e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51541
GENOMIC HEALTH, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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77-0552594 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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301 Penobscot Drive
Redwood City, California 94063
(Address of principal executive offices, including Zip Code)
(650) 556-9300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
The number of outstanding shares of the registrants Common Stock, $0.0001 par value, was
28,152,522 as of October 31, 2007.
GENOMIC HEALTH, INC.
INDEX
2
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
GENOMIC HEALTH, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
26,796 |
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$ |
14,926 |
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Short-term investments |
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47,122 |
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29,289 |
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Accounts receivable (net of allowance for doubtful accounts; 2007-$147, 2006-$510) |
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3,168 |
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1,862 |
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Prepaid expenses and other current assets |
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2,315 |
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1,609 |
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Total current assets |
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79,401 |
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47,686 |
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Property and equipment, net |
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9,747 |
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9,421 |
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Restricted cash |
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500 |
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500 |
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Other assets |
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490 |
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|
417 |
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Total assets |
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$ |
90,138 |
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$ |
58,024 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
459 |
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$ |
2,523 |
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Accrued compensation |
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2,725 |
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|
1,868 |
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Accrued expenses and other current liabilities |
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2,522 |
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1,474 |
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Accrued license fees |
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1,386 |
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|
907 |
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Notes payable current portion |
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2,695 |
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2,547 |
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Deferred revenues current portion |
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|
511 |
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|
710 |
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Lease incentive obligations current portion |
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198 |
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141 |
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Total current liabilities |
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10,496 |
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10,170 |
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Notes payable long-term portion |
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2,694 |
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4,726 |
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Deferred revenues long-term portion |
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|
482 |
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137 |
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Lease incentive obligations long-term portion |
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|
678 |
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|
587 |
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Other liabilities |
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|
748 |
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|
575 |
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Total liabilities |
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15,098 |
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16,195 |
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Stockholders equity: |
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Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued
and outstanding at September 30, 2007 and December 31, 2006, respectively |
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Common stock, $0.0001 par value; 100,000,000 shares authorized, 28,132,566 and
24,548,060 shares issued and outstanding at September 30, 2007 and December 31,
2006, respectively |
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2 |
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2 |
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Additional paid-in capital |
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221,384 |
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166,922 |
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Accumulated other comprehensive income |
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58 |
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8 |
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Accumulated deficit |
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(146,404 |
) |
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(125,103 |
) |
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Total stockholders equity |
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75,040 |
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41,829 |
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Total liabilities and stockholders equity |
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$ |
90,138 |
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$ |
58,024 |
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See accompanying notes.
3
GENOMIC HEALTH, INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues: |
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Product revenues |
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$ |
15,781 |
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$ |
6,928 |
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$ |
43,482 |
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$ |
18,932 |
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Contract revenues |
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120 |
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191 |
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1,197 |
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1,626 |
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Total revenues |
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15,901 |
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7,119 |
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44,679 |
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20,558 |
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Operating expenses: |
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Cost of product revenues |
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4,398 |
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2,674 |
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12,417 |
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7,201 |
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Research and development |
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5,643 |
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3,229 |
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16,037 |
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8,678 |
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Selling and marketing |
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9,484 |
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6,429 |
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26,377 |
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17,331 |
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General and administrative |
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4,488 |
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3,464 |
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12,763 |
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8,904 |
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Total operating expenses |
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24,013 |
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15,796 |
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67,594 |
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42,114 |
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Loss from operations |
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(8,112 |
) |
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(8,677 |
) |
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(22,915 |
) |
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(21,556 |
) |
Interest and other income |
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1,021 |
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|
602 |
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2,149 |
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|
1,943 |
|
Interest expense |
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(162 |
) |
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|
(105 |
) |
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|
(535 |
) |
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|
(312 |
) |
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|
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|
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Net loss |
|
$ |
(7,253 |
) |
|
$ |
(8,180 |
) |
|
$ |
(21,301 |
) |
|
$ |
(19,925 |
) |
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Basic and diluted net loss per share |
|
$ |
(0.26 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.81 |
) |
|
$ |
(0.81 |
) |
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Shares used in computing basic and diluted net loss per share |
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28,119,786 |
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24,516,761 |
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26,287,177 |
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24,499,316 |
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See accompanying notes.
