Unless otherwise indicated
herein, the terms we, our, us, or the Company refer to BG Medicine, Inc. and its subsidiary.
Overview
We are developing and commercializing diagnostic products that may be used to
help guide the care and management of patients who suffer from heart failure and related disorders.
Our BGM Galectin-3
®
Test is our first U.S. Food and Drug Administration, or FDA, cleared and CE Marked diagnostic product. It is
currently available as a blood test in the United States and the European Union, or EU. Our BGM Galectin-3 Test was included in the 2013 American College of Cardiology Foundation and the American Heart Association (ACCF/AHA) Guideline for the
Management of Heart Failure.
We market and sell our BGM Galectin-3 Test kits to clinical laboratories, hospitals, and health care providers.
We hope to accelerate the clinical and commercial adoption of galectin-3 testing by generating, publishing and publicizing data derived from clinical research studies that have incorporated our BGM Galectin-3 Test and by expanding our BGM Galectin-3
Tests indications for use. We have entered into licensing agreements with leading diagnostic instrument manufacturers to develop and commercialize galectin-3 assays that will be performed on automated platforms that have been incorporated into
routine practice in laboratories throughout the world.
We are developing a pipeline of diagnostic products by leveraging our intellectual
property and the mining of data generated from a patient cohort and specimen repository to which we have exclusive access for the development of diagnostic products. Among the products in development is our BGM CardioSCORE Test, a
biomarker-based blood test designed as an aid in the assessment of near-term risk for significant cardiovascular events, such as heart attack and stroke.
Our BGM Galectin-3 Test
Our BGM Galectin-3 Test is our first FDA cleared and CE
Marked diagnostic product. It is an
in vitro
diagnostic device that quantitatively measures galectin-3 in serum or plasma by enzyme linked immunosorbent assay (ELISA) on a microtiter plate platform. Heart failure patients with elevated
galectin-3 levels as measured using our BGM Galectin-3 Test have been found to be at significantly greater risk of adverse outcomes, including death or hospitalization. Measurement of this protein biomarker is intended to be used in conjunction with
clinical evaluation.
Galectins are a family of proteins that play many important roles in inflammation, immunity and cancer. Galectin-3, a
member of this family of proteins, is a protein biomarker that has been shown to play an important role in heart failure in both animal and human studies. In animal experiments, administration of galectin-3 to the heart led to the development of
cardiac fibrosis, or stiffening, in the heart muscle, a process that is often referred to as cardiac remodeling. In these animal studies, adverse remodeling reduced the hearts ability to pump normally, causing the animals to develop heart
failure. This link between galectin-3 and cardiac remodeling is significant and suggests that galectin-3 may be a useful biomarker for adverse cardiac remodeling, an important determinant of the clinical outcome of patients suffering from heart
failure. We have obtained an exclusive worldwide license to certain galectin-3 rights that relate to the association of this protein biomarker with heart failure. We have also filed several of our own patent applications related to galectin-3.
Our BGM Galectin-3 Test is currently available as a blood test in the United States and the EU. The
following table summarizes the current indications for use and commercial status of our BGM Galectin-3 Test:
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Test / Disease Area
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Indications
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Regulatory and Commercial Status
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BGM Galectin-3 Test
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An aid in assessing the prognosis of chronic heart failure
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- Marketed in the U.S. and Europe
- FDA 510(k) cleared November 2010
- CE Mark obtained October 2009
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An aid in assessing the prognosis of acute heart failure
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- Marketed in Europe
- CE Mark obtained October 2009
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An aid to identify adults at elevated risk of developing heart failure
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- Marketed in Europe
- CE Mark obtained May 2012
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Automated Testing For Galectin-3
Overview
We believe that automation of our galectin-3 test will broaden its
acceptance by laboratory customers and, as a result, accelerate its clinical adoption. To that end, we have entered into licensing and commercialization agreements with four leading diagnostic instrument manufacturers to develop and commercialize
automated instrument versions of our galectin-3 test. We have entered into worldwide license, development and commercialization agreements with Abbott Laboratories, or Abbott, bioMérieux SA, or bioMérieux, Siemens Healthcare
Diagnostics Inc., or Siemens, and Alere Inc., or Alere. These diagnostic instrument manufacturers account for a significant percentage of the automated laboratory testing instruments that are used throughout the world. The installed customer base of
these automated partners reflects all major segments of the diagnostics market, including hospital laboratories, national reference laboratories, regional laboratories and others.
Progress to Date
In January 2013, bioMérieux obtained
a CE Mark for its VIDAS
®
Galectin-3 assay and initiated its commercial launch in the EU. The VIDAS
®
Galectin-3 assay was developed by bioMérieux for the quantitative measurement of galectin-3 levels in blood
using the bioMérieux VIDAS
®
automated and multiparametric immunoassay testing system.
In April 2013, Abbott obtained a CE mark for its ARCHITECT
®
Galectin-3 assay and initiated its commercial launch in the EU. Abbott is offering the ARCHITECT
®
Galectin-3 assay on its
ARCHITECT
®
immunoassay platform. In the United States, Fujirebio Diagnostics, Incorporated, or Fujirebio, on
behalf of Abbott, is the first of our automated partners to have filed for 510(k) regulatory clearance of an automated version of the galectin-3 test. Fujirebio is developing the test for use on Abbotts ARCHITECT
®
immunochemistry instrument platform. Fujirebio initially submitted its 510(k) to the FDA in July 2012. Subsequently,
Fujirebio received a letter from the FDA requesting additional information on various matters, including the geographic composition of the patient cohort that provided the blood samples used to support the 510(k) submission. Due to the nature of the
additional information requested and the time required to address the FDAs questions, Fujirebio was unable to submit a complete response to the FDA by the FDA-designated deadline on February 25, 2013 and withdrew the submission. Fujirebio
submitted its new 510(k) to the FDA in February 2014.
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Recognition of Galectin-3 Testing in U.S. Guideline for the Management of Heart Failure
In June 2013, galectin-3 testing was recognized for the first time in the newly issued 2013 American College of Cardiology Foundation and the American
Heart Association Guideline for the Management of Heart Failure. The ACCF/AHA Guideline is designed to assist clinicians in selecting the best management strategy for individual patients and provides expert analysis of data on prevention, diagnosis,
risk stratification, and treatment. Galectin-3 testing has been assigned a Level of Evidence of A, multiple populations evaluated, and a Class of Recommendation corresponding to May Be Considered for the purpose of additive
risk stratification of acute heart failure patients, and a Level of Evidence of B, limited populations evaluated, and a Class of Recommendation of May Be Considered for risk stratification of ambulatory heart failure
patients. The guideline further notes that testing for galectin-3 is predictive of risk of adverse outcomes in heart failure, including hospitalization, and is additive to BNP and NT-proBNP testing for heart failure patient risk stratification. The
American College of Cardiology Foundation and the American Heart Association have jointly produced guidelines in the area of cardiovascular disease since 1980. The ACCF/AHA Task Force on Practice Guidelines is charged with developing, updating and
revising practice guidelines for cardiovascular diseases and procedures. Writing committees are charged with regularly reviewing and evaluating all available evidence to develop balanced, patient-centric recommendations for clinical practice. The
guidelines for heart failure management were last revised in 2009.
Reimbursement for Galectin-3 Testing
Approximately 70% of heart failure patients in the United States are of Medicare age. Therefore, reimbursement by Medicare is of
considerable interest to our laboratory customers. In the United States, for the 2014 calendar year, the Centers for Medicare and Medicaid Services (CMS) published a 2014 Medicare national limitation amount for the galectin-3 blood test
(analyte-specific CPT
®
Code 82777) at the amount of a crosswalked test (analyte-specific CPT
®
Code 84244) whose 2014 national limitation amount is $30.01. This national limitation replaces the galectin-3 blood
tests national limitation amount of $17.80 that was effective in 2013. The 2014 national limitation amount applies across the U.S. except in Ohio and West Virginia where rates of $23.99 and $26.40, respectively, will apply. In Europe, the
Companys sales efforts are currently directed to hospital situated emergency departments whose reimbursement is covered under the hospital budgeting process.
Market Opportunity for Galectin-3 Testing in Heart Failure
Heart Failure
Heart failure is a condition caused by a combination of diseases or factors that damage or overwork the heart muscle, thereby
limiting its ability to efficiently pump blood. Heart failure may lead to serious complications and is a leading cause of death. The most common cause of heart failure is coronary artery disease, including heart attack and unstable angina. Heart
failure is associated with other predisposing factors, such as high blood pressure, diabetes and defects of the heart valves or heart muscle. Patients with heart failure typically exhibit non-specific signs and symptoms such as swollen legs or
ankles and shortness of breath or weight gain. Heart failure may lead to declining function and, even, failure of other body organs, such as the kidney, lungs, and liver. Although the condition is usually progressive, the rate of progression varies
markedly from no noticeable deterioration over multiple years to rapid progression and death in just weeks or months.
Heart Failure in the
United States
According to the American Heart Association, an estimated 5.1 million Americans suffer from heart failure, with approximately 875,000 new cases occurring each year. By 2030, the prevalence of heart failure in the United
States is expected to increase to over 8.0 million patients. In 2013, the direct and indirect costs associated with heart failure in the United States are estimated to have been approximately $32 billion. The costs associated with heart failure
in the United States are expected to increase to approximately $97 billion by 2030. It is estimated that heart failure is responsible for over 277,000 deaths per year in the United States alone.
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Once diagnosed, the overall mortality, or rate of death, associated with heart failure is high, with 20%
dying within the first year of diagnosis and 50% dying within the first five years of diagnosis. In the United States, treatment of heart failure patients is associated with a high rate of hospitalization and ambulatory care visits, with an
estimated 1.3 million hospitalizations and an estimated 1.8 million physician office visits per year for patients with a primary diagnosis of heart failure. Unplanned re-hospitalization of heart failure patients is known to have a
significant impact on the utilization of health care resources. A recent review of Medicare claims data for re-hospitalization showed that patients with a discharge diagnosis of heart failure had a 30-day re-hospitalization rate of approximately
25%. Heart failure is the number one cause of early re-hospitalization among Medicare patients in the United States.
Heart
Failure in Europe
The European Society of Cardiology estimates that among the 51 countries it represents, there are at least 15 million individuals diagnosed with heart failure. Survival is poor, with reported 5-year
survival rates of 35% in The Netherlands and 41% in Sweden. A study in the UK reported a 10-year survival rate of 27%.
Clinical Utility and Benefits of Galectin-3 Testing for Patients with Heart Failure
Approximately 30% to 50% of heart failure patients are found to have elevated blood plasma or serum levels of galectin-3. Clinical studies in which
galectin-3 levels were measured with our BGM Galectin-3 Test have demonstrated that patients with elevated levels of galectin-3 experience a significantly higher rate of adverse outcomes, including mortality, hospitalization or early
re-hospitalization after recent hospital discharge. We believe that the measurement of the protein biomarker galectin-3 in patients with heart failure may facilitate decisions that are made regarding the intensity, locale, and nature of a heart
failure patients ongoing care. Clinical applications of the BGM Galectin-3 Test that reflect its potential utility and benefits include:
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Assessment of Prognosis:
Measurement of galectin-3 and the natriuretic peptide biomarkers such as BNP and NT-proBNP provides the clinician with
information regarding two distinct biological processes that contribute to the clinical outcome of patients who suffer from heart failure. Blood levels of the natriuretic peptide biomarkers are thought to reflect the degree of pressure or volume
overload in the heart, a significant determinant of the severity of heart failure. Elevated galectin-3 blood levels are thought to reflect cardiac remodeling, another very important determinant of the clinical outcome of heart failure. Clinical
studies indicate that galectin-3 provides prognostic information that is complementary and additive to that obtained with measurement of natriuretic peptides.
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Reducing Readmissions.
Heart failure is the most common cause of hospital readmission among Medicare patients. Approximately 25% of Medicare
patients who are hospitalized for heart failure are re-hospitalized within 30 days of discharge. The prevention of early re-hospitalization is now the subject of intense scrutiny by payers and government regulators, hospitals and health care
providers. Guidelines issued by the Centers for Medicare and Medicaid Services, or CMS, of the Department of Health and Human Services, or HHS, are intended to reduce unplanned readmissions by incenting or penalizing hospitals and health care
providers based on the frequency of hospital readmissions. Since it has been reported that heart failure patients with elevated levels of galectin-3 are two-to-three times more likely than other heart failure patients to be readmitted to the
hospital within 30 days of discharge, we believe that identifying these high-risk patients through galectin-3 testing is a potentially valuable and cost-effective tool that may help direct patients to the appropriate level of care and, in so doing,
prevent re-hospitalization.
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Stratification of Diagnostic Procedures and Therapies
: As the population ages, the prevalence of post-acute and chronic diseases, such as heart
failure rises. As the prevalence of these diseases rises, so does the need for simple, accessible, affordable and reliable tools to help guide decisions regarding the where, who and how these patients are managed. A first useful step is to identify
patients who are at increased risk of adverse outcomes. The second step is to create and implement risk stratified strategies for patient
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management. The BGM Galectin-3 Test can be used to identify the 30% to 50% of chronic heart failure patients who are at greater risk for adverse outcomes and who may require a more intense and
specialized approach to their management. Physicians may reference galectin-3 levels to determine the need for referral to a heart failure specialist, the need for advanced diagnostics and therapies, and logistical matters such as the time interval
between patient visits and the need for other forms of monitoring.
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Sales and Marketing of the BGM Galectin-3 Test
We are currently in the early stages of commercialization of our BGM Galectin-3 Test. We have focused our attention on what we believe
are the critical catalysts for driving market acceptance of a new diagnostic product:
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Utility
: We support both sponsored and independent clinical research studies that are designed to evaluate the potential clinical utility of our
BGM Galectin-3 Test.
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Call Point
: We support a modest sales organization that seeks to educate nurse practitioners, primary care physicians, cardiologists, and heart
failure specialists as to the clinical value of galectin-3 testing of heart failure patients. In addition to calling on individual health care providers, we attempt to address the needs of health provider groups such as Accountable Care
Organizations and integrated health care delivery networks. We also call on Clinical Research Organizations and pharmaceutical companies who may have an interest in incorporating our biomarker into clinical research and product development
activities. In the EU, we primarily call on hospitals and staff, hospital emergency departments and staff, and clinical research organizations.
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Access:
We support a modest sales organization that seeks to ensure that our test is offered by specialty, large national reference, smaller,
regionally-focused independent laboratories and hospital in-patient and outreach laboratories, as well as, Clinical Research Organizations. Our sales organization works in tandem with laboratory sales and technical personnel to ensure awareness of
the utility of our BGM Galectin-3 Test. In the EU, we primarily call on hospital laboratories and clinical research facilities.
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Promotion:
In 2013, 13 full-length clinical research papers and review articles were published regarding the utility of our BGM Galectin-3 Test.
In addition, numerous oral and poster presentations were delivered at both U.S. and international meetings.
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Our Product
Pipeline
New Clinical Claims and Indications for the BGM Galectin-3 Test
We believe that the clinical and commercial value of our BGM Galectin-3 Test may extend beyond its current indications for use. We expect to pursue new
clinical claims and indications for its use in assessing heart failure, as well as, in related disorders. Expansion of the product label to include new clinical claims and indications for use will require additional clinical studies and clearance,
or approval, by regulatory bodies, such as the FDA, and inclusion in our CE Mark for use in the EU.
CardioSCORE Test
Our CardioSCORE test is a multi-analyte biomarker-based blood test that is designed as an aid in the assessment of near-term risk for
significant atherothrombotic cardiovascular events, such as heart attack and ischemic stroke. The CardioSCORE test is a proprietary in vitro diagnostic multi-analyte assay in which the levels of multiple biomarkers are measured in blood and the
results are mathematically integrated to yield a single numerical score that is predictive of an individuals near-term atherothrombotic cardiovascular risk. Our development work indicates that the CardioSCORE test has the potential to offer
significant improvement over conventional risk factor-based diagnostics, such as the Framingham Risk Score, to identify near-term cardiovascular risk.
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In December 2012, we obtained a CE Mark for the CardioSCORE test, which will enable us to market the test in
Europe and other countries that recognize CE Mark. However, as a result of our decision to focus our efforts on increasing the adoption and sales of our galectin-3 test, we have decided to redirect investments from a launch of the CardioSCORE test
in Europe to support our galectin-3 efforts. We may move forward with a European launch in test markets, when and if appropriate partnership opportunities arise.
