mature B cell neoplasm present in a patient. These patents and foreign application also cover the use of computer-assisted means to facilitate and expedite that detection process.
The MatBA
®
patents issued from the first of our family of applications in the microarray space.
U.S. Patent No. 8,603,948 recently issued and is directed to a novel, highly sensitive, and specific probe panel which detects the type of renal cortical
neoplasm present in a biopsy sample. This patent covers a probe that permits diagnosis of the predominant subtypes of renal cortical neoplasms without the use of invasive methods and provides a molecular cytogenetic method for detecting and
analyzing the type of renal cortical neoplasm present in a renal biopsy sample. We recently filed U.S. Patent Application No. 14/078,726 which relates to this technology as well.
Moreover, we recently filed patent applications on a detection method and probe sets associated with HPV-associated cancers (US. Patent
Application Nos. 13/227,027 and 13/474,111). We are also working on several additional patent filings directed to our other microarrays, and we filed a patent application covering UroGenRA earlier this year (U.S. Patent Application
No. 61/765,768).
In addition to patents, we hold six U.S. registered trademarks, including a federal registration to CGI as well as five
U.S. trademark applications and one foreign trademark registration for certain of our proprietary tests and services. Our strategic use of distinctive trademarks has garnered increased name recognition and brand awareness for our tests and services
within the industry.
Through our clinical laboratory, we provide several clinical services that utilize our proprietary trade secrets. In particular, we
maintain trade secrets with respect to specimen accessioning, sample preparation, and certain aspects of cytogenetic analysis. All of our trade secrets are kept under strict confidence, and we take all reasonable steps, including the use of
non-disclosure agreements and confidentiality agreements, to ensure that our confidential information is not unlawfully disseminated. We also conduct training sessions on the importance of maintaining and protecting trade secrets with our scientific
staff and laboratory directors and supervisors.
In addition to our proprietary intellectual property, we entered into nonexclusive licenses with the
National Cancer Institute for the use of its intellectual property relating to a 3q marker and with Stanford University for use and development of a diagnostic assay and predictive model that has been granted two patents for the stratification and
risk prediction for DLBCL patients. Under the terms of the license, we are permitted to use the National Cancer Institutes proprietary intellectual property for use in our patent pending FHACT DNA probe, which is directed to the
diagnosis and prognosis of certain HPV-associated cancers.
Operations and Production Facilities
Our research and development laboratories and our diagnostic laboratories are located in our Rutherford, New Jersey headquarters.
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We work with electronic medical records providers to facilitate seamless communication between our laboratory and
the oncologist or pathologist at the test ordering site. Currently, we have the ability to integrate with electronic medical record systems, as we have already done with MDL, an electronic medical record provider. We do this integration through
utilizing HL7 interfaces, which are standard in health care information technology systems. We currently employ HL7 for its integration with a revenue cycle management company, Xifin, as well as with its electronic medical records partners such as
MDL. The use of the HL7 interface allows systems written in different languages and running on different platforms to be able to talk to each other through the use of an abstracted data layer. This means that we do not have to spend significant
extra time, often months, designing and developing common communications protocols when integrating with other electronic health records systems or billing systems providers.
When a customer takes a specimen from a patient for diagnostic testing, he or she will complete a requisition form (either by hand or electronically, or via
electronic medical records technology), and package the specimen for shipment to us. Once we receive the specimen at our laboratory and we enter all pertinent information about the specimen into our clinical laboratory information system, one of our
histotechnologists, cytotechnologists, flow technologists or molecular technologists prepares the specimen for diagnosis. The prepared specimen is sent to one of our pathologists or directors who is experienced in making the diagnosis requested by
the referring oncologist or pathologist.
After diagnosis, our pathologist uses our laboratory information systems to prepare a comprehensive report,
which includes any relevant images associated with the specimen. Our reporting portal, cgireports.com, allows a referring oncologist or pathologist to access his/her test results in real time in a secure HIPAA compliant manner. The reports are
generated in industry standard PDF formats which allows for high definition color images to be reproduced clearly. This portal has been fully operational at our facilities for over the past eight quarters.
In most cases we provide both the technical analysis and professional diagnosis, although we also fulfill requests from oncologists and pathologists for only
one service or the other. If an oncologist or pathologist at the hospital, cancer center, reference laboratory or physician office requires only the analysis, we prepare the data and then return it to the referring oncologist or pathologist for
assessment and diagnosis.
Quality Assurance
Clinical Lab Services
We are committed to
providing reliable and accurate diagnostic services to our customers. Accurate specimen identification, timely communication of diagnoses, and prompt correction of errors, is critical. We monitor and improve our performance through a variety of
methods, including performance improvement indicators, proficiency testing (CAP and New York State), external audits and satisfaction surveys. All quality concerns and incidents are subject to root cause analysis and our procedures are put
through annual evaluation to ensure that we are providing the best services possible to our patients and customers. Protection of patient results from misuse and improper access is imperative and thus electronic and paper results are guarded via
password-protection and identification cards.
We have established a comprehensive Quality Assurance and Management Program for our laboratory designed to
drive accurate and timely test results and to ensure the consistent high quality of our testing services. The Quality Assurance and Management Program documents the quality assurance/performance improvement plans and policies and the laboratory
quality assurance and quality control procedures that are necessary to ensure that we offer the highest quality of diagnostic testing services. This program is designed to satisfy all the requirements necessary for local and state licensures by the
New Jersey Health Department and the New York Department of Health Clinical Laboratory Evaluation Program and accreditation for clinical diagnostic laboratories by CAP. We follow the policies and procedures for patient and employee safety,
hazardous waste disposal and fire codes stated in the general laboratory procedure manual. We believe that all pertinent
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regulations of CLIA, Occupational Safety and Health Administration (OSHA), Environmental Protection Agency and FDA are satisfied by following the established guidelines and procedures
of our Quality Assurance and Management Program.
In addition to the compulsory proficiency programs and external inspections required by CMS and other
regulatory agencies, we have developed a variety of internal systems and procedures to emphasize, monitor and continuously improve the quality of our operations. We maintain internal quality controls by routinely processing specimens with known
diagnoses in parallel with patient specimens. We also have an extensive, internally administered program of specimen proficiency testing, in which our laboratory staff are blinded to the results.
We participate in numerous externally administered quality surveillance programs and our laboratory is accredited by CAP. The CAP accreditation program
involves both unannounced on-site inspections of our laboratories and our participation in CAPs ongoing proficiency testing program. CAP is an independent, non-governmental organization of board-certified pathologists that accredits
laboratories nationwide on a voluntary basis and that has been recognized by CMS as an accreditation organization to inspect laboratories to determine adherence to the CLIA standards. Successful participation in CAPs proficiency testing
program satisfies the CLIA requirement for participation in proficiency testing programs administered by an external source.
Microarrays
We test each lot of microarrays that are manufactured for us by Agilent and maintain a log of all the hybridizations. We also have an extensive
process of testing the hybridization results and comparing them to prior lots to ensure consistency and to review for potential changes. Any changes or results that are not consistent with expectations are logged and then immediately reviewed by our
team, including the Vice President of Research & Development. In cases where a manufacturing problem is suspected, we immediately review the entire lot and prepare the results for review with Agilent.
FISH-based DNA Probes
We are committed to the
highest level of quality in the development and manufacture of fluorescently-labeled DNA intended to compose our DNA-FISH probes. Our probes are manufactured to meet or exceed all established quality and performance specifications, and comply with
relevant safety and regulatory requirements as defined in the European In Vitro Diagnostic Directive in order to qualify them for CE marking.
On behalf
of our subsidiary, CGI Italia, we have created and implemented a Quality Management System applicable throughout the entire life cycle of our DNA-FISH probes. This Quality Management System maintains control over the quality of the goods
manufactured by us or third parties employed by us and services provided to CGI Italia. This system addresseswithin other proceduresthe organizational structure, manufacturing process and related responsibilities, the systematic quality
assurance and quality control of production, the means to monitor the performance of the quality system (internal/external audit) and the post-production vigilance.
Third-party Payor Reimbursement
Revenues from our
clinical laboratory tests are derived from several different sources. Depending on the billing arrangement and applicable law, parties that reimburse us for our services include:
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third-party payors that provide coverage to the patient, such as an insurance company, managed care organization or a governmental payor program;
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physicians or other authorized parties (such as hospitals or independent laboratories) that order the testing service or otherwise refer the services to us; or
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For the year ended December 31, 2013, we derived approximately 21% of our total revenue from private
insurance, including managed care organizations and other health care insurance providers, 13% from Medicare, 58% from direct-bill (including clinical trial) customers, including hospitals and other laboratories, and approximately 8% government
grants and DNA probes.
Where there is a coverage policy, contract or agreement in place, we bill the third-party payor, the hospital or referring
laboratory as well as the patient (for deductibles and coinsurance or copayments, where applicable) in accordance with the policy or contractual terms. Where there is no coverage policy, contract or agreement in place, we pursue reimbursement on
behalf of each patient on a case-by-case basis and rely on applicable billing standards to guide our claims.
We are reimbursed for three
categories of tests: (1) genetic and molecular testing; (2) anatomic pathology and IHC and (3) general immunology and flow cytometry. Reimbursement under the Medicare program for the diagnostic services that we offer is based on
either the Medicare Physician Fee Schedule or Medicare Clinical Laboratory Fee Schedule, each of which in turn is subject to geographic adjustments and is updated annually. Medical services provided to Medicare beneficiaries that require a degree of
physician supervision or other involvement, such as pathology tests, are generally reimbursed under the Medicare Physician Fee Schedule, whereas clinical diagnostic laboratory tests are generally reimbursed under the Clinical Laboratory Fee
Schedule. Most of the services that we provide are for genetic and molecular testing, which are reimbursed as clinical diagnostic laboratory tests.
Medicare fee schedule amounts are established for each billing code, or CPT code. In addition, for its laboratory fee schedule, Medicare also sets a cap on
the amount that it will pay for any individual test. This cap, usually referred to as the National Limitation Amount, is set at a percentage of the median of all the contractor fee schedule amounts for each billing code. In the past, Congress has
lowered the percentage of the median used to calculate the National Limitation Amount in order to achieve budget savings. Currently, the National Limitation Amount ceiling is set at 74% of the median for established tests and 100% of the median for
certain new tests that were not previously reimbursed. In billing Medicare for clinical laboratory services, we are required to accept, as payment in full, the lowest of our actual charge, the fee schedule amount for the state or local geographical
area or the National Limitation Amount.
Medicare also has policies that may limit when we can bill directly for our services and when we must instead
bill another provider, such as a hospital. When the testing that we perform is done on a specimen that was collected while the patient was in the hospital, as either an inpatient or outpatient, we may be required to bill the hospital for our
services, rather than the Medicare program, depending on whether or not the service was ordered more than 14 days after the patients discharge from the hospital. These requirements are complex and time-consuming and, depending on what they
require, may affect our ability to collect for our services.
Our reimbursement rates can vary based on whether we are considered to be an
in-network provider, a participating provider, a covered provider or an out-of-network provider. These definitions can vary from insurance company to insurance company, but we are generally considered an out of
network or non-participating provider in the vast majority of our cases. It is not unusual for a company that offers highly specialized or unique testing to be an out of network provider. An in-network provider usually
has a contracted arrangement with the insurance company or benefits provider. This contract governs, among other things, service-level agreements and reimbursement rates. In certain instances an insurance company may negotiate an
in-network rate for our testing rather than pay the typical out-of-network rate. An in-network provider usually has rates that are lower per test than those that are out-of-network, and that rate can
vary from a single digit percentage deduction discount to upwards of 25% to 30% lower than an out-of-network provider. The discount rate varies based on the insurance company, the testing type and the often times the specifics of the
patients insurance plan.
30
In May 2013 we entered into an agreement with Multiplan, Inc., a leading provider of healthcare cost management
solutions, which we believe will help us improve reimbursement rates and shorten our collection times. We intend to seek similar arrangements with other health cost care managers and insurance companies.
In addition, as part of the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA), signed into law by the President on February 22,
2012, Congress extended the special billing rule that also allowed laboratories to bill Medicare for the technical component of certain pathology services furnished to patients of qualifying hospitals. Effective July 1, 2012, independent
laboratories, like our laboratory, are required to bill for the technical component of these services in most instances.
Billing Codes for Third-party
Payor Reimbursement
CPT codes are the main data code set used by physicians, hospitals, laboratories and other health care professionals to report
separately-payable clinical laboratory tests for reimbursement purposes. The CPT coding system is maintained and updated on an annual basis by the American Medical Association. Although there is no specific code to report microarrays for oncology,
such as our MatBA
®
-CLL, there are existing codes that describe all of the steps in our MatBA
®
-CLL testing process. We currently use a
combination of different codes to describe the various steps in our testing process. Many of the CPT codes used to bill for molecular pathology tests such as ours have been significantly revised by the CPT Code Editorial Panel. These new codes
replace the more general stacking codes that were previously used to bill for these services with more test-specific codes, which became effective January 2013. In the Final Physician Fee Schedule Rule, which was issued in November 2012,
CMS stated that it had determined it would pay for the new codes as clinical laboratory tests, which are payable on the Clinical Laboratory Fee Schedule (CLFS). CMS also stated that it plans to gapfill the new codes; that is, it will ask
the contractors to determine a reasonable price for the new codes.
Among the new codes that were created by CPT were a specific subset of codes called
Multi-analyte Assays with Algorithmic Analysis (MAAAs). These tests typically use an algorithm applied to certain specific components to arrive at a score that is used to predict a particular clinical outcome. CMS recently stated that it will not
pay for some of these new codes, because it does not believe it is permitted to pay for the underlying algorithm. Instead, it will pay for only for the specific laboratory components that are performed as part of these tests. CMS also stated it has
plans to seek additional information about these codes next year. It is not clear what position CMS will finally decide to take on the MAAA tests, but its decision could adversely affect future reimbursement for such tests, including those we may
develop. Currently less than 10% of our revenue is derived from tests that may be considered MAAAs.
