UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 000-51541

 

GENOMIC HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

77-0552594

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

301 Penobscot Drive

Redwood City, California 94063

(Address of principal executive offices, including Zip Code)

 

(650) 556-9300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer  ☒

 

 

Accelerated filer  ☐

 

 

 

 

Non-accelerated filer  ☐

 

 

Smaller reporting company  ☐

 

 

 

 

 

 

 

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒ 

 

Securities registered pursuant to Section 12(b) of the Act :

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

GHDX

The Nasdaq Stock Market LLC

 

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, was 37,072,397  as of April 30, 2019.

 

 

 


 

GENOMIC HEALTH, INC.

INDEX

 

 

 

 

 

 

 

 

    

    

    

Page

 

PART I :

 

FINANCIAL INFORMATION

 

 

 

Item 1.  

 

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

5

 

 

 

Consolidated Statements of Stockholders’ Equity

 

6

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

Item 2.  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

Item 3.  

 

Quantitative and Qualitative Disclosures about Market Risk

 

37

 

Item 4.  

 

Controls and Procedures

 

38

 

PART II :

 

OTHER INFORMATION

 

38

 

Item 1.  

 

Legal Proceedings

 

38

 

Item 1A.  

 

Risk Factors

 

38

 

Item 6.  

 

Exhibits

 

59

 

Signatures  

 

 

 

59

 

 

2


 

PART  1: FINANCIAL INFORMATIO N

 

Item 1. Financial Statements

GENOMIC HEALTH, INC.

Condensed Consolidated Balance Sheet s

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,406

 

$

61,645

 

Short-term marketable securities

 

 

104,551

 

 

148,149

 

Accounts receivable

 

 

59,248

 

 

51,531

 

Prepaid expenses and other current assets

 

 

15,446

 

 

13,511

 

Total current assets

 

 

280,651

 

 

274,836

 

Property and equipment, net

 

 

39,913

 

 

39,532

 

Operating lease right-of-use assets

 

 

53,295

 

 

 —

 

Long-term marketable securities

 

 

 —

 

 

4,066

 

Other assets

 

 

18,931

 

 

15,938

 

Total assets

 

$

392,790

 

$

334,372

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

9,290

 

$

8,849

 

Accrued compensation and employee benefits

 

 

22,039

 

 

34,457

 

Accrued expenses and other current liabilities

 

 

13,404

 

 

15,870

 

Current portion of operating lease liabilities

 

 

4,495

 

 

 —

 

Other current liabilities

 

 

258

 

 

600

 

Total current liabilities

 

 

49,486

 

 

59,776

 

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

53,482

 

 

 —

 

Other liabilities

 

 

1,941

 

 

4,436

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

 

 3

 

 

 3

 

Additional paid-in capital

 

 

511,265

 

 

506,679

 

Accumulated other comprehensive income (loss)

 

 

49

 

 

(87)

 

Accumulated deficit

 

 

(193,326)

 

 

(206,325)

 

Treasury stock, at cost

 

 

(30,110)

 

 

(30,110)

 

Total stockholders’ equity

 

 

287,881

 

 

270,160

 

Total liabilities and stockholders’ equity

 

$

392,790

 

$

334,372

 

 

 

 

 

See accompanying notes.

 

3


 

GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Revenues:

 

 

 

 

 

 

 

Product revenues

 

$

108,757

 

$

92,625

 

Contract revenues

 

 

12

 

 

 —

 

Total revenues

 

 

108,769

 

 

92,625

 

Operating expenses:

 

 

 

 

 

 

 

Cost of product revenues

 

 

17,008

 

 

18,733

 

Research and development

 

 

15,054

 

 

16,807

 

Selling and marketing

 

 

45,348

 

 

41,755

 

General and administrative

 

 

19,820

 

 

19,718

 

Total operating expenses

 

 

97,230

 

 

97,013

 

Income (loss) from operations

 

 

11,539

 

 

(4,388)

 

Interest income

 

 

1,151

 

 

417

 

Unrealized gain on equity securities

 

 

449

 

 

127

 

Other income, net

 

 

127

 

 

309

 

Income (loss) before income taxes

 

 

13,266

 

 

(3,535)

 

Income tax expense

 

 

267

 

 

240

 

Net income (loss)

 

$

12,999

 

$

(3,775)

 

Basic net income (loss) per share

 

$

0.35

 

$

(0.11)

 

Diluted net income (loss) per share

 

$

0.34

 

$

(0.11)

 

Shares used in computing basic net income (loss) per share

 

 

36,719

 

 

35,198

 

Shares used in computing diluted net income (loss) per share.

 

 

38,764

 

 

35,198

 

 

 

 

 

See accompanying notes.

 

4


 

GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Comprehensive Incom e (Loss)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Net income (loss)

 

$

12,999

 

$

(3,775)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized gain (loss), net, on available-for-sale marketable securities, net of tax of $0 for the three months ended March 31, 2019 and 2018, respectively

 

 

136

 

 

(34)

 

Comprehensive income (loss)

 

$

13,135

 

$

(3,809)

 

 

 

 

 

See accompanying notes.

 

5


 

GENOMIC HEALTH, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Treasury

 

Total

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

Stock

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Income (Loss)

 

Deficit

 

at Cost

 

Equity

 

Balance at December 31, 2018

 

36,407

 

$

 3

 

$

506,679

 

$

(87)

 

$

(206,325)

 

$

(30,110)

 

$

270,160

 

Issuance of common stock upon exercise of stock options for cash and vesting of restricted stock units, net of taxes

 

645

 

 

 —

 

 

(1,745)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,745)

 

Issuance of restricted stock to directors in lieu of fees

 

 1

 

 

 —

 

 

50

 

 

 —

 

 

 —

 

 

 —

 

 

50

 

Stock-based compensation expense related to employee stock options, restricted stock units and employee stock purchase plan

 

 —

 

 

 —

 

 

6,281

 

 

 —

 

 

 —

 

 

 —

 

 

6,281

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,999

 

 

 —

 

 

12,999

 

Unrealized gain on investments, net of tax

 

 —

 

 

 —

 

 

 —

 

 

136

 

 

 —

 

 

 —

 

 

136

 

Balance at March 31, 2019

 

37,053

 

$

 3

 

$

511,265

 

$

49

 

$

(193,326)

 

$

(30,110)

 

$

287,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

35,049

 

$

 3

 

$

464,637

 

$

(294)

 

$

(245,945)

 

$

(30,110)

 

$

188,291

 

Cumulative effect of change in accounting policies (1)

 

 

 

 

 

 

 

 

 

 

180

 

 

13,943

 

 

 

 

 

14,123

 

Issuance of common stock upon exercise of stock options for cash and vesting of restricted stock units, net of taxes

 

307

 

 

 —

 

 

(3,449)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,449)

 

Issuance of restricted stock to directors in lieu of fees

 

 1

 

 

 —

 

 

50

 

 

 —

 

 

 —

 

 

 —

 

 

50

 

Stock-based compensation expense related to employee stock options, restricted stock units and employee stock purchase plan

 

 —

 

 

 —

 

 

5,186

 

 

 —

 

 

 —

 

 

 —

 

 

5,186

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,775)

 

 

 —

 

 

(3,775)

 

Unrealized loss on investments, net of tax

 

 —

 

 

 —

 

 

 —

 

 

(34)

 

 

 —

 

 

 —

 

 

(34)

 

Balance at March 31, 2018

 

35,357

 

$

 3

 

$

466,424

 

$

(148)

 

$

(235,777)

 

$

(30,110)

 

$

200,392

 

 

 

(1)

Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) and ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequent related updates

 

 

 

See accompanying notes.

6


 

 

GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

12,999

 

$

(3,775)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,412

 

 

3,155

 

Employee stock-based compensation

 

 

6,281

 

 

5,186

 

Write-off of previously capitalized software costs

 

 

 —

 

 

2,368

 

Impairment of long-lived assets

 

 

 —

 

 

2,154

 

Loss on disposal of property and equipment

 

 

709

 

 

 —

 

Outside director restricted stock awarded in lieu of fees

 

 

50

 

 

50

 

Gain on sale of corporate debt securities

 

 

(13)

 

 

 —

 

Discount on convertible promissory note

 

 

 —

 

 

(62)

 

Unrealized net gain on revaluation of equity investments

 

 

(449)

 

 

(127)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,717)

 

 

(1,283)

 

Prepaid expenses and other assets

 

 

(3,136)

 

 

(786)

 

Accounts payable

 

 

(563)

 

 

4,591

 

Accrued compensation and employee benefits

 

 

(12,418)

 

 

(3,040)

 

Accrued expenses and other liabilities

 

 

(2,703)

 

 

(2,151)

 

Deferred revenues

 

 

(121)

 

 

 —

 

Net cash (used in) provided by operating activities

 

 

(3,669)

 

 

6,280

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,978)

 

 

(2,236)

 

Purchases of marketable securities

 

 

(39,991)

 

 

(24,043)

 

Maturities of marketable securities

 

 

64,887

 

 

20,019

 

Proceeds from sales of corporate debt securities

 

 

23,305

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

45,223

 

 

(6,260)

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock under stock plans

 

 

9,873

 

 

1,152

 

Withholding taxes related to restricted stock units net share settlement

 

 

(11,618)

 

 

(4,601)

 

Payments on finance lease liabilities

 

 

(51)

 

 

 —

 

Net cash used in financing activities

 

 

(1,796)

 

 

(3,449)

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

39,758

 

 

(3,429)

 

Cash, cash equivalents and restricted cash at the beginning of period

 

 

61,917

 

 

45,708

 

Cash, cash equivalents and restricted cash at the end of period

 

$

101,675

 

$

42,279

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

2,411

 

$

533

 

Change in fair value of investments

 

$

449

 

$

200

 

 

 

 

 

See accompanying notes.

7


 

GENOMIC HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

 

Note 1.  Organization and Summary of Significant Accounting Policies

 

The Company

 

Genomic Health, Inc. (the “Company”) is a global healthcare company that provides actionable genomic information to personalize cancer treatment decisions. The Company develops and globally commercializes genomic based clinical laboratory services that analyze the underlying biology of cancer, allowing physicians and patients to make individualized treatment decisions. The Company was incorporated in Delaware in August 2000. The Company’s first product, the Oncotype DX breast cancer test, was launched in 2004 and is used for early stage invasive breast cancer patients to predict the likelihood of breast cancer recurrence and the likelihood of chemotherapy benefit. In January 2010, the Company launched its second product, the Oncotype DX colon cancer test, which is used to predict the likelihood of colon cancer recurrence in patients with stage II disease. The tests for invasive breast and colon cancer result in a quantitative score referred to as a Recurrence Score. In December 2011, the Company made Oncotype DX available for patients with ductal carcinoma in situ (“DCIS”), a pre-invasive form of breast cancer. This test provides a DCIS Score that is used to predict the likelihood of local disease recurrence. In June 2012, the Company began offering the Oncotype DX colon cancer test for use in patients with stage III disease treated with oxaliplatin containing adjuvant therapy. In May 2013, the Company launched the Oncotype DX prostate cancer test, which provides a Genomic Prostate Score (“GPS”) to predict disease aggressiveness in men with low risk prostate cancer and to improve treatment decisions for prostate cancer patients, in conjunction with the Gleason score, or tumor grading. In February 2018, the Oncotype DX AR-V7 Nucleus Detect test for men with metastatic castration-resistant prostate cancer (“mCRPC”) became commercially available.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. The Company had two wholly-owned subsidiaries at March 31, 2019: Genomic Health International Holdings, LLC, which was established in Delaware in 2010 and supports the Company’s international sales and marketing efforts; and Oncotype Laboratories, Inc., which was established in 2012, and is inactive. Genomic Health International Holdings, LLC has eight wholly-owned subsidiaries. The functional currency for the Company’s wholly-owned subsidiaries incorporated outside the United States is the U.S. dollar. All significant intercompany balances and transactions have been eliminated.

 

The Company assesses whether it is the primary beneficiary of a variable interest entity (“VIE”) at the inception of the arrangement and at each reporting date. This assessment is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the Company’s obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company continuously performs this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE.

 

Basis of Presentation and Use of Estimates

 

The accompanying interim period condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated balance sheet as of March 31, 2019, condensed consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the three months ended March 31, 2019 and 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2018 has been derived from audited financial statements, but it does not include certain information and notes required by GAAP for complete consolidated financial statements.

8


 

 

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

The accompanying interim period condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

During the first quarter of 2019, the Company adopted new accounting guidance related to leases which is described below. There have been no other significant changes in the Company’s accounting policies during the three months ended March 31, 2019 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2018.

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers , the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 2 “Revenues” for further discussion on Revenues.

 

Concentration of Risk

 

The Company is subject to credit risk from its portfolio of cash equivalents and marketable securities. The Company invests in money market funds through a major U.S. bank and is exposed to credit risk in the event of default by the financial institution to the extent of amounts recorded on the consolidated balance sheets. The Company invests in short term, investment grade debt instruments and by policy limits the amount in any one type of investment, except for securities issued or guaranteed by the U.S. government. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The goals of the Company’s investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after tax rate of return.

 

The Company is also subject to credit risk from its accounts receivable related to its product sales. The majority of the Company’s accounts receivable arise from product sales in the United States. Reimbursement on behalf of patients covered by Medicare accounted for 24% of the Company’s product revenues for the three months ended March 31, 2019 and 26% for the three months ended March 31, 2018. Accounts receivable on behalf of patients directly covered by Medicare represented 17% of the Company’s total accounts receivable at March 31, 2019 and December 31, 2018. No other third party payor represented more than 10% of the Company’s product revenues or accounts receivable balances for these periods.

 

9


 

Non-Marketable Investments

 

The carrying values of the Company’s non-marketable equity securities without readily determinable market values are initially measured at cost and adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net.

 

As of March 31, 2019 and December 31, 2018, the carrying value of the preferred stock of Epic Sciences, Inc. (“Epic Sciences”) was $10.8 million. The Company did not adjust the carrying value of the preferred stock during the three months ended March 31, 2019 and 2018.

 

The preferred stock of Epic Sciences is classified within Level 3 in the fair value hierarchy because the Company estimated the value utilizing an option pricing model that considered the most recent observable transaction and other unobservable inputs including volatility and long-term plans of Epic Sciences. The preferred stock represents a variable interest in the investee. The Company has concluded it is not the primary beneficiary and thus has not consolidated the investee pursuant to the requirements of FASB ASC 810, Consolidation. Additionally, as the Company does not have the ability to exercise significant influence, the equity method was not used to account for the investment.

 

Derivative Financial Instruments

 

The Company hedges a portion of its foreign currency exposure related to outstanding monetary assets and liabilities using foreign currency forward contracts. The foreign currency forward contracts, included in prepaid and other current assets or in accrued liabilities, depending on the contracts’ net position, the Company uses to hedge the exposure are not designated as hedges, and as a result, changes in their fair value of $42,000 for the three month ended March 31, 2019 are recorded in other income (expense). As of March 31, 2019 and December 31, 2018, the Company had foreign currency forward contracts with notional amounts of $15.3 million and $17.1 million, respectively.

 

Impairment of Long Lived Assets

 

The Company reviews long lived assets, which include property and equipment, intangible assets and investments in privately held companies, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. For property and equipment and intangible assets, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using undiscounted cash flows. For investments in non-marketable equity securities, evidence of impairment might include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. If the fair value of the investment is determined to be less than the carrying value, the asset is written down to its fair value. During the three months ended March 31, 2018, the Company wrote off $2.2 million and $2.4 million of previously capitalized equipment and software development costs, respectively, due to disposal activities. There was no impairment of long lived assets during the three months ended March 31, 2019.

 

10


 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . The new guidance requires lessees to recognize a right-of-use asset and a lease liability for almost all leases on the balance sheet. The Company adopted the new standard as of January 1, 2019 using a modified retrospective approach and did not restate comparative periods.  The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward the assessment of whether its contracts contain or are leases, classification of its leases and remaining lease terms. The Company also elected to combine its lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the condensed statements of operation on a straight-line basis over the lease term. Based on the Company’s portfolio of leases as of December 31, 2018, the adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of operating lease right-of-use (“ROU”) assets of $17.9 million and lease liabilities of $22.5 million, of which $6.1 million was recorded as current portion of operating lease liabilities, and the elimination of $4.5 million of straight-line lease liabilities, of which $1.1 million was recorded as accrued expenses and other current liabilities. There was no material impact to its condensed consolidated statements of operations. See Note 7 “Commitments and Contingencies” for additional information and disclosures.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for the Company beginning January 1, 2020 with early adoption permitted. The Company is evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

Note 2.  Revenues

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The estimated uncollectible amounts that were historically classified as bad debt expense are now generally considered implicit price concessions that are a direct reduction to accounts receivable rather than allowance for doubtful accounts.

 

The majority of the Company’s historical product revenues have been derived from the sale of its Oncotype DX breast cancer test. For product revenues, the Company estimates the transaction price which is the amount of consideration it expects to be entitled to receive in exchange for providing services based on its historical collection experience using a portfolio approach as a practical expedient to account for patient contracts as collective groups rather than individually. The Company monitors its estimates of transaction price to depict conditions that exist at each reporting date. If the Company subsequently determines that it will collect more consideration than it originally estimated for a contract with a patient, it will account for the change as an increase in the estimate of the transaction price in the period identified. Similarly, if the Company subsequently determines that the amount it expects to collect from a patient is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price, provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized.

 

The Company’s performance obligations are satisfied at one point in time when test reports are delivered. The Company also provides services to patients with whom the Company does not have contracts as defined in Topic 606. The Company recognizes revenue for these patients when contracts as defined in Topic 606 are established at the amount of consideration to which it expects to be entitled or when the Company receives substantially all of the consideration subsequent to the performance obligations being satisfied.

 

11


 

The following table presents the Company’s product revenues disaggregated by revenue source:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

United States

 

Outside of the United States

 

Total

 

 

2019

 

(In thousands)

 

 

Invasive breast cancer test

 

$

79,794

 

$

17,574

 

$

97,368

 

 

Prostate cancer test

 

 

8,511

 

 

79

 

 

8,590

 

 

Other

 

 

2,701

 

 

98

 

 

2,799

 

 

Total product revenues

 

 

91,006

 

 

17,751

 

 

108,757

 

 

Contract revenues

 

 

12

 

 

 —

 

 

12

 

 

Total revenues

 

$

91,018

 

$

17,751

 

$

108,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

Invasive breast cancer test

 

$

70,931

 

$

13,620

 

$

84,551

 

 

Prostate cancer test

 

 

5,806

 

 

34

 

 

5,840

 

 

Other

 

 

2,130

 

 

104

 

 

2,234

 

 

Total revenues

 

$

78,867

 

$

13,758

 

$

92,625

 

 

 

Contract revenues are generally derived from studies conducted with biopharmaceutical and pharmaceutical companies. The specific methodology for revenue recognition is determined on a case-by-case basis according to the facts and circumstances applicable to a given contract. The Company typically uses an input method that recognizes revenue based on the Company’s efforts to satisfy the performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. Advance payments received in excess of revenues recognized are classified as deferred revenue until such time as the revenue recognition criteria have been met.