In December 2011, we submitted a 510(k) to the FDA in order to obtain regulatory clearance to market the CardioSCORE test in the United States as an aid in the assessment of near-term risk for significant
cardiovascular events, such as heart attack and stroke. In response to this submission, FDA requested that we engage an independent committee of physicians to conduct a medical review and adjudication of clinical endpoints reported in the
submission. Due to the time involved in responding to this request, we withdrew the 510(k) on August 8, 2012. Our medical review also included the assessment of sample stability and the evaluation of other technical issues raised by the FDA. We
are currently analyzing the results of the medical review. When completed, the results obtained from our analysis of data collected from the medical review will guide our go-forward regulatory, commercial and investment strategy for the CardioSCORE
test in the United States.
BioImage Study Patient Cohort and Banked Specimens
We have exclusive rights to diagnostic inventions arising from our analysis of a proprietary observational and community-based cohort of over 6,800
individuals who have been followed since 2009. Baseline blood serum, plasma, DNA, and RNA samples collected from all participants have been stored and are available for our analysis. In addition, insurance claims data, including information
regarding diagnoses, procedures, and therapies related to over 1,200 non-fatal cardiovascular events that were experienced by participants in the cohort over the more than four years since follow-up was initiated is available to us for data mining.
We believe that this asset provides us with a unique and proprietary platform from which we may develop new diagnostic products.
The
Market
Cardiovascular Disease
According to the American Heart Association (AHA), an estimated 82.6 million American adults (approximately 1 in 3) have one or more types of cardiovascular disease. It is the leading cause of death
in the United States. The AHA estimated direct and indirect costs of cardiovascular disease in the U.S. for 2008 at $297.7 billion. Cardiovascular disease and stroke accounted for 16% of total health expenditures, more than any major diagnostic
group. Between 2012 and 2030, total direct medical costs of cardiovascular disease are projected to triple, from $309 billion to $834 billion. Indirect costs (attributable to lost productivity) for all cardiovascular diseases are estimated to
increase from $185 billion in 2012 to $284 billion in 2030.
Biomarkers and the Management of Cardiovascular Disease
Biomarkers are biologic indicators that are measured to help determine the risk of acquiring disease, the presence or diagnosis of disease, the expected
course or prognosis of disease, the potential response to treatment, and the effects of treatment. Essential biomarkers include, for example, physiologic parameters such as body temperature and blood pressure, blood cells, proteins, including
hormones and enzymes, blood glucose, genes and other molecules. Biomarkers may be measured at the bedside, in advanced imaging suites and other specialized testing facilities or in the clinical laboratory. Biomarkers are typically most useful when
the method of measurement is cost effective and the results obtained can be readily interpreted and are clinically relevant, actionable, reproducible and reliable. The measurement of biomarkers is fundamental to the current practice of preventive,
predictive, and personalized medicine.
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The measurement of biomarkers is a pivotal component of the evaluation and management of patients with heart
disease. While the measurement of physiologic parameters such as blood pressure and the electrocardiogram are important cardiac biomarkers, increasingly, the clinical management of heart disease is guided by the measurement of proteins that are
released into the blood stream by the damaged heart or other organs. The measurement of these protein biomarkers has become an essential element of the management of cardiovascular disease.
The use of biomarkers to help determine diagnosis, prognosis and treatment decisions has long been integral to the management of atherothrombotic disease, including myocardial infarction. More recently
biomarkers have been applied to the management of heart failure. Biomarkers that have been applied to the management of heart disease include biomarkers of heart muscle injury, such as troponin, biomarkers of hemodynamic stress, such as the
natriuretic peptides BNP and NT-proBNP, and inflammatory and prognostic biomarkers, such as galectin-3.
Laboratory Testing for Protein
Biomarkers
We market and sell our BGM Galectin-3 Test and expect to market and sell our future pipeline products to clinical
laboratories, hospitals, physicians and other health care providers to assist in the evaluation and management of heart failure and related disorders. In the United States, our BGM Galectin-3 Test may be ordered as part of a regular physician office
visit or in association with admission to the hospital. In the EU, our BGM Galectin-3 Test is primarily ordered in association with admission to the hospital.
As with other protein-based cardiac biomarkers, our BGM Galectin-3 Test kits are purchased by hospital-based and independent clinical laboratories that process the test, generate a test result and then
communicate that test result to ordering heart failure nurses, primary care physicians, cardiologists and heart failure specialists. It is estimated that in the United States, nearly 30% of all clinical laboratory testing is generated in connection
with the care of patients who have been admitted to the hospital. Of the somewhat more than 70% of all laboratory testing that is generated in connection with the care of patients who are seen in physician offices and other outpatient venues, more
than one-half is performed by independent clinical laboratories, about one-third is performed by hospital outreach laboratories, and the remainder is primarily performed in physician office laboratories. CMS estimated in 2011 that there were
approximately 5,600 independent clinical laboratories in the United States. Over 50% of all laboratory testing performed by independent clinical laboratories resides in large national reference laboratories, nearly 40% in smaller and more regionally
focused independent laboratories, and nearly 10% is performed in specialty laboratories.
Our Commercial Strategy
The primary goal of our commercial strategy is to drive the world-wide adoption of our BGM Galectin-3 Test, automated galectin-3 testing and our future
pipeline products. We have prioritized our actions and investments around what we believe are the key drivers of adoption of a diagnostic product that incorporates a novel, protein biomarker. We believe that the actions taken and investments made in
support of our efforts to drive adoption of our BGM Galectin-3 Test and automated galectin-3 testing will create a commercial conduit for our future pipeline products.
Clinical Laboratory Supply Agreements for Sale of Our BGM Galectin-3 Test Kits
Sales of
our BGM Galectin-3 Test kits are typically accomplished through written supply and pricing agreements under which we agree to supply BGM Galectin-3 Test kits, at a specified price, to specialty, national reference, regional reference and hospital
laboratories with the expectation that the contracting laboratory will offer galectin-3 testing services to their customers as part of their standard testing menu. Particularly noteworthy are
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long term agreements that we have entered into with Health Diagnostic Laboratory, Inc., a United States based specialty laboratory, and Laboratory Corporation of America, a United States based
national reference laboratory:
Health Diagnostic Laboratory, Inc.
In March 2011, we entered into a supply agreement with Health Diagnostic Laboratory, Inc., or HDL, pursuant to which HDL agreed to purchase BGM Galectin-3 Test kits from us and to offer galectin-3 testing
services to physicians in the United States. Under the terms of the agreement, we have also agreed to supply our BGM Galectin-3 Test kits to any affiliate of HDL in the United States that is interested in purchasing test kits from us. We agreed to
treat any such affiliate as we would treat HDL for the purposes of the agreement.
In addition, HDL agreed to include our BGM Galectin-3 Test
in its standard menu of lab tests. In the event HDL performs a minimum amount of galectin-3 assays, the agreement requires us to provide written notice to HDL of our intention to enter into any agreement with a third party under which such party
would have the right to offer or sell our CardioSCORE diagnostic test. We have also agreed to negotiate with HDL in good faith regarding the terms upon which we might enter into a similar agreement for CardioSCORE with HDL.
Under the terms of the agreement, we agreed to provide HDL with certain clinical market development resources, programs and assistance, as reasonably
requested by HDL, and HDL agreed to train its sales and service representatives and to perform certain sales, marketing and marketing education activities in support of galectin-3 testing services. The agreement is scheduled to expire on
March 15, 2016, unless extended by mutual written agreement of the parties. Either party may terminate the agreement upon 60-days prior written notice for failure of the other party to comply with the terms of the agreement, unless the
defaulting party remedies such failure within the 60-day notice period.
Laboratory Corporation of America
In May 2010, we entered into a license and supply agreement with Laboratory Corporation of America, or LabCorp, pursuant to which LabCorp agreed to make
our BGM Galectin-3 Test available to physicians in the United States. Under the terms of the agreement, we granted LabCorp and its affiliates a semi-exclusive worldwide license under our patent rights related to galectin-3 to market, offer for sale
and otherwise commercialize galectin-3 testing services using our BGM Galectin-3 Test. The license was semi-exclusive in the United States through the third year following the commercial launch of the BGM Galectin-3 Test and now the license is
non-exclusive.
Under our agreement with LabCorp, we sell our BGM Galectin-3 Tests to LabCorp at agreed upon prices. We have agreed, with
limited exceptions, that the kit price to be charged to LabCorp and its affiliates shall be no less favorable than the price charged to any other third party in the United States. Pursuant to the agreement, we are required to pay certain rebate
amounts to LabCorp if the aggregate number of automated tests that are capable of being performed in the United States using automated test kits sold by us or our business partners exceeds a certain amount during a specified period. We have also
agreed that, to the extent we enter into agreements with third parties after May 13, 2010 to manufacture, supply or distribute automated test kits, we will require such third parties to supply such automated test kits to LabCorp and its
affiliates.
Under the agreement, we will also provide LabCorp with certain clinical market development resources, programs and assistance as
reasonably requested by LabCorp. LabCorp has agreed to perform certain sales, marketing and market education activities in support of our BGM Galectin-3 Test. LabCorp may terminate the agreement at any time and for any reason upon 120-days written
notice and LabCorp may terminate the agreement immediately if we undergo a change of control to a competitor of LabCorp. Either party may terminate the agreement upon 60-days written notice for failure to comply with the terms of the agreement,
unless the defaulting party remedies such failure within the 60-day notice period.
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Development and Commercialization Agreements to Automate Galectin-3 Testing
Abbott, Alere, bioMérieux and Siemens
In November 2009, we entered into a strategic collaboration with Abbott Laboratories, to develop and commercialize galectin-3 assay kits and related control kits and calibrators, or Galectin-3 Products,
for purposes of this agreement, utilizing our galectin-3 technology and patent rights, for use on Abbotts
Architect
®
Immunochemistry Diagnostics Platform, or the Abbott Architect, and other Abbott diagnostic
instruments. In March 2010, we entered into a second strategic collaboration agreement with Alere to develop an automated version of our galectin-3 test for use on Aleres Triage
®
line of instruments. In May 2010, we entered into a third strategic collaboration agreement with bioMérieux to develop an automated version of our galectin-3
test for use on bioMérieuxs VIDAS
®
automated testing platform. In December 2010, we entered into a
fourth strategic collaboration agreement with Siemens to develop an automated version of our galectin-3 test on Siemenss systems. We refer to Abbott, Alere, bioMérieux and Siemens as our automated partners.
As part of these collaborations, we entered into a non-exclusive license and distribution agreement with each automated partner, which we refer to as our
automated partner agreements, pursuant to which we provided each automated partner and its affiliates with a non-exclusive, worldwide license under our patent rights related to galectin-3 to commercialize Galectin-3 Products for use on each
automated partners respective automated instrument platform.
Under the automated partner agreements, each automated partner is
prohibited from sublicensing its rights to commercialize our Galectin-3 Products and, except for the Galectin-3 Products described above, is prohibited from developing galectin-3 assays covered by our patent rights. We have the right to enter into a
total of five licenses of our patent rights related to galectin-3 for the commercialization of Galectin-3 Products through the expiration of the five-year period following the date on which Abbott makes its first commercial sale of Galectin-3
Products, and we may enter into unlimited additional licenses thereafter. Under these agreements, our automated partners are responsible for developing and commercializing the tests and we are responsible for furthering clinical awareness and
developing the market for galectin-3 testing. Also under these agreements, each automated partner will pay us a product access fee and a marketing service fee for each Galectin-3 Product it sells.
Upon commercial introduction of the automated tests by our partners, royalties on sales of their automated galectin-3 tests will be due to us. The
agreements contain provisions that, under certain circumstances, entitle our partners to reduce the royalty amounts payable to us on the sales of their tests in amounts that are subject to negotiation by us and our respective partners. In some
cases, our partners rights to reduce the royalty amounts are triggered by the CMS payment rate referenced below (also see Reimbursement) or the average selling prices in other regions that are below certain agreed-upon thresholds. The CMS
national payment limit for galectin-3 testing for the 2014 calendar year is currently below the agreed-upon CMS payment rate thresholds in these agreements. Accordingly, the current royalty amounts payable to us under these agreements are subject to
reduction by our partners, in amounts to be negotiated by us and our respective partners. There can be no assurance that in any renegotiation of these royalty provisions we will be successful in negotiating new rates that will be favorable to us.
Each automated partner is required to use its commercially reasonable efforts to promote, market, sell and distribute the Galectin-3 Products
worldwide. We are required to use our commercially reasonable efforts to pursue certain clinical development objectives, perform certain marketing services in the United States and certain foreign countries, and develop and implement a reimbursement
strategy for galectin-3 assays in those countries.
Unless terminated earlier, each automated partner agreement will expire on the expiration
date of the last-to-expire patent in our patent rights related to galectin-3. In the case of each automated partner agreement, we or our
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automated partner may terminate the agreement upon 60 days written notice of a material breach of the agreement that is not cured within such 60 days, and, in the case of each automated partner
agreement, each automated partner may terminate its agreement with us upon 30-days written notice upon the occurrence of certain events, including if the Galectin-3 Products fail to meet certain product claims, performance requirements or
manufacturing requirements, the automated partners become aware of possible third-party patent infringement of our patent rights relating to galectin-3, the Galectin-3 Products negatively impact other assay or system performance parameters that
cannot be resolved, the predicate device does not receive regulatory approval in the United States or galectin-3 is either not accepted by, or a new marker showing superior clinical utility is adopted by, the physician community.
Our Technology In-Licenses from Third Parties
ACS Biomarker
We have exclusively licensed from ACS Biomarker B.V., or ACS Biomarker, a
portion of the intellectual property rights covering our galectin-3 tests. In May 2007, we entered into an initial biomarker product license and collaboration agreement with ACS Biomarker and in July 2012, we entered into a sublicense agreement
with ACS Biomarker, which superseded the initial agreement in its entirety. Pursuant to the agreement, ACS Biomarker granted to us an exclusive, worldwide sublicense to develop and commercialize two proprietary cardiovascular biomarkers for
congestive heart failure, galectin-3 and thrombospondin-2. Each of these biomarkers is licensed by ACS Biomarker from the University of Maastricht. The agreement permits us to sublicense the rights that ACS Biomarker granted to us to third
parties.
Under the terms of the agreement, we have developed an implementation plan for the development and commercialization of products
derived from the licensed biomarkers. As consideration for the sublicenses, we were required to pay ACS Biomarker an upfront payment and are required to make milestone payments and royalty prepayments to the extent that we achieve specified
development and regulatory milestones. Additionally, we are obligated to pay ACS Biomarker royalties on any net sales, together with a percentage of any sublicense revenue, from our galectin-3 tests and any other products that we develop using
the licensed intellectual property. As of December 31, 2013, we have paid to ACS Biomarker a total of approximately $1.0 million in up-front, milestone and royalty prepayments.
The term of the agreement extends from its effective date until the last date on which a claim on the licensed IP remains issued and unexpired, unless terminated earlier pursuant to the terms of the
agreement. Either party may terminate the agreement upon written notice if the other party fails to perform a material obligation under the agreement, or upon the occurrence of certain bankruptcy events involving the other party. The
licenses granted by ACS Biomarker to us will expire immediately upon any such termination, but certain other obligations, including those related to payment of royalties, indemnification and confidentiality, shall survive.
Our Other Research Collaboration
HRP Initiative
In 2006, we
initiated the High-Risk Plaque (HRP) initiative for atherothrombotic cardiovascular disease. The HRP initiative consists of a series of pre-competitive, multi-party research and development projects, which are administered and coordinated by us
pursuant to participation agreements with Abbott, AstraZeneca plc or AstraZeneca, Merck & Co., Inc. or Merck, Koninklijke Philips N.V. or Philips and Takeda Pharmaceutical Company Limited or Takeda. Since the inception of the HRP
initiative, these participating companies have supported the research and development projects by providing approximately $26.6 million in funding. The overall goals of the HRP initiative are to advance the understanding, recognition and management
of atherothrombotic cardiovascular disease, to provide a roadmap for the development and registration of screening, diagnostic and therapeutic interventions for high-risk plaque and to promote the use of these interventions by patients,
pharmaceutical companies and third-party payers.