These changes in coding and reimbursement methods
could have an adverse impact on our revenues going forward. However, we are currently working with our billing consultants to determine what changes will be required by the new coding changes. The elimination of the stacking codes
requires us to either use the new more specific codes where applicable effective January 1, 2013, or to use other Not Otherwise Classified (NOC) codes when billing for some of our tests. The implementation of these new codes will
vary from payer to payer and it is too early to assess the impact, if any, that the migration to the new codes may have on our results of operations. If CMS decides not to reimburse for the algorithm included in the MAAA tests, then we would only be
able to bill Medicare for the specific genetic examinations that we perform, without the algorithms. The introduction of the new codes, in combination with the other action being considered by CMS with regard to pricing, could result in a reduction
in the payment that we receive for our tests and make it more difficult to obtain coverage from Medicare or other payers. There can be no guarantees that Medicare and other payers will establish positive or adequate coverage policies or
reimbursement rates. We are moving forward with plans to obtain billing codes for our tests. A specific code for our tests, however, does not assure an adequate coverage policy or reimbursement rate. Please see the section entitled Legislative
and Regulatory Changes Impacting Clinical Laboratory Tests for further discussion of certain legislative and regulatory changes to these billing codes and the impact on our business.
31
Coverage and Reimbursement for Our Microarray Tests
Although MatBA
®
is a relatively new test, some third-party payors have established coverage and
reimbursement policies set for other microarray-based tests. We have been able to receive reimbursement for our tests from some payors based on their established policies, including major commercial third-party payors.
The current landscape with payors is generally as follows:
Commercial Third-party Payors and Patient Pay
. Where there is a coverage policy in place, we bill the payor and the patient in accordance with the
established policy. Where there is no coverage policy in place, we pursue reimbursement on behalf of each patient on a case-by-case basis. Our efforts in obtaining reimbursement based on individual claims, including pursuing appeals or
reconsiderations of claims denials, take a substantial amount of time, and bills may not be paid for many months, if at all. Furthermore, if a third-party payor denies coverage after final appeal, payment may not be received at all. We are working
to decrease risks of nonpayment by implementing a revenue cycle management system.
Medicare and Medicaid
. We believe that as much as 30% to 40% of
our future market for our tests may be derived from patients covered by Medicare and Medicaid.
We cannot predict whether, or under what circumstances,
payors will reimburse our microarray tests. Payment amounts can also vary across individual policies. Denial of coverage by payors, or reimbursement at inadequate levels, would have a material adverse impact on market acceptance of our tests.
Legislative and Regulatory Changes Impacting Clinical Laboratory Tests
From time to time, Congress has revised the Medicare statute and the formulas it establishes for both the Medicare Clinical Laboratory Fee Schedule and the
Physician Fee Schedule. The payment amounts under the Medicare fee schedules are important not only for our reimbursement under Medicare, but also because the schedule often is used as a basis for establishing the payment amounts set by other third
party payors. For example, state Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients.
Under the statutory formula for clinical laboratory fee schedule amounts, increases are made annually based on the Consumer Price Index for All Urban
Consumers as of June 30 for the previous twelve-month period. From 2004 through 2008, Congress eliminated the Consumer Price Index for All Urban Consumers update in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. In
addition, for years 2009 through 2013, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) mandated a 0.5% cut to the Consumer Price Index for All Urban Consumers. Accordingly, the update for 2009 was reduced to 4.5%
and negative 1.9% for 2010. In March 2010, the President signed into law PPACA, which, among other things, imposed additional cuts to the Medicare reimbursement for clinical laboratories. The PPACA replaced the 0.5% cut enacted by MIPPA with a
productivity adjustment that will reduce the Consumer Price Index update in payments for clinical laboratory tests. In 2011, the productivity adjustment was -1.2%. In addition, the PPACA includes a separate 1.75% reduction in the CPI
update for clinical laboratories for the years 2011 through 2015. On February 22, 2012, President Obama signed the MCTRJCA, which mandated an additional change in reimbursement for clinical laboratory services payments. This legislation
requires CMS to reduce the Medicare clinical laboratory fee schedule by 2% in 2013, which in turn will serve as a base for 2014 and subsequent years. Based on the changes required by PPACA and MCTRJCA, payment for clinical laboratory services will
be reduced by approximately 0.8% for 2014.
With respect to our diagnostic services for which we are reimbursed under the Medicare Physician Fee Schedule,
because of the statutory formula, the Sustainable Growth Rate (SGR), the rates would have decreased for the past several years if Congress failed to intervene. In the past, when the application of the statutory formula resulted in lower
payment, Congress has passed interim legislation to prevent the reductions. On November 1, 2012, the Centers for Medicare & Medicaid Services (CMS) issued its 2013 Physician Fee Schedule Final Rule
32
(the Final Rule). In the Final Rule, CMS called for a reduction of approximately 26.5% in the 2013 conversion factor that is used to calculate physician reimbursement. However, the
American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, prevented this proposed reduction and kept the existing reimbursement rate in effect until December 31, 2013.
For 2014, CMS projected the cut would be about 24%, unless Congress acted. However, on December 18, 2013, Congress passed legislation that enacted a 0.5%
update in the conversion factor, which will be effective until March 31, 2014. Currently, Congress is considering a long-term fix to the SGR, which could eliminate the need for annual Congressional action. At this time, it is impossible to know
how likely Congress is to act or what the impact will be of its actions, if any, on CGI. If Congress fails to act before March 31, 2014, or if it does not enact a long-term solution to the SGR, then the resulting decrease in payment could
adversely impact our revenues and results of operations.
In addition to the reductions described above, our Medicare payments under both the CLFS and the
PFS are also subject to an additional 2% reduction, as a result of sequestration. This automatic cut results because the Joint Select Committee on Deficit Reduction, which was created by congress in 2011, was unable to agree on a set of
deficit reduction recommendations for Congress to vote on. The reduction is scheduled to continue until 2023.
For the year ended December 31, 2013
and the year ended December 31, 2012, approximately 13% and 18%, respectively, of our total revenues are derived from Medicare generally and any changes to the physician fee schedule that result in a decrease in payment could adversely impact
our revenues and results of operations.
In addition, periodically CMS also changes its payment policies related to laboratory reimbursement in ways that
could have an impact on the revenues of the Company. For example, in 2013 Final Rule, CMS included a reduction of certain relative value units and geographic adjustment factors used to determine reimbursement for a number of commonly used pathology
codes, including CPTs 88300, 88302, 88304, and 88305. In particular, the 2013 Final Rule implemented a cut of approximately 33% in the global billing code for 88305 and a 52% cut in the Technical Component of that code. These codes describe services
that we must perform in connection with our tests and we bill for these codes in connection with the services that we provide. In the 2013 Final Rule, CMS also announced how it intended to set prices for the new molecular diagnostic tests, for which
the American Medical Association had adopted over 100 new codes. In that Rule, CMS announced it intended to continue to pay for the new molecular codes on the CLFS rather than move them to the Physician Fee Schedule, as some stakeholders had urged.
It would then request that the Medicare Administrative Contractors gapfill the new codes and set an appropriate price for them. That gapfilling process took place over 2013 and CMS announced the new prices for these codes in
September, 2013. The median of the prices set by the contractors will become the new prices for these codes, effective January 1, 2014. We do not yet know what impact, if any, these changes will have on the Companys operations.
In the Proposed Physician Fee Schedule Rule for 2014, issued on July 8, 2013, CMS made two proposals that could affect laboratory reimbursement. First,
CMS made a proposal to change how it calculates the RVUs used to calculate payments under the PFS. Under this proposal, where a service was paid at a lower rate in the hospital based on the hospital Outpatient Prospective Payment System (OPPS) than
it is under the PFS, CMS proposed to reduce the RVUs for that service in order to equalize the payment between the two systems. This change, if implemented, would have resulted in approximately a 25% cut in aggregate payments to independent
laboratories. In the Final Physician Rule for 2014, however, CMS chose not to implement this proposal, although it stated that it would develop a revised proposal that it would propose in the future. At this point, it is impossible to know what the
impact of such a proposal might be on the Company.
In addition, in the 2014 Proposed Rule, CMS also noted that payments for many codes paid under the
Clinical Laboratory Fee Schedule have not been revised to reflect technological advances that have occurred since the CLFS was first developed in 1984. CMS therefore proposed that it would begin to review all codes on the CLFS and adjust them to
reflect technological changes, a process that it expected would take about five years. CMS
33
stated that it could either increase or decrease payment levels based on this review, however, it expected that most payments were likely to decrease. CMS adopted this proposal in the Final 2014
Physician Fee Rule (the 2014 Final Rule); therefore, it is expected this review process will begin in 2014. We do not know what impact, if any, these changes may have on our business.
In addition, CMS made several other changes in the 2014 Final Rule that could impact our business. First, CMS implemented a policy that will bundle payment
for the examination of 10 or more prostate biopsies for an individual patient, rather than paying separately for each individual procedure as had been done previously. This will result in a significant reduction in reimbursement on each of these
procedures. In addition, CMS also has developed new codes applicable to billing for Immunohistochemistry procedures, which are a common staining procedure used in pathology. Those codes will reduce the reimbursement that we will receive when we
provide these services. Finally, CMS has also implemented a set of edits under its National Correct Coding Initiative, which will only pay for a single unit of service when we perform a FISH (Fluorescent In Situ Hybridization) test. As many FISH
tests require two or more probes, this change will also reduce the reimbursement received by the Company. We are still reviewing the provisions to determine the impact of these changes.
Further, with respect to the Medicare Program, Congress has proposed on several occasions to impose a 20% coinsurance on patients for clinical laboratory
tests reimbursed under the clinical laboratory fee schedule, which would require us to bill patients for these amounts. Because of the relatively low reimbursement for many clinical laboratory tests, in the event that Congress were to ever enact
such legislation, the cost of billing and collecting for these services would often exceed the amount actually received from the patient and effectively increase our costs of billing and collecting.
Finally, some of our Medicare claims may be subject to policies issued by Palmetto GBA, the current Medicare Administrative Contractor for California, Nevada,
Hawaii and certain U.S. territories. The Medicare contractor has recently issued a Local Coverage Decision that affects coverage, coding and billing of many molecular diagnostic tests. Under this Local Coverage Determination, Palmetto will not cover
any molecular diagnostic tests, including our tests, unless the test is expressly included in a National Coverage Determination issued by CMS or a Local Coverage Determination or coverage article issued by Palmetto. Currently, laboratory
providers may submit coverage determination requests to Palmetto for consideration and apply for a unique billing code for each test (which is a separate process from the coverage determination). In the event that a non-coverage determination
is issued, the laboratory must wait six months following the determination to submit a new request. In addition, effective May 1, 2012, Palmetto implemented its new Molecular Diagnostic Services Program, under which, among other things,
laboratories must use newly-assigned billing codes specific to the test. These new billing codes enable Palmetto to measure utilization and apply coverage determinations. Denial of coverage by Palmetto, or reimbursement at inadequate
levels, would have a material adverse impact on market acceptance of our tests.
Governmental Regulations
Clinical Laboratory Improvement Amendments of 1988 and State Regulation
As a diagnostic service provider, we are required to hold certain federal, state and local licenses, certifications and permits to conduct our business. As to
federal certifications, in 1988, Congress passed the Clinical Laboratory Improvement Amendments (CLIA) establishing quality standards for all laboratories testing to ensure the accuracy, reliability and timeliness of patient test results
regardless of where the test was performed. The Companys laboratory is CLIA accredited. As to state laws, we are required to meet certain laboratory licensing and other requirements. Our laboratory holds the required licenses and
accreditations obtained from the applicable state agencies in which we operate. For more information on state licensing requirements, see the sections entitled Description of the BusinessGovernment Regulations
New Jersey and New
York State Laboratory Licensing
and Description of the BusinessGovernment Regulations
Other States Laboratory Testing
.
34
Under CLIA, a laboratory is defined as any facility which performs laboratory testing on specimens derived from
humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of, or assessment of health. CLIA also requires that we hold a certificate applicable to the type of work we perform and comply
with certain standards. CLIA further regulates virtually all clinical laboratories by requiring they be accredited by the federal government and comply with various operational, personnel, facilities administration, quality and proficiency
requirements intended to ensure that their clinical laboratory testing services are accurate, reliable and timely. CLIA compliance and accreditation is also a prerequisite to be eligible to bill for services provided to governmental payor program
beneficiaries. CLIA is user-fee funded. Therefore, all costs of administering the program must be covered by the regulated facilities, including certification and survey costs.
We are subject to survey and inspection every two years to assess compliance with program standards, and may be subject to additional unannounced inspections.
Laboratories performing high complexity testing are required to meet more stringent requirements than laboratories performing less complex tests. In addition, a laboratory like ours that is certified as high complexity under CLIA may
obtain analyte specific reagents, which are used to develop diagnostic tests that are developed and validated for use in examinations the laboratory performs itself known as laboratory-developed tests (LDTs). Our laboratory is CLIA
accredited and under our CLIA accreditation, we were allowed to first use MatBA
®
-CLL in November 2010 and MatBA
®
-SLL in the first
quarter 2012.
In addition to CLIA requirements, we participate in the oversight program of the College of American Pathologists (CAP). Under
CMS requirements, accreditation by CAP is sufficient to satisfy the requirements of CLIA. Therefore, because we are accredited by CAP, we are deemed to also comply with CLIA. CLIA also provides that a state may adopt laboratory regulations that are
more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory schemes. State laws may require that laboratory personnel meet certain qualifications, specify certain quality
controls, or prescribe record maintenance requirements.
FDA
The U.S. Food and Drug Administration (FDA) regulates the sale or distribution, in interstate commerce, of medical devices under the Federal Food,
Drug, and Cosmetic Act (FDCA), including in vitro diagnostic test kits, reagents and instruments used to perform diagnostic testing. Such devices must undergo pre-market review by FDA prior to commercialization unless the device is of a
type exempted from such review by statute or pursuant to FDAs exercise of enforcement discretion. FDA, to date, has decided not to exercise its authority to actively regulate the development and use of LDTs such as ours as medical devices and
therefore we do not believe that our LDTs currently require pre-market clearance or approval. It is possible, perhaps likely, that FDA will decide to more actively enforce its regulations against all LDTs in the near term, which could lead to
pre-market and post-market regulatory obligations for the continued marketing of our tests.
Section 1143 of the Food and Drug Administration Safety
and Innovation Act, signed by the President on July 9, 2012, requires FDA to notify Congress at least 60 days prior to issuing a draft or final guidance regulating LDTS and provide details of the anticipated action. We are monitoring
developments and anticipate that our products (CGH-Microarrays and FISH Probes) will be able to comply with anticipated requirements. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. FDA
regulations pertaining to medical devices govern, among other things, the research, design, development, pre-clinical and clinical testing, manufacture, safety, efficacy, storage, record-keeping, packaging, labeling, adverse event reporting,
advertising, promotion, marketing, distribution and import and export of medical devices. Pursuant to the FDCA, medical devices are subject to varying degrees of regulatory control and are classified into one of three classes depending on the
controls FDA determines necessary to reasonably assure their safety and efficacy.