 

Note 3.  Net Income (Loss) Per Share

 

Basic net income (loss) per share is calculated by dividing net income (loss) for the period by the weighted-average number of common shares outstanding for the period without consideration of potential common shares. Diluted earnings per share is calculated using the weighted-average number of common shares outstanding including the dilutive effect of stock awards as determined under the treasury stock method. In periods when the Company has a net loss, stock awards are excluded from the calculation of diluted net loss per share as their inclusion would have an antidilutive effect.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

    

 

(In thousands, except per share amounts)

Numerator:

 

 

 

 

 

 

 

Net income (loss)

 

$

12,999

 

$

(3,775)

 

Denominator:

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding used in the calculation of basic net income (loss) per share

 

 

36,719

 

 

35,198

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Options to purchase common stock

 

 

1,592

 

 

 —

 

Restricted stock units

 

 

453

 

 

 —

 

Total

 

 

2,045

 

 

 —

 

Weighted-average shares of common stock outstanding used in the calculation of diluted net income (loss) per share

 

 

38,764

 

 

35,198

 

Basic net income (loss) per share

 

$

0.35

 

$

(0.11)

 

Diluted net income (loss) per share

 

$

0.34

 

$

(0.11)

 

12


 

The Company excluded stock awards of 367,000 for the three months ended March 31, 2019 from the computation of diluted net income per share because their effect was anti-dilutive.

 

The Company excluded potentially dilutive stock awards of 790,000 for the three months ended March 31, 2018 from the computation of diluted net loss per share because their effect was anti-dilutive.

 

 

Note 4.  Cash and Cash Equivalents, Restricted Cash, and Marketable Securities

 

The following tables set forth the Company’s cash and cash equivalents, restricted cash, and marketable securities as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

   (In thousands) 

 

Cash, cash equivalents, and restricted cash

 

 

 

 

 

 

 

Cash

 

$

97,728

 

$

49,046

 

Money market deposits

 

 

3,129

 

 

10,364

 

Commercial paper

 

 

549

 

 

2,235

 

Restricted cash (1)

 

 

269

 

 

272

 

Total cash, cash equivalents and restricted cash

 

 

101,675

 

 

61,917

 

Marketable securities

 

 

 

 

 

 

 

Commercial paper

 

 

37,281

 

 

70,162

 

Corporate debt securities

 

 

63,810

 

 

78,981

 

Corporate equity securities

 

 

3,460

 

 

3,072

 

Total marketable securities

 

 

104,551

 

 

152,215

 

Total cash and cash equivalents, restricted cash and marketable securities

 

$

206,226

 

$

214,132

 

 

(1)

Restricted cash is included in Other assets on the consolidated balance sheet.

 

The following tables summarize the Company’s available-for-sale securities that are measured at fair value as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

Cost or

 

Gross

 

Gross

 

Total

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(In thousands)

 

Commercial paper

    

$

37,824

    

$

 7

    

$

(1)

    

$

37,830

 

Corporate debt securities

 

 

63,767

 

 

47

 

 

(4)

 

 

63,810

 

Total

 

$

101,591

 

$

54

 

$

(5)

 

$

101,640

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

Cost or

 

Gross

 

Gross

 

Total

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(In thousands)

 

Commercial paper

 

$

72,455

 

$

 —

 

$

(58)

    

$

72,397

 

Corporate debt securities

 

 

79,009

 

 

18

 

 

(46)

 

 

78,981

 

Total

 

$

151,464

 

$

18

 

$

(104)

 

$

151,378

 

 

13


 

The following table provides the breakdown of the available-for-sale marketable securities with unrealized losses as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

In a Loss Position for

 

 

 

Less Than 12 Months

 

 

 

Gross

 

 

 

 

 

 

Unrealized

 

Estimated

 

 

 

Losses

 

Fair Value

 

 

 

(In thousands)

 

As of March 31, 2019:

 

 

 

 

 

 

 

Commercial paper

 

$

(1)

 

$

17,657

 

Corporate debt securities

 

 

(4)

 

 

19,163

 

Total

 

$

(5)

 

$

36,820

 

As of December 31, 2018:

 

 

 

 

 

 

 

Commercial paper

 

$

(58)

 

$

59,423

 

Corporate debt securities

 

 

(46)

 

 

37,608

 

Total

 

$

(104)

 

$

97,031

 

 

The following table provides the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

 

 

(In thousands)

 

Due in one year or less

 

$

101,591

 

$

101,640

 

$

147,398

 

$

147,312

 

Due in more than one year but less than five years

 

 

 —

 

 

 —

 

 

4,066

 

 

4,066

 

Total

 

$

101,591

 

$

101,640

 

$

151,464

 

$

151,378

 

 

Marketable Equity Securities

 

In December 2017, the Company invested €3.4 million or $4.0 million in 270,000 shares of the common stock of Biocartis N.V. (Biocartis), a public company listed on the Euronext exchange. This corporate equity security investment was accounted for as an available-for-sale marketable security and valued at €3.1 million or $3.5 million and €2.7 million or $3.1 million at March 31, 2019 and December 31, 2018, respectively. During the three months ended March 31, 2019, the Company recorded an increase in fair value of $449,000 and a foreign currency revaluation loss of $61,000, in other income, net for the three months ended March 31, 2019, respectively. During the three months ended March 31, 2018, the Company recorded an increase in fair value of $127,000 and a foreign currency revaluation gain of $139,000, in other income, net.

 

Note 5.  Fair Value Measurements

 

Fair Value Hierarchy

 

The Company measures certain financial assets, including cash equivalents and marketable securities, at their fair value on a recurring basis. The fair value of these financial assets was determined based on a hierarchy of three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

Level 1:   Quoted prices in active markets for identical assets or liabilities;

 

Level 2:   Observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

14


 

Level 3:   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The Company did not have any non-financial assets or liabilities that were measured or disclosed at fair value on a recurring basis at either March 31, 2019 or December 31, 2018. The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018 by level within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actively Quoted

 

Significant

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Balance at

 

 

 

Assets

 

Inputs

 

Inputs

 

March 31,

 

 

 

Level 1

 

Level 2

 

Level 3

 

2019

 

 

 

(In thousands)

 

As of March 31, 2019:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

3,129

    

$

 —

    

$

 —

    

$

3,129

 

Commercial paper

 

 

 —

 

 

37,830

 

 

 —

 

 

37,830

 

Corporate debt securities

 

 

 —

 

 

63,810

 

 

 —

 

 

63,810

 

Corporate equity securities

 

 

3,460

 

 

 —

 

 

 —

 

 

3,460

 

Foreign exchange derivative instruments

 

 

 

 

 

212

 

 

 

 

 

212

 

Total

 

$

6,589

 

$

101,852

 

$

 —

 

$

108,441

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actively Quoted

 

Significant

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Balance at

 

 

 

Assets

 

Inputs

 

Inputs

 

December 31,

 

 

 

Level 1

 

Level 2

 

Level 3

 

2018

 

 

 

(In thousands)

 

As of December 31, 2018:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

10,364

    

$

 —

    

$

 —

    

$

10,364

 

Commercial paper

 

 

 —

 

 

72,397

 

 

 —

 

 

72,397

 

Corporate debt securities

 

 

 —

 

 

78,981

 

 

 —

 

 

78,981

 

Corporate equity securities

 

 

3,072

 

 

 —

 

 

 —

 

 

3,072

 

Total

 

$

13,436

 

$

151,378

 

$

 —

 

$

164,814

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange derivative instruments

 

$

 —

 

$

135

 

 

 —

 

$

135

 

Total

 

$

 —

 

$

135

 

$

 —

 

$

135

 

 

The Company’s commercial paper and corporate debt securities are classified as Level 2 as they are valued using multi-dimensional relational pricing models that use observable market inputs, including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. Not all inputs listed are available for use in the evaluation process on any given day for each security evaluation. In addition, market indicators and industry and economic events are monitored and may serve as a trigger to acquire further corroborating market data. The Company’s corporate equity securities are classified as Level 1. There were no transfers between Level 1 and Level 2 categories during the three months March 31, 2019.

 

15


 

Note 6.  Collaboration and Commercial Technology Licensing Agreements

 

The Company has entered into agreements with third parties for the development and commercialization of certain products and product candidates.  

 

Epic Sciences

 

In June 2016, the Company entered into a collaboration agreement with Epic Sciences, which was superseded and replaced in March 2019 by a license agreement and laboratory services agreement with Epic Sciences, under which the Company was granted an exclusive license and distribution rights to commercialize Epic Sciences’ AR-V7 test in the United States, which is marketed under the Company’s trademark as the Oncotype DX AR-V7 Nucleus Detect test. The Company has primary responsibility, in accordance with applicable laws and regulations, for marketing and promoting the test, order fulfillment, billing and collections of receivables, claims appeals, customer support, and providing and maintaining order management systems for the test. Epic Sciences is responsible for performing all tests, performing studies, including analytic, clinical utility and clinical validation studies, and seeking Medicare coverage and a Medicare payment rate from the Centers for Medicare and Medicaid Services (“CMS”) for the test. The license and laboratory service agreement has a term of 10 years from June 2016, unless terminated earlier under certain circumstances. The Oncotype DX AR-V7 Nucleus Detect test became commercially available in February 2018. In October 2018, Palmetto GBA (“Palmetto”), the Medicare Administrative Contractor that sets Medicare coverage policies, approved coverage for the use of the Oncotype DX AR-V7 test through its final local coverage determination (“LCD”), providing initial coverage for eligible Medicare patients for dates of service on or after December 10, 2018. The Company recognizes revenues for the test performed under this arrangement and Epic Sciences receives a fee per test performed that represents the fair market value for the testing services they perform.

 

Under collaboration agreement, in 2016 and 2017, the Company invested $7.5 million in subordinated convertible promissory notes of Epic Sciences that converted into shares of Epic Sciences preferred stock in March 2017. The subordinated convertible promissory notes had been recognized at fair value, which the Company estimated to be approximately $7.1 million while the difference of $375,000 was deferred as of December 31, 2017 and has been recognized as an additional cost of purchases of Oncotype DX AR-V7 Nucleus Detect tests, which the Company believes would be at a discount to fair value. In June 2018, the Company invested an additional $2.5 million in Epic Sciences preferred stock.

 

Additional terms of the original agreement included the Company’s obligation to pay Epic Sciences $4.0 million upon achievement of certain milestones. In December 2018 and January 2019, the milestones were achieved and, the Company recorded the payments of $2.0 million for each in other assets, which are being recognized as cost of product revenue over the term of the agreement.

 

Biocartis  

 

In September 2017, the Company entered into an exclusive license and development agreement with Biocartis, a molecular diagnostics company based in Belgium, to develop and commercialize an in vitro diagnostic (“IVD”) version of the Oncotype DX breast cancer test on Biocartis’ Idylla platform that can be performed locally by laboratory partners and in hospitals around the world. Under the terms of the license and development agreement, the Company has an exclusive, worldwide, royalty-bearing license to develop and commercialize an IVD version of the Oncotype DX breast cancer test on the Biocartis Idylla platform, and an option to expand the collaboration to include additional tests in oncology and urology. The Company has primary responsibility for developing, validating and obtaining regulatory authorizations and registrations for IVD Oncotype DX tests to be performed on the Idylla platform. The Company is also responsible for manufacturing and commercialization activities with respect to such tests.

 

In December 2017, the Company purchased 270,000 ordinary shares of Biocartis at the market price of €12.50 for a total cost of €3.4 million or $4.0 million. The investment has been recognized at fair value, which the Company believes to be $3.5 million and $3.1 million at March 31, 2019 and December 31, 2018, respectively.

 

16


 

In September 2018, the Company extended its option to expand the collaboration to include urology, and recorded a €1.0 million, or $1.2 million, expense.

 

In November 2018, the Company and Biocartis signed an addendum to the license and development agreement in which the Company exercised the option to expand the collaboration to include the urology field and recorded a €2.0 million, or $2.3 million, expense. In addition, the Company obtained a right of first refusal to add an additional test, a non-invasive detection of prostate cancer in a pre-biopsy setting, and recorded a €500,000, or $575,000, expense. 

 

Additional terms of the license and development agreement include the Company’s obligation to pay Biocartis an aggregate of €3.5 million in cash upon achievement of certain milestones and €3.0 million for the expansion of the collaboration to include additional tests in oncology and urology. In addition, the Company will pay royalties based primarily on the future sales volumes of the Company’s test performed on the Idylla platform.

 

Note 7.  Commitments and Contingencies

 

Leases

 

The Company has operating for office and laboratory facilities, data centers and certain equipment, some of which include options to extend for 5 years and finance leases for certain equipment. The Company's leases have remaining lease terms of 1 to 9 years. Under Topic 842, the Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date or remeasurement date in determining the present value of lease payments. The incremental borrowing rate is a hypothetical rate based on the Company’s understanding of what its credit rating was as of such date. Leases with an initial term of 12 months or less ("short-term leases") and leases deemed immaterial are not recorded on the condensed consolidated balance sheet. Certain of the Company’s lease contracts include obligations to pay for other services, such as operations and maintenance. The Company accounts for these other services as a component of the lease when related payments are fixed or vary depending on an index or a rate.

 

During the three months ended March 31, 2019, the Company considered that it is reasonably certain that the Company will exercise the option to extend the lease term of leases for its office and laboratory facilities in Redwood City, California. The Company included the extended term of 5 years and remeasured the ROU assets and lease liabilities for the related leases. The remeasurement resulted in the recognition of $34.0 million of ROU assets and lease liabilities.

 

In January 2019, the Company entered into an operating lease for an office facility and recognized ROU assets and liabilities of $2.7 million. The following table represents the Company’s ROU assets and lease liabilities and the balance sheet classification at March 31, 2019:

 

 

 

 

 

 

 

 

March 31, 2019

 

Lease activity

Balance sheet classification

(In thousands)

 

Operating lease

 

 

 

 

Operating lease ROU assets

Operating lease right-of-use assets

$

53,295

 

Operating lease liabilities - current portion

Current portion of operating lease liabilities

 

4,495

 

Operating lease liabilities - non-current portion

Operating lease liabilities

 

53,482

 

Total operating lease liabilities

 

$

57,977

 

 

 

 

 

 

Finance leases

 

 

 

 

Finance lease ROU assets

Other assets

$

405

 

Finance lease liabilities - current portion

Other current liabilities

 

208

 

Finance lease liabilities - non-current portion

Other liabilities

 

199

 

Total finance lease liabilities

 

$

407

 

The following table represents lease costs and other lease information:

17


 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

 

(In thousands)

 

Lease cost

 

 

 

 

Operating lease cost

 

$

1,830

 

Finance lease cost:

 

 

 

 

Amortization of right-of-use assets

 

 

53

 

Interest on lease liabilities

 

 

 5

 

Short-term lease cost

 

 

16

 

Variable lease cost

 

 

380

 

Total lease cost

 

$

2,284

 

 

 

 

 

 

Other information

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows from operating leases

 

$

1,689

 

Operating cash flows from finance leases

 

 

 5

 

Financing cash flows from finance leases

 

 

51

 

 

 

 

 

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

54,634

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

 

457

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

Weighted-average remaining lease term — operating leases

 

 

7.9 years

 

Weighted-average remaining lease term — finance leases

 

 

1.9 years

 

 

 

 

 

 

Weighted-average discount rate — operating leases

 

 

5.9%

 

Weighted-average discount rate — finance leases

 

 

4.5%

 

Maturities of lease liabilities were as follows:

 

 

 

 

 

 

 

 

 

 

    

Operating

 

Finance

 

 

 

lease payments

 

lease payments

 

 

 

(In thousands)

 

Years Ending December 31,

 

 

 

 

 

 

 

2019 (remainder of year)

 

$

5,807

 

$

166

 

2020

 

 

7,795

 

 

221

 

2021

 

 

8,630

 

 

37

 

2022

 

 

8,951

 

 

 —

 

2023

 

 

10,001

 

 

 —

 

2024 and thereafter

 

 

32,755

 

 

 —

 

Total lease payments

 

$

73,939

 

$

424

 

Less imputed interest

 

 

(15,962)

 

 

(17)

 

Total lease liabilities

 

$

57,977

 

$

407

 

 

 

 

 

 

 

 

 

Operating lease payments include $48.2 million related to options to extend lease terms that are reasonably certain of being exercised.

 

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Contingencies

From time to time, the Company may be subject to various legal proceedings and claims arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. An estimated loss contingency is accrued in the consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal proceedings, including litigation, government investigations and enforcement actions, could result in material costs, occupy significant management resources and entail civil and criminal penalties, even if the Company ultimately prevails. Any of the foregoing consequences could result in serious harm to the Company’s business, results of operations and financial condition.

 

 

Note 8.  Stock-Based Compensation

 

Stock Options

 

The following table summarizes the activities for stock options for the three months ended March 31,2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Outstanding Options

 

Remaining

 

Aggregate

 

 

 

Number of

 

Weighted-Average

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Exercise Price

 

Life

 

Value

 

 

 

(In thousands)

 

 

 

(In years)

 

(In thousands)

 

Balance at December 31, 2018

 

3,083

 

$

29.03

 

 

 

 

 

 

Options granted

 

301

 

$

72.42

 

 

 

 

 

 

Options exercised

 

(413)

 

$

23.90

 

 

 

 

 

 

Options forfeited

 

(32)

 

$

41.80

 

 

 

 

 

 

Options expired

 

 —

 

$

 —

 

 

 

 

 

 

Balance at March 31, 2019

 

2,939

 

$

34.06

 

6.8

 

$

106,537

 

Exercisable at March 31, 2019

 

1,809

 

$

28.75

 

5.7

 

$

74,704

 

Vested and expected to vest at March 31, 2019

 

2,852

 

$

33.65

 

6.8

 

$

104,478

 

 

Restricted Stock Units

 

The following table summarizes the activities for restricted stock units (“RSU”s) for the three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

 

 

 

Number of

 

Grant Date Fair

 

 

 

Shares

 

Value

 

 

 

(In thousands)

 

 

 

 

Balance at December 31, 2018

 

843

 

$

31.70

 

RSUs granted

 

275

 

$

75.64

 

RSUs vested (1)

 

(373)

 

$

29.74

 

RSUs cancelled

 

(29)

 

$

42.68

 

Balance at March 31, 2019

 

716

 

$

49.15

 

 

(1)

Includes 140,277 shares withheld to cover taxes.

 

Restricted Stock in Lieu of Directors’ Fees

 

Outside members of the Company’s Board of Directors may elect to receive fully-vested restricted stock in lieu of cash compensation for services as a director. During the three months ended March 31, 2019, the Company issued 775 shares of restricted stock to outside directors, with a grant date fair value of $50,000 and a weighted-average grant date fair value of $64.41 per share.

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Employee Stock Purchase Plan

 

There were no shares issued pursuant to the Employee Stock Purchase Plan (“ESPP”) during the three months ended March 31, 2019. As of March 31, 2019, there was $366,000 of unrecognized compensation expense related to the ESPP, which is expected to be recognized over a period of two months.

 

Employee Stock-Based Compensation Expense

 

The Company recognized employee stock-based compensation expense of $6.3 million and $5.2 million for the three months ended March 31, 2019 and 2018, respectively.