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The HRP initiative is governed by a joint steering committee, or JSC, which is comprised of designees from
the participating companies, and is led by a scientific program board consisting of academic experts in the cardiovascular field, which advises the JSC and assists in the design of the research protocols. The JSC is responsible for overseeing the
conduct and progress of the HRP initiative, including finalizing and approving program activities, program and activity budgets, external communications, patent filings, third-party licensing and commercialization of data and rights under the HRP
initiative. We will own certain inventions and data that are conceived in the conduct of the HRP initiative, including those that arise from our data mining and analysis of a proprietary patient cohort and specimen repository that was developed as
part of this initiative. We have agreed to grant each participating company a non-exclusive, perpetual, royalty-free license to all such inventions and data for any and all uses. Each participation agreement expires upon the earlier of the
completion of the HRP initiative or the fifth anniversary of such agreement, unless otherwise terminated by the parties.
Among other research
projects, the HRP initiative has contributed to what we believe are two important advances in the identification of patients at risk for major atherothrombotic events, including data derived from studies that validated our CardioSCORE test and a
novel three-dimensional vascular ultrasound technique. The three-dimensional vascular ultrasound technique is being pursued by companies other than BG Medicine. The HRP initiative met the goals we set out to accomplish and we are no longer
initiating new research projects in the initiative. All revenue for the HRP initiative has been recorded as of December 31, 2013.
Intellectual Property
The focus of our
work is the development and commercialization of novel diagnostic tests based on biomarkers. Through our research and development efforts, we have developed expertise in proprietary methods using experimental design, biological sample preparation,
high throughput biomolecular data and statistical analysis, clinical study design and statistical analysis, and specialized bioinformatics methods to interpret data sets. We seek to protect these methods as trade secrets and, in some cases, by
filing patent applications.
We seek to protect the diagnostic tests that we have developed primarily through patents. The patentability of
test methods and products based on biomarkers is well-established in most countries. Because we use an empirical as well as a hypothesis-driven approach to biomarker discovery, we may measure many different molecules in each biological specimen.
Thus, we may be able to identify multiple biomarkers and biomarker combinations that are associated with a clinical outcome of interest. We believe that this may enhance our ability to obtain patents for diagnostic tests based on our discoveries.
However, due to technological changes that may affect our proposed products or judicial interpretation of the scope of our patents, our proposed products might not, now or in the future, be adequately covered by our patents.
As of February 28, 2014 we have 5 issued U.S. patents and 13 pending patent applications filed either with the U.S. Patent and Trademark Office or
under the PCT and foreign counterparts of certain of these patent applications. A subset of the intellectual property that we own or license relates to our galectin-3 test. This intellectual property includes U.S. Patent Nos. 7,888,137 and
8,084,276, exclusively licensed from ACS Biomarker B.V. and nine corresponding patent applications pending in the United States and abroad, as well as issued patents in Europe, Australia, China, Hong Kong, and Japan. U.S. Patent No. 7,888,137
is scheduled to expire in November 2026 and U.S. Patent No. 8,084,276 is scheduled to expire in September 2024. We own U.S. and corresponding foreign applications relating to a specific method and kit for detecting galectin-3. Any patent
issuing from this U.S. application could expire as early as 2029. In addition, we own seven U.S. patent applications filed either with the U.S. Patent and Trademark Office or under the PCT, and foreign counterparts of these patent applications
related to methods for clinical evaluation of subjects and therapies based on galectin-3 measurements. A subset of the intellectual property that we own relates to our CardioSCORE test. This intellectual property includes U.S. Patent Application
No. 12/946,470 and three corresponding patent applications abroad, and U.S. Patent Application No. 13/765,366 and one corresponding patent filed under the PCT. Any patent issuing from the earliest-filed U.S. application could expire as
early as 2030. For the diagnostic tests that we develop based on our biomarker discoveries, we expect to rely primarily on patent protection.
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Several of our owned and licensed patent applications are in an early stage of prosecution, and we cannot assure you that any of the pending patent applications will result in patents being
issued. In addition, due to technological changes that may affect our proposed products or judicial interpretation of the scope of our patents, our proposed products might not, now or in the future, be adequately covered by our patents.
In addition to our internal diagnostic product development efforts, for which we plan to seek to obtain exclusive ownership rights, we expect to obtain
certain ownership rights to intellectual property conceived in the conduct of the HRP initiative, a study of atherothrombotic cardiovascular disease that we initiated, and from our research, development and commercialization collaboration with other
initiatives or collaborations that we may undertake.
We maintain a policy of requiring our employees and consultants to execute
confidentiality and invention assignment agreements upon commencement of their relationships with us. These agreements are designed both to enable us to protect and maintain the confidentiality of our trade secret information by prohibiting
unauthorized disclosure or use of our technology, and to secure title to technology developed by us or on our behalf so that it may be protected through patent filings or other means.
Manufacturing
Since 2009, we have been operating under an exclusive development and
manufacturing agreement with Corgenix Medical Corporation, pursuant to which Corgenix will manufacture the BGM Galectin-3 Test for distribution in the United States, Europe and elsewhere. Corgenix develops, manufactures, distributes and markets in
vitro diagnostic products based on ELISA technology using the microtiter format. Corgenix is the sole manufacturer of our BGM Galectin-3 Test. As part of our development and commercialization activities, we and Corgenix are required to comply with
the FDAs quality system regulation, or QSR, and other regulations which cover, among other things, the methods and documentation for the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our
products. The FDA monitors compliance with QSR through periodic inspections.
Competition
We believe that our cardiovascular diagnostic tests address significant unmet medical needs, improve patient outcomes and contain health care costs. We
believe that we compete primarily on the basis of the value of the quantitative information our cardiovascular diagnostics provide and the clinical validation of our BGM Galectin-3 Tests ability to aid in the prognosis of patients with chronic
heart failure. We also compete by leveraging industry leaders in diagnostic instrument platform manufacturers and reference laboratory providers to provide comprehensive worldwide access to our BGM Galectin-3 test in outpatient and inpatient
settings, along a continuum extending from physician offices, clinics, hospital emergency rooms, intensive care units and central labs to commercial reference labs.
We face competition from a number of companies in the commercialization of diagnostic products for cardiovascular disease. Established diagnostics companies, such as Abbott Diagnostics, Beckman Coulter,
bioMérieux , Roche Diagnostics, General Electric, Alere, Ortho Clinical Diagnostics, Mitsubishi, Philips and Siemens offer cardiovascular disease tests to complement their legacy routine testing businesses. In addition, commercial
laboratories with extensive service networks for diagnostic tests, such as LabCorp and Quest Diagnostics, have expanded or acquired testing capabilities to include more specialized cardiovascular testing. Specialized cardiovascular CLIA
laboratories such as Atherotech, Berkeley Heart Lab (now part of Quest Diagnostics), Bioreference Lab (Gene Dx), Boston Heart Diagnostics (formerly Boston Heart Lab), Cleveland HeartLab, Health Diagnostic Laboratory (HDL), Liposcience, Aviir
and Cardio DX have expanded their presence and menu in the cardiovascular market and some have developed their own tests or panels.
We have
identified a number of recent entrants to the field with competing technologies and approaches in cardiovascular diagnostics. Companies that may compete with us in the cardiovascular diagnostics space, include Athena Diagnostics, Atherotech,
Berkeley Heart Lab, HDL, Bioreference Lab (Gene Dx), Dako, diaDexus, Myriad Genetics, Singulex and Critical Diagnostics.
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Regulatory
Our BGM Galectin-3 Test is our first FDA cleared and CE Marked diagnostic product. The test received 510(k) regulatory clearance from the FDA in November 2010 and obtained CE Mark in the European Union in
October 2009.
Fujirebio, on behalf of Abbott, is the first of our automated partners to have filed for 510(k) regulatory
clearance of an automated version of the galectin-3 test. Fujirebio is developing the test for use on Abbotts
ARCHITECT
®
immunochemistry instrument platform. Fujirebio initially submitted its 510(k) to the FDA in July
2012. Subsequently, Fujirebio received a letter from the FDA requesting additional information on various matters, including the geographic composition of the patient cohort that provided the blood samples used to support the 510(k) submission. Due
to the nature of the additional information requested and the time required to address the FDAs questions, Fujirebio was unable to submit a complete response to the FDA by the FDA-designated deadline on February 25, 2013 and withdrew the
submission. Fujirebio submitted its new 510(k) to the FDA in February 2014.
In December 2011, we submitted a 510(k) to the FDA in order
to obtain regulatory clearance to market the CardioSCORE test in the United States as an aid in the assessment of near-term risk for significant cardiovascular events, such as heart attack and stroke. In response to this submission, FDA requested
that we engage an independent committee of physicians to conduct a medical review and adjudication of clinical endpoints reported in the submission. Due to the time involved in responding to this request, we withdrew the 510(k) on August 8,
2012. Our medical review also included the assessment of sample stability and the evaluation of other technical issues raised by the FDA. We are currently analyzing the results of the medical review. When completed, the results obtained from our
analysis of data collected from the medical review will guide our go-forward regulatory, commercial and investment strategy for the CardioSCORE test in the United States.
The FDA recommends that sponsors such as us interact with the agency early and often in the development of diagnostic products. We intend to follow this recommendation in an effort to manage development
risks and facilitate the regulatory process. In light of the importance of the U.S. market for our potential products, and because of the opportunity to seek and receive early FDA input on development programs, we will prioritize U.S. regulatory
plans and submissions over other jurisdictions. In addition, we intend to identify opportunities to prepare and file submissions in compliance with EU-Directive 98/79/EC and other applicable standards and national reimbursement rules. We plan to
prioritize European Union Member States based on market size, regulatory approvals and other considerations.
Our current and planned business
is subject to extensive and frequently changing laws and regulations in the United States, the European Union, and elsewhere that we may do business.
U.S. Regulations
Food and Drug Administration
In the United States, in vitro diagnostics are regulated by the FDA as medical devices. There are two principal regulatory pathways to receive
authorization to market in vitro diagnostics, a 510(k) premarket notification and a premarket approval application, or PMA. The FDA makes a risk-based determination as to which pathway a particular in vitro diagnostic is eligible. In addition, since
July 2012 with the enactment of the Food and Drug Administration Safety and Innovation Act, or FDASIA, a
de novo
pathway is directly available for certain low to moderate risk devices that would not qualify for the 510(k) notification pathway
due to lack of a predicate device.
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The information that must be submitted to the FDA in order to obtain clearance or approval to market a new
medical device varies depending on how the medical device is classified by the FDA. Medical devices are classified into one of three classes on the basis of their level of risk and the controls deemed by the FDA to be necessary to reasonably assure
their safety and effectiveness. Class I devices are subject to general controls, including establishment registration, device listing, labeling, reporting and recordkeeping, and adherence to FDAs quality system regulations, which
are device-specific good manufacturing practices. Class II devices are subject to the general controls and also special controls, including guidance documents, performance standards, and postmarket surveillance. Class III devices are subject to most
of the previously identified requirements as well as to premarket approval. Most Class I devices are exempt from the requirement for premarket notification to the FDA; most Class II devices require the submission of a 510(k) premarket notification
to the FDA prior to commercial marketing; and Class III devices require submission of a PMA. Device manufacturers and PMA holders are also subject to numerous postmarketing requirements.
The FDA can require the submission of clinical data to support 510(k) clearance,
de novo
reclassification, or a PMA. Clinical studies undertaken in the United States are subject to FDA requirements
applicable to investigational device exemption, or IDE, institutional review board, or IRB, review and approval, and informed consent of the study subjects.
Clinical Trials of Devices
Clinical trials for a medical device must be conducted in
accordance with FDA requirements, including informed consent from study participants, review and approval by an IRB, financial disclosure by clinical investigators, and listing of appropriate studies on ClinicalTrials.gov. Additionally, FDA approval
of an IDE application must be obtained in order to conduct a clinical study of significant risk devices, which are devices that present a potential for serious risk to the health, safety, or welfare of a subject, including devices that
are of substantial importance in diagnosing or treating disease, or preventing impairment of human health. Sponsors of clinical studies are responsible for monitoring the studies, and for recordkeeping and reporting. The FDA may prevent studies from
moving forward, and may suspend or terminate studies once initiated. The FDA may inspect sponsor records, clinical investigators, and clinical sites involved in clinical trials. The FDA may take enforcement action for non-compliance with any of
these requirements.
510(k) Premarket Notification
A 510(k) notification requires the sponsor to demonstrate that a medical device is substantially equivalent to another marketed device, termed a predicate device, that is legally marketed in
the United States and for which a PMA was not required. A device is substantially equivalent to a predicate device if it has the same intended use and same technological characteristics as the predicate; or has the same intended use but different
technological characteristics, where the information submitted to the FDA does not raise new questions of safety or effectiveness and demonstrates that the device is at least as safe and effective as the legally marketed predicate device.
The FDAs performance goal review time for a 510(k) notification is 90 days from the date of receipt, however, in practice, the review
process often takes significantly longer. After its initial review, the FDA may require additional information including clinical data in order to make a decision regarding the claims of substantial equivalence. Clinical studies of in vitro
diagnostic products are typically designed with the primary objective of obtaining analytical or clinical performance data. If the FDA believes that the device is not substantially equivalent to a predicate device, it will issue a Not
Substantially Equivalent letter and designate the device as a Class III device, which will require the submission and approval of a PMA before the new device may be marketed. Under certain circumstances, the sponsor may submit a
de novo
petition to the FDA to reclassify the new device as a Class I or Class II device.
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If a predicate device does not exist, the FDA may make a risk-based determination that the device is
eligible for
de novo
reclassification and premarket review instead of requiring a PMA. The
de novo
process is similar to clearance of the 510(k) premarket notification, and typically requires the submission of clinical data to support
the reclassification. A
de novo
petition can be submitted either prior to the submission of a 510(k) when no predicate device can be identified, or after the FDA determines that a new device is not substantially equivalent due to
lack of an appropriate predicate device. Under the FDASIA amendments to the statute, the FDA may decline to undertake a classification if the FDA either (1) identifies a legally marketed predicate device that would be appropriate
for a 510(k), or (2) determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. The statute directs the FDA to classify the device within
120 days following receipt of the
de novo
application.
Premarket Approval
The PMA process is more complex, costly and time consuming than the 510(k) process. A PMA must be supported by manufacturing data, preclinical data, and
more detailed and comprehensive scientific evidence, including clinical data, to demonstrate the safety and efficacy of the medical device for its intended purpose. If the device is determined to present a significant risk, the sponsor
may not begin a clinical trial until it submits an application for investigational device exemption, or IDE, to the FDA and obtains approval from the FDA to begin the trial.
After the PMA is submitted, the FDA has 45 days to make a threshold determination that the PMA is sufficiently complete to permit a substantive review. If the PMA is deemed not sufficiently complete, the
FDA will issue a refuse to file determination. If the PMA is complete, the FDA will file the PMA and begin a substantive review of the application. The FDA is subject to a performance goal review time for a PMA that is 180 days from the
date of filing, although in practice the total review time is longer. Questions from the FDA, requests for additional data, additional testing and submissions by the applicant, and referral to an advisory committee may delay the process
considerably. Indeed, the total process may take several years and there is no guarantee that the PMA will ever be approved. Even if approved, the FDA may limit the indication for which the device may be marketed. The FDA may also request additional
clinical studies or registries as a condition of approval or even after the PMA is approved. Any changes to the medical device may require a supplemental PMA to be submitted and approved. In addition, annual reports and other reports are required.
Requirements Applicable to Marketed Devices
The FDA Quality System Regulations, or QSRs, impose requirements for design control and validation, management review, complaint handling and investigation, labeling control, servicing, recordkeeping
requirements, and more. The FDA also regulates device imports and exports. Manufacturers are required to submit medical device reports for deaths or serious injuries associated with the use of their devices, and for malfunctions that could cause or
contribute to a death or serious injury. The FDA also requires reporting of certain corrections or removals of devices. Labeling and promotional activities are subject to regulation by the FDA, and certain device advertising is subject to regulation
by the Federal Trade Commission.
Laboratory Developed Tests
Although the FDA has claimed for many years that it has the statutory authority to regulate laboratory-developed tests, or LDTs, as medical devices, the agency has generally exercised enforcement
discretion toward them. LDTs are tests that are developed, validated, and offered as testing services by a clinical laboratory, and these tests are regulated under the Clinical Laboratory Improvement Act, or CLIA. The FDA has stated that it will
take enforcement action against any specific LDT if necessary to protect the public health. In addition, under FDA regulations applicable to analyte-specific reagents, or ASRs, a laboratory using an ASR in its LDT is required to indicate in its test
report that the test has not been cleared or approved by the FDA. The FDA has also issued
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several draft guidance documents, such as those regarding products labeled Research Use Only, or RUO, and In Vitro Diagnostic Multivariate Index Assays, or IVDMIAs, which may affect
the regulation of clinical laboratory tests if finalized.