Class I devices are those for which reasonable assurance of the safety
and effectiveness can be provided by adherence to FDAs general regulatory controls for medical devices, which include compliance with the
35
applicable portions of FDAs Quality System Regulations, facility registration and product listing, reporting of adverse medical events and appropriate, truthful and non-misleading labeling,
advertising and promotional materials, or general controls. Many Class I devices are exempt from pre-market regulation, however, some Class I devices require pre-market clearance by FDA through the 510(k) pre-market notification process described
below.
Class II devices are subject to FDAs general controls, and any other special controls as deemed necessary by FDA to provide reasonable
assurance of the safety and effectiveness of the devices. Pre-market review and clearance by FDA for Class II devices are generally accomplished through the 510(k) pre-market notification procedure. Pre-market notification submissions are subject to
user fees, unless a specific exemption applies. To obtain 510(k) clearance for a medical device (or for certain modifications to devices that have received 510(k) clearance), a manufacturer must submit a pre-market notification demonstrating that
the proposed device is substantially equivalent to a previously cleared 510(k) device or to a pre-amendment device that was in commercial distribution before May 28, 1976 (a predicate device) for which FDA has not yet called for the
submission of a pre-market approval (PMA) application. In making a determination that the device is substantially equivalent to a predicate device, FDA compares the proposed device to the predicate device or predicate devices and
assesses whether the subject device is comparable to the predicate device or predicate devices with respect to intended use, technology, design and other features which could affect the safety and effectiveness. If FDA determines that the subject
device is substantially equivalent to the predicate device or predicate devices, the subject device may be cleared for marketing. FDAs 510(k) clearance pathway generally takes from three to twelve months from the date the application is
completed, but can take significantly longer. Moreover, in January 2011, FDA announced twenty-five specific action items it intended to take to improve transparency and predictability of the 510(k) program. We anticipate that the changes may also
result in additional requirements with which manufacturers will need to comply in order to obtain or maintain 510(k) clearance for their devices. These additional requirements could increase the costs or time for manufacturers seeking
marketing clearances through the 510(k) process. Moreover, the 510(k) process could result in a not-substantially equivalent determination, in which case the device would be regulated as a Class III device, discussed below, or could be eligible for
de novo
classification available for novel low and moderate risk devices. In the
de novo
process, FDA can classify a device into Class I or Class II based on a risk-based determination without the submission of a 510(k) or within 30
days after receipt of a not-substantially equivalent determination. In 2013, several assays and diagnostic tests received pre-market approval through the
de novo
process.
Class III devices are those devices which are deemed by FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, have a
new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device. Reasonable assurance of the safety and effectiveness of Class III devices cannot be assured solely by the general controls and
the other requirements described above. These devices are required to undergo the pre-market approval (PMA) process in which the manufacturer must demonstrate reasonable assurance of the safety and effectiveness of the device to
FDAs satisfaction. A PMA application must provide extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. Premarket
approval applications (and supplemental pre-market approval applications) are subject to significantly higher user fees than are 510(k) pre-market notifications. After approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling or its manufacturing process. The PMA process, including the gathering of clinical and nonclinical data and the submission to and review by FDA, can take several years.
A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA application. These trials generally require an
effective Investigational Device Exemption from FDA for a specified number of patients, unless the product is exempt from Investigational Device Exemption requirements or deemed a non-significant risk device eligible for more abbreviated
Investigational Device Exemption requirements. The Investigational Device Exemption application must be supported by appropriate data, such as
36
animal and laboratory testing results. Clinical trials may begin 30 days after the submission of the Investigational Device Exemption application unless FDA or the appropriate institutional
review boards at the clinical trial sites place the trial on clinical hold.
After a device is placed on the market, regardless of the classification or
pre-market pathway, it remains subject to significant regulatory requirements. Even if regulatory approval or clearance of a medical device is granted, FDA may impose limitations or restrictions on the uses and indications for which the device may
be labeled and promoted. Medical devices may be marketed only for the uses and indications for which they are cleared or approved. In 2013, FDA issued guidance for industry regarding appropriate labeling and distribution practices for in vitro
diagnostic products intended for research or investigational use only FDAs guidance cautions that labeling or distribution practices that conflict with research or investigational use (e.g., use in clinical diagnostic applications) could
subject products shipped with research or investigational use labeling to all applicable requirements of the FDCA as well as enforcement action. As a result of FDAs recent guidance, component suppliers for our LDTs may no longer be willing to
distribute components to our clinical laboratory. If this were to occur, we could not produce our LDTs.
Device manufacturers must also establish
registration and device listings with FDA. A medical device manufacturers manufacturing processes and those of its suppliers are required to comply with the applicable portions of the Quality Systems Regulations, which cover the methods and
documentation of the design, testing, production, processes, controls, quality assurance, labeling, packaging and shipping of medical devices. Domestic facility records and manufacturing processes are subject to periodic unscheduled inspections by
FDA. FDA also may inspect foreign facilities that export products to the United States.
Failure to comply with applicable regulatory requirements can
result in enforcement action by FDA, which may include any of the following sanctions: warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of current or future products, operating restrictions, partial suspension or
total shutdown of production, denial of 510(k) clearance or PMA applications for new products, or challenges to existing 510(k) clearances or PMA applications.
We believe that our LDTs and, should we reach that point, our in vitro diagnostic test kits, would likely be regulated as either Class II or Class III devices
should FDA lift its enforcement discretion for the category of LDTs in which we believe we currently fall. It is also possible under those circumstances that some may fall into one Class and some into the other. Accordingly, some level of premarket
revieweither a 510(k), PMA or
de novo
approvalwould likely be required for each test. While the data requirements are typically greater for Class III devices, the data required for Class II devices has increased, and it is likely
that some amount of clinical data (retrospective or prospective or both) would be required for either type of submission. FDA continues to review the adequacy of its 510(k) process. It is difficult to predict what changes may result, but it should
be assumed that any changes will increase, not decrease, the regulatory requirements.
Health Insurance Portability and Accountability Act, as
amended by the Health Information Technology for Economic and Clinical Health Act (HITECH)
Under the administrative simplification
provisions of HIPAA, as amended by HITECH, the United States Department of Health and Human Services has issued regulations which establish uniform standards governing the conduct of certain electronic health care transactions and protecting the
privacy and security of Protected Health Information used or disclosed by health care providers and other covered entities. For further discussion of HIPAA and the impact on our business, see the section entitled
Risk FactorsRisks
Related to Our BusinessWe are required to comply with laws governing the transmission, security and privacy of health information that require significant compliance costs, and any failure to comply with these laws could result in material
criminal and civil penalties.
37
Federal, State and Foreign Fraud and Abuse Laws
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in
return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under a governmental payor program. The definition of remuneration has been broadly interpreted to
include anything of value, including gifts, discounts, credit arrangements, payments of cash, waivers of co-payments, ownership interests and providing anything at less than its fair market value. Recognizing that the Anti-Kickback Statute is broad
and may technically prohibit many innocuous or beneficial arrangements within the health care industry, the U.S. Department of Health and Human Services has issued a series of regulatory safe harbors. These safe harbor regulations
set forth certain provisions, which, if met, will assure health care providers and other parties that they will not be prosecuted under the federal Anti- Kickback Statute. Although full compliance with these provisions ensures against prosecution
under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback
Statute will be pursued. For further discussion of the impact of federal and state health care fraud and abuse laws and regulations on our business, see the section entitled
Risk FactorsRisks Related to Our BusinessWe are
subject to federal and state health care fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully comply with such laws.
In addition to the administrative simplification regulations discussed above, HIPAA also created two new federal crimes: health care fraud and false
statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors. A violation of this statute is a felony and may
result in fines, imprisonment or exclusion from governmental payor programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making
any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from
governmental payor programs.
Finally, another development affecting the health care industry is the increased enforcement of the federal False Claims Act
and, in particular, actions brought pursuant to the False Claims Acts whistleblower or qui tam provisions. The 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 by a federal governmental payor program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the
defendant has defrauded the federal government by submitting a false claim to the federal government and permit such individuals to share in any amounts paid by the entity to the government in fines or settlement. In addition, various states have
enacted false claim laws analogous to the federal False Claims Act, although many of these state laws apply where a claim is submitted to any third-party payor and not merely a governmental payor program. When an entity is determined to have
violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties ranging from $5,500 to $11,000 for each false claim.
Additionally, in Europe various countries have adopted anti-bribery laws providing for severe consequences, in the form of criminal penalties and/or
significant fines, for individuals and/or companies committing a bribery offence. Violations of these anti-bribery laws, or allegations of such violations, could have a negative impact on our business, results of operations and reputation. For
instance, in the United Kingdom, under the new Bribery Act 2010, which went into effect in July 2011, a bribery occurs when a person offers, gives or promises to give a financial or other advantage to induce or reward another individual to
improperly perform certain functions or activities, including any function of a public nature. Bribery of foreign public officials also falls within the scope of the Bribery Act 2010. Under the new regime, an individual found in violation of the
Bribery Act of 2010, faces imprisonment of up to 10 years. In addition, the individual can be subject to an unlimited fine, as can commercial organizations for failure to prevent bribery.
38
Physician Referral Prohibitions
Under a federal law directed at self-referral, commonly known as the Stark Law, there are prohibitions, with certain exceptions, on
Medicare and Medicaid payments for laboratory tests referred by physicians who personally, or through a family member, have an investment or ownership interest in, or a compensation arrangement with, the clinical laboratory performing the tests. A
person who engages in a scheme to circumvent the Stark Laws referral prohibition may be fined up to $100,000 for each such arrangement or scheme. In addition, any person who presents or causes to be presented a claim to the Medicare or
Medicaid programs in violation of the Stark Law is subject to civil monetary penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed and possible exclusion from participation in federal governmental
payor programs. Bills submitted in violation of the Stark Law may not be paid by Medicare or Medicaid, and any person collecting any amounts with respect to any such prohibited bill is obligated to refund such amounts. Many states have comparable
laws that are not limited to Medicare and Medicaid referrals.
Corporate Practice of Medicine
Numerous states have enacted laws prohibiting business corporations, such as us, from practicing medicine and employing or engaging physicians to practice
medicine, generally referred to as the prohibition against the corporate practice of medicine. These laws are designed to prevent interference in the medical decision-making process by anyone who is not a licensed physician. Violation of these laws
may result in civil or criminal fines, as well as sanctions imposed against us and/or the professional through licensure proceedings.
New Jersey
and New York State Laboratory Licensing
Our laboratory is licensed and in good standing under both the New Jersey and the New York State
Departments of Health standards. Our current licenses permit us to receive specimens obtained in those states.
New Jersey and New York state laws and
regulations also establish standards for the day-to-day operations of clinical laboratories, including physical facility requirements and equipment and quality control. New York standards include proficiency testing requirements, even for a
laboratory not located in New York. In addition, the New York Department of Health separately approves certain LDTs offered in New York State. The Company has obtained the requisite approvals for its LDTs. If we are found to be out of compliance
with New Jersey or New York statutory or regulatory standards we may be subject to suspension, restriction or revocation of our laboratory license or assessed civil money penalties. A noncompliant laboratory may also be found guilty of a misdemeanor
under New Jersey and New York laws. A finding of noncompliance, therefore, may result in harm to our business.
Other States Laboratory
Testing
In addition to New York, several other states require the licensure of out-of-state laboratories that accept specimens from those states,
even though we are physically located in New Jersey. We have obtained licenses in these states and believe we are in compliance with their applicable licensing laws.
From time to time, other states may require out of state laboratories to obtain licensure in order to accept specimens from the state. If we identify any
other state with such requirements or if we are contacted by any other state advising us of such requirements, we intend to follow instructions from the state regulators as to how we should comply with such requirements.
Other Regulatory Requirements
Our laboratory is
subject to federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste and biohazardous waste, including chemical, biological agents and compounds,
39
blood and bone marrow samples and other human tissue. Typically, we use outside vendors who are contractually obligated to comply with applicable laws and regulations to dispose of such waste.
These vendors are licensed or otherwise qualified to handle and dispose of such waste.
OSHA has established extensive requirements relating to workplace
safety for health care employers, including requirements to develop and implement programs to protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposure through needle stick or similar penetrating injuries.
Segment and Geographical Information
We operate in one
reportable business segment and derive revenue from multiple countries, with 97%, 92% and 97% coming from the United States in fiscal year 2013, 2012, and 2011, respectively.
Employees
As of December 31, 2013, we had a total
of 61 full-time and 6 part-time employees, 43% of which hold graduate degrees including 15 doctorate degrees and 7 of which are engaged in full-time research and development activities. We plan to expand production, sales and marketing and our
research and development programs, and we plan to hire additional staff as these initiatives are implemented. None of our employees are represented by a labor union, and we consider our employee relations to be good. Our work place environment was
recognized by being #20 nationwide by The Scientist in Best Places to Work in Industry, 2011.
We were incorporated in the State of Delaware
on April 8, 1999 and our principal executive offices are located at 201 Route 17 North, 2
nd
Floor, Rutherford, New Jersey 07070. Our telephone number is (201) 528-9200 and our corporate
website address is
www.cancergenetics.com
. We include our website 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 website. The information on our website is not
incorporated by reference in this annual report on Form 10-K.
This annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments to those reports, as well as other documents we file with the U.S. Securities and Exchange Commission (SEC), are available free of charge through the Investors section of our website as soon as reasonably
practicable after such material is electronically filed with or furnished to the SEC. The public can obtain documents that we file with the SEC at
www.sec.gov
.
This report includes the following trademarks, service marks and trade names owned by us: MatBA
®,
UroGenRA FHACT, UGenRA, FReCaD, Expand Dx, Summation, Select One
®
, DLBCL Complete, Cervixcyte, Leuka, CGI
®
, CLL Complete
®
, and Empowering Personal Cancer Treatment
®
. These trademarks,
service marks and trade names are the property of Cancer Genetics, Inc. and its affiliates.
Risks Relating to Our Financial Condition and Capital Requirements
We are an early stage company with a history of net losses; we expect to incur net losses in the future, and we may never achieve sustained
profitability.
We have historically incurred substantial net losses. We incurred losses of $12.4 million, $6.7 million and $19.9 million for
fiscal years ended December 31, 2013, 2012 and 2011, respectively. From our inception in April 1999 through December 31, 2013, we had an accumulated deficit of $61.3 million. We expect our losses to continue as a result of ongoing research
and development expenses and increased sales and marketing costs. These losses have had, and will continue to have, an adverse effect on our working capital, total assets and stockholders equity. Because of the numerous risks and uncertainties
associated with our research, development and commercialization efforts, we are unable to predict when we will become profitable, and we may never become
40
profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then maintain profitability
would negatively affect our business, financial condition, results of operations and cash flows.