4
GENOMIC HEALTH, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2007 |
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2006 |
|
Operating activities |
|
|
|
|
|
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Net loss |
|
$ |
(21,301 |
) |
|
$ |
(19,925 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
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Depreciation and amortization |
|
|
2,783 |
|
|
|
1,752 |
|
Employee stock-based compensation |
|
|
4,411 |
|
|
|
1,973 |
|
Non-employee stock-based compensation |
|
|
50 |
|
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|
70 |
|
Changes in assets and liabilities: |
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|
|
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Accounts receivable, net |
|
|
(1,306 |
) |
|
|
(1,593 |
) |
Employee note receivable |
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|
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|
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|
37 |
|
Prepaid expenses and other current assets |
|
|
(706 |
) |
|
|
(544 |
) |
Other assets |
|
|
(152 |
) |
|
|
89 |
|
Accounts payable |
|
|
(2,064 |
) |
|
|
331 |
|
Accrued expenses and other liabilities |
|
|
1,700 |
|
|
|
414 |
|
Accrued compensation |
|
|
857 |
|
|
|
731 |
|
Deferred revenues |
|
|
146 |
|
|
|
923 |
|
Lease incentive obligations |
|
|
148 |
|
|
|
763 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(15,434 |
) |
|
|
(14,979 |
) |
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Purchase of short-term investments |
|
|
(57,313 |
) |
|
|
(14,329 |
) |
Maturities of short-term investments |
|
|
39,530 |
|
|
|
43,291 |
|
Purchase of property and equipment |
|
|
(3,030 |
) |
|
|
(6,385 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(20,813 |
) |
|
|
22,577 |
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
|
|
|
|
910 |
|
Principal payments on notes payable |
|
|
(1,884 |
) |
|
|
(891 |
) |
Proceeds from issuance of common stock, net |
|
|
50,001 |
|
|
|
109 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
48,117 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
11,870 |
|
|
|
7,726 |
|
Cash and cash equivalents at the beginning of period |
|
|
14,926 |
|
|
|
18,839 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period |
|
$ |
26,796 |
|
|
$ |
26,565 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
535 |
|
|
$ |
105 |
|
See accompanying notes.
5
GENOMIC HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
The Company
Genomic Health, Inc. (the Company) is a life science company focused on the development and
commercialization of genomic-based clinical diagnostic tests for cancer that allow physicians and
patients to make individualized treatment decisions. The Company was incorporated in Delaware in
August 2000. The Companys first test, Oncotype DX, was launched in 2004 and is used for
early-stage breast cancer patients to predict the likelihood of breast cancer recurrence and the
likelihood of chemotherapy benefit. The Company has incurred significant losses and expects to
incur additional losses for at least the next year as commercial and development efforts continue.
Basis of Presentation
The accompanying interim period condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States (GAAP). The
condensed consolidated balance sheet as of September 30, 2007, condensed consolidated statements of
operations for the three and nine months ended September 30, 2007 and 2006 and condensed
consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006 are
unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the
Company considers necessary for a fair presentation of its financial position, operating results
and cash flows for the periods presented. The condensed consolidated balance sheet at December 31,
2006 has been derived from audited financial statements. However, it does not include certain
information and notes required by GAAP for complete consolidated financial statements.
Results for any interim period are not necessarily indicative of results for any future
interim period or for the entire year. The accompanying financial statements should be read in
conjunction with the audited financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2006, as subsequently amended.
Income Taxes
The Company adopted Financial Accounting Standards Board (FASB) Interpretation 48,
Accounting for Uncertainty in Income Taxes (FIN 48), as of January 1, 2007. FIN 48 addresses how
tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, the tax benefit from an uncertain tax position can be recognized only if
it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate resolution or settlement. In
May 2007, FASB issued Financial Staff Position FSP FIN 48-1 (FSP FIN 48-1), which provides
guidance on determining whether a tax position is effectively settled for purposes of recognizing
previously unrecognized tax benefits and is effective upon the Companys initial adoption of FIN
48. The adoption of FIN 48 and FSP FIN 48-1 had no impact on the Companys financial condition,
results of operations or cash flows.