In recent years, the FDA has indicated that it is reconsidering its policy of
enforcement discretion and reviewing the regulatory requirements that it will apply to LDTs. In July 2010, the FDA held a 2-day meeting to obtain input from stakeholders on how it should apply its authority to implement a reasonable risk-based and
effective regulatory framework for LDTs. The FDA has indicated that it intends to issue guidance documents to establish such a regulatory framework, but to date it has not done so.
CLIA and State Clinical Laboratory Laws
The FDA is responsible for the complexity
categorization of commercially marketed in vitro diagnostic, or IVD, tests under CLIA, placing them into one of three categories based upon the potential risk to public health in reporting erroneous results. The categories were devised on the basis
of the complexity of the test, and include waived tests, tests of moderate complexity, and tests of high complexity.
The Center for Medicare
and Medicaid Services, or CMS, regulates clinical laboratories under CLIA. Laboratories that perform testing on human specimens for the purpose of providing information for diagnosis, prevention or treatment of disease or assessment of health are
subject to CLIA, which imposes quality standards for laboratory testing to ensure the accuracy, reliability and timeliness of patient test results.
Laboratories performing moderate- or high-complexity testing must meet various CLIA requirements applicable to personnel, operations, establishment and verification of performance specifications,
proficiency testing, patient test management, quality control, and quality assurance. CLIA certified laboratories are typically subject to survey and inspection every two years to assess compliance with program standards. Sanctions can be applied
against a laboratory that is found to be out of compliance with CLIA requirements, including, among others, suspension, limitation, or revocation of a CLIA certificate.
Laboratories may also seek accreditation by the College of American Pathologists, or CAP. CAP is an independent, non-governmental organization approved by CMS to inspect laboratories to determine
compliance with CLIA requirements. The CAP Laboratory Accreditation Program is an internationally recognized program that utilizes teams of practicing laboratory professionals as inspectors, and accreditation by CAP can often be used to meet CLIA or
state certification requirements.
In addition to CLIA, States also have laws that apply to clinical laboratories, including state licensing
laws. Some states impose requirements that are more stringent than CLIA requirements. State laws may also require detailed review of a laboratorys technical procedures or scientific validation of laboratory tests.
Environmental, Health and Safety for Clinical Laboratories
Clinical laboratories are subject to federal and state laws and regulations related to the protection of the environment, health and safety of employees, the handling of medical specimens, and medical
waste. For example, the federal Occupational Safety and Health Administration, or OSHA, has established standards for the protection of health care employees, including requirements to protect workers from blood-borne pathogens, such as HIV and
hepatitis B and C. Some biological materials and laboratory supplies are classified as hazardous materials and are subject to applicable regulations of the Department of Transportation, the United States Postal Service, the Public Health Service,
and the International Air Transport Association. In addition, state laws regulate the disposal of medical waste and hazardous waste.
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HIPAA and Other Privacy and Data Security Laws
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, established for the first time comprehensive federal protections for the
privacy and security of health information. HIPAA standards apply to three types of organizations, or Covered Entities: health plans, health care clearing houses, and health care providers which conduct certain health care transactions
electronically. HIPAAs Privacy rule requires Covered Entities to implement policies and procedures regulating uses and disclosures of protected health information, granting individuals certain rights with respect to their protected health
information and complying with a variety of administrative requirements such as training and progressive discipline in response to violations. HIPAAs Security standards require Covered Entities and individuals or organizations providing
services to Covered Entities involving the use or disclosure of protected health information, or Business Associates, to have in place administrative, physical, and technical standards to guard against the misuse of protected health
information.
HIPAA was amended in 2009 by the Health Information Technology for Economic and Clinical Health Act, or HITECH, provisions of the
American Recovery and Reinvestment Act. HITECH strengthened and expanded HIPAA and increased penalties for violations. Among other changes, HITECH requires Covered Entities and Business Associates to report breaches of unsecured protected health
information to affected individuals and to the federal government and in some cases to local or national media outlets. Under HITECH, Business Associates are directly liable for compliance with applicable HIPAA requirements and both Covered Entities
and Business Associates are subject to audit by the federal government and enforcement by state Attorneys General, who were given authority to enforce HIPAA under HITECH. Additionally, some state laws impose privacy protections more stringent than
HIPAA and data security requirements applicable to information beyond health care information. These state laws create an additional level of enforcement and may require additional reporting in the event of breach. Most of the institutions and
physicians from which we obtain biological specimens and patient level data that we use in our research and validation work are Covered Entities and must obtain proper authorization from their patients for the subsequent use of those samples and
associated clinical information. We are not presently subject to HIPAA; however, if we begin billing electronically for tests that we conduct, we will be obligated to comply. Additionally, if we provide clinical laboratory testing services or enter
into specific kinds of relationships with a Covered Entity or a Business Associate of a Covered Entity, we may incur HIPAA compliance obligations. HIPAA governs the availability of samples and associated patient data, so we must carefully structure
research and development activities to ensure that HIPAA will permit participation by our covered entity collaborators.
Beyond HIPAA, our
activities must comply with all applicable privacy and data security laws. For example, there are international privacy laws that impose restrictions on the access, use, and disclosure of health information from outside of the United States. All of
these laws may impact our business. Many of them overlap and apply simultaneously making compliance a difficult and complex endeavor. Our failure to comply with these privacy and security laws or a breach of protected health information or personal
data could cause significant financial or reputational harm to our company. If we engage in activities that make us a covered entity or business associate for HIPAA purposes, we will have to implement a comprehensive HIPAA compliance program.
Additionally, significant changes in the laws restricting our ability to obtain tissue samples and associated patient information or our failure to comply with existing law could significantly impact our business and our future business plans.
European Regulations
Article 168 of the Treaty on the Functioning of the European Union, or TFEU, requires a high level of human health protection to be ensured in the
definition and implementation of all Union policies and activities. Union action, which complements national policies, must be directed towards improving public health, preventing human illness and diseases, and obviating sources of danger to human
health. On the basis of article 168(4)(a) of the TFEU, the European Legislator is required to contribute to the achievements of these objectives through adopting measures setting high standards of quality and safety for organs and substances of
human origin, blood and blood derivatives, as well as for medicinal products and medical devices.
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In the European Union, IVD medical devices are regulated under EU-Directive 98/79/EC, or the IVD Directive,
which is implemented by national provisions. The IVD Directive is currently under revision. A new Regulation applicable directly in all Member States without need for implementation may be adopted in the course of 2014, and would
gradually take effect thereafter. The proposed new regime is stricter than the current rules.
The IVD Directive requires that medical devices
meet the essential requirements set out in Annex I to the IVD Directive. These requirements include the safety and efficacy of the devices. According to the IVD Directive, the Member States presume compliance with these essential requirements in
respect of devices which are in conformity with the relevant national standards transposing the harmonized standards of which the reference numbers have been published in the Official Journal of the European Communities. These harmonized standards
include ISO 13485:2012, the quality standard for medical device manufacturers. In addition, specific requirements can be laid down in Common Technical Specifications adopted by the European Commission.
For devices for performance evaluation (including clinical investigation), the manufacturer shall draw up a statement containing: (i) an evaluation
plan stating the purpose, scientific, technical or medical grounds, scope of the evaluation, (ii) the list of laboratories taking part in the evaluation study, (iii) the starting date and scheduled duration for the evaluation, and
(iv) a statement that the essential requirements are met apart from the aspects covered by the evaluation. In addition, the manufacturer must notify the device for performance evaluation to the Member States competent authorities.
Individual Member States may also subject certain types of investigation to a review by an Ethics Committee and authorization by their competent authorities. The proposed new regime introduces an authorization requirement by the Member States
competent authorities for interventional clinical performance studies and other clinical performance studies involving risks for the subjects.
IVD medical devices, other than devices for performance evaluation, must bear the CE marking of conformity when they are placed on the market. The CE
mark is a declaration by the manufacturer that the product meets all the appropriate provisions of the relevant legislation implementing the relevant European Directive. The manufacturer must follow a conformity assessment procedure to obtain this
CE marking. The manufacturer must also draw up an EC Declaration of conformity before placing the IVD on the market. For certain IVD medical devices, a review by an independent body, or notified body, is necessary.
Each European Member State must adopt its own laws, regulations and administrative provisions necessary to implement the IVD Directive. Member States may
not create any obstacle to the placing on the market or the putting into service within their territory of devices bearing the CE marking according to the conformity assessment procedures, except for purposes of pricing and reimbursement procedures.
Advertising of medical devices is regulated separately by each individual European Member State. While some Member States only impose
requirements on the content of advertising, some others require prior approval by the authorities, at least for some categories of IVD medical devices.
EU rules governing the donation, procurement, testing, processing, preservation, storage and distribution of cells and tissues that are not medicinal products are contained in Directive 2004/23/EC.
Establishments in the European Union that conduct such activities must be licensed and are subject to inspection by regulatory authorities. Such establishments must implement appropriate quality systems and maintain appropriate records to ensure
that cells and tissues can be traced from the donor to the recipient and vice versa. There are also requirements to report serious adverse events and reactions linked to the quality and safety of cells and tissues. Individual European Member States
are free to further restrict the export, collection, and use of such bodily material.
Moreover, in the European Union the protection of
individuals with regard to the processing of personal data is regulated under EU-Directive 95/46/EC on Data Protection, or the DP Directive (which also is in the process of being replaced by a stricter Regulation). If specimens, such as blood plasma
and urine, taken from patients relate to an identified or identifiable natural person, the data derived from such specimens fall within the scope of the DP Directive. Member States prohibit the processing of personal data concerning health, unless
(i) explicit
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consent has been obtained; (ii) the processing of the data is required for the purposes of preventive medicine, medical diagnosis, the provision of care or treatment or the management of
health care services; or (iii) the health data are processed by a health professional subject under national law or rules established by national competent bodies to the obligation of professional secrecy or by another person also subject to an
equivalent obligation of secrecy. In addition, EU Member States may allow for the processing of health data for research purposes, subject to possible conditions.
Billing and Reimbursement
United States
In the United States, diagnostic tests may be paid for by several sources, including third-party payers such as insurance companies, managed care
organizations or government health programs such as Medicare and Medicaid, and patients. Each of these payers may have different billing requirements. Currently, we do not bill any third-party payer for the galectin-3 test or any other test.
Coding
Clinical laboratory
tests are typically billed to payers using the Healthcare Common Procedure Coding System, or HCPCS, and the Current Procedural Terminology, or CPT, coding systems. CPT codes are incorporated in the HCPCS as Level I HCPCS codes and typically result
in a predetermined payment for a specific in vitro diagnostic test. The CPT set of codes is copyrighted and maintained by the American Medical Association, or AMA. The AMA publishes the CPT Code, which is a listing of descriptive terms and
identifying codes for items and services provided in outpatient settings. The purpose of the CPT Code is to provide a uniform language that accurately describes medical, surgical, and diagnostic services, and it is used by the Centers for
Medicare & Medicaid Services, or CMS, and private insurers for reimbursement.
If a new laboratory test does not fall under an
existing CPT code, it may require a new code for reimbursement purposes. The process for seeking a test-specific code for such a new test is lengthy and typically takes from one to two years to complete. While the AMAs decision is pending,
billing may be done under an existing, non-specific CPT code. A manufacturer or provider may decide not to request assignment of a CPT code and instead use an existing, non-specific code for reimbursement purposes. However, use of such codes may
result in more frequent denials and/or requests for supporting clinical documentation from the third-party payer and in lower reimbursement rates, which may vary based on geographical location.
A manufacturer of an in vitro diagnostic kit or a provider of laboratory services may request establishment of a Category I CPT code
for a new product. Assignment of a specific CPT code ensures routine processing and payment for a diagnostic test by both private and government third-party payers. In October 2011, the AMA CPT
®
Editorial Panel accepted our request to establish a Category 1 code for galectin-3 in the pathology and laboratory/chemistry section of CPT and established a new
analyte-specific code, 82777. In November 2012, CMS, in the Final Determination for the Medicare Clinical Laboratory Fee Schedule for 2013, assigned a payment rate for the BGM Galectin-3 Test under CPT code 82777, effective January 1, 2013. In
December 2013, after further consideration based on additional information provided by BG Medicine, CMS agreed that its original decision to crosswalk galectin-3 to existing test code 83520 should be revised. CMS published the final determination of
the 2014 Medicare national limitation amount for the Companys galectin-3 blood test (analyte-specific CPT
®
Code 82777) at the amount of a crosswalked test (analyte-specific CPT
®
Code 84244) whose 2014 national
limitation amount is $30.01. This national limitation amount will replace the galectin-3 blood tests national limitation amount of $17.80 that was effective in 2013. Crosswalking is used when a new test code is comparable to an existing test
code, multiple existing test codes, or a portion of an existing test code on the Clinical Laboratory Fee Schedule, or CLFS. Under this methodology, the new test code is assigned the local fee schedule amounts and the national limitation amount of
the existing test, with payment made at the lesser of the local fee schedule amount or the national limitation amount. The 2014 national limitation amount applies across the U.S. except in Ohio and West Virginia where rates of $23.99 and $26.40,
respectively, will apply.
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Coverage Decisions
When deciding whether to pay for a particular diagnostic test, third-party payers generally consider whether the test is a covered benefit under the relevant plan and, if so, whether it is reasonable and
necessary for the diagnosis or treatment of illness and injury. Coverage determinations often are influenced by current standards of practice and clinical data, particular at the local level. CMS, which is the government agency responsible for
overseeing the Medicare program, has the authority to make coverage determinations on a national basis, but most Medicare coverage decisions are made at the local level by contractors that administer the Medicare program in specified geographic
areas. Private and government third-party payers have separate processes for making coverage determinations, and private third-party payers may or may not follow Medicares coverage decisions. If a third-party payer has a coverage determination
in place for a particular diagnostic test, billing for that test must comply with the established policy. Otherwise, the third-party payer makes payment decisions on a case-by-case basis.
Payment
Payment for covered diagnostic tests is determined based on various
methodologies, including prospective payment systems and fee schedules. In addition, private third-party payers may negotiate contractual rates with participating providers or set rates as a percentage of the billed charge. Diagnostic tests
furnished to Medicare inpatients generally are included in the bundled payment made to the hospital under Medicares Inpatient Prospective Payment System. Payment for diagnostic tests furnished to Medicare beneficiaries in most other
circumstances is based on the CLFS under which a payment amount is assigned to each covered CPT code. The law requires fee schedule amounts to be adjusted annually by the percentage increase in the consumer price index, or CPI, for the prior year,
but Congress has frequently frozen the payment rates. In addition, the 2014 national limitation amount is subject to a 2% sequestration applicable to Medicare services.
European Union
In the European Union, the reimbursement mechanisms used by private
and public health insurers vary by Member State. For the public systems, reimbursement is determined by guidelines established by the legislator or responsible national authority. As elsewhere, inclusion in reimbursement catalogues focuses on the
medical usefulness, need, quality and economic benefits to patients and the health care system. Acceptance for reimbursement comes with cost, use and often volume restrictions, which can vary by Member State.
Employees
As of February 28,
2014, we employed 23 full-time employees, of whom 10 had advanced degrees, 6 were engaged in product development, 10 performed sales and marketing functions and 7 performed general and administrative functions. None of our employees are represented
by a labor union, and we consider our relationships with our employees to be good.
Company History and Available Information
We were incorporated in Delaware in February 2000 and later that year chose the name Beyond Genomics, Inc. In October 2004, we changed
our name to BG Medicine, Inc. We maintain our operations at 880 Winter Street, Suite 210, Waltham, Massachusetts 02451 (formerly 610 Lincoln Street North, Waltham, Massachusetts 02451), and our phone number is (781) 890-1199. Our Internet
website address is www.bg-medicine.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.
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The risks and
uncertainties described below are those that we currently believe may materially affect us. If any of the following risks actually occur, they may materially harm our business, our financial condition and our results of operations.
Risks Related to Our Financial Position
We will be required to raise additional funds to finance our operations, continue the development and commercialization of our cardiovascular diagnostic tests and remain a going concern; we may not
be able to do so when necessary, and/or the terms of any financings may not be advantageous to us.