 

 

 

Note 9.  Segment Information

 

The Company operates in one business segment, which primarily focuses on the development and global commercialization of genomic-based clinical laboratory services that analyze the underlying biology of cancer, allowing physicians and patients to make individualized treatment decisions. The Company’s Oncotype DX breast, colon and prostate cancer tests have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment. As of March 31, 2019, the majority of the Company’s product revenues have been derived from sales of one product, the Oncotype DX breast cancer test.

 

The following table summarizes total revenue from customers by geographic region. Product revenues are attributed to countries based on ship-to location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

United States

 

$

91,018

 

 

78,867

 

Outside of the United States

 

 

17,751

 

 

13,758

 

Total revenues

 

$

108,769

 

$

92,625

 

 

 

 

Note 10.  Income Taxes

 

The Company recognized income tax expense of $267,000 and $240,000 for the three months ended March 31, 2019 and 2018, respectively, which was computed using the “discrete” (or “cut-off”) method. The income tax expense for the three months ended March 31, 2019 and 2018 was primarily comprised of foreign income tax expense.

 

Based on all available objective evidence, the Company believes that it is more likely than not that its deferred tax assets will not be fully realized. Accordingly, the Company maintains a valuation allowance against all of its deferred tax assets as of both March 31, 2019 and December 31, 2018. The Company will continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.

 

The Company had $6.7 million and $6.4 million of unrecognized tax benefits at March 31, 2019 and December 31, 2018, respectively. The Company does not anticipate a material change to its unrecognized tax benefits over the next 12 months that would affect its effective tax rate. Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.

 

Accrued interest and penalties related to unrecognized tax benefits are recognized as part of the Company’s income tax provision in its condensed consolidated statements of operations. The statute of limitations remains open for the years 2001 through 2019 in U.S. federal and state jurisdictions, and for the years 2013 through 2019 in foreign jurisdictions.

 

 

20


 

Note 11.  Restructuring

 

In March 2018, the Company announced its decision to no longer provide its commercial offering of Oncotype SEQ Liquid Select or any further investment in next generation sequencing (NGS) panels due to a decision to focus the Company’s efforts to develop IVD test solutions and other tests with more predictable reimbursement, higher proprietary value and better prospects for global adoption. With this shift in strategic direction, the Company announced a reduction of its workforce of approximately 10% and recorded charges of $8.5 million consisting of $4.8 million in non-cash asset impairments and $3.7 million in employee separation charges, all of which were recorded as operating expenses in the consolidated statements of operations. The Company paid all of the employee separation charges during 2018.

 

There were no restructuring costs during the three months ended March 31, 2019.  

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSI S OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” and similar expressions are intended to identify forward looking statements. These are statements that relate to future periods and include statements about our expectation that, for the foreseeable future, a significant amount of our revenues will be derived from our Oncotype DX invasive breast cancer test; the factors that may impact our financial results; our ability to achieve sustained profitability; our business strategy and our ability to achieve our strategic goals; our expectations regarding product revenues and the sources of those revenues; the amount of future revenues that we may derive from Medicare patients or categories of patients; our belief that we may become more dependent on Medicare reimbursement in the future; our plans to pursue reimbursement on a case-by-case basis; our ability, and expectations as to the amount of time it will take, to achieve reimbursement from third-party payors and government insurance programs for new indications of tests, new tests or in new markets; the potential impact of changes in reimbursement levels for our tests; our expectations regarding our international expansion and opportunities; the potential effects of foreign currency exchange rate fluctuations and our efforts to hedge such effects; our beliefs with respect to the benefits and attributes of our tests or collaborations or tests we may seek to develop or collaborate on in the future; the factors we believe drive demand for our tests and our ability to sustain or increase such demand; our success in increasing patient and physician demand as a result of our direct sales approach and our salesforce’s capacity to sell our tests; plans for, and the timeframe for the development or commercial launch of future tests, test enhancements or new technologies; the factors that we believe will drive reimbursement and the establishment of coverage policies; the capacity of our clinical reference laboratory to process tests and our expectations regarding capacity; our dependence on collaborative relationships to develop tests and the success of those relationships; whether any additional tests will result from our collaborations or license agreements; the applicability of clinical results to actual outcomes; our estimates and assumptions with respect to disease incidence and potential market opportunities; the occurrence, timing, outcome or success of clinical trials or studies; our expectations regarding timing of the announcement or publication of research results; the benefits of our technology platform; the economic benefits of our tests to the healthcare system; the ability of our tests to impact treatment decisions; our beliefs regarding our competitive position; our expectations regarding new and future technologies, including non-invasive test technology, and their potential benefits; our belief that multi gene analysis provides superior analytical information; our beliefs regarding the benefits of genomic analysis in various patient populations; our expectations regarding our research and development, general and administrative and sales and marketing expenses and our anticipated uses of our funds; our expectations regarding capital expenditures; our ability to comply with the requirements of being a public company; our expectations regarding billing and collections; our ability to attract and retain experienced personnel; the adequacy of our insurance; our anticipated cash needs and our estimates regarding our capital requirements; our expected future sources of cash; our compliance with federal, state and foreign regulatory requirements; the potential impact resulting from the regulation of our tests by the U.S. Food and Drug Administration, or FDA, and other similar non-U.S. regulators; our belief that our tests are properly regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA; the impact of new or changing policies, regulation or legislation, or of judicial decisions, on our business and reimbursement for our tests; the impact of seasonal fluctuations on our business; our belief that we have taken reasonable steps to protect our intellectual property; the impact of changing interest rates; our beliefs regarding

21


 

unrecognized tax benefits or our valuation allowance; the impact of accounting pronouncements and our critical accounting policies, judgments, estimates, models and assumptions on our financial results; the impact of the economy on our business, patients and payors; and anticipated trends and challenges in our business and the markets in which we operate.

 

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, those risks discussed in Item 1A of this report, as well as our ability to develop and commercialize new products and product enhancements; the risk of unanticipated delays in research and development efforts; the risk that we may not obtain or maintain reimbursement for our existing tests or any future tests we may develop, including the risk that we may lose Medicare coverage for our tests; the risk that reimbursement pricing or coverage for our tests may change; the risks and uncertainties associated with the regulation of our tests by the FDA or regulatory agencies outside of the U.S.; risks associated with the outcome of any legal proceeding, including litigation, government investigations and enforcement actions against us; the success of our new technology; the results of clinical studies; the applicability of clinical results to actual outcomes; the impact of new legislation or regulations, or of judicial decisions, on our business; our ability to compete against third parties; the success of our collaborations; our ability to obtain capital when needed; the economic environment; and our history of operating losses. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

This report contains epidemiological cancer data sourced from GLOBOCAN 2018 and the American Cancer Society, Cancer Facts and Figures, 2018. These sources generally indicate that they believe their information is reliable but do not guarantee the accuracy and completeness of their information. Although we believe that the sources are reliable, we have not independently verified their data.

In this report, all references to “Genomic Health,” “we,” “us,” or “our” mean Genomic Health, Inc.

 

Genomic Health, the Genomic Health logo, Oncotype, Oncotype DX, Breast Recurrence Score, DCIS Score, Genomic Prostate Score, GPS, Oncotype DX AR-V7 Nucleus Detect and Oncotype IQ are trademarks or registered trademarks of Genomic Health, Inc. We also refer to trademarks of other corporations and organizations in this report.

 

Business Overview

 

We are a global healthcare company that provides clinically-actionable genomic information to personalize cancer treatment. We develop and globally commercialize genomic-based clinical laboratory services that analyze the underlying biology of cancer, allowing physicians and patients to make individualized treatment decisions. We are translating significant amounts of genomic data that will be useful for treatment planning throughout the cancer patient’s journey, from diagnosis to treatment selection and monitoring. We offer our Oncotype tests as a clinical laboratory service, where we analyze the expression levels of genes in tumor tissue samples and provide physicians with a quantitative gene expression profile expressed as a single quantitative score, which we call a Recurrence Score for invasive breast cancer and colon cancer, a DCIS Score for ductal carcinoma in situ, or DCIS, and a Genomic Prostate Score, or GPS, for prostate cancer.

In January 2004, we launched our first Oncotype DX test, which is used to predict the likelihood of cancer recurrence and the likelihood of chemotherapy benefit in early stage invasive breast cancer patients. In January 2010, we launched our second Oncotype DX test, the first multigene expression test developed to assess risk of recurrence in stage II colon cancer patients. In late December 2011, we made Oncotype DX available for patients with DCIS, a pre-invasive form of breast cancer. In June 2012, we extended our offering of the Oncotype DX colon cancer test to patients with stage III disease treated with oxaliplatin-containing adjuvant therapy. In May 2013, we launched our Oncotype DX prostate cancer test, which is used to predict disease aggressiveness in men with low and intermediate risk disease. In February 2018, the Oncotype DX AR-V7 Nucleus Detect test for men with metastatic castration-resistant prostate cancer, or mCPRC, which is offered through our collaboration with Epic Sciences, Inc., or Epic Sciences, became commercially available. As of April 30, 2019, the list price of our Oncotype DX invasive breast cancer and DCIS tests in the United States was $4,620, the list price of our Oncotype DX colon cancer test was $4,420, the list price of our

22


 

Oncotype DX prostate cancer test was $4,520, and the list price of the Oncotype DX AR-V7 Nucleus Detect test was $4,160. There have been no increases during the three months ended March 31, 2019 to the list prices of our Oncotype DX invasive breast, colon and prostate cancer tests and our DCIS test. The substantial majority of our historical revenues have been derived from the sale of Oncotype DX invasive breast cancer tests ordered by physicians in the United States.

For the three months ended March 31, 2019, more than 37,580 Oncotype test reports were delivered for use in treatment planning, compared to more than 32,440 test reports delivered for the same period in 2018. All of our internally-developed tests are conducted at our clinical reference laboratory in Redwood City, California, which is accredited under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and certified by the College of American Pathologists, or CAP. The Oncotype DX AR-V7 Nucleus Detect test is performed by Epic Sciences at its clinical reference laboratory in San Diego, California, which is accredited under CLIA and certified by CAP. Our clinical reference laboratory processing capacity is currently approximately 150,000 tests annually, and has significant expansion capacity with incremental increases in laboratory personnel and equipment. The Oncotype DX breast, colon, and prostate cancer tests analyze different genes. However, all of our tests, excluding Oncotype DX AR-V7 Nucleus Detect, are based on a similar Oncotype DX reverse transcription polymerase chain reaction, or RT-PCR, platform and require both histology and pathology assessments. We believe that we currently have sufficient capacity to process current demand for our tests.

We have expanded our clinical laboratory facilities and processing capacity to accommodate future test processing, research and development and general use office space. We expect our continued commercialization efforts of our tests will result in increased costs for laboratory testing, including staffing-related costs, incremental sales and marketing personnel to introduce our products to physicians and patients, costs for clinical utility studies and costs associated with obtaining and maintaining reimbursement coverage.

We depend upon third-party payors, both public and private, to provide reimbursement for our tests. Accordingly, we have and expect to continue to focus substantial resources on obtaining and maintaining reimbursement coverage from third-party payors. Sales of our tests in the United States and other countries are dependent upon the coverage decisions and reimbursement policies established by government healthcare programs and private health insurers. Market acceptance of our tests has and will continue to depend upon the ability to obtain an appropriate level of coverage for, and reimbursement from, third-party payors for our tests. We have had Medicare coverage for our Oncotype DX invasive breast cancer test since 2006 and for our Oncotype DX colon cancer test since 2011. In October 2015, we obtained Medicare coverage for our Oncotype DX prostate cancer test for patients with low and very-low risk as defined by National Comprehensive Cancer Network, or NCCN, guidelines. Effective October 2017, Palmetto expanded their reimbursement coverage of our Oncotype DX prostate cancer test to include qualified patients with favorable intermediate-risk prostate cancer.

In January 2017, Palmetto announced that it would cover the Oncotype DX DCIS test under a new local coverage determination, or LCD, for services furnished beginning March 6, 2017.

In September 2018, the Centers for Medicare and Medicaid Services, or CMS, issued new Proprietary Laboratory Analyses, or PLA, codes for our Oncotype DX DCIS test and Oncotype DX Genomic Prostate Score test, which became effective on October 1, 2018 for administrative and billing purposes. Medical national payment rates for the new PLA codes for both tests became effective January 1, 2019.

We have expanded our business in both the United States and international markets. Operational requirements generally vary from country to country, and different countries may have a public healthcare system, a combination of public and private healthcare system or a cash-based payment system. We have a direct commercial presence with employees in Canada, Japan and certain European countries, including our European headquarters in Geneva, Switzerland. Additionally, we have exclusive distribution agreements for the sale of our breast and colon cancer tests with distributors covering more than 90 countries outside of the United States.

As our international business expands, our financial results become more sensitive to the effect of fluctuations in foreign currency exchange rates. For example, in countries where we have a direct commercial presence, our tests are sold in local currency, which results in foreign currency exchange rate fluctuations affecting our U.S.-dollar reported

23


 

revenues. In other markets where we sell our tests in U.S. dollars to distribution partners, the demand for our tests may be impacted by the change in U.S. dollar exchange rates affecting partners’ costs or local market price adjustments.

We expect that international sales of our Oncotype tests will be heavily dependent on the availability of reimbursement and sample access. In many countries, governments are primarily responsible for reimbursing diagnostic tests. Governments often have significant discretion in determining whether a test will be reimbursed at all, and if so, on what conditions, for which other competing products, and how much will be paid. In addition, certain countries, such as China, have limitations on exporting tissue samples which will impair our ability to offer our tests in those countries without local laboratories or a method of test delivery which does not require samples to be transported to our U.S. laboratory.

The majority of our international Oncotype DX breast and colon cancer test revenues come from direct payor reimbursement, payments from our distributors, patient self-pay, and clinical collaborations in various countries. We have obtained some coverage, which varies substantially from country to country, for our breast cancer test outside of the United States, including in Argentina, Canada, the Czech Republic, Germany, Greece, Hungary, Ireland, Israel, Saudi Arabia, Spain, Switzerland and the United Kingdom. In 2013, we announced that the National Institute for Health and Care Excellence, or NICE, in the United Kingdom issued its final guidance recommending the Oncotype DX multi-gene breast cancer test for use in clinical practice to guide chemotherapy treatment decisions for certain patients.

We established reimbursement with NHS England following NICE’s recommendation for our breast cancer test, and in 2015 we began to receive payments from NHS England trusts with whom we have completed contractual arrangements. In 2014, the Gynecologic Oncology Working Group, or AGO, in Germany first updated their guidelines to recommend Oncotype DX as the only breast cancer gene expression test to predict chemotherapy benefit in early-stage, hormone receptor-positive invasive breast cancer. In December 2018, NICE issued updated guidance to now include patients with micrometastases, while continuing to recommend the Oncotype DX breast cancer test for use in clinical practice to guide chemotherapy treatment decisions for certain patients with early stage, N-, hormone receptor positive, human epidermal growth factor receptor 2, or HER2, negative, invasive breast cancer. Additionally, in its updated assessment of breast cancer gene expression profiling tests, the German Institute for Quality and Efficiency in Health Care, or IQWiG, concluded in September 2018 that only the Oncotype DX Breast Recurrence Score test has sufficient evidence to guide breast cancer adjuvant chemotherapy decisions based on the Trial Assigning IndividuaLized Options for Treatment (Rx), or TAILORx, study results. Also, each of the AGO in Germany and the Japan Breast Cancer Society recently updated their guidelines to recommend Oncotype DX as the only breast cancer gene expression test to predict chemotherapy benefit in early-stage, hormone receptor-positive invasive breast cancer. We expect that it will take several years to establish broad coverage and reimbursement for our Oncotype DX breast, colon and prostate cancer tests with payors in countries outside of the United States and there can be no assurance that our efforts will be successful. 

Oncotype DX Breast Cancer Tests

We expect to continue to focus substantial resources on pursuing adoption of and reimbursement for our Oncotype DX breast cancer test including through the development of a distributable in vitro diagnostic, or IVD, version of the Oncotype DX breast cancer test, offered on the Biocartis Idylla platform, which we currently anticipate will be commercially available in select European markets beginning in 2020. We believe increased demand for our Oncotype DX breast cancer test resulted from the impact of the Trial Assigning IndividuaLized Options for Treatment (Rx), or TAILORx , results, our ongoing commercial efforts, expanded utility for new breast cancer patient groups, continued publication of peer-reviewed articles on studies we sponsored, conducted or collaborated on that support the use of and reimbursement for the test, clinical presentations at major symposia, and the inclusion of our breast cancer test in clinical practice guidelines for, node negative, or N−, estrogen receptor positive, ER+, invasive disease. However, this increased demand is not necessarily indicative of future growth rates, and we cannot provide assurance that this level of increased demand can be sustained or that publication of articles, future appearances or presentations at medical conferences, increased commercial efforts or expansion of utility to new breast cancer patient groups will have a similar impact on demand for our breast cancer test in the future. Sequential quarterly demand for our breast cancer test may also be impacted by other factors, including the economic environment and seasonal variations that have historically impacted physician office visits, any shift in commercial focus, patient enrollment in Oncotype DX clinical studies and the number of clinical trials in process by cooperative groups or makers of other tests conducting experience studies.

24


 

In June 2018, the results of the TAILORx trial were published in The New England Journal of Medicine and presented at the plenary session of the 2018 American Society of Clinical Oncology annual meeting. The TAILORx trial was independently designed and led by ECOG-ACRIN Cancer Research Group under the sponsorship of the National Cancer Institute, or NCI. TAILORx represents the largest breast cancer treatment trial ever conducted, and thousands of investigators enrolled more than 10,000 women across approximately 1,200 sites in six countries. With regard to the primary endpoint, TAILORx enrolled approximately 7,000 women with Oncotype DX Breast Recurrence Score results of 11 to 25. This primary study group was randomized to receive hormonal therapy with or without chemotherapy in order to more precisely define the benefit of chemotherapy, if any. These randomized patients with Oncotype DX Breast Recurrence Score results of 11 to 25 comprised approximately two-thirds of all TAILORx patients and were followed long-term, with nine-year outcomes reported. This group of women represents approximately 260,000 breast cancer patients diagnosed in major global markets each year. The TAILORx study definitively established that chemotherapy can be spared in at least 70 percent of patients. Tumor size or tumor grade did not predict chemotherapy benefit. Thus, the TAILORx trial established that chemotherapy treatment should be guided using the Oncotype DX breast cancer test as the genomic classifier. We anticipate that the results of the TAILORx study will continue to have a positive impact on our invasive breast cancer revenue growth.

Most national and regional third-party payors in the United States, along with the designated regional Medicare Administrator Contractor for our tests, have issued positive coverage determinations for our Oncotype DX breast cancer test for patients with N−, ER+ invasive disease through contracts, agreements or policy decisions. The local carrier with jurisdiction for claims submitted by us for Medicare patients also provides coverage for our invasive breast cancer test for ER+ patients with N+ disease (up to three positive lymph nodes) and invasive breast cancer patients where a lymph node status is unknown or not accessible due to a prior surgical procedure, or when the test is used to guide a neoadjuvant treatment decision. Additionally, some payors provide policy coverage for the use of our test in ER+ patients with N+ disease, including lymph node micro metastasis. However, we may not be able to obtain reimbursement coverage from other payors for our test for breast cancer patients with N+, ER+ disease.