Interest and penalties related to uncertain tax positions will be reflected in income tax
expense. As of September 30, 2007, the Company had not recognized any tax penalties or interest in
its balance sheets or statements of operations. All tax years since the Companys inception remain
subject to future examination by the major tax jurisdictions in which the Company is subject to
tax.
Recent Accounting Pronouncements
In June 2007, FASB ratified the consensus reached by the Emerging Issues Task Force on Issue
No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities (EITF 07-3). Pursuant to EITF 07-3, nonrefundable
advance payments for goods or services that will be used or rendered for future research and
development activities should be deferred and capitalized. Such amounts should be recognized as an
expense as the related goods are delivered or services are performed, or when the goods or services
are no longer expected to be received. EITF 07-3 is effective for fiscal years beginning after
December 15, 2007 and is to be applied prospectively for contracts entered into on or after the
effective date. The Company is in the process of determining the impact that EITF 07-3 will have on
its financial condition or results of operations.
6
In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159, which includes
an amendment to Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, permits entities the option to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is in the process of determining the impact that SFAS 159 will
have on its financial condition or results of operations.
In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157, which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements, is effective for fiscal
years beginning after November 15, 2007. The Company is in the process of determining the impact
that SFAS 157 will have on its financial condition or results of operations.
Note 2. Net Loss Per Share and Comprehensive Loss
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of
common shares outstanding for the period without consideration of potential common shares. Diluted
net loss per share is computed by dividing net loss by the weighted-average number of common shares
outstanding for the period less the weighted-average unvested common shares subject to repurchase
and dilutive potential common shares for the period determined using the treasury-stock method.
Options to purchase common stock have not been included in the calculation of diluted net loss per
share as their inclusion would be anti-dilutive.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Net loss |
|
$ |
(7,253 |
) |
|
$ |
(8,180 |
) |
|
$ |
(21,301 |
) |
|
$ |
(19,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average net common shares
outstanding for basic and diluted
loss per common share |
|
|
28,119,786 |
|
|
|
24,516,761 |
|
|
|
26,287,177 |
|
|
|
24,449,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.26 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.81 |
) |
|
$ |
(0.81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common shares outstanding
at period end not included in
diluted net loss per share
calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
3,143,329 |
|
|
|
2,206,736 |
|
|
|
3,143,329 |
|
|
|
2,206,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
The Company reports comprehensive loss and its components as part of total stockholders
equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Net loss |
|
$ |
(7,253 |
) |
|
$ |
(8,180 |
) |
|
$ |
(21,301 |
) |
|
$ |
(19,925 |
) |
Change in unrealized gain on available-for-sale securities |
|
|
29 |
|
|
|
47 |
|
|
|
50 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(7,224 |
) |
|
$ |
(8,133 |
) |
|
$ |
(21,251 |
) |
|
$ |
(19,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Public Offering of Common Stock
In May 2007, the Company received $49.7 million in net proceeds from an underwritten public
offering of 3,450,000 shares of common stock pursuant to the Companys outstanding shelf
registration statement on Form S-3. Entities affiliated with Julian Baker, an outside director and
a principal stockholder of the Company, purchased 1,000,000 shares of the Companys common stock in
this offering. As of November 9, 2007, the Company had approximately $46.5 million of securities
available for sale under the shelf registration statement.
Note 4. Commercial Technology and Licensing Agreements
The Company is a party to various agreements under which it licenses technology on a
nonexclusive basis in the field of human diagnostics. Access to these licenses enables the Company
to process its laboratory tests for Oncotype DX. The Company recognized
7
costs recorded under these agreements for the three months ended September 30, 2007 and 2006
and the nine months ended September 30, 2007 and 2006 of $1.2 million, $541,000, $3.4 million and
$1.5 million, respectively, which were included in cost of product revenues.
Note 5. Notes Payable
In March 2005, the Company entered into an arrangement to finance the acquisition of
laboratory equipment, computer hardware and software, leasehold improvements and office equipment.