Our operations to date have
consumed substantial amounts of cash. We expect to continue to incur losses and use cash during 2014 and beyond. Our cash utilization amount depends on the progress of our development and commercialization efforts for our cardiovascular diagnostic
tests, as well as the cost, timing and outcomes of regulatory submissions for our tests and the progress of our partners for the automated versions of our tests, among several other factors. We believe that our existing cash will be sufficient to
meet our anticipated cash requirements into the third quarter of 2014; however, if we incur delays in commercializing our cardiovascular diagnostic tests or in achieving significant product revenue, or if we encounter other unforeseen adverse
business developments, we may exhaust our capital resources prior to this time. We expect that we will need significant additional capital in the future to fund our commercialization efforts and to grow our business. If we are unable to obtain
adequate financing on acceptable terms when needed, we will be required to implement aggressive cost reduction strategies. These reductions would significantly impact activities related to the commercialization of the BGM Galectin-3 Test and the
development of additional indications for the BGM Galectin-3 Test and other pipeline products, and would harm our business, financial condition and results of operations.
There is substantial doubt concerning our ability to continue as a going concern.
Our financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. We expect to incur further losses in the commercialization of our cardiovascular diagnostic test and the operations of our business and have been dependent on funding our operations
through the issuance and sale of equity securities. These circumstances raise substantial doubt about our ability to continue as a going concern. As a result of this uncertainty and the substantial doubt about our ability to continue as a going
concern as of December 31, 2013 the Report of Independent Registered Public Accounting Firm at the beginning of the Financial Statements section in this Form 10-K includes a going concern explanatory paragraph. Managements plans include
increasing revenue through new arrangements with commercial distribution partners and the reduction of expenditures. However, no assurance can be given at this time as to whether we will be able to achieve these objectives. Our financial statements
do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Our term loan facility contains affirmative and negative covenants that impose significant restrictions on our business and financing activities.
If we default on our obligations, whether due to events beyond our control or otherwise, the lenders would have a right to foreclose on substantially all of our assets. A default could materially and adversely affect our operating results and our
financial condition.
In February 2012, as amended in May 2013, we entered into a term loan facility with General Electric Capital
Corporation and Comerica Bank, or the lenders. At December 31, 2103, we have an outstanding balance of $7.5 million under the term loan facility and we are required to repay the principal monthly through maturity in September 2015. As security
for our obligations under the term loan facility, we granted the lenders a lien in substantially all of our assets, other than our intellectual property, for which we have provided a negative pledge
21
to the lenders. The term loan facility contains several affirmative and negative covenants that impose significant restrictions on our business and operations. Among others, these covenants limit
our ability to incur additional indebtedness; grant liens; merge or consolidate with another entity; dispose of our business or certain assets; change our business; make certain investments or declare dividends; engage in certain transactions with
affiliates; encumber our intellectual property; or repurchase stock.
Our failure to comply with these covenants may result in the declaration
of an event of default that, if not cured or waived, could cause all amounts outstanding under the term loan facility to become due and payable immediately and could cause the lenders to foreclose on the collateral securing the indebtedness,
including our cash, cash equivalents and short-term investments. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have
sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all. In addition, the term loan facility may limit our ability to
finance future operations or capital needs or to engage in, expand or pursue our business activities. It may also prevent us from engaging in activities that could be beneficial to our business and our stockholders unless we repay the outstanding
debt, which may not be desirable or possible.
Due in part to our limited financial resources, we may fail to select or capitalize on
the most scientifically, clinically or commercially promising or profitable indications for our product candidates, and/or we may be unable to pursue the indications that we would like to pursue.
We have limited technical, managerial and financial resources to determine the indications on which we should focus the development efforts related to
our product candidates. Due to our limited available financial resources, we have had to curtail development programs for our CardioSCORE test and certain additional indications for our galectin-3 test and activities that might otherwise have led to
more rapid progress of our product candidates through the regulatory and development processes.
Furthermore, we cannot assure you that we
will be able to retain adequate staffing levels to run our operations and/or to accomplish all of the objectives that we otherwise would seek to accomplish. The decisions to allocate our research, management and financial resources toward particular
indications for our product candidates may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay or terminate certain development programs may also cause us to
miss valuable opportunities.
Risks Related to Our Business and Strategy
We are an early stage commercial company with a history of losses resulting from our research and development and early commercialization efforts, we expect to incur losses for at least the next
several years, and we may never achieve profitability.
We have incurred substantial net losses since our inception in February 2000.
For the years ended December 31, 2013, 2012 and 2011, we incurred net losses of $15.8 million, $23.8 million and $17.6 million, respectively. Our accumulated deficit was approximately $152.9 million at December 31, 2013. We expect to
continue to incur net losses in 2014 and beyond.
Historically, we have generated limited revenue from our biomarker discovery and analysis
services agreements. We are in the process of commercializing our first product and, to date, have generated a limited amount of product revenue. Our BGM Galectin-3 Test, received clearance from the U.S. Food and Drug Administration, or FDA, in late
2010 as an aid in assessing the prognosis of patients suffering from chronic heart failure, and is commercially available in the United States. Our BGM Galectin-3 Test is also available in Europe under a CE Mark as an aid in assessing the prognosis
of acute and chronic heart failure and as an aid in identifying individuals in the general population who are risk of developing heart failure. Our BGM Galectin-3 Test is being
22
marketed in the United States through specialty, national, regional and hospital laboratories. We will need to generate significant product revenue to achieve profitability. Even as we increase
our sales of our BGM Galectin-3 Test, launch automated versions of our galectin-3 test, and launch future pipeline products, we expect our losses to continue as a result of our increased manufacturing, sales and marketing, and ongoing research and
development expenses. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders equity. Because of the numerous risks and uncertainties associated with our
product development and commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. If we are unable to achieve and then maintain profitability, our business, financial condition and results of operations will be negatively affected and the market value of our common stock will decline.
Our business is dependent on our ability to successfully develop and commercialize novel diagnostic tests. If we fail to develop and commercialize
these products, we may be unable to execute our business plan.
Historically, we have generated revenues from initiatives,
collaborations and biomarker discovery and analysis services agreements with pharmaceutical companies and health care organizations. Our current business strategy, however, focuses on developing and commercializing diagnostic tests that incorporate
biomarkers that we in-license and/or identify through data mining and outsourced laboratory analysis of specific patient cohorts and specimen repositories. Beginning in November 2012, we have shifted our focus from early stage biomarker discovery
toward a more commercially-oriented role in which we generate and support studies that have been designed to provide evidence of clinical utility, further differentiate and support the BGM Galectin-3 Test and future products in our pipeline. We do
not expect to receive future revenue from performing biomarker discovery and analysis services for third parties. The success of our business will depend on our ability to develop and commercialize diagnostic tests based on the products in our
current pipeline, as well as others that we may in-license in the future.
Prior to commercializing our diagnostic tests, we are required to
undertake time-consuming and costly development activities, sometimes including clinical studies, and to obtain regulatory clearance or approval, for which the outcome is uncertain. We have limited experience in developing and commercializing
diagnostic tests and there are considerable risks involved in these activities. The science and methods that we are employing are innovative and complex, and it is possible that our product development programs will ultimately not yield diagnostic
tests for commercialization. Products that appear promising in early development may fail to be validated in subsequent studies, and even if we achieve positive results, we may still fail to obtain the necessary regulatory clearances or approvals.
Few research and development projects result in commercial products, and perceived viability in early clinical studies 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 obtaining additional clinical and nonclinical data, which would adversely impact the timing for generating potential revenue from those product candidates. If our development programs yield fewer commercial products
than we expect, we may be unable to execute our business plan, and our business, financial condition and results of operations may be adversely affected.
If we are unsuccessful in the execution of our commercial strategy, our business, financial condition, results of operations and prospects will be materially adversely affected.
We have implemented a commercial strategy that is intended to generate revenues through the widespread market adoption of our BGM Galectin-3 Test,
automated galectin-3 testing and our future pipeline products. As part of this strategy, we have established a scalable US-based sales organization to promote our products to clinical laboratory services providers, health care providers, health care
provider organizations, hospitals, clinical research organizations and pharmaceutical manufacturers. In support of this strategy, we generate and support clinical research studies that have been designed to provide evidence of the clinical utility
of our products, to further differentiate our products and to otherwise support the commercial introduction of our BGM Galectin-3
23
Test and future products in our pipeline. We are unable to give any assurance that we will be successful in executing our commercial strategy or that we will be successful in providing evidence
of clinical utility of our products, differentiating our products or otherwise supporting our products in the manner, timeframe or under the cost parameters we anticipate, if at all. Even if we execute this strategy as planned, we may not yield the
increased revenues and market growth that we anticipate. Our failure to be commercially successful in implementing our new commercialization strategy would materially adversely impact our business, financial condition, results of operations and
prospects.
We may not be able to successfully commercialize our BGM Galectin-3 Test in the timeframes we expect, or at all.
Our first product, the BGM Galectin-3 Test, received clearance from the FDA in late 2010 and is commercially available throughout the
United States as an aid in assessing the prognosis of patients suffering from chronic heart failure. In Europe, our BGM Galectin-3 Test is commercially available under a CE Mark as an aid in assessing the prognosis of patients suffering from acute
and chronic heart failure and as an aid in identifying individuals in the general population who are at risk of developing heart failure. Our BGM Galectin-3 Test is being marketed in the United States by our sales and marketing organization to
clinical laboratory services providers, health care providers, health care provider organizations, hospitals, clinical research organizations and pharmaceutical manufacturers. In Europe, we market our BGM Galectin-3 Test to hospitals, clinical
research organizations and pharmaceutical manufacturers. We are unable to give any assurance that we will be successful in generating revenues from adoption of the BGM Galectin-3 Test. Even if we are successful in generating revenue from the sale of
the BGM Galectin-3 Test, we may not generate the increased revenues and market growth that we anticipate. Our failure to generate revenue from the sale of the BGM Galectin-3 Test would materially adversely impact our business, financial condition,
results of operations and prospects.
We may not be able to provide evidence of clinical utility or to differentiate our BGM Galectin-3
Test through clinical research studies in the timeframes we expect, or at all.
We generate and support clinical research studies that
have been designed to provide evidence of the clinical utility of our BGM Galectin-3 Test and to differentiate its performance from other diagnostic products. The results of these studies are essential to our efforts to ensure customer acceptance
and clinical adoption of our BGM Galectin-3 Test. The results of these studies support the efforts of our sales and marketing organizations efforts to promote our BGM Galectin-3 Test and to educate potential customers. We may be unable to
demonstrate that our galectin-3 test provides incremental benefits over currently available heart failure diagnostic tests sufficient to ensure adoption of our test in the timeframes we expect, or at all.
Furthermore, we are unable to give any assurance that we will be successful in providing sufficient evidence of clinical utility of our BGM Galectin-3
Test or differentiate from other diagnostic products in the manner, timeframe or under the cost parameters we anticipate, if at all. If we are unable to provide evidence of clinical utility and differentiate our BGM Galectin-3 Test, we may not be
able to generate the increased revenues and market growth that we anticipate. Our failure to generate revenue from the sale of the BGM Galectin-3 Test would materially adversely impact our business, financial condition, results of operations and
prospects.
We may not be able to provide evidence of clinical utility or to differentiate our current or future pipeline
products, including our BGM Galectin-3 Test and our CardioSCORE Test
.
Our ability to successfully commercialize the future
pipeline products that we may develop will depend on numerous factors, including whether health care providers believe that any other diagnostic tests that we successfully develop provide sufficient incremental clinical utility; whether the medical
community accepts that our diagnostic products have sufficient sensitivity, specificity and predictive value to be meaningful in patient care and treatment decisions, and; whether health insurers, government health programs and other third-party
payers will cover and pay for our diagnostic tests and the amount that they will reimburse. These factors may
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present obstacles to commercial acceptance of our diagnostic product candidates. If these obstacles arise, we may need to devote substantial time and resources to overcome these obstacles, and we
might not be successful. Failure to achieve widespread market acceptance of our diagnostic products would materially harm our business, financial condition and results of operations.
We are unable to give any assurance that we will be successful in providing sufficient evidence of clinical utility of our BGM Galectin-3 Test or differentiate from other diagnostic products in the
manner, timeframe or under the cost parameters we anticipate, if at all. If we are unable to provide evidence of clinical utility and differentiate our BGM Galectin-3 Test, we may not be able to generate the increased revenues and market growth that
we anticipate. Our failure to generate revenue from the sale of the BGM Galectin-3 Test would materially adversely impact our business, financial condition, results of operations and prospects.
We may not be able to successfully commercialize our BGM Galectin-3 Test because its clinical indications for use do not generate broad enough
customer acceptance.
We believe that the measurement of the protein biomarker galectin-3 in patients with heart failure may
facilitate treatment decisions that are made regarding the intensity, locale, and nature of a heart failure patients ongoing care. We believe that results obtained from testing with our BGM Galectin-3 Test may be used to aid in the assessment
of prognosis, reduce hospital readmissions, and help identify patients who may require more intense and specialized care such as referral to a heart failure specialist, the need for advanced diagnostics and therapies, and the need for other
specialized forms of monitoring. We cannot be certain that these indications for use will generate broad enough customer acceptance to yield the increased revenues and market growth that we anticipate from adoption of the BGM Galectin-3 Test. Our
failure to generate sufficiently broad customer acceptance and widespread market adoption of the BGM Galectin-3 Test would materially adversely impact our business, financial condition, results of operations and prospects.
Our automated partners may be unable to develop and/or obtain regulatory clearance of galectin-3 tests that can be performed on their automated
platforms.
We have entered into worldwide license, development and commercialization agreements with Abbott Laboratories, or Abbott,
bioMérieux SA, or bioMérieux, Siemens Healthcare Diagnostics Inc., or Siemens, and Alere, Inc., or Alere. To date, only bioMérieux and Abbott have launched galectin-3 tests developed for their automated platforms in Europe,
under CE Mark, and only Fujirebio Diagnostics, Incorporated, or Fujirebio, on behalf of Abbott, has made a 510(k) submission to the FDA. The submission made in July 2012 by Fujirebio on behalf of Abbott was subsequently withdrawn on February, 25,
2013 after receiving the FDAs response. Fujirebio, on behalf of Abbott, filed a new 510(k) submission with the FDA in February 2014. There are a variety of risks and uncertainties that may cause delays in, or prevent our automated partners
from, successfully developing or obtaining CE Mark or regulatory clearance from the FDA for automated versions of our galectin-3 test in the timeframes we expect, or at all. Delays may result from unanticipated problems in product development, an
inability to obtain regulatory clearance or approval on a timely basis. Any material delays in our partners receipt of regulatory clearance or approval for the automated versions of our galectin-3 test, or their failure to obtain such
clearances or approvals at all, would have a material adverse effect on our business, financial condition and results of operations.
Our
automated partners may be unable or decide not to commercialize automated galectin-3 tests.
We have entered into worldwide license,
development and commercialization agreements with Abbott Laboratories, or Abbott, bioMérieux SA, or bioMérieux, Siemens Healthcare Diagnostics Inc., or Siemens, and Alere, Inc., or Alere. To date, only bioMérieux and Abbott have
launched galectin-3 tests developed for their automated platforms in Europe, under CE Mark. Since launching in 2013, revenues from the sale of automated galectin-3 tests developed for these platforms have, thus far, been limited. We intend to
leverage the commercial capabilities of our automated partners to promote the utility of our tests to clinicians, laboratory decision makers,
25
payers, patients and other stakeholders. However, even if we are able to implement this strategy, we will be largely dependent on these third parties for the commercial success of our products.
They may not deploy the resources we would like them to, and our revenue would then suffer. In addition, we could become embroiled in disputes with these parties regarding the terms of any agreements, their performance or intellectual property
rights. Any dispute could disrupt the sales of our products and adversely affect our reputation and revenue. Failure of our strategy to leverage the expertise, marketing resources and installed base of our automated partners would have a material
adverse effect on our future business, financial condition and results of operations.
The royalty provisions in the agreements with our
partners for the automated versions of our galectin-3 test are subject to renegotiation and following renegotiation, the royalties payable to us may not be favorable to us.
The agreements we entered into with our partners who are developing and commercializing the automated versions of our galectin-3 test contain provisions that, under certain circumstances, entitle our
partners to reduce the royalty amounts payable to us on the sales of their tests in amounts that are subject to negotiation by us and our respective partners. In some cases, our partners rights to reduce the royalty amounts are triggered by
the CMS payment rate being below certain agreed-upon thresholds and in other cases, our partners rights to reduce the royalty amounts payable to us are triggered by the average selling prices for the tests in certain regions being below
certain agreed-upon price thresholds. Effective January 1, 2014 the payment rate at which our BGM Galectin-3 Test is reimbursed by the Centers for Medicare and Medicaid Services, or CMS, was increased to $30.01 from $17.80 per test. Even with
the increase, the CMS payment rate for the 2014 calendar year is still currently below the agreed-upon CMS payment rate thresholds in the agreements with our automated partners. Accordingly, the current royalty amounts payable to us under these
agreements are subject to reduction by our partners, in amounts to be negotiated by us and our respective partners. There can be no assurance that in any renegotiation of these royalty provisions we will be successful in negotiating new rates that
will be favorable to us.