 

We have established limited reimbursement coverage for the use of our Oncotype DX DCIS test for some private third-party payors. In many instances our test is covered under existing breast cancer coverage policies with the addition of the indicated diagnosis code for DCIS. We have also received a new LCD for our Oncotype DX DCIS test beginning March 6, 2017. We intend to continue to devote resources to expanding private reimbursement for our Oncotype DX DCIS test in this patient population. We believe it may take several years to achieve reimbursement with a majority of third-party payors for the use of our test for DCIS patients. However, we cannot predict whether, or under what circumstances, payors will reimburse for this test.

We have established coverage for our Oncotype DX invasive breast cancer test in more than 90% of state Medicaid programs for N− disease. In addition, the Veterans Administration and the Department of Defense hospitals have processes in place that provide coverage for this test.

Oncotype DX Colon Cancer Test

We expect to continue to pursue adoption of and reimbursement for our Oncotype DX colon cancer test. We are working with public and private payors and health plans to secure coverage for our Oncotype DX colon cancer test based upon our published and presented results in clinical validation studies and the completed and ongoing studies designed to demonstrate the treatment decision impact of the test in clinical practice. We intend to pursue reimbursement while seeking to obtain formal coverage policies with payors and expect that this test will continue to be reviewed on a case by case basis until policy decisions have been established. We believe it may take several years to achieve additional reimbursement with third-party payors for our colon cancer test. However, we cannot predict whether, or under what circumstances, payors will reimburse for this test.

25


 

Oncotype DX Prostate Cancer Test

We expect to continue to focus substantial resources on pursuing adoption of and reimbursement for our Oncotype DX prostate cancer test. We believe the key factors that will drive adoption of this test include publication of the clinical validation study conducted in collaboration with the University of California, San Francisco and other studies we sponsored, conducted or collaborated on that support the use of and reimbursement for the test, clinical presentations at major symposia and our ongoing commercial efforts.

In August 2015, Palmetto issued its final LCD, approving nationwide coverage of our prostate cancer test for qualified male Medicare patients with low and very-low risk disease, as defined by NCCN guidelines, throughout the United States. The LCD includes specific requirements for certification and training of physicians who order the test and requirements for collection and reporting of specific data elements related to the use of our test and patient outcomes. Effective October 2015, Palmetto initiated reimbursement of the Oncotype DX prostate cancer test.

In August 2017, Palmetto issued its final LCD, recommending Medicare coverage for use of our prostate cancer test in qualified patients with favorable intermediate-risk prostate cancer. Effective October 2017, Palmetto expanded their reimbursement coverage of our Oncotype DX prostate cancer test to include qualified patients with favorable intermediate-risk prostate cancer.

Other than Medicare coverage, we have obtained limited reimbursement coverage from third-party payors for our Oncotype DX prostate cancer test. Our prostate cancer test may be considered investigational by payors and therefore may not be covered under their reimbursement policies. Consequently, we intend to pursue case by case reimbursement and expect that this test will continue to be reviewed on this basis until policy decisions have been made by individual payors. We plan to work with public and private payors and health plans to secure coverage for our Oncotype DX prostate cancer test based upon clinical evidence demonstrating the clinical utility of the test. We believe it may take several years to achieve reimbursement with a majority of third-party payors for our prostate cancer test. However, we cannot predict whether, or under what circumstances, payors will reimburse for this test. We may continue to hire additional commercial, scientific, technical and other personnel to support this process.

Oncotype DX AR-V7 Nucleus Detect Test

In June 2016, we entered into a collaboration agreement with Epic Sciences which was subsequently superseded in March 2019 by a new contractual agreement, under which we have been granted exclusive license and distribution rights to commercialize the Oncotype DX AR-V7 Nucleus Detect test in the United States.

The Oncotype DX AR-V7 Nucleus Detect test is performed by Epic Sciences in its centralized laboratory in San Diego, California. This blood-based test detects the V7 variant of the androgen receptor, or AR, protein in the nucleus of CTCs, and provides information to help guide treatment selection in patients with metastatic castration-resistant prostate cancer, or mCRPC.

In January 2017, investigators from Memorial Sloan Kettering Cancer Center and Epic Sciences published findings in European Urology , that only nuclear localization of AR-V7 protein in CTCs from mCRPC patient blood samples is predictive of therapeutic benefit. Previous work by the same team, reported in JAMA Oncology , demonstrated that nuclear localized AR-V7 protein in CTCs was predictive of a 76% reduction of risk of death for mCRPC patients who received taxane chemotherapy versus Androgen Receptor Signaling Inhibitors. We began making the Oncotype DX AR-V7 Nucleus Detect test available through a clinical utility program in July 2017 and it became commercially available in February 2018.

In October 2018, Palmetto initiated coverage for the use of the Oncoytpe DX AR-V7 test through its final LCD, providing coverage for eligible Medicare patients for dates of service on or after December 10, 2018.

We believe that this test is complementary to our other Oncotype tests and allows us to leverage our commercial channel in oncology and urology in a way that we believe may generate growth across our business in the United States.

26


 

We may also pursue additional collaboration opportunities that are intended to complement our expanding product portfolio.

Commercial Collaborations

In September 2017, we entered into an exclusive license and development agreement with Biocartis N.V., or Biocartis, a molecular diagnostics company based in Belgium, to develop and commercialize an in vitro diagnostic, or IVD, version of the Oncotype DX breast cancer test on Biocartis' Idylla platform that can be performed locally by laboratory partners and in hospitals around the world. The Idylla platform offers a unique solution in the localization of complex molecular diagnostics. Using the sample-to-answer, real-time PCR-based cartridge of the Idylla platform, we intend to enable local pathology labs to generate Oncotype DX breast recurrence score results. Under the terms of the license and development agreement, we have an exclusive, worldwide, royalty-bearing, license to develop and commercialize an IVD version of our Oncotype DX breast cancer test on Biocartis’ Idylla platform, and an option to expand the collaboration to include additional tests in oncology and urology. We have primary responsibility for developing, validating and registering IVD tests to be performed on the Idylla platform, and are also responsible for manufacturing and commercialization activities with respect to such tests. In November 2018, we signed an addendum to the license and development agreement with Biocartis, exercising our option to expand the collaboration to include urology. We obtained a first right to add an additional test, a non-invasive detection of prostate cancer in a pre-biopsy setting.

 

See Note 6 “ Collaboration and Commercial Technology Licensing Agreements ” in the Notes to Condensed Consolidated Financial Statements for additional information regarding the financial terms of our commercial collaboration agreements.

 

Product Development Opportunities

In addition to developing products to address new cancer areas, we seek to expand the clinical utility and addressable patient populations for our existing tests, including expanding our current test offerings to include tests that are performed as IVDs. These development efforts may lead to a variety of possible new products covering various treatment decisions, including risk assessment, screening and prevention, early disease diagnosis, adjuvant and/or neoadjuvant disease treatment, metastatic disease treatment selection and patient monitoring.

Potential new products may address a variety of specific clinical needs by leveraging one or multiple technological capabilities. Additionally, we believe potential new products can be implemented in the form of non‑invasive tests performed on blood or urine, similar to the Oncotype DX AR-V7 Nucleus Detect test.

We have also begun development of an IVD version of the Oncotype DX breast cancer test on Biocartis' Idylla platform that we believe will be able to be performed locally by laboratory partners and in hospitals around the world.

As new clinical evidence continues to be introduced, we intend to incorporate such evidence into additional iterations of these tests, which could include additional genes or updated interpretations of genes already included in such tests.

Technology

Next Generation Technologies

When the presence of tumor-derived DNA in blood or urine is high and persists or increases over time, the cancer is likely growing and a new course of treatment may be appropriate. We plan on monitoring this tumor-derived DNA through a variety of technologies to expand our focus beyond early‑stage treatment decision support toward patients with later‑stage disease to help guide therapeutic choices, monitor progression and response to therapeutics, and monitor disease recurrence. We may pursue additional research and development opportunities and leverage our existing and future collaborations using other analytes such as circulating tumor cells, or CTCs, RNA, and proteins. Additionally, we may also use a number of other technologies across our various development programs and to implement our products. While early‑stage cancer continues to represent a significant opportunity with near‑term revenue potential, we believe we

27


 

also have an opportunity to expand our business further along the patient’s cancer journey, both through our research and development process and strategic collaborations.

We are also working with a number of different technologies, such as digital PCR and detection and capture methods for circulating tumor cells, or CTCs, and circulating tumor DNA, or ctDNA, to expand our capabilities, and continue to develop methods to enable genomic testing using a variety of biological materials such as blood and urine.

We have developed computer programs to automate our RT-PCR assay processes. We have also developed and optimized laboratory information management systems to track our gene-specific reagents, instruments, assay processes and the data generated. Similarly, we have automated data analysis, storage and process quality control. We use statistical methods to optimize and monitor assay performance and to analyze data from our development studies. We are investigating methods to further automate our workflow.

Economic Environment

Continuing concerns over entitlement and health care reform efforts, including efforts to repeal, replace or reduce the impact of the Affordable Care Act, or ACA, the elimination of the ACA’s personal mandate, regulatory changes and taxation issues, and geopolitical issues have contributed to uncertain expectations both for the U.S. and global economies. These factors, combined with uncertainties in business and consumer confidence and continued concerns regarding the stability of some European Union member countries and the United Kingdom’s exit from the European Union, have contributed to the expectations of slower domestic and global economic growth in the near term. We periodically evaluate the impact of the economic environment on our cash management, cash collection activities and volume of tests delivered.

As of the date of this report, we have not experienced a loss of principal on any of our short-term marketable securities, and we expect that we will continue to be able to access or liquidate these investments as needed to support our business activities. We periodically monitor the financial position of our significant third-party payors, which include Medicare and managed care companies. As of the date of this report, we do not expect the current economic environment to have a material negative impact on our ability to collect payments from third-party payors in the foreseeable future. We believe the economic environment and changes in the healthcare system continued to impact product payment cycles, growth in tests delivered and product revenue generated during the three months ended March 31, 2019. We intend to continue to assess the impact of the economic environment on our business activities. If the economic environment does not improve or deteriorates, our business including our patient population, government and third-party payors and our distributors and suppliers could be negatively affected, resulting in a negative impact on our product revenues.

U.S. Healthcare Reimbursement and Regulatory Environment

The healthcare industry has undergone significant change driven by various efforts to reduce costs, both in the U.S. and in many foreign countries. The effect of the implementation of the ACA, the elimination of personal mandate, or any future changes to the ACA on our business is uncertain and, could among other things limit the use of our tests and reduce reimbursement. We also expect that pricing of medical products and services will remain under pressure as alternative payment models such as bundling, value-based purchasing and accountable care organizations develop in the United States. Additionally, the ACA requires medical device manufacturers to pay a 2.3% excise tax on U.S. sales of certain medical devices that are listed with the FDA starting in January 2013; this tax has been suspended through 2019, but is scheduled for re-imposition in 2020. Various proposals have been put forth, including by the FDA to regulate laboratory developed tests, or LDTs, as medical devices. Although none of our LDTs, such as our Oncotype DX breast, colon and prostate cancer tests, are currently listed with the FDA, we cannot assure you that the tax will not apply to services such as ours in the future.

In addition, the Protecting Access to Medicare Act of 2014, or PAMA, requires CMS to implement a substantial new payment system for certain clinical laboratory tests, which became effective in 2018. Under PAMA, laboratories that receive the majority of their Medicare revenues from payments made under the Clinical Laboratory Fee Schedule, or CLFS, or the Physician Fee Schedule will be required to report every three years (or annually for “advanced diagnostic

28


 

laboratory tests”), private payor payment rates and volumes for their tests. CMS will use the rates and volumes reported by laboratories to develop Medicare payment rates for the tests equal to the volume-weighted median of the private payor payment rates for the tests. As a result, effective January 1, 2018, our Medicare reimbursement rate for our invasive breast cancer test increased by more than 10%. This rate will be reassessed by CMS every three years.

There have also been recent and substantial changes to the payment structure for physicians, including those passed as part of the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which was signed into law on April 16, 2015. MACRA created the Merit-Based Incentive Payment System which, beginning in 2019, more closely aligns physician payments with composite performance for the Physician Quality Reporting System, the Value-based modifier program and the Electronic Health Record Meaningful Use program, and incentivizes physicians to enroll in alternative payment methods. At this time, we do not know whether these changes to the physician payment systems will have any impact on orders or payments for our tests.

Changes in Medicare Administrative Contractor (MAC) services

On a five-year basis, Medicare requests bids for its regional MAC services. Palmetto GBA under their MolDx Program is continuing to establish coverage and coding policies for molecular diagnostic tests performed in our jurisdiction, including our tests, which is not subject to the same five-year rotation as for regional MAC services. The elimination of the MolDx Program or a change in the administrator of that program could impact the current coverage for our existing tests and our ability to obtain Medicare coverage for products for which we do not yet have coverage or any products we may launch in the future, or delay payments for our tests.

Critical Accounting Policies and Significant Judgments and Estimates

 

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts in the financial statements and related disclosures. On an ongoing basis, management evaluates its significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates. Estimates are assessed each period and updated to reflect current information. A summary of our critical accounting policies is presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.  During the first quarter of 2019, we adopted new accounting guidance related to leases which is described below at “Recently Adopted Accounting Pronouncements.” There have been no other significant changes in our accounting policies during the three months ended March 31, 2019 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Results of Operations

 

Three Months Ended March 31, 2019 and 2018

 

We recognized net income of $13.0 million for the three months ended March 31, 2019 compared to a net loss of $3.8 million for the three months ended March 31, 2018. On a basic and diluted per share basis, net income per share was $0.35 and $0.34, respectively, for the three months ended March 31, 2019. On a basic and diluted per share basis, net loss per share was $0.11 for the three months ended March 31, 2018. We may incur net losses in future periods due to future spending and fluctuations in our business, and we may not achieve or maintain sustained profitability in the future.

 

Revenues

 

We derive our revenues primarily from product sales and, in some periods, from contract research arrangements. We operate in one industry segment. As of March 31, 2019, the substantial majority of our product revenues have been

29


 

derived from the sale of our Oncotype DX breast cancer test. Payors are billed upon generation and delivery of test results to the ordering physician.

 

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

March 31,

 

 

 

2019

 

2018

 

Invasive breast cancer test

 

$

97,368

 

$

84,551

 

Prostate cancer test

 

 

8,590

 

 

5,840

 

Other

 

 

2,799

 

 

2,234

 

Product revenues

 

$

108,757

    

$

92,625

 

Period over period dollar increase in product revenues

 

$

16,132

 

 

 

 

Period over period percentage increase in product revenues

 

 

17

%  

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

 

12

 

 

 —

 

Total revenues

 

$

108,769

 

$

92,625

 

Period over period dollar increase in total revenues

 

$

16,144

 

 

 

 

Period over period percentage increase in total revenues

 

 

17

%  

 

 

 

 

The period over period increase in product revenues resulted primarily from increased adoption of our tests, as well as expanded private and Medicare coverage, collection efficiencies due to process and system improvements and private payor contract renewals.

Test volume increased by 16% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Of the growth in test volume, our U.S. invasive breast cancer and prostate cancer tests increased by 9% and 25%, respectively, for the three months ended March 31, 2019 compared to the same period in 2018.

International product revenue was $17.8 million, or 16% of product revenues for the three months ended March 31, 2019 compared to $13.8 million, or 15% of product revenues for the three months ended March 31, 2018 primarily due to revenue growth in the United Kingdom, Canada, and the Asia-Pacific region offset by the impact of a stronger U.S. dollar compared to the Euro and British pound. International test volume increased by 28% for the three months ended March 31, 2019 compared to the same period in 2018.

 

Product revenues related to Medicare patients comprised 24% and 26% of product revenues for the three months ended March 31, 2019 and 2018, respectively. There were no other third-party payors comprising product revenues of 10% or more for those periods.

 

Cost of Product Revenues

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

Total cost of product revenues

 

$

17,008

 

$

18,733

 

Period over period dollar decrease

 

$

(1,725)

 

 

 

 

Period over period percentage decrease

 

 

(9)

%  

 

 

 

 

Cost of product revenues includes the cost of materials, direct labor, equipment and infrastructure expenses associated with processing tissue samples (including sample accessioning, histopathology, anatomical pathology, paraffin extraction, RT-PCR, quality control analyses and shipping charges to transport tissue samples) and license fees.

30


 

Infrastructure expenses include allocated facility occupancy and information technology costs. Costs associated with performing our tests are recorded as tests are processed. Costs recorded for tissue sample processing represent the cost of all the tests processed during the period regardless of whether revenue was recognized with respect to that test.

 

The $1.7 million, or 9% decrease in the cost of product revenue for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to a decrease of $3.6 million for a one-time write-off of fixed assets and lab supplies due to our March 2018 cessation of Oncotype SEQ, including Oncotype SEQ Liquid Select test, product development and commercialization activities, partially offset by an increase of $866,000 in personnel cost, primarily due to increased salary, bonus and stock-based compensation expense, an increase of $597,000 in other expense increases, such as lab supplies and shipping expenses, which were primarily due to an increase in test volume. Excluding the first quarter 2018 Oncotype SEQ related termination costs, total cost of product revenues for the three months ended March 31, 2019 would have increased by 12% over expenses in the comparable period in 2018. 

 

We expect the cost of product revenues may increase in future periods to the extent we process more tests.

 

Research and Development Expenses

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

Total research and development expenses

 

$

15,054

 

$

16,807

 

Period over period dollar decrease

 

$

(1,753)

 

 

 

 

Period over period percentage decrease

 

 

(10)

%  

 

 

 

 

Research and development expenses represent costs incurred to develop our technology, our pipeline products and continuous process improvement, and carry out clinical studies, primarily related to our ongoing work in breast and prostate cancer. Research and development expenses include personnel related expenses, reagents and supplies used in research and development laboratory work, collaboration expenses, infrastructure expenses, including allocated overhead and facility occupancy costs, contract services and other outside costs.

 

The $1.8 million, or 10%, decrease in research and development expenses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to a $1.5 million decrease in personnel expenses and a $1.3 million charge for impairment of long-lived assets related due to our March 2018 cessation of Oncotype SEQ, including Oncotype SEQ Liquid Select test, product development and commercialization activities, partially offset by increases in contract labor of $534,000, and $274,000 in lab supplies. The $1.5 million decrease in personnel-related expenses included the impact of $1.8 million severance charges, primarily due to the reduction in personnel resulting from our March 2018 decision to no longer provide our commercial offering of Oncotype SEQ Liquid Select or any further investment in next generation sequencing (NGS) panels. Excluding the first quarter 2018 Oncotype SEQ related termination and impairment costs, total research and development would have increased by 10% over the comparable period in 2018.

 

We expect our research and development expenses to increase in future periods due to increased investment in our new product pipeline for breast, prostate and other cancers.