In connection with this arrangement, the Company granted the lender a security interest in the
assets purchased with the borrowed amounts. The Company can prepay all, but not part, of the
amounts outstanding under the arrangement so long as the Company also pays a 5% premium on the
outstanding principal balance. This premium is reduced to 4% of the outstanding principal balance
in April 2008.
As
of September 30, 2007, the Companys aggregate commitments
under this financing arrangement
were as follows:
|
|
|
|
|
|
|
Annual |
|
|
|
Payment |
|
|
|
Amounts |
|
|
|
(In thousands) |
|
|
|
(Unaudited) |
|
Years Ending December 31: |
|
|
|
|
2007 (remainder of the year) |
|
$ |
805 |
|
2008 |
|
|
3,073 |
|
2009 |
|
|
1,934 |
|
2010 |
|
|
238 |
|
|
|
|
|
Total minimum payments |
|
|
6,050 |
|
Less: interest portion |
|
|
(661 |
) |
|
|
|
|
Present value of net minimum payments |
|
|
5,389 |
|
Less: current portion of obligations |
|
|
(2,695 |
) |
|
|
|
|
Long-term obligations |
|
$ |
2,694 |
|
|
|
|
|
8
Note 6. Commitments
Lease Obligations
In September 2005, the Company entered into a non-cancelable lease for 48,000 square feet of
laboratory and office space. The lease expires in February 2012 and includes lease incentive
obligations totaling $834,000 that are being amortized on a straight-line basis over the life of
the lease. In connection with this lease, the Company was required to secure a $500,000 letter of
credit, which is classified as restricted cash on its condensed consolidated balance sheet.
In January 2007, the Company entered into a non-cancelable lease for an additional 48,000
square feet of laboratory and office space in a nearby location. The lease expires in February 2012
and includes lease incentive obligations totaling $283,000 that are being amortized on a
straight-line basis over the life of the lease. In connection with this lease, the Company paid a
$151,000 cash security deposit, which is included in other assets on its condensed consolidated
balance sheet.
Future non-cancelable commitments at September 30, 2007 under these leases, which are
considered operating leases, were as follows:
|
|
|
|
|
|
|
Annual |
|
|
|
Payment |
|
|
|
Amounts |
|
|
|
(In thousands) |
|
|
|
(Unaudited) |
|
Years Ending December 31: |
|
|
|
|
2007 (remainder of the year) |
|
$ |
296 |
|
2008 |
|
|
1,348 |
|
2009 |
|
|
1,520 |
|
2010 |
|
|
1,634 |
|
2011 |
|
|
1,723 |
|
Thereafter |
|
|
290 |
|
|
|
|
|
Total minimum payments |
|
$ |
6,811 |
|
|
|
|
|
Note 7. Stock-Based Compensation
Employee Stock-based Compensation Expense
The Company uses the Black-Scholes option valuation model to value stock options to employees
and outside directors under Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment (SFAS 123R). Employee stock-based compensation expense was calculated based
on awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The following table presents the impact
of SFAS 123R on selected statements of operations line items for the three and nine months ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Cost of product revenues |
|
$ |
99 |
|
|
$ |
47 |
|
|
$ |
283 |
|
|
$ |
111 |
|
Research and development |
|
|
468 |
|
|
|
202 |
|
|
|
1,308 |
|
|
|
557 |
|
Selling and marketing |
|
|
481 |
|
|
|
218 |
|
|
|
1,312 |
|
|
|
533 |
|
General and administrative |
|
|
562 |
|
|
|
323 |
|
|
|
1,508 |
|
|
|
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee stock-based compensation expense |
|
$ |
1,610 |
|
|
$ |
790 |
|
|
$ |
4,411 |
|
|
$ |
1,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense represents expense related to stock options granted
on or after January 1, 2006, as well as stock options granted prior to, but not yet vested as of,
January 1, 2006. As of September 30, 2007, total unrecognized compensation expense related to
non-vested stock options, net of estimated forfeitures, was $14.2 million. The Company expects to
recognize this expense over a weighted-average period of 41 months.
9
Valuation Assumptions
Option valuation models require the input of highly subjective assumptions that can vary over
time. The Companys common stock has been publicly traded for less than three years, so expected
volatility is based primarily on comparable peer data. The expected life of options granted is
estimated based on historical option exercise data and assumptions related to unsettled options.