If the marketplace does not accept our BGM Galectin-3 Test or other diagnostic products we might develop, we
may be unable to generate sufficient revenue to sustain and grow our business.
Although we believe that our BGM Galectin-3 Test and
our future pipeline products represent promising commercial opportunities, our products may never gain significant acceptance in the marketplace and therefore never generate substantial revenue or profits for us. As is the case with all novel
biomarkers, we must establish markets for our diagnostic tests and build those markets through physician education and awareness programs. Publication in peer reviewed journals of results from studies using our products will be an important
consideration in the adoption by physicians of our products. The process of publication in leading medical journals is subject to a peer review process. Peer reviewers may not consider the results of studies of our BGM Galectin-3 Test and our future
pipeline products sufficiently novel or worthy of publication. Failure to have our studies published in peer reviewed journals may adversely affect adoption of our products.
Health insurers and other third-party payers may decide not to reimburse our diagnostic products or may provide inadequate reimbursement, which could jeopardize our commercial prospects.
In the United States, the regulatory process that allows diagnostic tests to be marketed is independent of any coverage
determinations made by third-party payers. For new diagnostic tests, private and government payers decide whether to cover the test, the reimbursement amount for a covered test and the specific conditions for reimbursement. Physicians may order
diagnostic tests that are not reimbursed by third-party payers, but coverage determinations and reimbursement levels and conditions are critical to the commercial success of a diagnostic product.
Each third-party payer makes its own decision about which tests it will cover and how much it will pay, although many payers will follow the lead of
Medicare. As a result, the coverage determination process is often a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of our
26
products to each payer separately, with no assurance that approval will be obtained. If third-party payers decide not to cover our diagnostic tests or if they offer inadequate payment amounts,
our ability to generate revenue from our diagnostic tests could be limited. Even if one or more third-party payers decide to reimburse for our tests, a third-party payer may stop or lower payment at any time, which could reduce revenue. We cannot
predict whether third-party payers will cover our tests or offer adequate reimbursement. We also cannot predict the timing of such decisions. In addition, physicians or patients may decide not to order our tests if third-party payments are
inadequate, especially if ordering the test could result in financial liability for the patient.
In the United States, the American Medical
Association assigns specific CPT codes, which are a medical nomenclature used to report medical procedures and services under public and private health insurance plans. Once the CPT code is established, the CMS establishes reimbursement payment
levels and coverage rules for Medicare, and private payers establish rates and coverage rules independently. Effective January 1, 2014 the payment rate at which our BGM Galectin-3 Test is reimbursed by the Centers for Medicare and Medicaid
Services, or CMS, was increased to $30.01 from $17.80 per test. The 2014 national limitation amount applies across the U.S. except in Ohio and West Virginia where rates of $23.99 and $26.40, respectively, will apply. In addition, the 2014 national
limitation amount is subject to a 2% sequestration applicable to Medicare services. Additionally, any or all of our diagnostic tests developed in the future may not be approved for reimbursement or may be approved at a level that limits our
commercial success.
In addition, payment for diagnostic tests furnished to Medicare beneficiaries is made based on a fee schedule set by CMS
in most instances. In recent years, payments under these fee schedules have decreased and may decrease more, which could jeopardize our commercial prospects. Reimbursement decisions in the European Union and in other jurisdictions outside of the
United States vary by country and region and there can be no assurance that we will be successful in obtaining adequate reimbursement.
We expect to face intense competition, often from companies with greater resources and experience than us.
The clinical diagnostics industry is highly competitive and subject to rapid change. The industry continues to expand and evolve as an increasing number
of competitors and potential competitors enter the market. Many of these competitors and potential competitors have substantially greater financial, technological, managerial and research and development resources and experience than we do. Some of
these competitors and potential competitors have more experience than we do in the development of diagnostic products, including validation procedures and regulatory matters. In addition, we expect that our diagnostic products, if successfully
developed, will compete with product offerings from large and well-established companies that have greater marketing and sales experience and capabilities than we do. We are aware of other diagnostic tests under development, which, if successfully
developed and commercialized, would compete with our products.
Our competitors, some of whom we collaborate with and will rely on to
commercialize our products, may include established diagnostics companies, such as Abbott Diagnostics, Beckman Coulter, bioMérieux, Roche Diagnostics, General Electric, Alere, Ortho Clinical Diagnostics, Mitsubishi, Philips and Siemens. We
may also compete with national commercial laboratories with extensive service networks for diagnostic tests, such as LabCorp and Quest Diagnostics. Specialized cardiovascular CLIA laboratories such as Atherotech, Berkeley Heart Lab (now part of
Quest Diagnostics), Bioreference Lab (Gene Dx), Boston Heart Diagnostics (formerly Boston Heart Lab), Cleveland HeartLab, Health Diagnostic Laboratory (HDL), Liposcience, Aviir and Cardio DX have expanded their presence and menu in the
cardiovascular market and some have developed their own tests or panels. Companies that may compete with us in the cardiovascular diagnostics space, include Athena Diagnostics, Atherotech, Berkeley Heart Lab, HDL, Bioreference Lab (Gene Dx), Dako,
diaDexus, Myriad Genetics, Singulex and Critical Diagnostics. If we are unable to compete successfully, we may be unable to grow and sustain our revenue.
27
If our automated partners fail to perform or prioritize their collaborations or terminate their
agreements with us, our ability to substantially increase customer acceptance and clinical adoption of our galectin-3 test will be undermined.
Although the microplate version of the BGM Galectin-3 Test is the primary, current focus of our commercialization strategy, we have partnered with four leading diagnostic instrument manufacturers to
develop automated versions of our galectin-3 test, which we expect will result in broader customer acceptance and clinical adoption of our galectin-3 test. We believe that through these four partners we will have broad access to major segments of
the diagnostics market, including hospital laboratories, private laboratories, reference laboratories and physician office laboratories, due to the widespread coverage of our partners installed bases. Under the agreements, our partners are
responsible for developing and commercializing the tests. Accordingly, we are dependent upon our automated partners to prioritize the development of their respective automated versions and the regulatory clearance of their automated versions. Our
partners may experience difficulties and delays in other segments of their businesses that may negatively impact their ability to prioritize and commercialize the automated versions of our test. Our partners delays, failures or unwillingness
to prioritize or devote adequate resources to develop and obtain regulatory clearance for the automated versions of our galectin-3 test would result in a substantially smaller market opportunity for our galectin-3 testing business and would
adversely impact our financial condition, results of operations and prospects.
We are dependent on third parties for the patient samples
that are essential to the development and validation of our diagnostic tests.
To pursue the development and validation of our
diagnostic tests, we need access, over time, to thousands of patient samples, including blood, blood plasma and serum, urine and other fluids. We do not have direct access to a supply of patient samples. As a result, we have made arrangements with
third parties, such as academic medical centers, government programs and payers such as Humana that have given us access to a significant number of patient samples for the development and validation of our diagnostic tests. Most of the institutions
and physicians from which we obtain biological specimens that we use in our research and validation work are Covered Entities under HIPAA. Under this law, these parties may have to obtain proper authorization from their patients,
de-identify samples or take some other step to permit the subsequent use of those samples and associated clinical information. We are not presently a Covered Entity or a Business Associate of a Covered Entity subject to HIPAA; however, we may become
a Covered Entity or a Business Associate of a Covered Entity in the future. We may lose access to patient samples provided by such third parties, or have that access limited, because the third parties decrease the number of patient samples they
provide, due to changes in privacy laws governing the use and disclosure of medical information or due to changes in the laws restricting our ability to obtain patient samples and associated information. In certain instances, we owe the party
providing the samples for our research programs payments which may be related to the sales of products derived from those research programs. In addition, we may be forced to actively pursue patient samples from other sources for the diagnostic
testing indications we pursue, which could be expensive and time consuming. If we fail to secure and maintain an adequate supply of patient samples, or if our existing supply arrangements are terminated or result in access to fewer samples than
expected, our ability to pursue our development efforts may be slowed or halted, which could have a material adverse effect on our business, financial condition and results of operations. Additionally, if we engage in activities that make us a
covered entity for HIPAA purposes, such as electronic billing of third party payers, we will have to implement a comprehensive HIPAA compliance program. HIPAA compliance is a costly and time consuming process. Failure to comply would have a material
adverse effect on our business, financial condition and results of operations.
We rely on third-party suppliers for some of our
laboratory instruments and supplies and we will rely on third-party suppliers for the commercialization of our products. If any of these supply arrangements are interrupted or terminated, we may not be able to find adequate replacements on a timely
basis or at all.
We rely on Abbott, Alere, bioMérieux, Siemens and other vendors to supply us with laboratory immunochemistry
instruments and reagents for the development and commercialization of our diagnostic tests. If we were to lose any of these suppliers or if our suppliers were to become unwilling or unable to provide these
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materials in required quantities or on our required timelines, we would be required to identify new suppliers with similar instrumentation, reagents and software capable of supporting our
development efforts, or possibly modify our development processes and procedures. If supplies required for our diagnostic tests are interrupted or terminated, we may need to repeat some or all of our development studies for such products, and we may
need to seek a new or amended FDA clearance for such products. We may not be able to identify or contract with acceptable replacement sources on a timely basis, on acceptable terms, or at all. If we are able to identify other suppliers, there is no
guarantee that we would be able to transfer our technologies to new instruments and equipment or substitute reagents or other materials with comparable results or on a timely basis. We may also become involved in disputes with our third-party
suppliers or we may become party to disputes between these suppliers and other parties, which could be expensive and time consuming. Delays or difficulties experienced with these third-party suppliers would have a material adverse effect on our
business, financial condition and results of operations.
Risks Related To Regulatory Approval and Other Government Regulations
Although we have received FDA clearance for our BGM Galectin-3 Test for use as an aid in assessing the prognosis of patients
diagnosed with chronic heart failure, we may not obtain regulatory clearance for the additional indications we are seeking when expected, if at all.
In the United States, we may seek FDA clearance or approval for our products prior to their launch for clinical use, whether offered as a diagnostic kit or laboratory service. The FDA process can be
lengthy and unpredictable. For example, for our first product, the BGM Galectin-3 Test for heart failure, we initially submitted a 510(k) premarket notification to the FDA in March 2009. Upon review of our 510(k) application, the FDA determined that
our device was not substantially equivalent to the legally marketed device to which we claimed substantial equivalence and therefore denied clearance. The FDA indicated that additional clinical and other data were required in support of our filing,
and we submitted a new 510(k) application in December 2009 with additional data. In February 2010, we received a letter from the FDA regarding our 510(k) application that requested additional clinical and statistical information to support our
application and, after further contact with the FDA, we submitted our formal response to the FDA letter in August 2010. We finally received 510(k) clearance from the FDA in November 2010 for our BGM Galectin-3 Test as an aid in assessing the
prognosis of patients diagnosed with chronic heart failure. In addition, even after having received clearance for the initial indication of the test, we have had difficulty obtaining clearance for a second indication to identify individuals who do
not currently have, but are at increased risk for developing, heart failure. In May 2012, we submitted a 510(k) to the FDA for the second indication of the BGM Galectin-3 Test. In July 2012, we received a letter from the FDA regarding our 510(k)
that requested additional information, including information regarding our clinical validation study, the Framingham Heart Study, and additional analytical study data. We submitted our response to the FDA in November 2012, but based on our dialogue
with the FDA, the nature of the additional information requested and the time required to address the FDAs questions regarding various matters including the age of the blood samples used to support our 510(k), we allowed the 510(k) to expire
on the January 23, 2013 deadline for submitting our response to the FDA. We are currently evaluating our options for submitting 510(k) applications for new indications for our galectin-3 test. There can be no assurance as to when we may be in a
position to submit new 510(k) applications for other indications for our galectin-3 test to the FDA, if at all.
Although we have
received FDA clearance for the microplate version of our BGM Galectin-3 Test for heart failure, we may not obtain regulatory clearance for automated versions of this test when expected, if at all.
Commercial introduction of the automated versions of our galectin-3 test will require FDA clearance or approval. For example,
Fujirebio, on behalf of our partner Abbott, is our first partner to file for 510(k) regulatory clearance of an automated version of the test in the U.S. Fujirebio is developing the test for use on Abbotts ARCHITECT
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immunochemistry instrument platform. Fujirebio submitted its 510(k) to the FDA in July 2012 and received a letter
from the FDA in July 2012 requesting additional information on various matters, including the geographic composition of the patient cohort that provided the blood samples used to support the 510(k). Due to the nature
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of the additional information requested and the time required to address the FDAs questions, Fujirebio withdrew the 510(k) immediately prior to the FDA-designated February 25, 2013
deadline. Fujirebio submitted its new 510(k) to the FDA in February 2014. There can be no assurance that the FDA will not raise additional questions based on Fujirebios new 510(k) submission.
Changes in regulatory review procedures, approval requirements or enactment of additional regulatory approval requirements may delay or prevent us
from marketing our proposed products.
To market our products in Europe, we must obtain a CE Mark and may, in some cases, need
marketing approval from the European Medicines Agency. In October 2009, we obtained a CE Mark in Europe for our first product, the BGM Galectin-3 Test for heart failure. In December 2012, we obtained a CE Mark in Europe for our second product, the
CardioSCORE test. In addition, we have partnered with four leading diagnostic instrument manufacturers which are developing automated instrument versions of our galectin-3 test. In January 2013, bioMérieux obtained a CE Mark in Europe for an
automated version of our galectin-3 test and is executing a phased launch of the test in Europe and in certain other territories that recognize the CE Mark. In April 2013, Abbott obtained a CE mark for its automated version of our galectin-3 test
and has since initiated its commercial launch in Europe. To date, we have found the CE Mark process to be a productive means of executing our commercialization strategy in Europe and in other countries that recognize the CE Mark. If, however, the CE
Mark process becomes more onerous, costly or time-consuming, we will need to re-evaluate our ex-U.S. commercialization strategy and invest more of our limited resources before even entering the market with our products.
The process of obtaining regulatory clearances or approvals to market medical devices, including in vitro diagnostic test kits, from the FDA and
similar regulatory authorities outside of the United States can be costly and time-consuming.
In pursuing our strategy of
commercializing our products worldwide, we face various regulatory schemes and requirements. Each regulatory agency may impose its own requirements and may refuse to grant approval or may require additional data before granting marketing approval
even if marketing approval has been granted by other agencies. For example, in seeking clearance from the FDA for our galectin-3 test, we relied on samples from previously concluded studies sponsored by other parties to determine the clinical
utility of our galectin-3 test, and we may do so for our other product candidates. While the FDA accepted such data in support of our galectin-3 test, and we believe it has accepted such data in other cases, the FDA may require us to conduct our own
prospective studies to support future product clearances or approvals, which would make the development and validation of our product candidates more costly and time-consuming. There can be no assurance that such clearances or approvals will be
granted on a timely basis or at all.
Our CardioSCORE test has not been cleared by the FDA for sale in the United States.
We do not currently receive significant revenue from sales of our cardiovascular diagnostic tests, though we anticipate that a
substantial portion of any future product revenue will be generated from sales of our cardiovascular diagnostic tests. We are actively marketing and selling our first product, the BGM Galectin-3 Test for heart failure, and, to date, we have
recognized only a modest amount of revenue from galectin-3 test sales. In December 2011, we submitted a 510(k) to the FDA in order to obtain regulatory clearance to market the CardioSCORE test in the United States as an aid in the assessment of
near-term risk for significant cardiovascular events, such as heart attack and stroke. In response to this submission, the FDA requested that we engage an independent committee of physicians to conduct a medical review and adjudication of clinical
endpoints reported in the submission. Due to the time involved in responding to this request, we withdrew the 510(k) on August 8, 2012. Our medical review also included the assessment of sample stability and the evaluation of other technical
issues raised by the FDA. We are currently analyzing the results of the medical review. When completed, the results obtained from our analysis of data collected from the medical review will guide our go-forward regulatory, commercial and investment
strategy for the CardioSCORE test in the United
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States. If these results enable us to file a new 510(k) for the same or a modified intended use, the FDA may have substantive comments on our new 510(k) and require that we submit further
additional information and data prior to clearing our 510(k). The FDA may not clear our 510(k) in a timely manner, or at all, or may determine that our device is not substantially equivalent to a legally marketed device. If the FDA denies our
request for 510(k) clearance, we may be required to seek and obtain premarket approval, or PMA. The PMA process is more complex, costly and time-consuming than the 510(k) process. In addition, the FDA may clear our CardioSCORE test for a narrower
indication than we are seeking, in which case the market for our test could be significantly reduced. The occurrence of any of these events would adversely affect our commercial opportunity and our business, financial condition and results of
operations.