 

Selling and Marketing Expenses

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

Total selling and marketing expenses

 

$

45,348

 

$

41,755

 

Period over period dollar increase

 

$

3,593

 

 

 

 

Period over period percentage increase

 

 

 9

%  

 

 

 

 

31


 

Our selling and marketing expenses consist primarily of personnel related expenses, education and promotional expenses, market analysis and development expenses and infrastructure expenses, including allocated facility occupancy and information technology costs. These expenses include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding our genomic technologies, how our tests are developed and validated and the value of the quantitative information that our tests provide. Selling and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation and dissemination of scientific and economic publications related to our tests. Our sales force compensation includes annual salaries and eligibility for quarterly commissions based on the achievement of predetermined sales goals and other management objectives.

The $3.6 million, or 9%, increase in selling and marketing expenses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to a  $1.7 million increase in promotional marketing materials expense,  a $1.5 million increase in personnel-related expense, primarily from increased stock bonuses and stock compensation and a $921,000 increase in contract labor and travel and entertainment resulting from increased international expansion, partially offset by $1.0 million in severance and other personnel-related costs related to our cessation of Oncotype SEQ, including the Oncotype SEQ Liquid Select in March 2018. The increase in promotional and marketing materials was due to a combination of new international product campaigns and marketing and trade shows along with an increase in sponsorships.  

 

We expect selling and marketing expenses will increase in future periods due to our efforts to establish adoption of and reimbursement for our products, continued investment in our global commercial infrastructure and increases in our sales force and incurring other expenses to support the growth of our business.

 

General and Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

Total general and administrative expenses

 

$

19,820

 

$

19,718

 

Period over period dollar increase

 

$

102

 

 

 

 

Period over period percentage increase

 

 

 1

%  

 

 

 

 

Our general and administrative expenses consist primarily of personnel-related expenses, occupancy and equipment expenses, including rent and depreciation expenses, billing and collection fees, bad debt expense, professional fees and other expenses, including intellectual property defense and prosecution costs, and other administrative costs, partially offset by cost allocations to our commercial laboratory operations, research and development, and sales and marketing functions, including allocated information technology and facility occupancy costs.

 

The $102,000, or 1%, increase in general and administrative expenses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to a $412,000 increase in billing and collections partially offset by a $443,000 decrease in contract labor and consulting services related to the evaluation of our business for process improvements and information technology enhancements in 2018.  Personnel-related expenses were flat period over period as a result of increases in bonus accruals, stock compensation expense and payroll taxes totaling $641,000 offset by a decrease in salary and benefits of $633,000. The decrease in salary and benefits for the three months ended March 31, 2019 is primarily due to the $909,000 in severance and other personnel-related costs related to our cessation of Oncotype SEQ in March 2018.

 

We expect general and administrative expenses to increase in future periods as we hire additional staff and incur other expenses to support the growth of our business, and to the extent we spend more on billing and collections fees.

 

Interest Income

 

Interest income was $1.2 million for the three months ended March 31, 2019 compared to $417,000 for the three months ended March 31, 2018.   The $734,000 increases in interest income for the three months ended March 31, 2019 

32


 

over the comparable period in 2018 was primarily due from a combination of increased cash and investments in interest-bearing marketable securities and higher interest rates.

 

Unrealized gain on equity securities

 

For the three months ended March 31, 2019, we had unrealized gain on equity securities of $449,000 compared to $127,000 for the three months ended March 31, 2018.  

 

Other Income, Net

 

Other income, net was $127,000 and $219,000 for the three months ended March 31, 2019 and 2018, respectively, and was primarily related to a  $51,000 gain on life insurance premiums, $41,000 of net foreign currency gains and a  $13,000 gain on sale of corporate debt securities. Other income, net for the three months ended March 31, 2018 was primarily related to $262,000 of net foreign currency gains, resulting from valuation adjustments to our international accounts receivable balance. We expect other income (expense), net to continue to fluctuate based on fluctuations in exchange rates that impact our foreign currency transaction gains and losses.

 

Income Tax Expense

 

We recognized income tax expense of $267,000 and $240,000 for the three months ended March 31, 2019 and 2018, respectively, which was computed using the “discrete” (or “cut-off”) method. The income tax expense for both periods was primarily comprised of foreign tax expense.

 

Based on all available objective evidence, we believe that it is more likely than not that our deferred tax assets will not be fully realized. Accordingly, we maintain a valuation allowance on all of our deferred tax assets as of both March 31, 2019 and December 31, 2018. We will continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.  

 

Liquidity and Capital Resources

 

As of March 31, 2019, we had an accumulated deficit of $193.3 million. We may incur net losses in the future, and we cannot provide assurance as to when, if ever, we will achieve sustained profitability. We expect that our research and development expenses, selling and marketing expenses and general and administrative expenses will increase in future periods and, as a result, we will need to continue to generate significant product revenues to achieve sustained profitability.

 

 

 

 

 

 

 

 

 

    

March 31,

 

December 31,

 

 

2019

 

2018

 

 

(in thousands)

Cash, cash equivalents, restricted cash, and short-term marketable securities

 

$

206,226

 

$

210,066

Working capital

 

 

230,158

 

 

215,060

 

 

Sources (Uses) of Liquidity

 

Historically, we have financed our operations primarily through sales of our equity securities and cash received in payment for our tests. At March 31, 2019, we had cash, cash equivalents, restricted cash and short-term investments of $206.2 million compared to $201.1 million at December 31, 2018. The $3.9 million decrease was primarily attributable to a decrease in cash resulting from annual bonus payments and increased payroll taxes paid on annual RSU vesting, as well as investments in the growth of our business, including research and development, global expansion, and activities related to reimbursement coverage of our tests. In accordance with our investment policy, available cash is invested in short-term and long-term, low-risk, investment-grade debt instruments. Our cash and marketable securities are held in a variety of interest-bearing instruments including money market accounts and high-grade commercial paper and corporate bonds.

 

33


 

Accounts Receivable

 

At March 31, 2019 and December 31, 2018, $59.2 million and $51.5 million, or 15% of our total assets consisted of accounts receivable. The $7.7 million increase in accounts receivable from December 31, 2018 to March 31, 2019 was primarily due to an increase in product revenue.

 

Days sales outstanding, or DSO, is a measure of the average number of days it takes for us to collect our accounts receivable, calculated from the date that tests are billed. At March 31, 2019 and December 31, 2018, our weighted average DSOs were 70 days and 65 days, respectively. The timing of our billing and cash collections may also cause fluctuations in our monthly DSOs and accounts receivable. We actively monitor our accounts receivable aging and believe that the increase in DSO is reasonable and within historic ranges.

 

The following tables summarize accounts receivable by payor mix at March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

% of

 

 

 

 

31 - 60

 

61 - 90

 

91 - 120

 

121 to 180

 

Over 180

 

 

 

Total

 

Total

 

Current

 

Days

 

Days

 

Days

 

Days

 

Days

 

 

 

(In thousands)

 

Managed care and other

 

$

49,221

 

83

%

$

29,230

 

$

6,841

 

 

3,002

 

 

2,218

 

$

2,879

 

 

5,051

 

Medicare

 

 

10,027

 

17

 

 

7,752

 

 

809

 

 

734

 

 

304

 

 

224

 

 

204

 

Total accounts receivable

 

$

59,248

 

100

%

$

36,982

 

$

7,650

 

$

3,736

 

$

2,522

 

$

3,103

 

$

5,255

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

% of

 

 

 

 

31 - 60

 

61 - 90

 

91 - 120

 

121 to 180

 

Over 180

 

 

    

Total

  

Total

 

Current

  

Days

   

Days

  

Days

  

Days

  

Days

 

 

 

(In thousands)

 

Managed care and other

 

$

42,739

 

83

$

15,838

 

$

8,621

 

$

3,980

 

$

3,272

 

$

4,433

 

$

6,595

 

Medicare

 

 

8,792

 

17

 

 

5,735

 

 

1,333

 

 

748

 

 

513

 

 

292

 

 

171

 

Total accounts receivable

 

$

51,531

 

100

$

21,573

 

$

9,954

 

$

4,728

 

$

3,785

 

$

4,725

 

$

6,766

 

 

 

Cash Flows

 

The following table summarizes our cash flow activities:

 

 

 

 

 

 

 

 

 

2019

 

2018

 

 

(In thousands)

 

For the three months ended March 31,

 

 

 

 

 

 

Cash provided by (used in):

 

 

 

 

 

 

Operating activities

$

(3,669)

 

$

6,280

 

Investing activities

 

45,223

 

 

(6,260)

 

Financing activities

 

(1,796)

 

 

(3,449)

 

Capital expenditures (included in investing activities above)

$

(2,978)

 

$

(2,236)

 

 

Cash (Used in) Provided by Operating Activities

 

Cash used in operating activities was $3.7 million for the three months ended March 31, 2019 and consisted primarily of $26.7 million related to changes in operating assets and liabilities offset by net income of $13.0 million and adjustments for non-cash items of $10.0 million.

 

Cash provided by operating activities was $6.3 million for the three months ended March 31, 2018 and consisted primarily of net loss of $3.8 million adjusted for non-cash items of $12.9 million, unrealized gain on revaluation of equity investment of $0.1 million and $2.7 million related to changes in operating assets and liabilities.

 

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Cash Provided by (Used in) Investing Activities

 

Cash provided by investing activities for the three months ended March 31, 2019 was $45.2 million, consisting of $64.9 million of maturities of marketable securities and $23.3 million from sales of debt securities, partially offset by $40.0 million net purchases of marketable securities and $3.0 million in capital expenditures related to the expansion of our business.

 

Cash used in investing activities for the three months ended March 31, 2018 was $6.3 million, consisting of $4.0 million net purchases of marketable securities and $2.2 million in capital expenditures related to the expansion of our business.

 

Cash Used in Financing Activities

 

Cash used in financing activities for the three months ended March 31, 2019 was $1.8 million, consisting primarily of $9.9 million of proceeds from the issuance of our common stock upon the exercise of stock options offset by $11.6 million of cash paid for tax withholdings related to net share settlements of RSUs.

 

Cash used in financing activities for the three months ended March 31, 2018 was $3.4 million, consisting primarily of $1.2 million of proceeds from the issuance of our common stock upon the exercise of stock options offset by $4.6 million of cash paid for tax withholdings related to net share settlements of RSUs.

 

Contractual Obligations

 

There were no material changes during the interim period in the contractual obligations presented in the latest annual report for the year ended December 31, 2018.

 

Operating Capital and Capital Expenditure Requirements

 

We currently anticipate that our cash, cash equivalents and short-term marketable securities, together with payments for our tests, will be sufficient to fund our operations and facilities expansion plans for at least the next 12 months, including our research and development programs, our commercialization efforts related to Oncotype DX AR-V7 Nucleus Detect, our efforts to expand adoption of and reimbursement for our tests, our international expansion efforts and our development of our IVD product and capabilities. We expect to spend approximately $19 million over the next 12 months for planned laboratory equipment, information technology and facilities expansion. We may also use cash to acquire or invest in complementary businesses, technologies, services or products. We expect that our cash, cash equivalents and short-term marketable securities will also be used to fund working capital and for other general corporate purposes, such as licensing technology rights, distribution arrangements for our tests both within and outside of the United States or expanding our direct sales capabilities worldwide.

The amount and timing of actual expenditures may vary significantly depending upon a number of factors, such as the amount of cash provided by our operations, the progress of our commercialization efforts, product development, regulatory requirements, progress in reimbursement for our tests and available strategic opportunities for acquisition of or investment in complementary businesses, technologies, services or products.

We cannot be certain that our international expansion plans, efforts to expand adoption of and reimbursement for our tests or the development of future products will be successful or that we will be able to raise sufficient additional funds to see these activities through to a successful result. It may take years to move any one of a number of product candidates in research through development and validation to commercialization.

Our future funding requirements will depend on many factors, including the following:

·

the rate of progress in establishing and maintaining reimbursement arrangements with domestic and international third-party payors;

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·

costs associated with expanding our commercial and laboratory operations, including our selling and marketing efforts;

·

the rate of progress and cost of research and development activities associated with expansion of our current tests and the development of new tests;

·

the rate of progress and cost of selling and marketing activities associated with expanding adoption of our tests;

·

costs associated with acquiring, licensing or investing in technologies;

·

costs associated with acquiring or investing in complementary businesses or assets;

·

expenditures in connection with strategic relationships and license agreements, including our agreements with Epic Sciences and Biocartis;

·

costs related to future product launches;

·

costs related to acquiring or achieving access to tissue samples and technologies;

·

costs related to filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

·

the effect of competing technological and market developments;

·

costs related to international expansion;

·

costs and delays in product development as a result of any changes in regulatory oversight applicable to our products or operations;

·

the impact of changes in Federal, state and international taxation; and

·

the economic and other terms and timing of any collaborations, licensing or other arrangements into which we may enter or investments or acquisitions we might seek to effect.

If we are not able to generate and maintain sustained product revenues to finance our cash requirements, we will need to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations or licensing arrangements. If we raise funds by issuing equity securities, dilution to stockholders may result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities or borrowings 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 products, or grant licenses on terms that are not favorable to us. The credit market and financial services industry have in the past, and may in the future, experience periods of upheaval that could impact the availability and cost of equity and debt financing. If we are not able to secure additional funding when needed, on acceptable terms, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives. In addition, we may have to work with a partner on one or more of our product or market development programs, which could lower the economic value of those programs to us.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2019, we had no off-balance sheet arrangements.

 

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Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-02, Leases (Topic 842). The new guidance requires lessees to recognize a right-of-use asset and a lease liability for almost all leases on the balance sheet. We adopted the new standard as of January 1, 2019 using a modified retrospective approach and did not restate comparative periods. As permitted under the transition guidance, we carried forward the assessment of whether our contracts contain or are leases, classification of its leases and remaining lease terms. Based on our portfolio of leases as of December 31, 2018, the adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of right-of-use assets of $18 million and lease liabilities of $23 million, primarily relating to real estate, on our condensed consolidated balance sheets, with no material impact to our condensed consolidated statement of operations. See Note 7 “Commitments and Contingencies” for additional information and disclosures.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning January 1, 2020 with early adoption permitted. We are evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to interest earned on our cash equivalents and marketable securities. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. Our investment policy provides for investments in short-term, low-risk, investment-grade debt instruments. Our investments in marketable securities, which are comprised primarily of money market funds, commercial paper and corporate bonds, are subject to default, changes in credit rating and changes in market value. These investments are subject to interest rate risk and will decrease in value if market interest rates increase.

 

At March 31, 2019, we had cash, cash equivalents and short-term marketable securities of $206.2 million. We currently do not utilize derivative financial instruments to hedge interest rate exposure. The securities in our investment portfolio are classified as available-for-sale securities and are, due to their short-term nature, subject to minimal interest rate risk. To date, we have not experienced a loss of principal on any of our investments. Although we currently expect that our ability to access or liquidate these investments as needed to support our business activities will continue, we cannot ensure that this will not change. We believe that, if market interest rates were to change immediately and uniformly by 10% from levels at March 31, 2019, the impact on the fair value of these securities or our cash flows or income would not be material.

 

Foreign Currency Exchange Risk

 

Substantially all of our revenues are recognized in U.S. dollars, although a growing percentage is denominated in foreign currency as we continue to expand into markets outside of the United States. Certain expenses related to our international activities are payable in foreign currencies. As a result, factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets will affect our financial results.

 

We recognized net foreign currency gains of $41,000 and $262,000 for the three months ended March 31, 2019 and 2018, respectively. The functional currency of our wholly-owned subsidiaries is the U.S. dollar, so we are not currently subject to gains and losses from foreign currency translation of the subsidiary financial statements. We use forward contracts to mitigate the impact of adverse movements in foreign exchange rates related to the remeasurement of monetary assets and liabilities and hedge our foreign currency exchange rate exposure. As of March 31, 2019 and December 31, 2018, we had foreign currency contracts with notional amounts of $15.3 million and $17.1 million, respectively. Although the impact of currency fluctuations on our financial results has been immaterial in the past, there

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can be no guarantee that the impact of currency fluctuations related to our international activities will not be material in the future.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

(a)  Evaluation of disclosure controls and procedures . We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

(b)  Changes in internal control over financial reporting . There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the first quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART I I. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may be subject to various legal proceedings and claims arising in the ordinary course of business. Legal proceedings, including litigation, government investigations and enforcement actions could result in material costs, occupy significant management resources and entail civil and criminal penalties, even if we ultimately prevail. We are currently being investigated by the United States Department of Justice related to our compliance with the Medicare Date of Service billing regulation. We received a civil investigative demand (“CID”) in connection with this matter and have produced specific documents in response to the CID. An adverse outcome could include us being required to pay treble damages, and incur attorneys’ fees, penalties and other adverse actions that could materially and adversely affect our business, financial condition and results of operations. We are unable to predict the outcome and are unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.

 

ITEM 1 A. RISK FACTOR S.

 

Risks Relating to our Business and Business Strategy

We have a history of net losses, we may incur net losses in the future, and we expect to continue to incur significant expenses to develop and market our tests and enter into collaborations, which may make it difficult for us to achieve sustained profitability.

From our inception in August 2000 through March 31, 2019, we had an accumulated deficit of $193.3 million. We expect to continue to invest in our product pipeline, including our current Oncotype DX tests and future commercialized products, and to invest in our global commercial infrastructure, our laboratory operations, commercial collaborations,

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and other technologies. For the three months ended March 31, 2019, our research and development expenses were $15.1 million, and our selling and marketing expenses were $45.3 million. We expect our expense levels to continue to increase for the foreseeable future as we seek to globally expand the clinical utility of our Oncotype DX breast and prostate cancer tests, drive adoption of and reimbursement for our Oncotype DX colon cancer and prostate cancer tests and develop and commercialize new tests, including Oncotype DX AR-V7 Nucleus Detect and the in-vitro diagnostic, or IVD, version of our Oncotype DX breast cancer test. As a result, we will need to generate significant growth in revenues in order to achieve sustained profitability. Our failure to achieve increased revenue or sustained profitability in the future could cause the market price of our common stock to decline.

If third‑party payors, including managed care organizations and Medicare, do not provide reimbursement, breach, rescind or modify their contracts or reimbursement policies or delay payments for our tests, or we are unable to successfully renegotiate reimbursement contracts, our commercial success could be compromised.

Physicians and patients might not order our tests unless third‑party payors, such as managed care organizations as well as government payors such as Medicare and Medicaid and government payors outside of the United States, pay a substantial portion of the test price. Reimbursement by a payor may depend on a number of factors, including a payor’s determination that tests using our technologies are not experimental or investigational, and that they are medically necessary, cost-effective, supported by peer-reviewed publications and included in clinical practice guidelines. There is uncertainty concerning third-party payor reimbursement of any test incorporating new technology, including tests developed using our Oncotype platform.

Our Oncotype DX invasive breast cancer test has received certain negative assessments in the past relating to technology criteria for clinical effectiveness and appropriateness for use in patients with N+ disease, and our tests may receive similar negative assessments in the future. Since each payor makes its own decision as to whether to establish a policy to reimburse our tests, seeking these approvals is a time-consuming and costly process. To date, we have positive coverage determinations for our Oncotype DX breast cancer test for N‑, ER+ patients from most third‑party payors in the United States through contracts, agreements or policy decisions. We cannot be certain that coverage for this test will be provided in the future by additional third‑party payors or that existing contracts, agreements or policy decisions or reimbursement levels, including tests processed as out of network, will remain in place or be fulfilled within existing terms and provisions. From time to time payors change processes that may affect timely payment. These changes may result in uneven cash flow or impact the timing of revenue recognized with these payors.