We may need to raise additional capital to repay
indebtedness, to fund our existing operations, to develop and commercialize new tests and technologies, and to expand our operations.
We may need
to raise additional financing to repay certain indebtedness and fund our current level of operations. We need capital to fund our capital contributions of up to $5.0 million to our joint venture with Mayo and to satisfy indebtedness of approximately
$6.0 million due to Wells Fargo Bank. We believe that our current cash will support our operations for 24 months. We may also need to raise additional capital to fund our existing operations. We can provide no assurances that any additional sources
of financing will be available to us on favorable terms, if at all, when needed. Our forecast of the period of time through which our current financial resources will be adequate to support our operations and the costs to support our general and
administrative, sales and marketing and research and development activities are forward-looking statements and involve risks and uncertainties.
Additional financing, which is not in place at this time, may be from the sale of equity or convertible or other debt securities in a public or private
offering, from an additional credit facility or strategic partnership coupled with an investment in us or a combination of both. We may be unable to raise sufficient additional financing on terms that are acceptable to us, if at all. Our failure to
raise additional capital and in sufficient amounts when needed may significantly impact our ability to expand our business. For further discussion of our liquidity requirements, see the section entitled Liquidity and Capital
ResourcesCapital Resources and Expenditure Requirements.
We may need to raise capital to repay indebtedness and to expand our business to
meet our long-term business objectives, including to:
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increase our sales and marketing efforts to drive market adoption and address competitive developments;
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fund development and marketing efforts of any future tests;
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further expand our clinical laboratory operations;
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expand our technologies into other types of cancer;
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acquire, license or invest in technologies;
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acquire or invest in complementary businesses or assets;
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fund our subsequent contributions of up to $5.0 million to our joint venture with Mayo if our joint venture with Mayo achieves certain operational milestones; and
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finance capital expenditures and general and administrative expenses.
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Our present and future funding
requirements will depend on many factors, including:
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our ability to achieve revenue growth;
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our rate of progress in establishing reimbursement arrangements with domestic and international
third-party
payors;
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the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts;
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our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for our microarray tests and probes;
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our rate of progress in, and cost of research and development activities associated with, products in research and early development;
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the effect of competing technological and market developments;
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costs related to international expansion; and
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the potential cost of and delays in test development as a result of any regulatory oversight applicable to our tests.
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The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders could
result. Any equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and
privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and
licensing arrangements, we might be required to relinquish significant rights to our technologies or tests, or grant licenses on terms that are not favorable to us.
The credit markets and the financial services industry have experienced a period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. These events have generally made equity and debt financing more difficult to obtain. Accordingly,
additional equity or debt financing might not be available on reasonable terms, if at all. If we cannot secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or
sales and marketing initiatives. In addition, we may have to work with a partner on one or more of our development programs, which could lower the economic value of those programs to us.
Risks Relating to Our Business and Strategy
If we
are unable to increase sales of our laboratory tests and services or to successfully develop and commercialize other proprietary tests, our revenues will be insufficient for us to achieve profitability.
We currently derive substantially all of our revenues from our laboratory testing services. We have recently begun offering our MatBA
®
-CLL, MatBA
®
-SLL, MatBA
®
-DLBCL,
MatBA
®
-MCL and UroGenRA-Kidney microarrays through our CLIA-accredited and state licensed laboratory. We also recently launched FHACT for use as a diagnostic tool for cervical
cancer in non-U.S. markets. We are in varying stages of research and development for other diagnostic tests that we may offer. If we are unable to increase sales of our laboratory tests and services or to successfully develop and commercialize other
diagnostic tests, we will not produce sufficient revenues to become profitable.
Our business depends on our ability to successfully develop and
commercialize novel cancer diagnostic tests and services, which is time consuming and complex, and our development efforts may fail.
Our current
business strategy focuses on discovering, developing and commercializing molecular diagnostic tests and services. We believe the success of our business depends on our ability to fully commercialize our existing diagnostic tests and services and to
develop and commercialize new diagnostic tests. We have multiple tests in development, but research, development and commercialization of diagnostic tests is time-consuming, uncertain and complex. Our current diagnostic test pipeline includes:
UroGenRA microarray, UGenRA microarray, FReCaD Renal Cancer Test, FHACT HPV-associated Cancer Test and expansion of the MatBA
®
microarray as a prognostic tool in FL.
Tests such as these, or any additional technologies that we may develop, may not succeed in reliably diagnosing or predicting the recurrence of cancers with the sensitivity and specificity necessary to be clinically useful, and thus may not succeed
commercially.
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In addition, prior to commercializing our diagnostic tests, we must undertake time-consuming and costly
development activities, sometimes including clinical studies, and obtain regulatory clearance or approval, which may be denied. This development process involves a high degree of risk, substantial expenditures and will occur over several years. Our
development efforts may fail for many reasons, including:
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failure of the tests at the research or development stage;
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difficulty in accessing archival tissue samples, especially tissue samples with known clinical results; or
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lack of clinical validation data to support the effectiveness of the test.
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Tests that appear promising in
early development may fail to be validated in subsequent studies, and even if we achieve positive results, we may ultimately fail to obtain the necessary regulatory clearances or approvals. There is substantial risk that our research and development
projects will not result in commercial tests, and that success in early clinical trials will not be replicated in later studies. At any point, we may abandon development of a test or be required to expend considerable resources repeating clinical
trials, which would adversely impact the timing for generating potential revenues from that test. In addition, as we develop tests, we will have to make significant investments in research, development and marketing resources. If a clinical
validation study of a particular test then fails to demonstrate the outlined goals of the study, we might choose to abandon the development of that test. Further, our ability to develop and launch diagnostic tests will likely depend on our receipt
of additional funding. If our discovery and development programs yield fewer commercial tests than we expect, we may be unable to execute our business plan, which may adversely affect our business, financial condition and results of operations.
We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could harm our operating results,
dilute our stockholders ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may
pursue acquisitions of businesses and assets. We also may pursue strategic alliances and joint ventures that leverage our core technology and industry experience to expand our offerings or distribution. For example, we entered into a joint venture
in May 2013 with Mayo Foundation for Education and Research. We have no experience with acquiring other companies and limited experience with forming strategic alliances and joint ventures. We may not be able to find suitable partners or acquisition
candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or
contingent liabilities. Any future acquisitions also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could have a material adverse effect on our financial condition, results of operations and
cash flows. Integration of an acquired company also may disrupt ongoing operations and require management resources that would otherwise focus on developing our existing business. We may experience losses related to investments in other companies,
which could have a material negative effect on our results of operations. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any
acquisition, technology license, strategic alliance or joint venture.
To finance any acquisitions or joint ventures, we may choose to issue shares of our
common stock as consideration, which would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.
Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.
Our agreement with Mayo may not proceed successfully.
In November 2011, we entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research, subsequently amended. Under the
agreement, we formed a joint venture in May 2013 to focus on
43
developing oncology diagnostic services and tests utilizing next generation sequencing and made an initial $1.0 million capital contribution to that joint venture in October 2013. The agreement
also requires additional capital contributions by us of up to $5.0 million over the next three years, with $4.0 million of such amount subject to the joint venture achieving certain operational milestones. The operation of the joint venture may also
divert management time from operating our business. No assurances can be given that we will be able to fully fund the joint venture agreement, or that, even if funded, the joint venture will ever achieve the research, development and commercial
objectives currently contemplated by the parties, such as the discovery and commercialization of new diagnostic tests utilizing next-generation sequencing. If the development efforts of the joint venture do not result in commercially successful
tests or services, it will have an adverse effect on our business, financial condition and results of operations.
If we are unable to obtain
regulatory clearance or approvals in the United States, if we experience delays in receiving clearance or approvals, or if we do not gain acceptance from other laboratories of any cleared or approved diagnostic tests at their facilities, our growth
strategy may not be successful.
We currently offer our proprietary tests in conjunction with our comprehensive panel of laboratory services in our
CLIA-accredited laboratory. Because we currently offer these tests and services solely for use within our laboratory, we believe we may market the tests as LDTs. Under current FDA enforcement policies and guidance, LDTs generally do not require FDA
premarket clearance or approval before commercialization, and we have marketed our LDTs on that basis. However, an element of our long-term strategy is to place molecular diagnostic tests on-site with other laboratories to broaden access to our
technology and increase demand for our tests and any future diagnostic tests that we may develop. FDA regulates diagnostic kits sold and distributed through interstate commerce as medical devices. Unless an exemption applies, generally, before a new
medical device or a new use for a medical device may be sold or distributed in the United States, the medical device must receive either FDA clearance of a 510(k) pre-market notification or pre-market approval. As a result, before we can market or
distribute our DNA probes or microarray tests in the United States for use by other clinical testing laboratories, we must first obtain pre-market clearance or pre-market approval from FDA. We have not yet applied for clearance or approval from FDA,
and need to complete additional validations before we are ready to apply. We believe it would likely take two years or more to conduct the studies and trials necessary to obtain approval from FDA to commercially launch any of our proprietary
products outside of our clinical laboratory. Once we do apply, we may not receive FDA clearance or approval for the commercial use of our tests on a timely basis, or at all. If we are unable to achieve clearance or approval or if clinical diagnostic
laboratories do not accept our tests, our ability to grow our business by deploying our tests could be compromised.
If we are unable to execute our
marketing strategy for our cancer diagnostic tests and are unable to gain acceptance in the market, we may be unable to generate sufficient revenue to sustain our business.
We are an early-stage company and have engaged in only limited sales and marketing activities for the diagnostic tests and services offered in our clinical
laboratory. To date, we have received very limited revenue from sales of our probes and microarrays. While we are in the process of launching several of our DNA probes outside of the United States, we have limited experience in marketing these
probes and we need to develop relationships with third-party distributors in the emerging market countries where we are targeting our selling efforts.
Although we believe that our diagnostic tests represent promising commercial opportunities, our tests may never gain significant acceptance in the marketplace
and therefore may never generate substantial revenue or profits for us. We will need to establish a market for our diagnostic tests and build that market through physician education and awareness programs. Gaining acceptance in medical communities
requires publication in leading peer-reviewed journals of results from studies using our tests. The process of publication in leading medical journals is subject to a peer review process and peer reviewers may not consider the results of our studies
sufficiently novel or worthy of publication. Failure to have our studies published in peer-reviewed journals would limit the adoption of our tests.
44
Our ability to successfully market the diagnostic tests that we may develop will depend on numerous factors,
including:
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whether healthcare providers believe our diagnostic tests provide clinical utility;
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whether the medical community accepts that our diagnostic tests are sufficiently sensitive and specific to be meaningful in patient care and treatment decisions; and
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whether health insurers, government health programs and other third-party payors will cover and pay for our diagnostic tests and, if so, whether they will adequately reimburse us.
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Failure to achieve widespread market acceptance of our diagnostic tests would materially harm our business, financial condition and results of operations.
If we cannot develop tests to keep pace with rapid advances in technology, medicine and science, our operating results and competitive position
could be harmed.
In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There are
several new cancer drugs under development that may increase patient survival time. There have also been advances in methods used to analyze very large amounts of genomic information. We must continuously develop new tests and enhance our existing
tests to keep pace with evolving standards of care. Our tests could become obsolete unless we continually innovate and expand them to demonstrate benefit in patients treated with new therapies. New cancer therapies typically have only a few years of
clinical data associated with them, which limits our ability to perform clinical studies and correlate sets of genes to a new treatments effectiveness. If we cannot adequately demonstrate the applicability of our tests to new treatments, sales
of our tests and services could decline, which would have a material adverse effect on our business, financial condition and results of operations.
If our tests do not continue to perform as expected, our operating results, reputation and business will suffer.
Our success depends on the markets confidence that we can continue to provide reliable, high-quality diagnostic tests. We believe that our customers are
likely to be particularly sensitive to test defects and errors. As a result, the failure of our tests or services to perform as expected would significantly impair our reputation and the public image of our tests and services, and we may be subject
to legal claims arising from any defects or errors.
We have indebtedness with restrictive covenants that limit our ability to obtain additional
debt financing and that requires us to restrict cash as collateral, which could have a material adverse effect on our financial condition, our ability to fund operations, and react to changes in our business.
As of December 31, 2013, we had indebtedness for borrowed money in the aggregate principal amount of $6.0 million due under a line of credit with Wells
Fargo. Substantially all of our assets, including our intellectual property, were pledged as collateral. In March 2014, we agreed in principle to re-negotiated terms of the line of credit. We anticipate that we will enter into an extension through
April 1, 2016 at a rate of interest equal to LIBOR plus 1.75%. Effective April 1, 2014, the pledge of all of our assets and intellectual property as well as the guarantee by Mr. Pappajohn will be released. Under the terms of the extension, we
will be required to restrict $6.0 million in cash as collateral. Additionally, we will be required to maintain limits on capital spending and are restricted as to the amount we may pledge as collateral for additional borrowings from any source. Our
debt and related covenants could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive position. For example, it could:
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require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing the availability of our cash flow from operations to fund working capital, capital expenditures or other
general corporate purposes;
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limit our flexibility in planning for, or reacting to, changes in our business and industry;
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place us at a disadvantage compared to competitors that may have proportionately less debt; and
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increase our cost of borrowing.
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We currently rely on a single third-party to produce our microarrays
and any problems experienced by this vendor could result in a delay or interruption in the supply of our microarrays to us until the problem is cured by such vendor or until we locate and qualify an alternative source of supply.
The design of our microarrays is currently optimized on a family of instruments referred to as the Agilent Microarray Platform, which is currently produced
solely by Agilent Technologies Inc. (Agilent). We currently purchase these components from Agilent under purchase orders and do not have a long-term contract with Agilent. If Agilent were to delay or stop producing our microarrays, or if
the prices Agilent charges us were to increase significantly, we would need to identify another supplier and optimize our microarrays on a new technology platform. We could experience delays in manufacturing the microarrays while finding another
acceptable supplier, which could impact our results of operations. The changes could also result in increased costs associated with migrating to the new technology platform and in increased manufacturing costs. Further, any prolonged disruption in
Agilents operations could have a significant negative impact on the supply of our microarrays.
If our sole laboratory facility becomes
damaged or inoperable, or we are required to vacate the facility, our ability to provide services and pursue our research and development efforts may be jeopardized.