Our BGM Galectin-3 Test for heart failure and any future products cleared by the FDA will be subject to ongoing regulation
by the FDA. Failure to comply with such regulation could cause a material adverse effect on our business, financial condition and results of operations.
After a device is placed on the market, numerous regulatory requirements apply. These include:
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compliance with FDAs quality system regulation, or QSR;
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labeling regulations, which prohibit the promotion of products for unapproved or off-label uses and impose other restrictions on marketing;
and
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medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or
serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.
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Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
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fines, injunctions, and civil penalties;
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recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of production;
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refusal to grant 510(k) clearance or PMAs of new products;
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withdrawal of 510(k) clearance or PMAs that are already granted; and
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Being subject to any of these sanctions could adversely affect our business, financial condition and results of operations.
Even if we are successful in obtaining regulatory clearance or approval for our product candidates, we will be subject to regulations under
additional federal and state laws.
If we develop diagnostic tests suitable for commercialization, and after receiving all necessary
regulatory clearances and approvals, we will be subject to national, regional and local regulations. For example, in the United States, the regulations which we may be subject to include:
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the federal Food, Drug and Cosmetic Act and its related rules, regulations, guidance documents and other interpretations relating to the manufacture
and marketing of medical products;
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the federal Medicare and Medicaid Anti-kickback Law, and state anti-kickback prohibitions;
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the federal physician self-referral prohibition, commonly known as the Stark Law, and the state equivalents;
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the various state laws governing patient privacy; and
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the federal civil and criminal False Claims Act.
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The risk of our being found in violation of these laws and regulations is 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 laws or regulations, even if we prevail, could cause us to incur significant legal expenses and divert our managements attention from the
operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines. We
could also be required to refund any improperly received payments, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business, financial condition and results of operations.
If we or our third-party manufacturer fail to comply with the FDAs quality system regulation, the development and manufacture of
our products could be delayed or interrupted and our products may be subject to product recalls.
We and our contract manufacturers
are required to comply with the FDAs QSR and other regulations which cover, among other things, the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our
products. The FDA monitors compliance with QSR through periodic inspections. If the FDA determines that we or our contractors are not in compliance with applicable regulatory standards, we could be prevented or forced to delay the development or
manufacture of our products, which could have a material adverse effect on our business, financial condition and results of operations. Moreover, any failure to maintain QSR compliance could force us to cease the development or manufacture of our
products and subject us to other enforcement sanctions, including withdrawal of our products from the U.S. or foreign markets, and delay or interrupt the development or manufacture of additional products.
Health care reform measures could hinder or prevent our product candidates commercial success.
The U.S. government and other governments have shown significant interest in pursuing health care reform. Any government-adopted reform measures could
adversely impact the pricing of health care products, including our diagnostic products, and services in the U.S. or internationally and the amount of reimbursement available from governmental agencies or other third-party payers. The continuing
efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payers of health care services to contain or reduce health care costs may adversely affect our ability to set prices we believe are fair for any
diagnostic products we may develop and commercialize. Changes in health care policy, such as the creation of broad limits for diagnostic products, could substantially interrupt the sale of future diagnostic tests, increase costs, divert
managements attention and adversely affect our ability to generate revenues and achieve profitability.
New laws, regulations and
judicial decisions, or new interpretations of existing laws, regulations and decisions, relating to health care availability, methods of delivery or payment for diagnostic products and services, or sales, marketing or pricing, may limit our
potential revenue, and we may need to revise our research and development or commercialization programs. The pricing and reimbursement environment may change in the future and become more challenging due to several reasons, including policies
advanced by the U.S. government, new health care legislation or fiscal challenges faced by government health administration authorities. Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and
regulatory proposals and initiatives to change the health care system in ways that could affect our ability to sell any diagnostic products we may develop and commercialize profitably. Some of these proposed and implemented reforms could result in
reduced reimbursement rates for our diagnostic products, which would adversely affect our business strategy, operations and financial results. For example, in March 2010, President Obama signed into law a legislative overhaul of the U.S. health care
system, known as the Patient Protection and Affordable Care Act of 2010, as amended by the Healthcare and Education Affordability Reconciliation Act of 2010, or the PPACA,
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which may have far reaching consequences for life science companies like us. As a result of this legislation, substantial changes could be made to the current system for paying for health care in
the United States, including changes made in order to extend medical benefits to those who currently lack insurance coverage. Extending coverage to a large population could substantially change the structure of the health insurance system and the
methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of private payers and government programs, such as Medicare and Medicaid, the creation of a
government-sponsored health care insurance source, or some combination of both, as well as other changes. Restructuring the coverage of medical care in the United States could impact the reimbursement for prescribed drugs, biopharmaceuticals,
medical devices or our product candidates. If reimbursement for our approved product candidates, if any, is substantially less that we expect in the future, or rebate obligations associated with them are substantially increased, our business could
be materially and adversely impacted. In addition, certain members of Congress remain fixated on the repeal of some or all of PPACA, adding further uncertainty to the laws future impact on us.
Further federal and state proposals and health care reforms could limit the prices that can be charged for the product candidates that we develop and may
further limit our commercial opportunity. Our results of operations could be materially adversely affected by the PPACA, by the Medicare prescription drug coverage legislation, by the possible effect of such current or future legislation on amounts
that private insurers will pay and by other health care reforms that may be enacted or adopted in the future.
Risks Related to Our
Intellectual Property
If the combination of patents, trade secrets and contractual provisions that we rely on to protect our
intellectual property proves inadequate, our ability to successfully commercialize our proposed products will be harmed and we may never be able to operate our business profitably.
Our success depends, in large part, on our ability to protect proprietary methods, discoveries and diagnostic tests that we develop under the patent and other intellectual property laws of the United
States and other countries, so that we can seek to prevent others from unlawfully using our inventions and proprietary information. We rely on both patents and trade secrets to protect the proprietary aspects of our methods and discoveries. As of
February 28, 2014
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we have 5 issued U.S. patents and 13 pending patent applications filed either with the U.S. Patent and Trademark Office or under the PCT and foreign counterparts of certain of these patent applications. A subset of the
intellectual property that we own or license relates to our galectin-3 test. This intellectual property includes U.S. Patent Nos. 7,888,137 and 8,084,276, exclusively licensed from ACS Biomarker B.V. and nine corresponding patent applications
pending in the United States and abroad, as well as issued patents in Europe, Australia, China, Hong Kong and Japan. U.S. Patent No. 7,888,137 is scheduled to expire in November 2026 and U.S. Patent No. 8,084,276 is scheduled to expire in
September 2024. We own a U.S. and corresponding foreign applications relating to a specific method and kit for detecting galectin-3. Any patent issuing from this U.S. application could expire as early as 2029. In addition, we own seven U.S. patent
applications filed either with the U.S. Patent and Trademark Office or under the PCT, and foreign counterparts of these patent applications related to methods for clinical evaluation of subjects and therapies based on galectin-3 measurements. A
subset of the intellectual property that we own relates to our CardioSCORE test. This intellectual property includes U.S. Patent Application No. 12/946,470 and three corresponding patent applications abroad, and U.S. Patent Application
No. 13/765,366 and one corresponding patent application filed under the PCT. Any patent issuing from the earliest-filed U.S. application could expire as early as 2030. For the diagnostic tests that we develop based on our biomarker discoveries,
we expect to rely primarily on patent protection. Several of our owned and licensed patent applications are in an early stage of prosecution, and we cannot assure you that any of the pending patent applications will result in patents being issued.
In addition, due to technological changes that may affect our proposed products or judicial interpretation of the scope of our patents, our proposed products might not, now or in the future, be adequately covered by our patents.
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The patentability of molecular biomarkers and of test methods and products based on biomarkers is
well-established in most countries. However, the issue of any patent, including the patents for which we have applied, depends upon a detailed interpretation of the specific patent claims and prior art, and generally is highly uncertain because of
the complex legal and factual considerations it involves. In recent years, patentability issues have been the subject of much litigation. For example, on March 20, 2012, the United States Supreme Court rendered its decision in Mayo
Collaborative Services v. Prometheus Laboratories, Inc., in which the Court denied patent protection for patent claims covering methods that correlate the concentration of a well-known drug metabolite to the likely harm or ineffectiveness of the
drug as a means of determining proper drug dosage. At issue was whether the claimed methods transformed unpatentable laws of nature into patent-eligible applications of those laws of nature. The Court held that the patent claims at issue effectively
claim the underlying laws of nature themselves and thus ran afoul of the prohibition on patenting laws of nature, were not patent eligible and therefore, were determined to be invalid. Like other developers of diagnostic products, we are evaluating
the Prometheus decision, analyzing how the decision may impact our patents and pending patent applications, and evaluating various patent prosecution strategies. In addition, we are waiting with interest to learn how the lower courts in the United
States and the USPTO will apply this decision. The result of the case in the United States, although limited to the patent claims at issue in Prometheus, or other legal developments in the United States or in foreign jurisdictions may preclude or
limit the patent protection available for our diagnostic tests and therapeutic methods. The patentability of claims currently pending, the validity and enforceability of issued or to be issued patent claims and the commercial value of our patent
rights, therefore, are highly uncertain.
In addition, we cannot be certain that we hold the rights to the technology covered by pending
patent applications or to other proprietary technology required for us to commercialize our proposed products. Rights in applications filed by us or our licensors may be affected adversely by patent applications filed by others which have not yet
been published. For example, because certain U.S. patent applications are confidential until patents issue, such as applications filed prior to November 29, 2000, or applications filed after this date which will not be filed in foreign
countries, third parties may have filed patent applications for technology covered by our pending patent applications without our being aware of those applications, and our patent applications may not have priority over those applications. For this
and other reasons, we may be unable to secure desired patent rights, thereby losing desired exclusivity or co-exclusivity. It is also possible that one or more organizations will hold patent rights to which we will need a license. If those
organizations refuse to grant us a license to such patent rights on reasonable terms, we will not be able to market our products.
If
third parties assert that we have infringed their patents and proprietary rights or challenge the validity of our patents and proprietary rights, we may become involved in intellectual property disputes and litigation that would be costly, time
consuming, and delay or prevent the development or commercialization of our proposed products.
Our ability to commercialize our
proposed products depends on our ability to develop, manufacture, market and sell our proposed products without infringing the proprietary rights of third parties. Third parties may allege that our proposed products or our methods or discoveries
infringe their intellectual property rights. Numerous U.S. and foreign patents and pending patent applications, which are owned by third parties, exist in fields that relate to our proposed products and our underlying methodologies and discoveries,
including patents and patent applications claiming methods for the discovery of biomarkers or biomarker sets and assay systems and methods designed to exploit them clinically in drug discovery efforts or in selection of patients.
A third party may sue us for infringing its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or
to determine the scope and validity of third-party proprietary rights. In addition, a third party may claim that we have improperly obtained or used its confidential or proprietary information. The cost to us of any litigation or other proceeding
relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our managements attention from other aspects of our business. Some of our competitors may be able to sustain the
costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.
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If we are found to infringe upon intellectual property rights of third parties, we might be forced to pay
damages, potentially including treble damages, if we are found to have willfully infringed on such parties patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a
license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology
licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively market some or all of our products, which could limit our ability to generate revenue or achieve profitability and
possibly prevent us from generating revenue sufficient to sustain our operations. Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses to our intellectual property may be offset by amounts
paid by our collaborators to third parties who have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenue from products developed through collaborations.
Many of our employees were previously employed at universities or other biotechnology, pharmaceutical or diagnostic products companies, including our
competitors or potential competitors. While we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have inadvertently or otherwise
used or disclosed the former employers intellectual property, trade secrets or other proprietary information. Litigation based on such allegations may be brought against us, and even if we are successful in defending ourselves, we could incur
substantial costs and our management could be distracted. If we fail in defending such allegations, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.
If we are unable to protect our trade secrets, we may be unable to protect our interests in proprietary technology, processes and know-how that is
not patentable or for which we have elected not to seek patent protection.
In addition to patented technology, we rely upon
unpatented proprietary technology, processes and know-how, including, particularly our biomarker discovery methodologies. In an effort to protect our unpatented proprietary technology, processes and know-how, we require our employees, consultants,
collaborators, contract manufacturers and advisors to execute confidentiality agreements. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, in particular as we are
required to make such information available to a larger pool of people as we seek to expand our discovery and development efforts and commercialize our proposed products. These agreements may be breached, and we may not become aware of, or have
adequate remedies in the event of, any such breach. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees and consultants have previous employment or consulting
relationships. Also, others may independently develop substantially equivalent technology, processes and know-how or otherwise gain access to our trade secrets. If we are unable to protect the confidentiality of our proprietary technology, processes
and know-how, competitors may be able to use this information to develop products that compete with our products, which could adversely impact our business.
If we fail to comply with our obligations in the agreements under which we license development or commercialization rights to products or technology from third parties, we could lose license rights
that are important to our business.
Several of our collaboration agreements provide for licenses to us of intellectual property or
sharing of rights to intellectual property that is important to our business, and we may enter into additional agreements in the future that provide licenses to us of valuable technology. These licenses impose, and future licenses may impose,
various commercialization, milestone and other obligations on us, including the obligation to terminate our use of patented subject matter under certain contingencies. If a licensor becomes entitled to, and exercises, termination rights under a
license, we would lose valuable rights and our ability to develop our products. We may need to license other intellectual property to commercialize future products. Our business may suffer if any current or
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future licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties, if the licensed patents or other rights are found to be
invalid or if we are unable to enter into necessary licenses on acceptable terms.
Risks Related To the Growth of Our Management Team,
Workforce, Manufacturing and Facilities
Our future success depends on our ability to retain our key employees and to attract,
retain and motivate qualified personnel.
Our success depends on our ability to attract, retain and motivate highly qualified
management and scientific personnel. All of the arrangements with the principal members of our executive and scientific teams may be terminated by us or the employee at any time without notice. The loss of any of these persons expertise would
be difficult to replace and could have a material adverse effect on our ability to achieve our business goals. In addition, the loss of the services of any member of our senior management or our scientific staff may impede the achievement of our
research, development and commercialization objectives by diverting managements attention to transition matters and identification of suitable replacements, if any. There can be no assurance that we will be successful in hiring or retaining
qualified personnel and our failure to do so could have a material adverse effect on our business, financial condition and results of operations.
Recruiting and retaining qualified sales and marketing and scientific personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the
competition among pharmaceutical, biotechnology, medical device and diagnostic companies for similar personnel. We also experience competition for the hiring of sales and marketing personnel from pharmaceutical, biotechnology, medical device and
diagnostic companies. We do not maintain key person insurance on any of our employees. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development
and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.
We have only a limited number of employees to manage and operate our business.
As of February 28, 2014, we employed 23 full-time employees. Due to our limited cash, we have implemented a plan designed to focus our capital resources on our most promising indications and further
reduce our cash utilization. Our focus on reducing our cash utilization requires us to manage and operate our business in a highly efficient manner. We cannot assure you that we will be able to retain adequate staffing levels to run our operations
and/or to accomplish all of the objectives that we otherwise would seek to accomplish.
Failures in our information technology and
storage systems could significantly disrupt our operations.
Our ability to execute our business plan depends, in part, on the
continued and uninterrupted performance of our information technology systems, or IT systems. Despite the implementation of security measures, IT systems are vulnerable to damage from a variety of sources, including computer viruses, unauthorized
access, telecommunications or network failures, malicious human acts, terrorism and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins,
computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and
maintain data, could result in a material disruption in our operations. Furthermore, to the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential
or proprietary information, we could incur liability and the further development of our product candidates could be delayed.
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We rely on a single third party to manufacture and supply our product candidates. Any problems
experienced by this vendor could result in a delay or interruption in the supply of our product candidates to us until this vendor cures the problem or until we locate and qualify an alternative source of supply.