We have obtained limited reimbursement from private third-party payors in the United States for our Oncotype DX colon cancer test and for our Oncotype DX breast cancer test for N+ and DCIS patients. Until further clinical data is presented, our N+ and DCIS indication for our breast cancer test and our colon cancer test may be considered investigational by payors and therefore may not be covered under their reimbursement policies.

We have obtained Medicare reimbursement coverage for our Oncotype DX GPS prostate cancer test for low and very-low risk patients and for favorable intermediate risk patients. However, we may not be able to obtain Medicare reimbursement coverage for this test for patients with different risk profiles or obtain other third-party payor reimbursement for our tests for patients with colon or prostate cancer or with N+ breast cancer or DCIS that is similar to the coverage we have obtained for our invasive breast cancer test for N-, ER+ patients.

Under the terms of the coverage determinations for our Oncotype DX GPS prostate cancer test, coverage for the test for patients with certain risk profiles is limited to tests ordered by physicians who agree to participate in a Certification and Training Registry, or CTR, and to provide certain information about Medicare beneficiaries who receive our test. If physicians do not timely submit necessary information as part of participating in the CTR, the timeframe in which we are reimbursed and recognize revenue for those tests may be accordingly delayed and negatively affect our results of operations.

Changes in payment rates may result in delays receiving payments and a related increase in accounts receivable balances as payors update their billing systems to reflect the changes. Additionally, on a five-year rotational basis, Medicare requests bids for its regional Medicare Administrative Contractor, or MAC, services. In September 2013, the claims processing function for our jurisdiction transitioned from Palmetto to Noridian Healthcare Solutions, although coverage determinations for our tests remain with Palmetto at this time through the MolDx Program. Future changes in

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the MAC with jurisdiction over our tests may affect our ability to obtain Medicare coverage and reimbursement for products for which we have coverage, for products for which we do not yet have coverage or for any products we may launch in the future or delay payments.

We believe that it may take several years to achieve reimbursement with the majority of our third-party payors for our tests. If we fail to establish and maintain broad adoption of and reimbursement for all our current tests and any future tests we may develop, our reputation could be harmed and our future prospects, revenue and our business could suffer. Additionally, we have in the past, and will likely in the future, experience delays and temporary interruptions in the receipt of payments from third-party payors due to modifications in existing contracts or arrangements, contract implementation matters, documentation requirements and other issues, which could cause our revenues to fluctuate from period to period.

Our financial results depend largely on the sales of one test, our Oncotype DX invasive breast cancer test, and we will need to generate sufficient revenues from this and other tests to run our business and generate profit.

For the near future, we expect to continue to derive a substantial majority of our revenues from sales of one test, our Oncotype DX invasive breast cancer test. We do not expect to recognize significant revenues from our DCIS or colon cancer tests. We are in various stages of research and development for other tests that we may offer as well as for enhancements to our existing tests. We may not be able to successfully commercialize tests for other cancers or diseases. If we are unable to increase sales of our Oncotype DX invasive breast cancer test, establish expanded adoption of and reimbursement for our prostate cancer or DCIS tests, or successfully develop and commercialize new products or product enhancements to our currently commercialized tests, our revenues and our ability to achieve sustained profitability would be impaired.

The prices at which our tests are reimbursed may be reduced by Medicare and private and other payors, and any such changes could have a negative impact on our revenues.

Even if we are being reimbursed for our tests, Medicare, Medicaid and other payors may withdraw their coverage policies, cancel their contracts with us at any time, review and adjust the rate of reimbursement, require co-payments from patients or stop paying for our tests, which would reduce our revenues. In addition, insurers, including managed care organizations as well as government payors such as Medicare and Medicaid, have increased their efforts to control the cost, utilization and delivery of healthcare services. These measures have resulted in reduced payment rates for and decreased utilization of clinical laboratory services, as well as an increase in the administrative requirements for reimbursement of claims. Noridian Healthcare Solutions and Palmetto GBA, the MACs that process Medicare claims and set Medicare coverage policies, respectively, for most tests billed by our laboratory and other MACs review coverage and decisions regularly.

The Protecting Access to Medicare Act of 2014, or PAMA, implements a substantial new payment system for clinical laboratory tests under the Clinical Laboratory Fee Schedule, or CLFS. Under PAMA, Medicare payment rates for tests are equal to the volume-weighted median of the private payor payment rates for such tests. The payment rates calculated under PAMA apply to our tests effective January 1, 2018, and will be reviewed annually for “advanced diagnostic laboratory tests” (and every three years for other tests), based on private payor payment rates and volumes. Laboratories that fail to report or erroneously report the required payment information may be subject to substantial civil money penalties. We believe our Oncotype DX tests each meet the criteria to be considered advanced diagnostic laboratory tests. We may or may not, however, seek designation as an advanced diagnostic laboratory test for any of our established tests. There can be no assurance under PAMA that adequate Medicare payment rates will continue to be assigned to our tests.

If we are unable to obtain or maintain adequate reimbursement for our tests outside of the United States, our ability to expand internationally will be compromised.

The majority of our international Oncotype DX breast and colon cancer test revenues come from direct payor reimbursement, payments from our distributors, and patient self‑pay. In many countries outside of the United States, various coverage, pricing and reimbursement approvals are required for our tests to be available to patients. We expect

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that it will take several years to establish broad coverage and reimbursement for our tests with payors in countries outside of the United States, and our efforts may not be successful. Even if public or private reimbursement is obtained, it may cover competing tests, or the reimbursement may be conditioned upon local performance of the tests or other requirements we may have difficulty satisfying. Reimbursement levels outside of the United States may vary considerably from the domestic reimbursement amounts we receive. In addition, because we rely on distributors to obtain reimbursement for our tests outside of the United States, to the extent we do not have direct reimbursement arrangements with payors, we may not be able to retain reimbursement coverage in certain countries with a particular payor if our agreement with a distributor is terminated or expires, if a distributor fails to pay us or for other reasons. We may also be negatively affected by the financial instability of, and austerity measures implemented by, several countries in the European Union, or EU, and elsewhere.

We depend on Medicare for a significant portion of our product revenues and if Medicare or other significant payors stop providing reimbursement or decrease the amount of reimbursement for our tests, our revenues could decline.

Reimbursement on behalf of patients covered by Medicare accounted for 24% and 26% of our product revenues for the three months ended March 31, 2019 and 2018, respectively. Accounts receivable on behalf of patients directly covered by Medicare represented 17% of our total accounts receivable at March 31, 2019 and December 31, 2018. While there were no other third-party payors representing 10% or more of our product revenues for these periods, there have been in the past, and may be in the future, payors accounting for 10% or more of our product revenues. Because the majority of stage II and stage III colon cancer patients and prostate cancer patients in the United States are age 65 and over, and thus eligible for Medicare, we may become more dependent on Medicare reimbursement in the future. It is possible that Medicare or other third-party payors that provide reimbursement for our tests may suspend, revoke or discontinue coverage at any time, may require co-payments from patients, or may reduce the reimbursement rates payable to us. Any such action could have a negative impact on our business, financial condition and results of operations. In addition, as described in Item 1 – Legal Proceedings, we are being investigated by the United States Department of Justice related to our compliance with a Medicare billing regulation related to the date of service for our tests. An adverse outcome could include us being required to pay treble damages, and incur attorneys’ fees, penalties and other adverse actions, that could materially and adversely affect our business, financial condition and results of operations.

Because of Medicare billing rules or changes in Medicare billing rules and processes, we may not receive reimbursement for all tests provided to Medicare patients or may experience delays of receiving payments.

Under Medicare billing rules, payment for our Oncotype DX tests performed on Medicare beneficiaries who were hospital patients at the time the tumor tissue samples were obtained and whose tests were ordered less than 14 days from discharge must be bundled into the payment that the hospital receives for the services provided. Effective January 1, 2018, this Medicare rule changed such that we may now bill Medicare directly for tests performed on Medicare beneficiaries who were hospital outpatients at the time the tumor tissue samples were obtained following an outpatient encounter. The rule remains unchanged with respect to payment for our Oncotype DX tests performed on Medicare beneficiaries who were hospital inpatients at the time the tumor tissue or blood samples were obtained and whose tests were ordered less than 14 days from discharge – payment for those tests must be bundled into the payment that the hospital receives for its services provided. In these circumstances, hospitals are required to furnish services such as our tests as “services furnished under arrangements between a provider and an outside vendor” and only the hospital may bill Medicare for such tests. Under these circumstances, for us to obtain payment for these services, we are required to bill individual hospitals for tests ordered for Medicare beneficiaries. Such hospitals have generally been unwilling to enter into written agreements with us to assume the financial responsibility for these tests ordered for Medicare beneficiaries and consequently we generally cancel such orders when received within the 14-day timeframe when written agreements from such hospitals are not in place.   We refer to this rule, as has been in effect and most recently amended as of January 1, 2018, as the Medicare Date of Service billing regulation.

These billing rules may lead to confusion regarding whether Medicare provides adequate reimbursement for our tests, and could discourage providers from ordering our tests for Medicare patients. In addition, compared to our breast cancer tests, a greater proportion of eligible patients for our colon and prostate tests are covered by Medicare. We cannot assure you that Medicare will continue these billing rules in their current form, that Medicare will not seek to expand the scope

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of its payment bundling rules in the future, or that other payors will not adopt similar billing rules. In addition, changes in Medicare billing rules and processes could result in delays in receiving payments and any such delays could affect our results of operations. In addition, as described in Item 1 – Legal Proceedings, we are being investigated by the United States Department of Justice related to our compliance with the Medicare Date of Service billing regulation. An adverse outcome could include us being required to pay treble damages, and incur attorneys’ fees, penalties and other adverse actions, that could materially and adversely affect our business, financial condition and results of operations.

If our laboratory facilities become inoperable, we will be unable to perform our tests and our business will be harmed.

We do not have redundant clinical reference laboratory facilities outside of Redwood City, California for our Oncotype DX tests. Redwood City is situated near active earthquake fault lines. Our facilities and the equipment we use to perform our tests would be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed or rendered inoperable by natural or man‑made disasters, including earthquakes, flooding and power outages, which may render it difficult or impossible for us to perform our tests 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 our reputation, and we may be unable to regain those customers in the future. Although we possess insurance for damage to our property and the disruption of our business, 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.

In order to rely on a third party to perform our tests, we could only use another facility with established state licensure and CLIA accreditation under the scope of which Oncotype DX tests could be performed following validation and other required procedures. We cannot assure you that we would be able to find another CLIA‑certified facility willing to comply with the required procedures, that this laboratory would be willing to perform the tests for us on commercially reasonable terms, or that it would be able to meet our quality or regulatory standards. In order to establish a redundant clinical reference laboratory outside of our Redwood City, California facilities, we would have to spend considerable time and money securing adequate space, constructing the facility, recruiting and training employees, and establishing the additional operational and administrative infrastructure necessary to support a second facility. We may not be able, or it may take considerable time, to replicate our testing processes or results in a new facility. Additionally, any new clinical reference laboratory facility opened by us would be subject to certification under CLIA and licensing by several states, including California and New York, which could take a significant amount of time and result in delays in our ability to resume operations.  

We may acquire other businesses, 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 complementary businesses and assets, as well as technology licensing arrangements or other collaborations. We also may pursue strategic alliances that leverage our core technology and industry experience to expand our product offerings or distribution, or make investments in other companies. We have in the past and may in the future experience losses related to the recognition of our portion of the net losses of equity method investees, and we may in the future experience impairment losses related to our investments in companies if we determine that the value of an investment is impaired. Losses related to our investments in other companies could have a material negative effect on our results of operations. We have no experience with respect to acquiring other companies and only recent experience with respect to the formation of strategic alliances and joint ventures. 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 by us also could result in significant write‑offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results. Integration of an acquired company also may require management resources that otherwise would be available for ongoing development of our existing business. 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, joint venture or investment. Additionally, although we are not currently a majority investor in any other company, we cannot guarantee that a company in whom we invest in the future will not be considered a variable interest entity, or VIE, under relevant accounting standards and guidance. If an entity in which we invest is determined to be a

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VIE, and we are determined to be the primary beneficiary of that VIE, we may have to consolidate that entity’s financial results with ours, and such consolidation could have a negative effect on our financial results.

To finance any acquisitions or investments, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of our stockholders. Periods of upheaval in the capital markets and world economy have in the past, and may in the future, cause volatility in the market price of our common stock. If the price of our common stock is low or volatile, we may not be able to acquire other companies for stock. 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 strategy to seek to enter into strategic collaborations and licensing arrangements with third parties to develop diagnostic tests and other products may not be successful.

 

We have relied, and expect to continue to rely, on strategic collaborations and licensing agreements with third parties for development opportunities, upon which we may develop diagnostic tests. For example, we licensed the that permit us to commercialize Oncotype Dx AR-V7 Nucleus Detect from Epic Sciences in the United States. Similarly, in connection with our collaboration with Biocartis, we licensed the rights to intellectual property enabling our development efforts for a distributed in vitro diagnostic, or IVD, test kit, the first of which we refer to as the Oncotype DXi IVD Breast Recurrence Score test. However, there is no assurance that we will be successful in these development and commercialization efforts. Establishing collaborations and licensing arrangements is difficult and time-consuming. Discussions may not lead to collaborations or licenses on favorable terms, if at all. To the extent we agree to work exclusively with a party in a given area, our opportunities to collaborate with others could be limited. Potential collaborators or licensors may elect not to work with us based upon their assessment of our financial, regulatory, commercial or intellectual property position. Additionally, we may incur significant costs in connection with seeking strategic collaborations and licensing arrangements regardless of whether the transaction is ever consummated. In the event that we consummate strategic collaboration, license or other transactions in the future, we cannot assure you that we would fully realize the potential benefit of any such transaction, which could adversely affect our future financial results.

 

Furthermore, from time to time we may modify the terms of our agreements with collaborators, such as Epic Sciences, including financial terms, and in the future, it is possible that we will agree to modify the terms of existing and future agreements with collaborators. Such modifications, if they result in unfavorable terms, may alter or limit our expected growth of revenue or increase our expected expenses from such agreements.

International expansion of our business exposes us to business, regulatory, political, operational, financial, compliance and economic risks associated with doing business outside of the United States.

Our business strategy incorporates international expansion, including increasing the size of and maintaining direct sales and physician outreach and education capabilities outside of the United States and expanding our relationships with international payors and distributors. Additionally, we are in the process of developing our first IVD medical device product, the Oncotype DXi Breast Recurrence Score test, which we expect will be initially made commercially available in Europe. Doing business internationally involves a number of risks, including:

·

difficulties in complying with multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, data protection laws, regulatory requirements and other governmental approvals, permits and licenses;

·

significant competition from local and regional product offerings;

·

difficulties in complying with unclear product regulations in various jurisdictions, including the changing regulation in Europe with regard to medical device and IVD regulations;

·

difficulties in staffing and managing foreign operations;

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·

complexities associated with managing multiple payor reimbursement regimes, government payors or patient self‑pay systems;

·

logistics and regulations associated with shipping tissue samples or complying with local regulations concerning the analysis of tissue, including infrastructure conditions and transportation delays;

·

limits in our ability to penetrate international markets if we are not able to process tests locally;

·

lack of intellectual property protection in certain markets;

·

financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our tests and exposure to foreign currency exchange rate fluctuations;

·

natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and

·

regulatory and compliance risks that relate to maintaining accurate information and control over the activities of our salesforce and distributors that may fall within the purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions or its anti‑bribery provisions, or similar anti-bribery or anti-corruption laws or regulations, such as the U.K. Anti-bribery Act and the U.K. Criminal Finances Act.

Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenues and results of operations.

We face risks associated with currency exchange rate fluctuations, which could adversely affect our operating results.

We receive a portion of our revenues and pay a portion of our expenses in currencies other than the U.S. dollar, such as the Euro, the Swiss franc, the British pound and the Canadian dollar. As a result, we are at risk from exchange rate fluctuations between such foreign currencies and the U.S. dollar, which could adversely affect our results of operations. Additionally, the volume of our international orders may be negatively impacted by a strong U.S. dollar. For the three months ended March 31, 2019, approximately 10% of our product revenues came from foreign denominated currencies. If the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions will result in decreased revenues and operating expenses. We may not be able to offset adverse foreign currency impact with increased revenues. We enter into forward contracts to mitigate the impact of adverse movements in foreign exchange rates related to the re-measurement of monetary assets and liabilities and hedge our foreign currency exchange rate exposure. Even with this strategy in place to mitigate balance sheet foreign currency risk, we will not eliminate our exposure to foreign exchange rate fluctuations on our financial results.

If it became necessary and we were unable to raise additional capital on acceptable terms in the future, it may limit our ability to develop and commercialize new tests and technologies and expand our operations.

We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercial operations and research and development activities. Specifically, we may need to raise capital to, among other things, expand and fund the commercialization of our products, increase our selling and marketing efforts, further expand our clinical laboratory operations, technologies and research and development activities, invest in complementary businesses or assets or finance capital expenditures and general and administrative expenses.

Our present and future funding requirements will depend on many factors, including establishing and maintaining reimbursement arrangements with third-party payors, costs associated with expanding our commercial and laboratory operations, spending on research and development activities, costs associated with acquiring, licensing or investing in new technologies or complementary businesses, costs associated with protecting our intellectual property rights, costs

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associated with international expansion, and the costs and potential delays involved with regulatory clearances and approvals.

We cannot assure you that we would be able to obtain additional funds on acceptable terms, or at all. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity or debt securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock and 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 products, or grant licenses on terms that are not favorable to us. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives. Any or all of these factors could harm our business, operating results and financial condition.

We may be unable to manage our future growth and operational expansion effectively, which could make it difficult to execute our business strategy.

Future growth, including the development of new capabilities, infrastructure, and processes to support our global IVD commercialization efforts, will impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees to add new and extend existing organizational capabilities in multiple areas, including operations, R&D, quality, regulatory, commercial, finance, legal, and others. In addition, rapid and significant growth may place strain on these and other areas and functions. Our ability to manage our operations and growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy.

To prepare for the effective date of the EU’s IVD Directive Regulation, or IVDR, and to support our global IVD commercialization efforts, we obtained our ISO 13485 certification. If we were to lose our ISO 13485 certification, whether as a result of a revocation, suspension or limitation, our ability to meet the requirements of IVDR and ability to support global IVD commercialization could be significantly, negatively impacted, and our business and growth prospects would be adversely affected.

  New diagnostic product development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any of the tests or products we develop individually or with our collaborators.