We currently derive substantially all of our revenues from our laboratory testing services. We do not have any clinical reference laboratory facilities outside
of our facility in Rutherford, New Jersey. Our facilities and equipment could be harmed or rendered inoperable by natural or man-made disasters, including fire, flooding and power outages, which may render it difficult or impossible for us to
perform our tests or provide laboratory services for some period of time. The inability to perform our tests or the backlog of tests that could develop if our facility is inoperable for even a short period of time may result in the loss of customers
or harm to our reputation or relationships with collaborators, and we may be unable to regain those customers or repair our reputation in the future. Furthermore, our facilities and the equipment we use to perform our research and development work
could be costly and time-consuming to repair or replace.
Additionally, a key component of our research and development process involves using biological
samples and the resulting data sets and medical histories, as the basis for our diagnostic test development. In some cases, these samples are difficult to obtain. If the parts of our laboratory facility where we store these biological samples are
damaged or compromised, our ability to pursue our research and development projects, as well as our reputation, could be jeopardized. We carry insurance for damage to our property and the disruption of our business, but this insurance may not be
sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.
Further, if our laboratory
became inoperable we may not be able to license or transfer our proprietary technology to a third-party, with established state licensure and CLIA accreditation under the scope of which our diagnostic tests could be performed following validation
and other required procedures, to perform the tests. Even if we find a third-party with such qualifications to perform our tests, such party may not be willing to perform the tests for us on commercially reasonable terms.
If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenues or achieve and sustain profitability.
Our principal competition comes from the existing mainstream diagnostic methods that pathologists and oncologists use and have used for many
years. It may be difficult to change the methods or behavior of the referring pathologists and oncologists to incorporate our molecular diagnostic testing in their practices. We
46
believe that we can introduce our diagnostic tests successfully due to their clinical utility and the desire of pathologists and oncologists to find solutions for more accurate diagnosis,
prognosis and personalized treatment options for cancer patients.
We also face competition from companies that currently offer or are developing products
to profile genes, gene expression or protein biomarkers in various cancers. Personalized genetic diagnostics is a new area of science, and we cannot predict what tests others will develop that may compete with or provide results superior to the
results we are able to achieve with the tests we develop. Our competitors include public companies such as NeoGenomics, Inc., Quest Diagnostics, Abbott Laboratories, Inc., Johnson & Johnson, Roche Molecular Systems, Inc., bioTheranostics,
Inc. (part of bioMérieux SA), Genomic Health, Inc., Myriad Genetics Inc., Response Genetics, Inc., and Foundation Medicine, Inc., and many private companies. We expect that pharmaceutical and biopharmaceutical companies will increasingly
focus attention and resources on the personalized diagnostic sector as the potential and prevalence increases for molecularly targeted oncology therapies approved by FDA along with companion diagnostics. For example, FDA has recently approved two
such agentsXalkori crizotinib from Pfizer Inc. along with its companion anaplastic lymphoma kinase FISH test from Abbott Laboratories, Inc. and Zelboraf vemurafenib from Genentech USA Incorporated and Daiichi-Sankyo Inc. along with its
companion B-RAF kinase V600 mutation test from Roche Molecular Systems, Inc. These two recent FDA approvals are only the second and third instances of simultaneous approvals of a drug and companion diagnostic, the first being the 1998 approval of
Genentech, Inc.s Herceptin trastuzumab for HER2 positive breast cancer along with the HercepTest from partner Dako A/S.
With respect to our
clinical laboratory sciences business we face competition from companies such as Genoptix, Inc. (a Novartis AG Company), Clarient, Inc. (a division of GE Healthcare, a unit of General Electric Company), Bio-Reference Laboratories, Inc., and Genzyme
Genetics (a LabCorp Specialty Testing Group).
Many of our present and potential competitors have widespread brand recognition and substantially greater
financial and technical resources and development, production and marketing capabilities than we do. Others may develop lower-priced, less complex tests that payors, pathologists and oncologists could view as functionally equivalent to our tests,
which could force us to lower the list price of our tests and impact our operating margins and our ability to achieve profitability. In addition, technological innovations that result in the creation of enhanced diagnostic tools may enable other
clinical laboratories, hospitals, physicians or medical providers to provide specialized diagnostic services similar to ours in a more patient-friendly, efficient or cost-effective manner than is currently possible. If we cannot compete successfully
against current or future competitors, we may be unable to increase market acceptance and sales of our tests, which could prevent us from increasing or sustaining our revenues or achieving or sustaining profitability.
A small number of test ordering sites account for most of the sales of our tests and services. If any of these sites orders fewer tests from us for any
reason, our revenues could decline.
Due to the early stage nature of our business and our limited sales and marketing activities to date, we have
historically derived a significant portion of our revenue from a limited number of test ordering sites, although the test ordering sites that generate a significant portion of our revenue may change from period to period. Our test ordering sites are
largely hospitals, cancer centers, reference laboratories and physician offices, as well as biopharmaceutical companies as part of a clinical trial. Oncologists and pathologists at these sites order the tests on behalf of the needs of their oncology
patients or as part of a clinical trial sponsored by a biopharmaceutical company in which the patient is being enrolled. The top five test ordering sites during 2013, 2012 and 2011 accounted for 69%, 58% and 63% respectively, of our clinical testing
volumes, with 36%, 46% and 29% respectively, of the volume coming from community hospitals. During the year ended December 31, 2013, there was one site which accounted for more than 10% of our revenue: a clinical trial client accounted for
approximately 40% of our revenue. During the year ended December 31, 2012, there were three sites which each accounted for approximately 10% or more of our clinical revenue: a clinical trial client accounted for approximately 13%, a university
teaching center accounting for approximately 11%, and; a community hospital
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accounted for approximately 10%. During 2011, there were two sites which accounted for more than 10% of our revenue: a community hospital accounted for approximately 18% and a community oncology
practice accounted for approximately 11%. We generally do not have formal, long-term written agreements with such test ordering sites, and, as a result, we may lose these significant test ordering sites at any time.
We expect to continue to incur significant expenses to develop and market our diagnostic tests, which could make it difficult for us to achieve and
sustain profitability.
In recent years, we have incurred significant costs in connection with the development of our diagnostic tests. For the
year ended December 31, 2013, our research and development expenses were $2.2 million, which was 33% of our net revenues, and our sales and marketing expenses were $1.8 million, which was 28% of revenue. For the year ended December 31,
2012, our research and development expenses were $2.1 million, which was 49% of our revenue, and our sales and marketing expenses were $1.4 million, which was 33% of revenue. For the year ended December 31, 2011, our research and development
expenses were $2.1 million, which was 69% of our revenue and our sales and marketing expenses were $1.6 million, which was 52% of revenue. We expect our expenses to continue to increase, in absolute dollars, for the foreseeable future as we seek to
expand the clinical utility of our diagnostic tests, drive adoption of and reimbursement for our diagnostic tests and develop new tests. As a result, we will need to generate significant revenues in order to achieve sustained profitability.
If pathologists and oncologists decide not to order our diagnostic tests, we may be unable to generate sufficient revenue to sustain our business.
To generate demand for our molecular diagnostic tests and services, we will need to educate oncologists and pathologists on the clinical utility,
benefits and value of each type of test we provide through published papers, presentations at scientific conferences and one-on-one education sessions by members of our sales force. In addition, we will need to assure oncologists and pathologists of
our ability to obtain and maintain adequate reimbursement coverage from third-party payors. We may need to hire additional commercial, scientific, technical and other personnel to support this process. If we cannot convince medical practitioners to
order our diagnostic tests or other future tests we develop, we will likely be unable to create demand for our tests in sufficient volume for us to achieve sustained profitability.
We depend on certain collaborations with third parties for the supply of certain tissue samples and biological materials that we use in our research and
development efforts. If the costs of such collaborations increase or our third party collaborators terminate their relationship with us, our business may be materially harmed.
Under standard clinical practice in the United States, tumor biopsies removed from patients are chemically preserved, embedded in paraffin wax and stored. Our
clinical development relies on our ability to access these archived tumor biopsy samples, as well as information pertaining to their associated clinical outcomes. Other companies often compete with us for access. Additionally, the process of
negotiating access to archived samples is lengthy, because it typically involves numerous parties and approvals to resolve complex issues such as usage rights, institutional review board approval, privacy rights, publication rights, intellectual
property ownership and research parameters.
We have collaborative relationships with Memorial Sloan-Kettering Cancer Center, Mayo, North ShoreLong
Island Jewish Health System, the National Cancer Institute, the Cleveland Clinic and other institutions who provide us with tissue samples and other biological materials that we use in developing and validating our tests. We do not have any written
arrangement with certain third party collaborators, and in many of the cases in which the arrangements are in writing, our collaborative relationships are terminable on 30 days notice or less. If one or more collaborators terminate their
relationship with us, we will need to identify other third parties to provide us with tissue samples and biological materials, which could result in a delay in our research and development activities and negatively affect our business. In addition,
as we grow, our collaborators that are research and academic institutions will begin to seek additional financial contributions from us, which may negatively affect our results of operations.
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There is a scarcity of experienced professionals in our industry. If we are not able to retain and recruit
personnel with the requisite technical skills, we may be unable to successfully execute our business strategy.
The specialized nature of our
industry results in an inherent scarcity of experienced personnel in the field. Our future success depends upon our ability to attract and retain highly skilled personnel (including medical, scientific, technical, commercial, business, regulatory
and administrative personnel) necessary to support our anticipated growth, develop our business and perform certain contractual obligations. Given the scarcity of professionals with the scientific knowledge that we require and the competition for
qualified personnel among life science businesses, we may not succeed in attracting or retaining the personnel we require to continue and grow our operations. The loss of a key employee, the failure of a key employee to perform in his or her current
position or our inability to attract and retain skilled employees could result in our inability to continue to grow our business or to implement our business strategy.
Our inability to attract, hire and retain a sufficient number of qualified sales professionals would hamper our ability to increase demand for our
tests, to expand geographically and to successfully commercialize any other diagnostic tests or products we may develop.
Our success in selling
our clinical laboratory services, diagnostic tests and any other tests or products that we are able to develop will require us to expand our sales force in the United States and internationally by recruiting additional sales representatives with
extensive experience in oncology and close relationships with medical oncologists, surgeons, pathologists and other hospital personnel. To achieve our marketing and sales goals, we will need to substantially expand our sales and commercial
infrastructure, with which to date we have had little experience. Sales professionals with the necessary technical and business qualifications are in high demand, and there is a risk that we may be unable to attract, hire and retain the number of
sales professionals with the right qualifications, scientific backgrounds and relationships with decision-makers at potential customers needed to achieve our sales goals. We may face competition from other companies in our industry, some of whom are
much larger than us and who can pay greater compensation and benefits than we can, in seeking to attract and retain qualified sales and marketing employees. If we are unable to hire and retain qualified sales and marketing personnel, our business
will suffer.
International expansion of our business exposes us to business, regulatory, political, operational, financial and economic risks
associated with doing business outside of the United States.
Our business strategy incorporates international expansion, including establishing
and maintaining clinician marketing and education capabilities outside of the United States and expanding our relationships with distributors and manufacturers. Doing business internationally involves a number of risks, including:
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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;
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failure by us or our distributors to obtain regulatory approvals for the sale or use of our tests in various countries, including failure to achieve CE Marking, a conformity mark which is required to market
in vitro diagnostic medical devices in the European Economic Area and which is broadly accepted in other international markets;
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difficulties in managing foreign operations;
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complexities associated with managing multiple payor-reimbursement regimes or self-pay systems;
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logistics and regulations associated with shipping tissue samples, including infrastructure conditions and transportation delays;
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limits on our ability to penetrate international markets if our diagnostic tests cannot be processed by an appropriately qualified local laboratory;
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financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;
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reduced protection for intellectual property rights;
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natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and
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failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by maintaining accurate information and control over sales and distributors
activities.
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Any of these risks, if encountered, could significantly harm our future international expansion and operations and,
consequently, have a material adverse effect on our financial condition, results of operations and cash flows.
Our dependence on distributors for
foreign sales of our FISH-based DNA probes could limit or prevent us from selling our probes in foreign markets and from realizing long-term international revenue growth.
We intend to grow our business internationally, and to do so we must enter into agreements with local distributors to sell our FISH-based DNA probes. These
agreements generally contain exclusivity provisions and generally cannot be terminated without cause during the term of the agreement. We may need to attract additional distributors to expand the territories in which we sell our probes. These
distributors may not commit the necessary resources to market and sell our probes to the level of our expectations, and we may be unable to locate suitable alternatives should we terminate our agreement with such distributors or if such distributors
terminate their agreement with us. If current or future distributors do not perform adequately, or we are unable to locate distributors in particular geographic areas, we may not realize long-term international revenue growth.
Some of our contract manufacturers and distributors are located outside of the United States, which may subject us to increased complexity and costs.
We rely on manufacturing facilities located outside the United States for our probes, particularly in India. We also utilize distributors to sell
probes outside the United States. Our probe manufacturing and international sales may be subject to certain risks, including:
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difficulty in obtaining, maintaining or enforcing intellectual property rights in some countries;
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local business and cultural factors that differ from our normal standards and practices;
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foreign currency exchange fluctuations;
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different regulatory requirements;
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impediments to the flow of foreign exchange capital payments and receipts due to exchange controls instituted by certain foreign governments and the fact that local currencies of some countries are not freely
convertible;
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geopolitical and economic instability and military conflicts;
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difficulties in managing international distributors;
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burdens of complying with a variety of foreign laws and treaties and changes in local laws and regulations, including tax laws;
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difficulty in enforcing agreements, judgments and arbitration awards in foreign jurisdictions; and
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adverse economic conditions in any jurisdiction.
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If we were sued for product liability or professional liability, we could face substantial liabilities that
exceed our resources.
The marketing, sale and use of our tests could lead to the filing of product liability claims were someone to allege that
our tests failed to perform as designed. We may also be subject to liability for errors in the test results we provide to pathologists and oncologists or for a misunderstanding of, or inappropriate reliance upon, the information we provide. A
product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend.
Although we
believe that our existing product and professional liability insurance is adequate, our insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or
professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could damage our reputation, result
in the recall of our tests, or cause current clinical partners to terminate existing agreements and potential clinical partners to seek other partners, any of which could impact our results of operations.
If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.
Our activities currently require the controlled use of potentially harmful biological materials and hazardous materials and chemicals. We cannot eliminate the
risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability
could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject to, on an ongoing basis, federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with these laws and regulations may become significant and could have a material adverse effect on our financial condition, results of operations and cash flows. In the event of an accident or if we
otherwise fail to comply with applicable regulations, we could lose our permits or approvals or be held liable for damages or penalized with fines.