The manufacture of our diagnostic product candidates requires specialized equipment and utilizes complicated production processes that would be
difficult, time-consuming and costly to duplicate. Corgenix Medical Corporation is currently the third-party manufacturer of our galectin-3 test. Any prolonged disruption in the operations of our third-party manufacturer could have a significant
negative impact on our ability to manufacture products on our own and would cause us to seek additional third-party manufacturing contracts, thereby increasing our development and any commercialization costs. We may suffer losses as a result of
business interruptions that exceed coverage under our manufacturers insurance policies. Events beyond our control, such as natural disasters, fire, sabotage or business accidents could have a significant negative impact on our operations by
disrupting our product candidate development and commercialization efforts until our third-party manufacturer can repair its facility or put in place third-party contract manufacturers to assume this manufacturing role, which we may not be able to
do on reasonable terms, if at all. In addition, if we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated with the verification of a new manufacturer or the reverification of an existing manufacturer could negatively affect our ability to develop product candidates or produce approved products
in a timely manner. Any delay or interruption in our clinical studies for the validation and commercialization of our product candidates could negatively affect our business.
In pursuing our commercialization strategy for our BGM Galectin-3 Test for heart failure, we are particularly dependent upon Health Diagnostic Laboratory, Inc., or HDL, which was responsible for
approximately 74% of our galectin-3 sales in 2013. Any disruption in HDLs operations or problems that otherwise adversely affect our business relationship with HDL could result in a delay or interruption of the sales volume of our galectin-3
test.
In pursuing our commercialization strategy for our BGM Galectin-3 Test for heart failure, we are particularly dependent upon
HDL, which was responsible for approximately 74% of our galectin-3 test sales in 2013. In March 2011, we entered into a supply agreement with HDL pursuant to which HDL agreed to make our microplate galectin-3 test available to physicians in the
United States. Under the agreement, we agreed to provide HDL with certain clinical market development resources, programs and assistance as reasonably requested by HDL, and HDL agreed to perform certain sales, marketing and marketing education
activities in support of our galectin-3 test. Accordingly, we may suffer losses as a result of any business interruptions experienced by HDL or if our relationship with HDL is otherwise adversely affected. Any prolonged disruption in HDLs
operations or problem that otherwise undermines our business relationship with HDL could have a significant negative impact on our ability to execute on our commercialization strategy for our galectin-3 test in the United States and to increase the
sales volume of our galectin-3 test.
If we become subject to product liability claims, we may be required to pay damages that exceed
our insurance coverage, and such claims may harm our business in other ways.
Our business exposes us to product liability claims that
are inherent in the testing, production, marketing and sale of diagnostic products. Although we currently maintain limited product liability insurance, we anticipate needing to secure additional product liability insurance for the development and
commercialization of our product candidates. We cannot be certain whether we will be able to secure such insurance on commercially reasonable terms, or at all. A product liability claim in excess of any insurance coverage we may obtain would have to
be paid out of our cash reserves and could harm our business. In addition, any injunction or other restriction on our ability to sell against one of our product candidates could harm our business.
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If we complete our development of any diagnostic tests, the marketing, sale and use of our tests could lead
to the filing of product liability claims if someone were to allege that our product failed to perform as it was designed. A product liability claim could result in substantial damages and be costly and time consuming for us to defend. We cannot
provide assurance that our product liability insurance would protect us from the financial impact of defending a product liability claim. Any product 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 product candidates, or cause current collaborators to terminate existing
agreements and potential collaborators to seek other partners, any of which could impact our results of operations.
Risks Related To Our
Common Stock
The trading market in our common stock has been extremely limited and substantially less liquid than the average
trading market for a stock quoted on The NASDAQ Capital Market. Additionally, the public float of our common stock is approximately 66% of our outstanding shares of common stock, as of February 28, 2014, which substantially reduces the
liquidity of our common stock and contributes to the limited trading volume for our common stock.
Since our initial listing on The
NASDAQ Global Market on February 4, 2011 and the transfer of our listing to The NASDAQ Capital Market on January 27, 2014, the trading market in our common stock has been extremely limited and substantially less liquid than the average
trading market for companies quoted on The NASDAQ Capital Market. The quotation of our common stock on The NASDAQ Capital Market does not assure that a meaningful, consistent and liquid trading market currently exists. We cannot predict whether a
more active market for our common stock will develop in the future. An absence of an active trading market could adversely affect our stockholders ability to sell our common stock at current market prices in short time periods, or possibly at
all. Additionally, market visibility for our common stock may be limited and such lack of visibility may have a depressive effect on the market price for our common stock.
The public float of our common stock is approximately 66% of our outstanding shares of common stock, as of February 28, 2014, which adversely affects the liquidity of the trading market for our
common stock; in as much as federal securities laws restrict sales of our shares by these stockholders. If our affiliates continue to hold their shares of common stock, there will be limited trading volume in our common stock, which may make it more
difficult for investors to sell their shares or increase the volatility of our stock price.
Our stock price is likely to be volatile
and the market price of our common stock may drop.
Prior to our initial public offering in February 2011, there was no public market
for our common stock and having been a publicly traded company for only three years, it is too early to determine whether an active trading market will develop and continue. There is a limited history, exacerbated by low average daily trading
volume, on which to gauge the volatility of our stock price. The stock markets and the markets for medical diagnostics and biotechnology stocks in particular, have experienced volatility that has often been unrelated to the operating performance of
particular companies. For example, our common stock traded as high as $3.15 and as low as $0.55 during 2013. Some of the many factors that may cause the market price of our common stock to fluctuate include:
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our ability to commercialize the products, if any, that we are able to develop;
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the progress and results of our product candidate development efforts;
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actions taken by regulatory authorities with respect to our product candidates, or our sales and marketing activities;
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regulatory developments in the United States, the European Union and other jurisdictions;
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the outcome of legal actions to which we may become a party;
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announcements concerning product development results or intellectual property rights of others;
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announcements of technological innovations or new products by us or our competitors;
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changes in financial estimates or recommendations by securities analysts;
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changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
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restatements of our financial results and/or material weaknesses in our internal controls;
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publication of research reports about us or the diagnostic products industry by securities or industry analysts;
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fluctuations in our operating results; and
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deviations in our operating results from the estimates of securities analysts or other analyst comments.
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Any broad market fluctuations may adversely affect the trading price of our common stock. Investors may not be able to sell when they desire due to
insufficient buyer demand and may realize less than, or lose all of, their investment.
In the past, following periods of volatility in the
market price of a companys securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and
resources, which could significantly harm our financial condition, operating results and reputation.
Insiders control a substantial
amount of our outstanding common stock, which could delay or prevent a change in corporate control or result in the entrenchment of management and/or the board of directors.
Certain of our directors, principal stockholders and/or their affiliates, including Flagship Ventures, or Flagship, General Electric Pension Trust, or GE, and Stelios Papadopoulos control approximately
40% of our outstanding common stock as of February 28, 2014. Accordingly, these stockholders, if acting as a group, or Flagship, which alone controls approximately 29% of our outstanding common stock as of February 28, 2014, will have
control or substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, and they may in some instances exercise this control
or substantial influence in a manner that advances their best interests and not necessarily those of other stockholders. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control, could deprive
investors of the opportunity to receive a premium for our common stock as part of a sale and could adversely affect the market price of our common stock.
If we fail to maintain compliance with the continued listing requirements of The NASDAQ Capital Market, our common stock may be delisted and the price of our common stock and our ability to access
the capital markets could be negatively impacted.
Our common stock is currently listed for trading on The NASDAQ Capital Market and
our potential delisting matter was closed on March 11, 2014. However, as disclosed in a Current Report on Form 8-K dated November 15, 2013, on November 14, 2013, we were notified by NASDAQ that we no longer satisfied the $50 million market
value of listed securities requirement for continued listing on The NASDAQ Global Market and that our common stock was therefore subject to delisting. We subsequently requested a hearing before the NASDAQ Listing Qualifications Panel, or the Panel,
and during the hearing on January 9, 2014 we requested, and later in January 2014 we received, the approval from the Panel to transfer the listing of our common stock to The NASDAQ Capital Market pursuant to an extension within which to
evidence compliance with the continued listing requirements by April 15, 2014. Accordingly, our common stock was transferred from The NASDAQ Global Market to The NASDAQ Capital Market on January 27, 2014. On March 11, 2014, we were
notified by NASDAQ that we had regained compliance with the minimum market value of listed securities rule and the NASDAQ matter had been closed.
If we fail to maintain compliance with the continued listing requirements of The NASDAQ Capital Market, our common stock may be delisted in the future. A delisting of our common stock from The NASDAQ
Capital Market could substantially further reduce the liquidity of our common stock and result in a corresponding
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material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and
may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities.
The requirements of being a public company require greater resources, increase our costs and distract our management, and we may be unable to
comply with these requirements in a timely or cost-effective manner.
As a public company with equity securities listed on The NASDAQ
Capital Market, we now incur significant legal, accounting and other expenses that we did not incur as a private company. We are required to comply with certain rules, regulations and requirements with which we were not required to comply prior to
becoming a public company.
Complying with rules, regulations and requirements will require substantial effort on the part of our board of
directors and management and will increase our costs and expenses. We will be required to:
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institute a more formalized function of internal control over financial reporting;
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prepare and distribute periodic and current public reports;
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formalize old and establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
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involve and retain to a greater degree outside counsel and accountants in the above activities; and
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establish and maintain an investor relations function, including the provision of certain information on our website.
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Compliance with these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and
costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar
coverage.
For the year ended December 31, 2012, we determined that we had a material weakness in internal control over financial
reporting. As a result, current and potential stockholders could lose confidence in our financial reporting which would harm our business and the trading of our stock.
For the fiscal year ended December 31, 2012, we determined that we had a material weakness in our internal control over financial reporting. Our efforts to comply with Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over financial reporting and our independent auditors audit of that assessment requires the commitment of significant financial
and managerial resources. Since having become a publicly traded company in February 2011, we have continually assessed the adequacy of our internal control over financial reporting, and the year ended December 31, 2012 was the first time that
our independent auditor was required to audit that assessment. In the course of our assessment and our auditors audit of our assessment, deficiencies in our internal control over financial reporting for the year ended December 31, 2012
were identified, including: (i) the documentation of our internal controls over financial reporting was missing adequate evidential matter to provide reasonable support for managements assessment of the effectiveness of the controls;
(ii) our design and implementation of certain controls were incomplete; (iii) we did not complete our documentation with sufficient specificity to demonstrate the operating effectiveness of our controls; (iv) we did not have
sufficient time to adequately test the operating effectiveness of our controls prior to December 31, 2012; and (v) we did not have sufficient time to implement certain key information technology controls, including access controls and
change management controls prior to December 31, 2012. These deficiencies collectively result in a material weakness, which is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting such that there
is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Immediately following our identification of the material weakness, in early 2013, we
hired an external specialist who assisted us to develop, implement and execute a plan to make
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necessary improvements to our internal control over financial reporting, including: (i) remediating our controls documentation in areas that lacked specificity; (ii) adding
documentation to evidence the operating effectiveness of existing controls, and (iii) completing the implementation of certain key information technology controls, including access controls and change management controls. Following the
implementation and execution of our remediation plan during 2013, our management concluded that our disclosure controls and procedures were effective as of December 31, 2013. Our independent auditor was not required to audit managements
assessment at that time, because the market value of our common stock held by non-affiliates was less than the threshold required by Section 404 of the Sarbanes-Oxley Act of 2002. If we determine in future fiscal periods that we have other
material weaknesses in our internal control over financial reporting, the reliability of our financial reports may be impacted or we could be required to restate our financial statements. In addition, our failure to successfully remediate a material
weakness in the future could result in adverse consequences to us, including, but not limited to, a loss of investor confidence in the reliability of our financial statements, which could cause the market price of our stock to decline.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our
common stock adversely, the price and trading volume of our common stock could decline.
The trading market for our common stock is
influenced by the research and reports that industry or securities analysts publish about us or our industry. If one or more of the analysts who cover us or our industry make unfavorable comments about our market opportunity or product candidates or
downgrade our common stock, the market price of our common stock would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could
cause the market price of our common stock or trading volume to decline.
Raising additional capital may cause dilution to existing
stockholders, restrict our operations or require us to relinquish rights.
In addition to using our common stock purchase agreement
with Aspire Capital to raise capital in the public markets, we may seek the additional capital necessary to fund our operations through public or private equity offerings, debt financings, and collaborative and licensing arrangements. To the extent
that we raise additional capital through the sale of equity or convertible debt securities, existing stockholders ownership interests will be diluted and the terms may include liquidation or other preferences that adversely affect their rights as a
stockholder. Additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures, or declaring dividends.
If we raise additional funds through collaboration and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or grant licenses on terms that are not favorable to us.
Because we do not intend to pay dividends for the foreseeable future, our stockholders will benefit from their investment in shares only if our
common stock appreciates in value.
We have not paid dividends to our stockholders since our inception and we are currently prohibited
from making any dividend payments under the terms of the term loan facility with our lenders. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business, and we do not anticipate
paying any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any future appreciation in their value.
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Provisions of our certificate of incorporation, our bylaws and Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove the current members of our board and management.
Certain provisions of our restated certificate of incorporation and restated bylaws could discourage, delay or prevent a merger, acquisition or other change of control that stockholders may consider
favorable, including transactions in which they might otherwise receive a premium for their shares. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove members of our board of directors. These
provisions also could limit the price that investors might be willing to pay in the future for our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the
opportunity to do so. These provisions:
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allow the authorized number of directors to be changed only by resolution of our board of directors;
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establish a classified board of directors, such that not all members of the board of directors may be elected at one time;
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authorize our board of directors to issue without stockholder approval preferred stock, the rights of which will be determined at the discretion of the
board of directors that, if issued, could operate as a poison pill to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;
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require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent;
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establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at
stockholder meetings;
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limit who may call stockholder meetings; and
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require the approval of the holders of 80% of the outstanding shares of our capital stock entitled to vote in order to amend certain provisions of our
restated certificate of incorporation and restated bylaws.
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In addition, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on our common stock, from merging or combining with us for
a prescribed period of time.
Risks Related to Our Common Stock Purchase Agreement with Aspire Capital
The sale of our common stock to Aspire Capital would cause substantial dilution to our existing stockholders.
In January 2013, we entered into a common stock purchase agreement, or the purchase agreement, with Aspire Capital, which provides that, upon the terms
and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase, at our option, up to an aggregate of $12 million of shares of the Companys common stock over the two-year term of the purchase agreement.
In addition, upon entering into the purchase agreement, we issued commitment shares to Aspire Capital for no cash consideration, and we may sell additional shares to Aspire Capital under the purchase agreement. We anticipate that the shares we issue
to Aspire Capital under the purchase agreement will later be sold by Aspire Capital over approximately the same two-year period although we have no control over their sales process. The sale of a substantial number of shares of our common stock by
us to Aspire Capital will result in immediate dilution to our existing stockholders and to purchasers of common stock in the offering contemplated hereby.
The sale by us of shares to Aspire Capital under the purchase agreement could cause the price of our common stock to decline.
We may cause Aspire Capital to purchase all, some or none of the $12 million of common stock offered under the purchase agreement, up to a maximum of 4,106,071 total shares issued under the purchase
agreement without stockholder approval. The purchase price for the common stock we may sell to Aspire Capital pursuant to the
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purchase agreement will fluctuate based on the trading price of our common stock in the public market. In addition, Aspire Capital may then sell all, some or none of the shares we issue to it
under the purchase agreement. Depending upon market liquidity during that period, a resale of shares by Aspire Capital at any given time could cause the trading price of our common stock to decline. The sale of a substantial number of shares of our
common stock by us to Aspire Capital or by Aspire Capital in the open market, or the anticipation of such sales, could cause the price of our common stock to decline and make it more difficult for us to sell equity or equity-related securities in
the future at a time and at a price that we might otherwise wish to effect such sales.
Securities regulations may restrict our ability
to access the full amount of our committed equity facility with Aspire Capital.
Although we have entered into the purchase agreement
with Aspire Capital for a maximum amount of $12 million, NASDAQ rules limit our ability to issue more than 19.99% of our currently outstanding shares to Aspire Capital without stockholder approval to exceed that amount. Similarly, SEC rules may also
restrict our ability to readily access the full amount of the committed equity facility or to access the facility in a manner that would be meaningful to fund our operations and execute on our commercialization strategy to the extent we believe
would be required to generate value for our stockholders. As a result, we may not realize the full value of the facility, which would undermine our ability to sufficiently address our need for additional capital, and our financial condition and
results of operations would be negatively affected.