At any point, we may delay or abandon a development program, or we may be required to expend unanticipated and considerable resources conducting or repeating clinical studies, which could adversely impact potential revenue and our expenses. In addition, any delay in product development could provide our competitors with additional time to commercialize competing products before we do, which in turn may adversely affect our growth prospects and operating results. In addition, the success of the development programs that require collaboration with third parties, such as our collaboration with Biocartis, will be dependent on the continued success of such collaborators. There is no guarantee that our collaborators will continue to be successful and, as a result, we may expend considerable time and resources developing diagnostic assays that will not ultimately be commercialized.

We are dependent on our information technology and telecommunications systems, and any failure of these systems could harm our business.

We depend on information technology, or IT, and telecommunications systems for significant aspects of our operations. In addition, our third‑party billing and collections provider is dependent upon telecommunications and data systems provided by outside vendors and information it receives from us on a regular basis. These IT 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. Failures or significant downtime of our IT or telecommunications systems or those used by our third‑party service providers could prevent us from processing tests, providing test results to physicians, billing payors, processing reimbursement appeals, handling patient or physician inquiries, conducting research and development activities,

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and managing the administrative aspects of our business. Any disruption or loss of IT or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business and our product revenues.

Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.

In the ordinary course of our business, we and our third-party billing and collections provider collect and store sensitive data, including legally protected health information, sensitive personal data, credit card information, personally identifiable information about our employees, customers and patients, intellectual property, and our proprietary business information and that of our customers, payors and collaboration partners. We manage and maintain our applications and data utilizing a combination of on‑site systems, managed data center systems and cloud‑based data center systems. These applications and data encompass a wide variety of business-critical information including research and development information, commercial information and business and financial information. We face four primary risks relative to protecting this critical information, including loss of access risk, inappropriate disclosure risk and inappropriate modification risk combined with the risk of our ability to identify and audit our controls over the first three risks.

 

The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure, and that of our third-party billing and collections provider, may be vulnerable to attacks by hackers or viruses, or breached due to employee error, malfeasance or other disruptions. Any such breach or interruption could compromise our networks and the information stored therein could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the Health Insurance Portability and Accountability Act of 1996, similar U.S. state data protection regulations, including the California Consumer Privacy Act, the E.U. General Data Protection Regulation, or GDPR, and other regulations, the breach of which could result in significant penalties. Unauthorized access, loss or disclosure could also disrupt our operations, including our ability to process tests, provide test results, bill payors or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, collect, process and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, manage the administrative aspects of our business and damage our reputation, any of which could adversely affect our business.

 

In addition, the interpretation and application of consumer, health‑related and data protection laws in the U.S., Europe and elsewhere are often uncertain, contradictory and in flux. We have self-certified with the Department of Commerce for compliance with the U.S.-E.U. Privacy Shield as of August 1, 2016, which we believe will mitigate customer concerns about overseas data transfers. However there continue to be concerns about whether the Privacy Shield will face additional challenges (similar to those that invalidated the prior Safe Harbor data transfer framework), and it is not guaranteed that companies who have self-certified under the Privacy Shield will be free of additional ongoing scrutiny by E.U. data protection authorities. Compliance with Privacy Shield requirements does not, in addition, equate to compliance with the stringent requirements of the GDPR. European data protection authorities could interpret or apply European data protection law in a manner that is inconsistent with our practices. If so, this could result in prohibitions on processing of data required to perform our tests in Europe or government-imposed fines, or both, which could adversely affect our business. Complying with these various laws could in addition cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business.

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 if someone were 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 physicians or for a misunderstanding of, or inappropriate reliance upon, the information we provide. For example, physicians sometimes order our Oncotype DX breast cancer test for patients who do not have the specific clinical attributes indicated on the report form as those for whom the test provides clinical information validated by studies. It is

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our practice to offer medical consultation to physicians ordering our test for such patients, including patients with ER‑ breast cancers. A product liability or professional liability claim could result in substantial damages and be costly and time consuming for us to defend. Although we maintain product and professional liability insurance, we cannot assure you that our insurance would protect us from the financial impact of defending against product liability or professional liability claims or any judgments, fines or settlement costs arising out of any such 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 cause injury to our reputation, result in the recall of our products, 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 hazardous materials in a manner that causes injury, we could be liable for damages.

Our activities currently require the use of hazardous materials and medical specimens. 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 or specimens. 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 on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products, as well as regulations relating to the safety and health of laboratory employees. The cost of compliance with these laws and regulations may become significant and could negatively affect our operating results.

We incur increased costs as a result of operating as a public company, and must continually implement additional and expensive business systems, procedures and controls to satisfy public company reporting requirements.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission. Compliance with Section 404 of the Sarbanes-Oxley Act and other requirements has increased our costs and required additional management resources. We will need to continue to implement additional finance, accounting, and business operating systems, procedures, and controls as we grow our business and organization and to satisfy existing reporting requirements. If we fail to maintain or implement adequate controls, if we are unable to complete the required Section 404 assessment as to the adequacy of our internal control over financial reporting in future Form 10-K filings, or if our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal control over financial reporting in future Form 10-K filings, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC, Nasdaq or other regulatory authorities which could require additional financial and management resources.

Risks Related to Governmental Regulation

Healthcare policy changes, including legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition and results of operations.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the Affordable Care Act, or ACA, enacted in March 2010, makes changes that significantly impact the pharmaceutical and medical device industries and clinical laboratories. Significant measures contained in the ACA include, for example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The ACA also includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties for such violations. In addition to the ACA, various healthcare reform proposals have also emerged from federal and state governments. The current U.S. President and other U.S. lawmakers have made statements about potentially repealing and/or replacing the ACA and efforts are currently underway in the U.S. Congress to consider legislative actions to that end. Notably, Congress enacted legislation in 2017 that eliminates the ACA’s individual insurance mandate beginning in 2019, which may significantly impact the number of covered lives participating in

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exchange plans. We are monitoring the impact of the ACA and proposals to repeal, replace or refine the ACA to enable us to determine the trends and changes that may potentially impact our business over time.

Under the Budget Control Act of 2011, which went into effect for dates of service on or after April 1, 2013, Medicare payments, including payments to clinical laboratories, are subject to a 2% reduction due to implementation of the automatic expense reductions (sequester). Reductions made by the Congressional sequester are applied to total claims payment made. The sequester reductions do not result in a rebasing of the negotiated or established Medicare or Medicaid reimbursement rates.

Although individual states’ reimbursement methodology has not materially affected the payment rate for our tests recently, we cannot be certain that future changes will not affect payment rates. We also cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the effect any future legislation or regulation will have on us. The taxes imposed by new legislation, cost reduction measures and the expansion in government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursements by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. In addition, sales of our tests outside the United States make us subject to foreign regulatory requirements and cost‑reduction measures, which may also change over time.

If the FDA were to begin regulating the laboratory developed tests we offer, 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.

Clinical laboratory tests like ours are regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, as well as by applicable state laws. Diagnostic kits that are sold and distributed through interstate commerce are regulated as medical devices by the FDA. Most LDTs are not currently subject to FDA regulation, although reagents or software provided by third parties and used to perform LDTs may be subject to regulation. We believe that our Oncotype tests are not diagnostic kits and also believe that they are LDTs. As a result, we believe our tests should not be subject to regulation at this time under established FDA policies. 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 the FDA.

At various times since 2006, the FDA has issued documents outlining its intent to require varying levels of FDA oversight of many LDTs, including our tests. It is unclear at this time if or when the FDA will finalize its plans to end enforcement discretion for LDTs; however, the FDA may decide to regulate certain LDTs on a case-by-case basis at any time.

Legislative proposals addressing oversight of genetic testing and LDTs have been introduced in previous Congresses, and we expect that new legislative proposals will be introduced from time to time in the future. We cannot provide any assurance that FDA regulation, including pre-market review, will not be required in the future for our tests, whether through finalization of guidance issued by the FDA, new enforcement policies adopted by the FDA or new legislation enacted by Congress. It is possible that legislation will be enacted into law or guidance could be issued by the FDA which may result in increased regulatory burdens for us to continue to offer our tests or to develop and introduce new tests.

If pre-market review is required for our current LDTs, our business could be negatively impacted until such review is completed and clearance or approval is obtained, and the FDA could require that we stop selling our tests pending pre‑market clearance or approval. If our tests are allowed to remain on the market but there is uncertainty about the regulatory status of our tests, if they are labeled investigational by the FDA, or if labeling claims the FDA allows us to make are more limited than the claims we currently make, orders or reimbursement may decline. The regulatory approval process may involve, among other things, successfully completing additional clinical trials and submitting a pre‑market clearance notice or filing a pre‑market approval application with the FDA. If pre‑market review is required by the FDA, there can be no assurance that our tests will be cleared or approved on a timely basis, if at all, nor can there be assurance that the labeling claims cleared or approved by the FDA will be consistent with our current claims or

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adequate to support continued adoption of and reimbursement for our tests. Ongoing compliance with FDA regulations would increase the cost of conducting our business, and subject us to inspection by and the regulatory requirements of the FDA, for example registration and listing and medical device reporting, and penalties in the event we fail to comply with these requirements. We may also decide voluntarily to pursue FDA pre‑market review of our tests if we determine that doing so would be appropriate.

We cannot predict the ultimate timing or form of final FDA guidance, legislation or regulation of LDTs and the potential impact on our existing tests, our tests in development or the materials used to perform our tests. While we qualify all materials used in our tests according to CLIA regulations, we cannot be certain that the FDA will not enact rules or guidance documents which could impact our ability to purchase certain materials necessary for the performance of our tests, such as products labeled for research use only. Should any of the reagents obtained by us from suppliers and used in conducting our tests be affected by future regulatory actions, our business could be adversely affected by those actions, including increasing the cost of testing or delaying and limiting or prohibiting the purchase of reagents necessary to perform testing.

If we were required to conduct additional clinical trials prior to continuing to sell our current tests or launching any other tests we may develop, those trials could result in delays or failure to obtain necessary regulatory approvals or clearances, which could harm our business.

If the FDA decides to regulate any of our LDTs, it may require additional pre-market clinical testing before clearing or approving such tests for commercial sales. Such pre-market clinical testing could delay the commencement or completion of other clinical testing, significantly increase our test development costs, delay commercialization of any future tests, and interrupt sales of our current tests. 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.

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 those trials. We may also depend on clinical investigators, medical institutions and contract research organizations to perform certain aspects of the trials. 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 LDTs, or to achieve sustained profitability.

Our business could be harmed by the loss, suspension, or other restriction on a license, certification, or accreditation, or by the imposition of a fine or penalties, under CLIA, its implementing regulations, or other state, federal and foreign laws and regulations affecting licensure or certification, or by future changes in these laws or regulations.

We and certain laboratories with whom we collaborate, including Epic Sciences, Inc., or Epic Sciences, are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA regulations mandate specific standards in the areas of personnel qualifications, facilities administration, quality systems, inspections, and proficiency testing. We and Epic Sciences each have a current certificate of accreditation under CLIA to perform testing through our accreditations by the College of American Pathologists, or CAP. To renew a CLIA certificate, laboratories are subject to survey and inspection every two years and inspectors may also make random inspections of clinical reference laboratories.

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Although we and Epic Sciences are required to hold a certificate of accreditation or compliance under CLIA to perform high complexity testing, laboratories are not required to hold a certificate of accreditation through CAP. We and Epic Sciences could alternatively maintain a certificate of accreditation from another accrediting organization or a certificate of compliance through inspection by surveyors acting on behalf of the CLIA program. If accreditation under CAP were to terminate, either voluntarily or involuntarily, it would be necessary to convert from a certification under CLIA to a certificate of compliance (or to a certificate of accreditation with another accreditation organization) in order to maintain our ability to perform clinical tests and to continue commercial operations. Whether we or Epic Sciences would be able to successfully maintain operations through either of these alternatives would depend upon the facts and circumstances surrounding the termination of the CAP accreditation, such as whether any deficiencies were identified by CAP as the basis for termination and, if so, whether these deficiencies were addressed to the satisfaction of the surveyors for the CLIA program (or another accrediting organization).

We and certain laboratories with whom we collaborate, including Epic Sciences, are also required to maintain a California clinical laboratory license to conduct testing in California. California laws establish standards for day‑to‑day operation of clinical reference laboratories, including the training and skills required of personnel and quality control.

In addition, clinical reference laboratories are required to be licensed on a test‑specific basis by New York State. New York law also mandates proficiency testing for laboratories licensed under New York state law, regardless of whether or not such laboratories are located in New York. Moreover, Pennsylvania, Maryland and Rhode Island require that licenses are maintained 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, which may require regulatory review of our tests in order for them to be offered, or may have other limitations such as prohibitions on the export of tissue necessary for us to perform our tests that may limit our ability to distribute outside of the United States.

If we or any laboratory with whom we collaborate, including Epic Sciences, were to lose CLIA accreditation or California license, whether as a result of a revocation, suspension or limitation, we would no longer be able to sell our tests, which would limit our revenues and harm our business. Additionally, if we or any laboratory with whom we collaborate were to lose a license in New York or in other states where a license is required, specimens from those states would not be able to be tested.

We are subject to numerous U.S. and foreign laws and governmental regulations, and any governmental enforcement action may materially affect our financial condition and business operations.

We are subject to regulation in the United States by both the federal government and the states in which we conduct our business, as well as in other jurisdictions outside of the United States, including:

·

Medicare billing and payment regulations applicable to clinical laboratories;

·

the Federal Anti‑kickback Law and state anti‑kickback prohibitions and the Eliminating Kickback Recovery Act of 2018;

·

the Federal physician self‑referral prohibition, commonly known as the Stark Law, and the state equivalents;

·

the Federal Health Insurance Portability and Accountability Act of 1996 (as amended);

·

the Medicare civil money penalty and exclusion requirements;

·

the Federal False Claims Act civil and criminal penalties and state equivalents; and

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·

the Foreign Corrupt Practices Act, the United Kingdom Anti‑bribery Act, the GDPR, and the E.U. In Vitro Diagnostic Device Regulation, all of which apply or will apply to our international activities.

The U.S. Attorney’s Offices have increased their scrutiny over the healthcare industry in recent years. The U.S. Congress, Department of Justice, Office of Inspector General of the Department of Health and Human Services, and Department of Defense have all issued subpoenas and other requests for information to conduct investigations of, and commenced civil and criminal litigation against, healthcare companies, related to financial arrangements with health care providers, regulatory compliance, product promotional practices, and documentation, coding and billing practices. In addition, the Federal False Claims Act has led to whistleblowers filing numerous qui tam civil lawsuits against healthcare companies, in part, because a whistleblower can receive a portion of any amount obtained by the government through such a lawsuit.

Governmental enforcement action or qui tam civil litigation against us may result in material costs and occupy significant management resources, even if we ultimately prevail. In addition, governmental enforcement action may result in substantial fines, penalties or administrative remedies, including exclusion from government reimbursement programs and entry into corporate integrity agreements with governmental agencies, which would entail significant obligations and costs. As described further in Item 1 – Legal Proceedings, we are being investigated by the United States Department of Justice related to our compliance with the Medicare Date of Service billing regulation. An adverse outcome could include our being required to pay treble damages, and incur attorneys’ fees, penalties and other adverse actions that could materially and adversely affect our business, financial condition and results of operations.

We have adopted policies and procedures designed to comply with these laws. 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 growth of our business and sales organization and our expansion outside of the United States may increase the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other 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. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s 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, we could be required to refund payments received by us, and we could lose the ability to bill for our tests 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.

If we are unable to obtain adequate regulatory clearances or approvals to market the in vitro diagnostic kits for our Oncotype DXi IVD Breast Recurrence Score tests in the countries in which we intend to commercialize this assay, or if regulatory limitations are placed on our diagnostic products, our business and growth will be harmed.

We intend to seek regulatory authorizations to market the Oncotype DXi IVD Breast Recurrence Score test in the markets in which we intend to commercialize the product. We expect to initially offer this test in Europe. We cannot assure investors that we will be successful in obtaining the required regulatory clearances or approvals. If we do not obtain regulatory clearances or approvals to market the Oncotype DXi IVD Breast Recurrence Score test or any future IVD products that we may develop, we may fail to successfully commercialize such products and the market potential for our IVD products would be constrained, and our business and growth prospects would be adversely affected.

We are subject to increasingly complex taxation rules and practices, which may affect how we conduct our business and our results of operations.

As our business grows, we are required to comply with increasingly complex taxation rules and practices. We are subject to tax in multiple U.S. tax jurisdictions and in foreign tax jurisdictions as we expand internationally. The development of our tax strategies requires additional expertise and may impact how we conduct our business. Our future effective tax rates could be unfavorably affected by changes in, or interpretations of, tax rules and regulations in the jurisdictions in which we do business or by changes in the valuation of our deferred tax assets and liabilities. Furthermore, we provide for certain tax liabilities that involve significant judgment. We are subject to the examination of

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our tax returns by federal, state and foreign tax authorities, which could focus on our intercompany transfer pricing methodology as well as other matters. If our tax strategies are ineffective or we are not in compliance with domestic and international tax laws, our financial position, operating results and cash flows could be adversely affected.

Risks Relating to Product Development, Commercialization and Sales of our Products

New test development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any new tests we may develop.

We have tests in development, including an IVD version of our invasive breast cancer test, and devote considerable resources to research and development. There can be no assurance that our new Oncotype tests or IVD versions of our current tests will be capable of reliably predicting the recurrence of cancers with the sensitivity and specificity necessary to be clinically useful and commercially viable. We also cannot be certain that the products we launch will attain use among the intended target of community oncologists and pathologists.   In addition, before we can develop diagnostic tests for new cancers or other diseases and commercialize any new products, we will need to:

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conduct substantial research and development;

·

conduct validation studies;

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expend significant funds;

·

develop and scale our laboratory processes to accommodate different tests; and

·

develop and scale our infrastructure including our operational systems such as order-to-cash, supply chain, and inventory management, and customer service to establish and add new capabilities.

Our product development process involves a high degree of risk and may take several years. Our product development efforts may fail for many reasons, including:

·

failure of the product at the research or development stage;

·

difficulty in accessing tissue and blood samples;

·

challenges in timely patient enrollment in future clinical trials; or

·

lack of clinical validation data to support the effectiveness of the product.

Few research and development projects result in commercial products, and success in early clinical trials often is not replicated in later studies. At any point, we may abandon development of a product candidate or we may be required to expend considerable resources repeating clinical trials, which would adversely impact the timing for generating potential revenues from those product candidates. If a clinical validation study fails to demonstrate the prospectively defined endpoints of the study, we might choose to abandon the development of the product or product feature that was the subject of the clinical trial, which could harm our business. In addition, competitors may develop and commercialize competing products faster than we are able to do so.

If we are unable to support demand for our tests, including successfully managing the evolution of our technology and business systems, our business could suffer.

As our test volume grows and we examine additional means through which we can provide our tests, we will need to continue to ramp up our testing capacity, implement increases in scale and related processing, customer service, billing and systems process improvements, and expand our internal quality assurance program, technology and manufacturing platforms to support testing on a larger scale. We will also need additional certified laboratory scientists and other scientific and technical personnel to process higher volumes of our tests. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that appropriate personnel will be available. As additional products are commercialized, we will need to bring new equipment on‑line, implement new

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systems, technology, controls and procedures and hire personnel with different qualifications. We cannot assure you that any such efforts will not result in delays. Failure to implement necessary procedures, transition to new equipment or processes or to hire the necessary personnel could result in higher cost of processing or an inability to meet market demand. There can be no assurance 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 test results, or that we will be successful in responding 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 our business could suffer.