If we cannot support demand for our tests, including successfully managing the evolution of our technology and manufacturing platforms, our business
could suffer.
As our test volume grows, we will need to increase our testing capacity, implement increases in scale and related processing,
customer service, billing, collection and systems process improvements and expand our internal quality assurance program and technology to support testing on a larger scale. We will also need additional certified laboratory scientists and other
scientific and technical personnel to process these additional tests. Any increases in scale, related improvements and quality assurance may not be successfully implemented and appropriate personnel may not be available. As additional tests are
commercialized, we will need to bring new equipment on line, implement new systems, technology, controls and procedures and hire personnel with different qualifications. Failure to implement necessary procedures or to hire the necessary personnel
could result in a higher cost of processing or an inability to meet market demand. We cannot assure you that we will be able to perform tests on a timely basis at a level consistent with demand, that our efforts to scale our commercial operations
will not negatively affect the quality of our test results or that we will respond successfully to the growing complexity of our testing operations. If we encounter difficulty meeting market demand or quality standards for our tests, our reputation
could be harmed and our future prospects and business could suffer, which may have a material adverse effect on our financial condition, results of operations and cash flows.
We may encounter manufacturing problems or delays that could result in lost revenue.
We currently manufacture our proprietary DNA probes outside the United States at a third party fully compliant facility and intend to continue to manufacture
our probes outside the United States. We currently have limited
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manufacturing capacity for our probes. If demand for our probes increases significantly, we will need to either expand our manufacturing capabilities or outsource to other manufacturers. If we or
third party manufacturers engaged by us fail to manufacture and deliver our probes in a timely manner, our relationships with our customers could be seriously harmed. We cannot assure you that manufacturing or quality control problems will not arise
as we attempt to increase the production of our probes or that we can increase our manufacturing capabilities and maintain quality control in a timely manner or at commercially reasonable costs. If we cannot manufacture our probes consistently on a
timely basis because of these or other factors, it could have a significant negative impact on the supply of our DNA probes.
Declining general
economic or business conditions may have a negative impact on our business.
Continuing concerns over United States health care reform legislation
and energy costs, geopolitical issues, the availability and cost of credit and government stimulus programs in the United States and other countries have contributed to increased volatility and diminished expectations for the global economy. These
factors, combined with low business and consumer confidence and high unemployment, precipitated an economic slowdown and recession. If the economic climate does not improve or continues to deteriorate, our business, including our access to patient
samples and the addressable market for diagnostic tests that we may successfully develop, as well as the financial condition of our suppliers and our third-party payors, could be adversely affected, resulting in a negative impact on our business,
financial condition and results of operations.
We depend on our information technology and telecommunications systems, and any failure of these
systems could harm our business.
We depend on information technology and telecommunications systems for significant aspects of our operations. In
addition, our third-party billing and collections provider depends upon telecommunications and data systems provided by outside vendors and information we provide on a regular basis. These information technology and telecommunications systems
support a variety of functions, including test processing, sample tracking, quality control, customer service and support, billing and reimbursement, research and development activities and our general and administrative activities. Information
technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some
of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information
technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party service providers could prevent us from processing tests, providing test results
to pathologists, oncologists, billing payors, processing reimbursement appeals, handling patient or physician inquiries, conducting research and development activities and managing the administrative aspects of our business. Any disruption or loss
of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business.
Regulatory Risks Relating to Our Business
Healthcare policy changes, including recently enacted legislation reforming the U.S. health care system, may have a material adverse effect on our
financial condition, results of operations and cash flows.
In March 2010, U.S. President Barack Obama signed the Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, PPACA), which makes a number of substantial changes in the way health care is financed by both governmental and private insurers. Among other things,
the PPACA:
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Requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices, beginning in 2013. This tax may apply to some or all of our current products
and products which are in development.
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Mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule of 1.75% for the years 2011 through 2015. In addition, a productivity adjustment is made to the
fee schedule payment amount. These changes in payments apply to some or all of the clinical laboratory test services we furnish to Medicare beneficiaries.
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Establishes an Independent Payment Advisory Board to reduce the per capita rate of growth in Medicare spending. The Independent Payment Advisory Board has broad discretion to propose policies, which may have a negative
impact on payment rates for services, including clinical laboratory services, beginning in 2016, and for hospital services beginning in 2020.
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Although some of these provisions may negatively impact payment rates for clinical laboratory services, the PPACA also extends coverage to approximately
32 million previously uninsured people, which may result in an increase in the demand for our tests and services. The mandatory purchase of insurance has been strenuously opposed by a number of state governors, resulting in lawsuits challenging
the constitutionality of certain provisions of the PPACA. On June 28, 2012, the Supreme Court upheld the constitutionality of the health care reform law, with the exception of certain provisions dealing with the expansion of Medicaid coverage
under the law. Therefore, most of the laws provisions will go into effect in 2013 and 2014. Congress has also proposed a number of legislative initiatives, including possible repeal of the PPACA. At this time, it remains unclear whether there
will be any changes made to the PPACA, whether to certain provisions or its entirety.
In addition, other legislative changes have been proposed and
adopted since the PPACA was enacted. Recently, on August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in
spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislations automatic reduction to several government programs.
This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. The full impact on our business of the PPACA and the new law is uncertain. In addition, on February 22, 2012, the President
signed the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA), which, among other things, mandated an additional change in Medicare reimbursement for clinical laboratory services. This legislation requires a rebasing of the
Medicare clinical laboratory fee schedule to effect a 2% reduction in payment rates otherwise determined for 2013. This will serve as a base for 2014 and subsequent years. As a result of the changes mandated by PPACA and MCTRJCA, CMS projects
laboratory services for 2013 will be reduced by approximately 3%.
Certain of our laboratory services are paid under the Medicare Physician Fee Schedule
and, under the current statutory formula, the rates for these services are updated annually. For the past several years, the application of the statutory formula would have resulted in substantial payment reductions if Congress failed to intervene.
In the past, Congress passed interim legislation to prevent the decreases. On November 1, 2012, the Centers for Medicare & Medicaid Services (CMS) issued the Final Rule. In the Final Rule, CMS called for a reduction of approximately
26.5% in the 2013 conversion factor that is used to calculate physician reimbursement. However, the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, prevents this proposed cut and keeps the current
reimbursement rate in effect until December 31, 2013. If Congress fails to act in future years to offset similar proposed reductions, the resulting decrease in payment could adversely impact our revenues and results of operations.
In addition, many of the Current Procedure Terminology (CPT) procedure codes that we use to bill our tests were recently revised by the AMA,
effective January 1, 2013. In the Final Rule, CMS announced that it has decided to keep the new molecular codes on the Clinical Laboratory Fee Schedule (CLFS), rather than move them to the Physician Fee Schedule as some stakeholders had urged.
CMS has also announced that for 2013 it will price the new codes using a gapfilling process by which it will refer the codes to the Medicare contractors to allow them to determine an appropriate price. In addition, it has also stated
that it will not recognize certain of the new codes for Multi-analyte Assays for Algorithmic Assays (MAAAs) because it does not believe they
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qualify as clinical laboratory tests. Our reimbursement could be adversely affected by CMS action in this area. If it reduces reimbursement for the new test codes or does not pay for our
new MAAA codes, then our revenues will be adversely affected. There can be no guarantees that Medicare and other payers will establish positive or adequate coverage policies or reimbursement rates.
We cannot predict whether future health care initiatives will be implemented at the federal or state level, or how any future legislation or regulation may
affect us. The taxes imposed by the new federal legislation and the expansion of governments role in the U.S. health care industry as well as changes to the reimbursement amounts paid by payors for our products or our medical procedure volumes
may reduce our profits and have a materially adverse effect on our business, financial condition, results of operations and cash flows. Moreover, Congress has proposed on several occasions to impose a 20% coinsurance on patients for clinical
laboratory tests reimbursed under the clinical laboratory fee schedule, which would require us to bill patients for these amounts. Because of the relatively low reimbursement for many clinical laboratory tests, in the event that Congress were to
ever enact such legislation, the cost of billing and collecting for these services would often exceed the amount actually received from the patient and effectively increase our costs of billing and collecting.
Our commercial success could be compromised if third-party payors, including managed care organizations and Medicare, do not provide coverage and
reimbursement, breach, rescind or modify their contracts or reimbursement policies or delay payments for our molecular diagnostic tests.
Pathologists and oncologists may not order our molecular diagnostic tests unless third-party payors, such as managed care organizations and government payors
such as Medicare and Medicaid, pay a substantial portion of the test price. Coverage and reimbursement by a third-party payor may depend on a number of factors, including a payors determination that tests using our technologies are:
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not experimental or investigational;
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appropriate for the specific patient;
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supported by peer-reviewed publications; and
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included in clinical practice guidelines.
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Uncertainty surrounds third-party payor reimbursement of any test
incorporating new technology, including tests developed using our DNA probes and microarrays. Technology assessments of new medical tests and devices conducted by research centers and other entities may be disseminated to interested parties for
informational purposes. Third-party payors and health care providers may use such technology assessments as grounds to deny coverage for a test or procedure. No technology assessments have been performed on our tests to date.
Because each payor generally determines for its own enrollees or insured patients whether to cover or otherwise establish a policy to reimburse our diagnostic
tests, seeking payor approvals is a time-consuming and costly process. We cannot be certain that coverage for our tests will be provided in the future by additional third-party payors or that existing contracts, agreements or policy decisions or
reimbursement levels will remain in place or be fulfilled under existing terms and provisions. If we cannot obtain coverage and reimbursement from private and governmental payors such as Medicare and Medicaid for our current tests, or new tests or
test enhancements that we may develop in the future, our ability to generate revenues could be limited, which may have a material adverse effect on our financial condition, results of operations and cash flow. Further, we have experienced in the
past, and will likely experience in the future, delays and temporary interruptions in the receipt of payments from third-party payors due to missing documentation and other issues, which could cause delay in collecting our revenue.
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We depend on Medicare and a limited number of private payors for a significant portion of our revenues and
if these or other payors stop providing reimbursement or decrease the amount of reimbursement for our tests, our revenues could decline.
For the
year ended December 31, 2013, we derived approximately 21% of our total revenue from private insurance, including managed care organizations and other health care insurance providers, 13% from government payor programs, most of which was
derived from Medicare and 58% from direct-bill customers, including hospitals and other laboratories. Medicare and other third-party payors may withdraw their coverage policies or cancel their contracts with us at any time, review and adjust the
rate of reimbursement or stop paying for our tests altogether, which would reduce our total revenues.
Payors have increased their efforts to control the
cost, utilization and delivery of health care services. In the past, measures have been undertaken to reduce payment rates for and decrease utilization of the clinical laboratory industry generally. Because of the cost-trimming trends, third-party
payors that currently cover and provide reimbursement for our tests may suspend, revoke or discontinue coverage at any time, or may reduce the reimbursement rates payable to us. Any such action could have a negative impact on our revenues, which may
have a material adverse effect on our financial condition, results of operations and cash flows.
In addition, we are currently considered a
non-contracting provider by a number of private third-party payors because we have not entered into a specific contract to provide our specialized diagnostic services to their insured patients at specified rates of reimbursement. If we
were to become a contracting provider in the future, the amount of overall reimbursement we receive is likely to decrease because we will be reimbursed less money per test performed at a contracted rate than at a non-contracted rate, which could
have a negative impact on our revenues. Further, we typically are unable to collect payments from patients beyond that which is paid by their insurance and will continue to experience lost revenue as a result.
Because of certain Medicare billing rules, we may not receive reimbursement for all tests provided to Medicare patients.
Under current Medicare billing rules, claims for our tests performed on Medicare beneficiaries who were hospital inpatients when the tumor tissue samples were
obtained and whose tests were ordered less than 14 days from discharge must be incorporated in the payment that the hospital receives for the inpatient services provided. Accordingly, we must bill individual hospitals for tests performed on Medicare
beneficiaries during these timeframes in order to receive payment for our tests. Because we generally do not have a written agreement in place with these hospitals that purchase these tests, we may not be paid for our tests or may have to pursue
payment from the hospital on a case-by-case basis. In addition, currently we are permitted to bill globally for certain anatomic pathology services we furnish to grandfathered hospitals, i.e. we bill both the technical component and the professional
component to Medicare. As part of the Middle Class Tax Relief and Job Creation Act of 2012, Congress extended the special provision for grandfathered hospitals through July 1, 2012. Therefore, as of that date we were required to
bill the grandfathered hospitals for the technical component of all anatomic pathology services we furnish to their patients, which may be difficult and/or costly for us.
Further, the Medicare Administrative Contractors who process claims for Medicare also can impose their own rules related to coverage and payment for
laboratory services provided in their jurisdiction. Recently, Palmetto GBA, the Medicare Administrative Contractor for California and surrounding areas, announced a comprehensive new billing policy and a coverage policy applicable to molecular
diagnostic tests, such as ours. Under coverage policy, Palmetto will deny payment for molecular diagnostic tests, unless it has issued a positive coverage determination for the test. If any of our tests are subject to the Palmetto policy and/or the
Palmetto policy is adopted by other contractors that process claims with hospitals or laboratories that purchase and bill for our tests, our business could be adversely impacted.
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Complying with numerous regulations pertaining to our business is an expensive and time-consuming process,
and any failure to comply could result in substantial penalties.
We are subject to CLIA, a federal law regulating clinical laboratories that
perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. Our clinical laboratory must be accredited under CLIA in order for us to perform testing on human
specimens. In addition, our proprietary tests must also be recognized as part of our accredited programs under CLIA so that we can offer them in our laboratory. CLIA is intended to ensure the quality and reliability of clinical laboratories in the
United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. We have a current
certificate of accreditation under CLIA to perform high complexity testing and our laboratory is accredited by the College of American Pathologists (CAP), one of six CLIA-approved accreditation organizations. To renew this certificate,
we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make periodic inspections of our clinical reference laboratory outside of the renewal process.
The law also requires us to maintain a state laboratory license to conduct testing in that state. Our laboratory is located in New Jersey and must have a New
Jersey state license; as we expand our geographic focus, we may need to obtain laboratory licenses from additional states. New Jersey laws establish standards for day-to-day operation of our clinical reference laboratory, including the training and
skills required of personnel and quality control. In addition, several other states require that we hold licenses to test specimens from patients in those states. Other states may have similar requirements or may adopt similar requirements in the
future. Finally, we may be subject to regulation in foreign jurisdictions as we seek to expand international distribution of our tests.