We may experience limits on our revenues if physicians or patients decide not to order our tests.

If medical practitioners do not order our tests or any future tests developed or offered by us, we will likely not be able to create or maintain demand for our products in sufficient volume for us to achieve sustained profitability. To generate demand, we will need to continue to make oncologists, urologists, surgeons and pathologists aware of the benefits of each type of test through published papers, presentations at scientific conferences and one‑on‑one education by our salesforce. In addition, we will need to demonstrate our ability to obtain and maintain adequate reimbursement coverage from third‑party payors.

We will need to continue to educate physicians, patients and payors about the benefits and cost‑effectiveness of our tests and to establish reimbursement arrangements for these tests with payors. We have and expect to continue to hire additional commercial, sales, scientific, technical and other personnel to support this process. If our marketing and educational efforts do not result in sufficient physician or patient demand, we may not be able to obtain adequate reimbursement for our tests. If we fail to successfully establish adoption of and additional reimbursement beyond Medicare for our colon and prostate cancer tests, our reputation could be harmed and our business could suffer.

Some patients may decide not to use our Oncotype tests due to their price, all or part of which may be payable directly by the patient if the applicable payor denies reimbursement in full or in part. Even if medical practitioners recommend that their patients use our tests, patients may still decide not to use our tests, either because they do not want to be made aware of the likelihood of recurrence or they wish to pursue a particular course of therapy regardless of test results. Additionally, the current economic environment in the United States and abroad could continue to negatively impact patients, resulting in higher co‑payments and insurance premiums or the loss of healthcare coverage, which may result in delayed medical checkups or an inability to pay for our tests. If only a small portion of the patient population decides to use our tests, we will experience limits on our revenues and our ability to achieve sustained profitability.

Our dependence on distributors for sales of our Oncotype tests outside of the U.S. could limit or prevent us from selling our test in foreign markets and impact our revenue.

As of March 31, 2019, we have entered into exclusive distribution agreements for the sale of our tests with distributors covering more than 90 countries. We may enter into other similar arrangements to distribute our tests in other countries in the future. We intend to continue to grow our business internationally, and to do so we may need to attract additional distributors to expand the territories in which we sell our tests. Despite contractual obligations, distributors may not commit the necessary resources to market and sell our tests to the level of our expectations. If current or future distributors do not perform adequately, or we are unable to enter into arrangements with distributors to market our tests in particular geographic areas, we may not realize long‑term international revenue growth. In addition, our revenue from distributors could be negatively impacted as a result of changes in business cycles, business or economic conditions, reimbursement rates, changes in foreign currency exchange rates that make our tests more expensive in our distributors’ local currencies or other factors that could affect their ability to pay us for tests on a timely basis or at all.

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.

We license from third parties technology necessary to develop our products. In return for the use of a third party’s technology, we may agree to pay the licensor royalties based on sales of our products. Royalties are a component of cost of product revenues and impact the margins on our tests. We may need to license other technologies to commercialize future products. We may also need to negotiate licenses to patents and patent applications after launching any of our

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commercial products. Our business may suffer if these licenses terminate, if the licensors fail to abide by the terms of the license, determine to unilaterally stop supplying technologies or products subject to a license, or fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid, if the patents or patent applications are unavailable for license or if we are unable to enter into necessary licenses on acceptable terms.

If we are unable to develop products to keep pace with rapid technological, medical and scientific change, 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. For example, technologies in addition to ours now permit measurement of gene expression in fixed paraffin‑embedded tissue specimens or blood or urine. There have also been advances in methods used to analyze very large amounts of genomic information, specifically NGS. These advances require us to continuously develop our technology, develop new products and enhance existing products to keep pace with evolving standards of care. Our tests could become obsolete unless we continually innovate and expand our products to demonstrate recurrence and treatment benefit in patients treated with new therapies. New treatment 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 treatment’s effectiveness. Additionally, as new products are developed, evolving industry standards and metrics may slow the widespread adoption of any new products we may introduce. If we are unable to demonstrate the applicability of our tests to new treatments or to keep pace with new industry standards, sales of our test could decline, which would harm our revenues.

If we are unable to compete successfully, we may be unable to increase or sustain our revenues or achieve sustained profitability.

We compete in a rapidly evolving and highly competitive industry, and there are a number of private and public companies that offer products or have conducted research to profile genes and gene expression in breast, colon and prostate cancer, including companies such as Agendia Inc., BioTheranostics, Exact Sciences Corporation, GenomeDx Biosciences Inc., Guardant Health, Inc., Hologic Inc., Myriad Genetics Inc. (and its Sividon Diagnostics subsidiary), NanoString Technologies Inc., NeoGenomics, Inc., OPKO Health, Inc. (and its Bio-Reference Laboratories, Inc. subsidiary) and Qiagen N.V. As we look to expand our research, development and commercialization efforts, we may face competition from companies such as Danaher Corporation (and its Cepheid, Inc. subsidiary), Bio-Techne Corporation, Grail, MDxHealth, Metamark Genetics, Inc., Natera Inc. and Personal Genome Diagnostics, Inc. Historically, our principal competition for our Oncotype tests has also come from existing diagnostic methods used by pathologists and oncologists, and such traditional diagnostic methods can be difficult to change or supplement. We also face competition from commercial laboratories with strong distribution networks for diagnostic tests, such as Laboratory Corporation of America Holdings and Quest Diagnostics Incorporated. Other potential competitors include companies that develop diagnostic tests such as Roche Diagnostics, a division of Roche Holding, Ltd, and Siemens AG, as well as other companies and academic and research institutions.

In our more recently established prostate cancer market, we face comparatively greater competition than in our breast cancer market, including competition from products which were on the market prior to our product launch and which are supported by clinical studies and published data. This existing direct and indirect competition for tests and procedures may make it difficult to gain market share, impact our ability to obtain reimbursement or result in a substantial increase in resources necessary for us to successfully continue to commercialize our Oncotype DX GPS prostate test and the recently launched Oncotype DX AR-V7 Nucleus Detect test.

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, where our patents have not issued or where our intellectual property rights are not recognized and compete with us in those countries, including encouraging the use of their test by physicians or patients in other countries. We have changed the list price of our tests in the past and we expect to change prices for our tests in the future. Any increase or decrease in pricing could impact reimbursement of and demand for our tests. 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 tests that could be viewed by physicians and payors as functionally equivalent to our tests, or offer tests at prices designed to promote market penetration, which

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could force us to lower the list prices of our tests and impact our operating margins and our ability to achieve sustained profitability. Some competitors have developed tests cleared or approved for marketing by the FDA. There may be a marketing differentiation or perception that an FDA‑cleared or approved test is more desirable than Oncotype tests, which are LDTs, and that may discourage adoption of and reimbursement for our tests. If we are unable to compete successfully against current or future competitors, we may be unable to increase market acceptance for and sales of our tests, which could prevent us from increasing or sustaining our revenues or achieving sustained profitability and could cause the market price of our common stock to decline.

Our research and development efforts will be hindered if we are not able to contract with third parties for access to tissue or complete timely enrollment in future clinical trials.

Under standard clinical practice, tumor biopsies removed from patients are typically chemically preserved and embedded in paraffin wax and stored. Our clinical development relies on our ability to secure access to these archived tumor biopsy samples, as well as information pertaining to their associated clinical outcomes. Generally, the agreements under which we gain access to archival samples are non-exclusive. Other companies study archival samples and often compete with us for access. Additionally, the process of negotiating access to archived samples is lengthy since it typically involves numerous parties and approval levels to resolve complex issues such as usage rights, institutional review board approval, privacy rights, publication rights, intellectual property ownership and research parameters. If we are not able to negotiate access to clinical samples with hospitals, clinical partners, pharmaceutical companies, or companies developing therapeutics on a timely basis, or at all, or if other laboratories or our competitors secure access to these samples before us, our ability to research, develop and commercialize future products will be limited or delayed. Finally, we may not be able to conduct or complete clinical trials on a timely basis if we are not able to enroll sufficient numbers of patients in such trials, and our failure to do so could have an adverse effect on our research and development and product commercialization efforts.

If we cannot successfully maintain or manage our current, or enter into new, relationships with outside third parties, our product development could be delayed and our introduction of new products into the market could be adversely affected which could have an adverse effect on our financial results.

We rely on and expect to continue to rely on clinical collaborators to perform a substantial portion of our clinical trial functions. If any of our collaborators were to breach or terminate its agreement with us or otherwise fail to conduct the contracted activities successfully and in a timely manner, the research, development or commercialization of the products contemplated by the collaboration could be delayed or terminated. If any of our collaboration agreements are terminated, or if we are unable to renew those agreements on acceptable terms, we would be required to seek alternatives. We may not be able to negotiate agreements with alternate collaborators on acceptable terms, if at all, and these collaborations may not be successful.

In the past, we have entered into clinical trial collaborations with highly regarded organizations in the cancer field. Our success in the future depends in part on our ability to enter into agreements with other leading cancer organizations. This can be difficult due to internal and external constraints placed on these organizations. Some organizations may limit the number of collaborations they have with any one company so as to not be perceived as biased or conflicted. Organizations may also have insufficient administrative and related infrastructure to enable collaborations with many companies at once, which can prolong the time it takes to develop, negotiate and implement collaboration. Additionally, organizations often insist on retaining the rights to publish the clinical data resulting from the collaboration. We have found the publication of clinical data in peer‑reviewed journals to be a crucial step in commercializing and obtaining reimbursement for tests such as ours, and our inability to control when, if ever, results are published may delay or limit our ability to derive sufficient revenues from any product that may result from a collaboration.

We have only recent experience in commercializing products through collaborations with third parties, which includes our commercial collaboration with Epic Sciences and our license and development agreement with Biocartis. The collaboration with Epic Sciences poses a number of risks, including, among others, whether we will be able to obtain adequate reimbursement for Oncotype DX AR-V7 Nucleus Detect with both public and private payors, whether our commercial channel will be successful in creating market demand for Oncotype DX AR-V7 Nucleus Detect, whether Epic Sciences is able to maintain appropriate state laboratory licensure, and whether our information technology and

55


 

reporting systems are adequately and securely integrated with those of Epic Sciences. We are also subject to legal, regulatory, quality and governmental risks with regards to the performance and delivery of Oncotype DX AR-V7 Nucleus Detect tests, due to the fact that Epic Sciences is a centralized CLIA laboratory performing such tests.

We expect to rely on third parties in conducting any future studies of our diagnostic products that may be required by the FDA, the EU or other regulatory authorities, and to fulfill product registration requirements in foreign countries, and those third parties may not perform satisfactorily.

 

We do not have the ability to independently conduct the clinical studies or other studies that may be required to obtain FDA, EU and other regulatory clearance or approval for our IVD products. Accordingly, we expect to rely on third parties, such as medical institutions and clinical investigators, to conduct such studies. Our reliance on these third parties for clinical development activities will reduce our control over these activities. These third-party contractors may not complete activities on schedule or conduct studies in accordance with regulatory requirements or the study design. Our reliance on third parties that we do not control will not relieve us of any applicable requirement to ensure compliance with various procedures required under good clinical practices and regulatory requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, the studies may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our diagnostic products in a timely manner, or at all.

 

Additionally, in many countries we are not permitted to directly apply for product registrations, and therefore must rely on third-party contractors or product distributors resident in those countries to fulfill the product registration requirements. Our reliance on these third parties reduces our control over the registration activities, and those parties may not appropriately register the products. Our reliance on third parties does not relieve us of the obligation to comply with applicable requirements, and therefore any failure on the part of any of the third parties could subject us to enforcement action in the country in which the registration was not properly fulfilled.

The loss of key members of our senior management team or our inability to attract and retain highly skilled scientists, software engineers, clinicians and salespeople could adversely affect our business.

Our success depends largely on the skills, experience and performance of key members of our executive management team and others in key management positions. The efforts of each of these persons together will be critical to us as we continue to develop our technologies and testing processes, continue our international expansion and transition to a company with multiple commercialized products. If we were to lose one or more of these key employees, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategies.

Our research and development programs, commercial laboratory operations and information technology infrastructure depend on our ability to attract and retain highly skilled scientists, technicians and engineers, including licensed laboratory technicians, chemists, biostatisticians and software engineers. We may not be able to attract or retain qualified scientists, technicians and software engineers in the future due to the competition for qualified personnel among life science and technology businesses, particularly in the San Francisco Bay Area. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. In addition, our success depends on our ability to attract and retain salespeople with extensive experience in oncology and urology and close relationships with medical oncologists, urologists, surgeons, pathologists and other hospital personnel. All of our employees in the United States are at will, which means that either we or the employee may terminate their employment at any time. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, our business and operating results could be harmed.

We rely on a limited number of suppliers or, in many cases, a sole supplier, for some of our laboratory instruments and materials and may not be able to find replacement suppliers or immediately transition to alternative suppliers.

We rely on many sole suppliers to supply and service some of the laboratory equipment on which we perform our tests. We believe that there are relatively few equipment manufacturers that are currently capable of supplying and servicing the

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equipment necessary for our tests. Although we have identified alternative suppliers, transition to a new supplier would be time consuming and expensive, and there can be no assurance that we would be able to secure alternative equipment and bring that equipment on line without experiencing interruptions in testing. If we should encounter delays or difficulties in securing the quality and quantity of equipment we require for our tests, we may need to reconfigure our test processes, which could result in an interruption in sales. If any of these events occur, our business and operating results could be harmed.

We also rely on several sole suppliers for certain laboratory reagents and materials which we use to perform our tests. While we have developed alternate sourcing strategies for these materials, we cannot be certain that these strategies will be effective. If we should encounter delays or difficulties in securing these laboratory materials, if the materials do not meet our quality specifications, or if we cannot obtain acceptable substitute materials, an interruption in test processing could occur. Any such interruption may significantly affect future product revenues.

Risks Related to Our Intellectual Property

If we are unable to maintain intellectual property protection, our competitive position could be harmed.

Our ability to compete and to achieve sustained profitability is impacted by our ability to protect our proprietary discoveries and technologies. We currently rely on a combination of issued patents, patent applications, copyrights, trademarks, and confidentiality, material data transfer, license and invention assignment agreements to protect our intellectual property rights. We also rely upon trade secret laws to protect unpatented know‑how and continuing technological innovation. Our intellectual property strategy is intended to develop and maintain our competitive position.

Our pending patent applications may not result in issued patents, and we cannot assure you that our issued patents or any patents that might ultimately be issued by the U.S. Patent and Trademark Office, or USPTO, will protect our technology. In addition, we do not file patent applications in every country nor is patent protection available in every country. We may face competition internationally in jurisdictions where we do not have intellectual property protection. Any patents that may be issued to us might be challenged by third parties as being invalid or unenforceable, or third parties may independently develop similar or competing technology that avoids our patents.

We cannot be certain that the steps we have taken will prevent the misappropriation and use of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

If patent regulations or standards are modified, such changes could have a negative impact on our business.

From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and validity of patents within the genomic diagnostic space, and any such changes could have a negative impact on our business. In addition, competitors may develop their own versions of our test 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.

There have been several cases involving “gene patents” and diagnostic claims that have been considered by the U.S. Supreme Court. In March 2012, the Supreme Court in Mayo Collaborative v. Prometheus Laboratories , or Prometheus, found a patented diagnostic method claim unpatentable because the relationship between a metabolite concentration and optimized dosage was a patent‑ineligible “law of nature.” In June 2013, the Supreme Court ruled in ACLU v. Myriad Genetics , or Myriad, that an isolated genomic DNA sequence is not patent eligible while cDNA is eligible. Both the Prometheus and Myriad decisions affect the legal concept of subject matter eligibility by seemingly narrowing the scope of the statute defining patentable inventions.

In December 2014, the USPTO published revised guidelines for patent examiners to apply when examining process claims for patent eligibility in view of several recent Supreme Court decisions, including Mayo Collaborative Services v. Prometheus Laboratories, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc ., and Alice Corporation Pty. Ltd. V. CLS Bank International, et al . The guidance indicates that claims directed to a law of nature, a natural

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phenomenon, or an abstract idea that do not meet the eligibility requirements should be rejected as non‑statutory, patent ineligible subject matter. While these guidelines may be subject to review and modification by the USPTO over time, we cannot assure you that our patent portfolio will not be negatively impacted by the decisions described above, rulings in other cases or changes in guidance or procedures issued by the USPTO.

Additional substantive changes to patent law, whether new or associated with the America Invents Act, may affect our ability to obtain, enforce or defend our patents. Accordingly, it is not clear what, if any, impact the new law will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend our issued patents, all of which could have a material adverse effect on our business.

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.

We have in the past, and may in the future, receive notices of claims of infringement and misappropriation or misuse of other parties’ proprietary rights and may from time to time receive additional notices. Some of these claims may lead to litigation. We cannot assure you that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third‑party trade secrets, alleging infringement by us of third‑party patents and trademarks or challenging the validity of our patents, will not be asserted or prosecuted against us. If there is a successful claim of infringement against us, we may be required to pay substantial damages (including treble damages if that infringement were found to be willful) to the party claiming infringement, develop non‑infringing technology, stop selling our tests or using technology that contains the allegedly infringing intellectual property or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. Our failure to develop non‑infringing technologies or license the proprietary rights on a timely basis could harm our business.

We may also initiate claims to defend our intellectual property or to seek relief on allegations that we use, sell, or offer to sell technology that incorporates third-party intellectual property. Intellectual property litigation, regardless of outcome, is expensive and time‑consuming, could divert management’s attention from our business and have a material negative effect on our business, operating results or financial condition. In addition, revising our tests to include the non‑infringing technologies would require us to re‑validate our tests, which would be costly and time consuming. Also, we may be unaware of pending third-party patent applications that relate to our tests. Parties making infringement claims on future issued patents may be able to obtain an injunction that could prevent us from selling our tests or using technology that contains the allegedly infringing intellectual property, which could harm our business.

It is possible that a third party or patent office might take the position that one or more patents or patent applications constitute prior art in the field of genomic-based diagnostics. In such a case, we might be required to pay royalties, damages and costs to firms who own the rights to these patents, or we might be restricted from using any of the inventions claimed in those patents. 

 

 

 

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ITEM 6. EXHIBIT S

 

 

 

 

Exhibit
Number

    

Description

10.13*

 

Sublease between the Company and Acelrx Pharmaceuticals, Inc., dated as of January 3, 2019.

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer.

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer.

32.1#

 

Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

32.2#

 

Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

101.INS

 

XBRL Instance Document.

101.SCH

 

XBRL Taxonomy Extension Schema.

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase.

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase.

101.LAB

 

XBRL Taxonomy Extension Label Linkbase.

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase.


* Filed herewith.

# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”). Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

GENOMIC HEALTH, INC.

 

 

 

 

 

Date: May 9, 2019

 

By:

/s/ Kimberly J. Popovits

 

 

 

Kimberly J. Popovits

 

 

 

President and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

Date: May 9, 2019

 

By:

/s/ G. Bradley Cole

 

 

 

G. Bradley Cole

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

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