If we were to
lose our CLIA accreditation or New Jersey laboratory license, whether as a result of a revocation, suspension or limitation, we would no longer be able to offer our tests, which would limit our revenues and harm our business. If we were to lose our
license in other states where we are required to hold licenses, we would not be able to test specimens from those states.
If FDA were to begin
requiring approval or clearance of our tests, we could incur substantial costs and time delays associated with meeting requirements for pre-market clearance or approval or we could experience decreased demand for, or reimbursement of, our tests.
Although FDA maintains that it has authority to regulate the development and use of LDTs, such as ours, as medical devices, it has not exercised
its authority with respect to most LDTs as a matter of enforcement discretion. FDA does not generally extend its enforcement discretion to reagents or software provided by third parties and used to perform LDTs, and therefore these products must
typically comply with FDA medical device regulations, which are wide-ranging and govern, among other things: product design and development, product testing, product labeling, product storage, pre-market clearance or approval, advertising and
promotion and product sales and distribution.
We believe that our DNA probe and microarray tests, as utilized in our laboratory testing, are LDTs. As a
result, we believe that pursuant to FDAs current policies and guidance that FDA does not require that we obtain regulatory clearances or approvals for our LDTs. The container we provide for collection and transport of tumor samples from a
pathology laboratory to our clinical reference laboratory may be a medical device subject to FDA regulation but is currently exempt from pre-market review by FDA. While we believe that we are currently in material compliance with applicable laws and
regulations, we cannot assure you that FDA or other regulatory agencies would agree with our determination, and a determination that we have violated these laws, or a public announcement that we are being investigated for possible violations of
these laws, could adversely affect our business, prospects, results of operations or financial condition.
Moreover, FDA guidance and policy pertaining to
diagnostic testing is continuing to evolve and is subject to ongoing review and revision. A significant change in any of the laws, regulations or policies may require us to
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change our business model in order to maintain regulatory compliance. At various times since 2006, FDA has issued guidance documents or announced draft guidance regarding initiatives that may
require varying levels of FDA oversight of our tests. For example, in June 2010, FDA announced a public meeting to discuss the agencys oversight of LDTs prompted by the increased complexity of LDTs and their increasingly important role in
clinical decision-making and disease management, particularly in the context of personalized medicine. FDA indicated that it was considering a risk-based application of oversight to LDTs and that, following public input and discussion, it might
issue separate draft guidance on the regulation of LDTs, which ultimately could require that we seek and obtain either pre-market clearance or approval of LDTs, depending upon the risk-based approach FDA adopts. The public meeting was held in July
2010 and further public comments were submitted to FDA through September 2010. FDA has stated it is continuing to develop draft guidance in this area. Section 1143 of the Food and Drug Administration Safety and Innovation Act, signed by the
U.S. President on July 9, 2012, requires FDA to notify U.S. Congress at least 60 days prior to issuing a draft or final guidance regulating LDTs and provide details of the anticipated action.
We cannot provide any assurance that FDA regulation, including pre-market review, will not be required in the future for our tests, whether through additional
guidance issued by FDA, new enforcement policies adopted by FDA or new legislation enacted by Congress. We believe it is possible that legislation will be enacted into law or guidance could be issued by FDA which may result in increased regulatory
burdens for us to continue to offer our tests or to develop and introduce new tests. Given the attention Congress continues to give to these issues, legislation affecting this area may be enacted into law and may result in increased regulatory
burdens on us as we continue to offer our tests and to develop and introduce new tests.
In addition, the Secretary of the Department of Health and Human
Services requested that its Advisory Committee on Genetics, Health and Society make recommendations about the oversight of genetic testing. A final report was published in April 2008. If the reports recommendations for increased oversight of
genetic testing were to result in further regulatory burdens, they could negatively affect our business and delay the commercialization of tests in development.
The requirement of pre-market review could negatively affect our business until such review is completed and clearance to market or approval is obtained. FDA
could require that we stop selling our tests pending pre-market clearance or approval. If FDA allows our tests to remain on the market but there is uncertainty about our tests, if they are labeled investigational by FDA or if labeling claims FDA
allows us to make are very limited, orders or reimbursement may decline. The regulatory approval process may involve, among other things, successfully completing additional clinical trials and making a 510(k) submission, or filing a pre-market
approval application with FDA. If FDA requires pre-market review, our tests may not be cleared or approved on a timely basis, if at all. We may also decide voluntarily to pursue FDA pre-market review of our tests if we determine that doing so would
be appropriate.
Additionally, should future regulatory actions affect any of the reagents we obtain from vendors and use in conducting our tests, our
business could be adversely affected in the form of increased costs of testing or delays, limits or prohibitions on the purchase of reagents necessary to perform our testing.
If we were required to conduct additional clinical trials prior to continuing to offer our proprietary genetic-based tests or any other tests that we
may develop as LDTs, those trials could lead to delays or failure to obtain necessary regulatory approval, which could cause significant delays in commercializing any future products and harm our ability to achieve sustained profitability.
If FDA decides to require that we obtain clearance or approvals to commercialize our proprietary genetic-based tests, we may be required to
conduct additional pre-market clinical testing prior to submitting a regulatory notification or application for commercial sales. In addition, as part of our long-term strategy we plan to seek FDA clearance or approval so we can sell our proprietary
tests outside our laboratory; however, we need to conduct additional clinical validation activities on our proprietary tests before we can submit an application for
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FDA approval or clearance. Clinical trials must be conducted in compliance with FDA regulations or FDA may take enforcement action or reject the data. The data collected from these clinical
trials may ultimately be used to support market clearance or approval for our tests. Once commenced, we believe it would likely take two years or more to conduct the studies and trials necessary to obtain approval from FDA to commercially launch any
of our proprietary microarrays outside of our clinical laboratory. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our test claims or that FDA or foreign authorities will agree with our
conclusions regarding our test results. Success in early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and studies. If we are
required to conduct pre-market clinical trials, whether using prospectively acquired samples or archival samples, delays in the commencement or completion of clinical testing could significantly increase our test development costs and delay
commercialization. Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical trials may be
delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical
trial. Moreover, the clinical trial process may fail to demonstrate that our tests are effective for the proposed indicated uses, which could cause us to abandon a test candidate and may delay development of other tests.
We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, which
might increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions and contract research organizations to perform the trials properly. If these parties do not successfully carry out their
contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical
trials may have to be extended, delayed or terminated. Many of these factors would be beyond our control. We may not be able to enter into replacement arrangements without undue delays or considerable expenditures. If there are delays in testing or
approvals as a result of the failure to perform by third parties, our research and development costs would increase, and we may not be able to obtain regulatory clearance or approval for our tests. In addition, we may not be able to establish or
maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests or to achieve sustained profitability.
We are subject to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully
comply with such laws.
We are subject to health care fraud and abuse regulation and enforcement by both the federal government and the states in
which we conduct our business. These health care laws and regulations include, for example:
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the federal Anti-kickback Statute, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the
referral of an individual for, or the purchase order or recommendation of, any item or services for which payment may be made under a federal health care program such as the Medicare and Medicaid programs;
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the federal physician self-referral prohibition, commonly known as the Stark Law, which prohibits physicians from referring Medicare or Medicaid patients to providers of designated health services with whom
the physician or a member of the physicians immediate family has an ownership interest or compensation arrangement, unless a statutory or regulatory exception applies;
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the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which established federal crimes for knowingly and willfully executing a scheme to defraud any health care benefit program or
making false statements in connection with the delivery of or payment for health care benefits, items or services;
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federal false claims laws, which, prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that
are false or fraudulent, and which may apply to entities like us to the extent that our interactions with customers may affect their billing or coding practices; and
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers.
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We have adopted policies and procedures designed to comply with these laws, including policies and procedures relating to financial
arrangements between us and physicians who refer patients to us. In the ordinary course of our business, we conduct internal reviews of our compliance with these laws. Our compliance is also subject to governmental review. The government alleged
that we engaged in improper billing practices in the past and we may be the subject of such allegations in the future as the growth of our business and sales organization may increase the potential of violating these laws or our internal policies
and procedures. See the section entitled Legal Proceedings for a detailed description of the governments prior allegations. The risk of our being found in violation of these laws and regulations is further increased by the fact
that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Further, the PPACA, among other things, amends the intent requirement of the federal
anti-kickback and criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the government may assert that a claim including items or services
resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Any action brought against us for violation of these laws or regulations, even if we successfully
defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be
subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, and/or exclusion from participation in Medicare, Medi-Cal or other state or federal health care programs, we could be
required to refund payments received by us, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.
We are required to comply with laws governing the transmission, security and privacy of health information that require significant compliance costs,
and any failure to comply with these laws could result in material criminal and civil penalties.
Under the administrative simplification
provisions of HIPAA, the U.S. Department of Health and Human Services has issued regulations which establish uniform standards governing the conduct of certain electronic health care transactions and protecting the privacy and security of Protected
Health Information used or disclosed by health care providers and other covered entities. Three principal regulations with which we are currently required to comply have been issued in final form under HIPAA: privacy regulations, security
regulations and standards for electronic transactions.
The privacy regulations cover the use and disclosure of Protected Health Information by health
care providers. It also sets forth certain rights that an individual has with respect to his or her Protected Health Information maintained by a health care provider, including the right to access or amend certain records containing Protected Health
Information or to request restrictions on the use or disclosure of Protected Health Information. We have also implemented policies, procedures and standards to comply appropriately with the final HIPAA security regulations, which establish
requirements for safeguarding the confidentiality, integrity and availability of Protected Health Information, which is electronically transmitted or electronically stored. The HIPAA privacy and security regulations establish a uniform federal
floor and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing Protected Health Information. As a result, we
are required to comply with both HIPAA privacy regulations and varying state privacy and security laws.
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Moreover, the Health Information Technology for Economic and Clinical Health Act (HITECH), among
other things, established certain health information security breach notification requirements. A covered entity must notify any individual whose protected health information is breached.
These laws contain significant fines and other penalties for wrongful use or disclosure of Protected Health Information. We have implemented practices and
procedures to meet the requirements of the HIPAA privacy regulations and state privacy laws. In addition, we are in the process of taking necessary steps to comply with HIPAAs standards for electronic transactions, which establish standards
for common health care transactions. Given the complexity of the HIPAA, HITECH and state privacy restrictions, the possibility that the regulations may change, and the fact that the regulations are subject to changing and potentially conflicting
interpretation, our ability to comply with the HIPAA, HITECH and state privacy requirements is uncertain and the costs of compliance are significant. To the extent that we submit electronic health care claims and payment transactions that do not
comply with the electronic data transmission standards established under HIPAA and HITECH, payments to us may be delayed or denied. Additionally, the costs of complying with any changes to the HIPAA, HITECH and state privacy restrictions may have a
negative impact on our operations. We could be subject to criminal penalties and civil sanctions for failing to comply with the HIPAA, HITECH and state privacy restrictions, which could result in the incurrence of significant monetary penalties.
Intellectual Property Risks Related to Our Business
Our rights to use technologies licensed from third parties are not within our control, and we may not be able to sell our products if we lose our
existing rights or cannot obtain new rights on reasonable terms.
Our ability to market certain of our tests and services, domestically and/or
internationally, is in part derived from licenses to intellectual property which is owned by third parties. As such, we may not be able to continue selling our tests and services if we lose our existing licensed rights or sell new tests and services
if we cannot obtain such licensed rights on reasonable terms. In particular, we currently in-license a biomarker from the National Cancer Institute used in our FHACT probe. Further, we may also need to license other technologies to
commercialize future products.
As may be expected, our business may suffer if (i) these licenses terminate; (ii) if the licensors fail to abide
by the terms of the license, properly maintain the licensed intellectual property or fail to prevent infringement of such intellectual property by third parties; (iii) if the licensed patents or other intellectual property rights are found to
be invalid or (iv) if we are unable to enter into necessary licenses on reasonable terms or at all.
In return for the use of a third-partys
technology, we may agree to pay the licensor royalties based on sales of our products as well as other fees. Such royalties and fees are a component of cost of product revenues and will impact the margins on our tests.
We may not be able to sell our probes or any other tests that we may develop using blocking DNA in the United States until patents held by third parties
expire.
Vysis, a division of Abbott Laboratories, Inc., possesses an exclusive license from the University of California for a family of patents
in the United States (Abbott patents) directed broadly to the usage of blocking DNA. The Abbott patents may present a barrier to our penetrating the United States market with certain of our probe-related tests because our probes are
configured to use blocking DNA. However, it is unclear whether these patents directly cover our probe-related tests. Therefore, the Abbot patents could pose a significant deterrent in marketing or selling certain of our products in the U.S. The
Abbott patents are due to expire on or about 2017. Our current business plan does not involve developing U.S.-based sales for our DNA probe products; rather, we are currently focused entirely on growing our DNA probe business in higher growth
emerging markets and select European markets.
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Our collaborators may assert ownership or commercial rights to inventions we develop from our use of the
biological materials they provide to us.
We rely on certain collaborators to provide us with tissue samples and biological materials that we use
to develop our tests. In some cases we have written agreements with collaborators that may require us to negotiate ownership and commercial rights with the collaborator if our use of such collaborators materials results in an invention. Other
agreements may limit our use of those materials to research/not for profit use. In other cases, we may not have written agreements, or the written agreements we have may not clearly deal with intellectual property rights. If we cannot successfully
negotiate sufficient ownership and commercial rights to the inventions that result from our use of a collaborators materials where required, or if disputes otherwise arise with respect to the intellectual property developed with the use of a
collaborators samples, we may be limited in our ability to capitalize on the market potential of these inventions.
The U.S. government may
have march-in rights to certain of our probe related intellectual property.
Because federal grant monies were used in support of the
research and development activities that resulted in our two issued U.S. patents, the federal government retains what are referred to as march-in rights to these patents.
In particular, the National Cancer Institute and the National Institutes of Health, each of which administered grant monies to us, technically retain the
right to require us, under certain specific circumstances, to grant the U.S. government either a nonexclusive, partially exclusive, or exclusive license to the patented invention in any field of use, upon terms that are reasonable for a particular
situation. Circumstances that trigger march-in rights include, for example, failure to take, within a reasonable time, effective steps to achieve practical application of the invention in a field of use, failure to satisfy the health and safety
needs of the public, and failure to meet requirements of public use specified by federal regulations. The National Cancer Institute and the National Institutes of Health can elect to exercise these march-in rights on their own initiative or at the
request of a
third-party.
If we are unable to maintain intellectual property protection, our competitive
position could be harmed.
Our ability to protect our proprietary discoveries and technologies affects our ability to compete and to achieve
sustained profitability. Currently, we rely on a combination of U.S. and foreign patents and patent applications, copyrights, trademarks and trademark applications, confidentiality or non-disclosure agreements, material transfer agreements,
licenses, work-for-hire agreements and invention assignment agreements to protect our intellectual property rights. We also maintain as trade secrets certain company know-how and technological innovations designed to provide us with a competitive
advantage in the marketplace. Currently, including both U.S. and foreign patent applications, we have only two issued U.S. patents and twelve pending patent applications relating to various aspects of our technology. While we intend to pursue
additional patent applications, it is possible that our pending patent applications and any future applications may not result in issued patents. Even if patents are issued, third parties may independently develop similar or competing technology
that avoids our patents. Further, we cannot be certain that the steps we have taken will prevent the misappropriation of our trade secrets and other confidential information and technology, particularly in foreign countries where we do not have
intellectual property rights.
From time to time the U.S. Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent and Trademark Office
(USPTO) may change the standards of patentability. Any such changes could have a negative impact on our business. For instance, on October 30, 2008, the Court of Appeals for the Federal Circuit issued a decision that methods or
processes cannot be patented unless they are tied to a machine or involve a physical transformation. The U.S. Supreme Court later reversed that decision in
Bilski v. Kappos
, finding that the machine-or-transformation test is not
the only test for determining patent eligibility. The Court, however, declined to specify how and when processes are patentable.
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Most recently, on March 20, 2012, in the case
Mayo v. Prometheus
, the U.S. Supreme Court reversed the
Federal Circuits application of
Bilski
and invalidated a patent focused on a diagnostic process because the patent claim embodied a law of nature. On July 3, 2012, the USPTO issued its Interim Guidelines for Subject Matter
Eligibility Analysis of Process Claims Involving Laws of Nature in view of the
Prometheus
decision. It remains to be seen how these guidelines play out in the actual prosecution of diagnostic claims. Similarly, it remains to be seen lower
courts will interpret the
Prometheus
decision. Some aspects of our technology involve processes that may be subject to this evolving standard, and we cannot guarantee that any of our pending process claims will be patentable as a result of
such evolving standards.
The U.S. Supreme Courts June 14, 2013 decision in
Association for Molecular Pathology v. Myriad
will likely
have an impact on the entire biotechnology industry. Specifically, the case involved certain of Myriad Genetics, Inc.s U.S. patents related to the breast cancer susceptibility genes BRCA1 and BRCA2. Plaintiffs asserted that the breast cancer
genes were not patentable subject matter. The Supreme Court unanimously held that the isolated form of naturally occurring DNA molecules does not rise to the level of patent-eligible subject matter. But the Court also held that claims directed to
complementary DNA (cDNA) molecules were patent-eligible because cDNA is not naturally occurring. The Supreme Court focused on the informational content of the isolated DNA and determined that the information contained in the isolated DNA molecule
was not markedly different from that naturally found in the human chromosome. Yet, in holding isolated cDNA molecules patent-eligible, the Court recognized the differences between human chromosomal DNA and the corresponding cDNA. Because the
non-coding regions of naturally occurring chromosomal DNA have been removed in cDNA, the Court accepted that cDNA is not a product of nature and, therefore, is patent-eligible subject matter.
It does not appear that the Supreme Courts ruling in
Myriad
will adversely affect our current patent portfolio which, unlike the claims at issue
in
Myriad
, centers on algorithmic methods associating chromosomal markers to specific clinical end-points. Nevertheless, we of course need to remain mindful that this is an evolving area of law.
In addition, on February 5, 2010, the Secretarys Advisory Committee on Genetics, Health and Society voted to approve a report entitled Gene
Patents and Licensing Practices and Their Impact on Patient Access to Genetic Tests. That report defines patent claims on genes broadly to include claims to isolated nucleic acid molecules as well as methods of detecting particular
sequences or mutations. The report also contains six recommendations, including the creation of an exemption from liability for infringement of patent claims on genes for anyone making, using, ordering, offering for sale or selling a test developed
under the patent for patient care purposes, or for anyone using the patent-protected genes in the pursuit of research. The report also recommended that the Secretary should explore, identify and implement mechanisms that will encourage more
voluntary adherence to current guidelines that promote nonexclusive in-licensing of diagnostic genetic and genomic technologies. It is unclear whether the U.S. Department of Health and Human Services will act upon these recommendations, or if the
recommendations would result in a change in law or process that could negatively impact our patent portfolio or future research and development efforts.
We may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in our loss of significant
rights and the assessment of treble damages.
From time to time we may face intellectual property infringement (or misappropriation) claims from
third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect us negatively. For example, were a third-party to succeed on an infringement claim against
us, we may be required to pay substantial damages (including up to treble damages if such infringement were found to be willful). In addition, we could face an injunction, barring us from conducting the allegedly infringing activity. The outcome of
the litigation could require us to enter into a license agreement which may not be pursuant to acceptable or commercially reasonable or practical terms or which may not be available at all.
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It is also possible that an adverse finding of infringement against us may require us to dedicate substantial
resources and time in developing non-infringing alternatives, which may or may not be possible. In the case of diagnostic tests, we would also need to include non-infringing technologies which would require us to re-validate our tests. Any such
re-validation, in addition to being costly and time consuming, may be unsuccessful.
Finally, we may initiate claims to assert or defend our own
intellectual property against third parties. Any intellectual property litigation, irrespective of whether we are the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert our managements
attention from our business and negatively affect our operating results or financial condition.
Risks Relating to Our Common Stock
There has been a limited trading market for our common stock.
We only recently received approval to list our common stock on The NASDAQ Capital Market. Prior to August 2013, our common stock had been quoted on the OTCQB,
and prior to our initial public offering in April 2013, there was no trading activity in our common stock. Although the NASDAQ listing improved the liquidity of our common stock, such listing has been of limited duration and no assurance can be
given that recent levels of trading activity will continue. A lack of an active market may impair the ability of our stockholders to sell shares at the time they wish to sell them or at a price that they consider reasonable. The lack of an active
market may also reduce the fair market value of our shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using our common
stock as consideration.
The price of our common stock may be volatile, and the market price of our common stock may decrease.
Our stock price per share may vary from time to time. Even if an active market for our stock continues, our stock price nevertheless may be volatile. Market
prices for securities of early-stage life sciences companies have historically been particularly volatile. The factors that may cause the market price of our common stock to fluctuate include, but are not limited to:
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progress, or lack of progress, in developing and commercializing our proprietary tests;
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favorable or unfavorable decisions about our tests or services from government regulators, insurance companies or other third-party payors;
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our ability to recruit and retain qualified regulatory and research and development personnel;
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changes in investors and securities analysts perception of the business risks and conditions of our business;
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changes in our relationship with key collaborators;
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changes in the market valuation or earnings of our competitors or companies viewed as similar to us;
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changes in key personnel;
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depth of the trading market in our common stock;
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termination of the lock-up agreements or other restrictions on the ability of persons who held our stock prior to our initial public offering to sell shares;
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changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
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the granting or exercise of employee stock options or other equity awards;
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realization of any of the risks described under this section entitled Risk Factors; and
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general market and economic conditions.
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In addition, the equity markets have experienced significant price and volume fluctuations that have affected the
market prices for the securities of newly public companies for a number of reasons, including reasons that may be unrelated to our business or operating performance. These broad market fluctuations may result in a material decline in the market
price of our common stock and you may not be able to sell your shares at prices you deem acceptable. In the past, following periods of volatility in the equity markets, securities class action lawsuits have been instituted against public companies.
Such litigation, if instituted against us, could result in substantial cost and the diversion of management attention.
Our stockholders may be
diluted by exercises of outstanding options and warrants.
As of December 31, 2013, we had outstanding options to purchase an aggregate of
873,542 shares of our common stock at a weighted average exercise price of $10.83 per share and warrants to purchase an aggregate of 1,797,114 shares of our common stock at a weighted average exercise price of $12.26 per share. The exercise of such
outstanding options and warrants will result in dilution of the value of our shares. In addition, shareholders may experience dilution if we issue common stock in the future.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our
common stock price and trading volume.
Securities research analysts, including those affiliated with our underwriters, establish and publish their
own periodic projections for our business. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match securities research
analysts projections. Similarly, if one or more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts
ceases coverage of our company or fails to publish reports on us regularly, our stock price or trading volume could decline. While we expect securities research analyst coverage, if no securities or industry analysts begin to cover us, the trading
price for our stock and the trading volume could be adversely affected.
Our directors and executive officers have substantial influence over us and
could delay or prevent a change in corporate control.
Our directors and executive officers, together with their affiliates, beneficially own
approximately 30.0% of our outstanding common stock-based on the number of shares outstanding on December 31, 2013. These stockholders, acting together, have significant influence over the outcome of matters submitted to our stockholders for
approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have significant influence over our management and affairs. Accordingly,
this concentration of ownership might harm the market price of our common stock by:
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delaying, deferring or preventing a change in control;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
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If we are unable to favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public
accounting firm is not able to provide an unqualified attestation report on the effectiveness of our internal controls over financial reporting, investors may lose confidence in our financial reporting and our stock price could be materially
adversely affected.
As a private company, we were not subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. As a
result of the completion of our initial public offering in April 2013, we are now required to document
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and test our internal control over financial reporting. For the year ended December 31, 2011, our independent registered public accounting firm reported a material weakness in our internal
control over financial reporting related to our monitoring of the performance of the third-party service providers we use in our revenue cycle. During 2011, we changed third-party service providers to improve our platform for future growth. After
the conversion, we identified instances of delayed billings and collection efforts and procedural issues with the timely application of cash receipts. If we fail to remediate the material weaknesses identified or to remediate any significant
deficiencies or material weaknesses that may be identified in the future, we may be unable to conclude that our internal control over financial reporting is effective and our independent registered public accounting firm may not be able to provide
an attestation reporting on the effectiveness of our internal control over financial reporting to the extent such an attestation report would be required. On April 5, 2012, President Obama signed the JOBS Act. Under the JOBS Act, issuers that
qualify as emerging growth companies under the JOBS Act will not be required to provide an auditors attestation report on internal controls for so long as the issuer qualifies as an emerging growth company. We currently qualify as
an emerging growth company under the JOBS Act and we will not provide an auditors attestation report on internal controls. However, if we cannot favorably assess the effectiveness of our internal control over financial reporting, or if we
require an attestation report from our independent registered public accounting firm and that firm is unable to provide an unqualified attestation report on the effectiveness of our internal controls over financial reporting, investor confidence
and, in turn, our stock price could be materially adversely affected. For a discussion on our remediation of our material weaknesses please see Managements Discussion and Analysis-Internal Control over Financial Reporting.
We are an emerging growth company, and any decision on our part to comply only with certain reduced disclosure requirements applicable to
emerging growth companies could make our common stock less attractive to investors.
We are an emerging growth company, as
defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging
growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as discussed above, reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously
approved. We could be an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a
large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700
million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. We have irrevocably chosen
to opt out of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards. We intend to take advantage of certain exemptions from various reporting requirements including, but not
limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval
of any golden parachute payments not previously approved, and if we do take advantage of these exemptions, we cannot predict if investors will find our common stock less attractive as a result. If some investors find our common stock less attractive
as a result of any choices to take advantage of these reduced disclosure obligations, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will incur significantly increased costs and devote substantial management time as a result of operating as a public company particularly after we
are no longer an emerging growth company.
As a public company and particularly after we cease to be an emerging growth
company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, in
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addition to being required to comply with certain requirements of the Sarbanes-Oxley Act of 2002, we will be required to comply with certain requirements of the Dodd Frank Wall Street Reform and
Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that
compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from
operational and other business matters to devote substantial time to these public company requirements.
However, for as long as we remain an
emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies
including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. We may choose to take advantage of these reporting exemptions until we no longer qualify as an emerging growth company.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to
private companies. We have irrevocably elected not to take advantage of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not
emerging growth companies.
After we are no longer an emerging growth company, we expect to incur significant expenses and devote
substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. We cannot predict or estimate the amount of additional costs we may
incur as a result of becoming a public company or the timing of such costs. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be
required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors,
our board committees or as executive officers.
Anti-takeover provisions of our certificate of incorporation, our bylaws and Delaware law could make
an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove the current members of our board and management.
Certain provisions of our amended and restated certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change
of control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove
members of our board of directors. These provisions also could limit the price that investors might be willing to pay in the future for our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate
in these transactions may not have the opportunity to do so. These provisions, among other things:
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allow the authorized number of directors to be changed only by resolution of our board of directors;
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authorize our board of directors to issue, without stockholder approval, preferred stock, the rights of which will be determined at the discretion of the board of directors and that, if issued, could operate as a
poison pill to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that our board of directors does not approve;
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establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings; and
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limit who may call a stockholder meeting.
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In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or
DGCL, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on our common stock, from merging or combining with us for a prescribed period of time.
Because we do not expect to pay cash dividends for the foreseeable future, you must rely on appreciation of our common stock price for any return on
your investment. Even if we change that policy, we may be restricted from paying dividends on our common stock.
We do not intend to pay cash
dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial performance, contractual
restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in our common stock. Investors
seeking cash dividends in the foreseeable future should not purchase our common stock.
Our ability to use our net operating loss carryforwards and
certain other tax attributes may be limited.
Our ability to utilize our federal net operating loss, carryforwards and federal tax credits are
limited under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. The limitations apply since we have experienced an ownership change, as defined by Section 382, as a result of the Companys securities
offerings. Generally, an ownership change occurs if the percentage of the value of the stock that is owned by one or more direct or indirect five percent shareholders changes by more than 50 percentage points over their lowest ownership
percentage at any time during the applicable testing period (typically three years). Since we have experienced an ownership change, our NOL carryforwards and federal tax credits are subject to limitations as to our ability to utilize
them to offset taxable income and related income taxes. In addition, future changes in our stock ownership, which may be outside of our control, may trigger further ownership changes which would further limit their utilization. As a
result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards and other tax attributes to offset United States federal taxable income and related income taxes are subject to limitations, which could
potentially result in increased future tax liability to us.
Our failure to meet the continued listing requirements of The NASDAQ Capital Market
could result in a de-listing of our common stock.
If we fail to satisfy the continued listing requirements of The NASDAQ Capital Market, such as
the corporate governance requirements or the minimum closing bid price requirement, NASDAQ may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair your
ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with NASDAQs listing requirements, but we can provide no assurance that any such action taken by
us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance
with NASDAQs listing requirements.