The risk-free interest rate is estimated using published rates for U.S. Treasury securities with a
remaining term approximating the expected life of the options granted. The Company uses a dividend
yield of zero as it has never paid cash dividends and does not anticipate paying cash dividends in
the foreseeable future. The Company granted 63,755 and 438,335 stock options to employees and
outside directors for the three and nine months ended September 30, 2007, respectively, compared
with 125,850 and 301,750 stock options granted for the three and nine months ended September 30,
2006, respectively. The weighted-average fair values and the assumptions or range of assumptions
used in calculating such values for stock options granted during these periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Volatility factor |
|
|
60.5 |
% |
|
|
65 |
% |
|
|
60.5-65 |
% |
|
|
65%-75 |
% |
Risk-free interest rate |
|
|
4.44 |
% |
|
|
4.59 |
% |
|
|
4.44-4.66 |
% |
|
|
4.59-5.10 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected life of options in years |
|
|
5.86 |
|
|
|
5.50 |
|
|
|
5.50-5.86 |
|
|
|
5.00-5.50 |
|
Weighted-average fair value |
|
$ |
12.00 |
|
|
$ |
8.04 |
|
|
$ |
11.35 |
|
|
$ |
7.61 |
|
Stock Options Granted to Non-employees
The Company grants options to outside consultants from time to time in exchange for services
performed for the Company. The Company granted 3,100 and 9,600 stock options to consultants for the
three and nine months ended September 30, 2007, respectively, compared with 500 and 2,850 stock
options granted for the three and nine months ended September 30, 2006, respectively. The fair
value of these option grants was determined using the Black-Scholes option pricing model and
accounted for as prescribed by SFAS 123R and Emerging Issues Task Force Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services. In general, the options vest over the contractual period of the
consulting arrangement and, therefore, the Company revalues the options periodically and records
additional compensation expense related to these options over the remaining vesting periods.
Stock-based compensation expense for options granted to outside consultants was $23,000 and $50,000
for the three and nine months ended September 30, 2007, respectively, compared with $18,000 and
$70,000 for the three and nine months ended September 30, 2006, respectively.
Stock Options Exercised
For the three and nine months ended September 30, 2007, the Company issued 23,923 and 134,506
shares of common stock in connection with the exercise of stock options by employees and
consultants with a weighted-average exercise price of $4.43 and $2.46 per share, respectively, and
total intrinsic value of $106,000 and $331,000, respectively. For the three and nine months ended
September 30, 2006, the Company issued 17,002 and 58,233 shares of common stock in connection with
the exercise of stock options by employees and consultants with a weighted-average exercise price
of $1.82 and $1.88 per share, respectively, and total intrinsic value of $31,000 and $109,000,
respectively.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read
in conjunction with the financial statements and notes to those statements included elsewhere in
this Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and our audited
financial statements for the year ended December 31, 2006 included in our Annual Report on Form
10-K, as subsequently amended. This Report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. When used in this Report, the words
expects, anticipates, intends, estimates, plans, believes, and similar expressions are
intended to identify forward-looking statements. These are statements that relate to future periods
and include statements about our expectation that, for the foreseeable future, substantially all of
our revenues will be derived from Oncotype DX; the factors we believe to be driving demand for
Oncotype DX and our ability to sustain such demand; our expectation that our research and
development expense levels will remain high as we seek to increase the clinical utility of Oncotype
DX and develop new tests; our expectation that our general and administrative and sales and
marketing expenses will increase and our anticipated uses of those funds; our expectations
regarding capital expenditures; the factors that may impact our financial results; the extent and
10
duration of our net losses; our ability to comply with the requirements of being a public
company; our ability to attract and retain experienced personnel; the impact changes in healthcare
policy or regulation could have on our business; the adequacy of our product liability insurance;
our ability to recognize revenues other than on a cash basis and when we expect we will recognize a
majority of revenues upon providing tests; the level of investment in our sales force; the capacity
of our commercial laboratory to process tests and our expectations regarding expanded capacity; our
dependence on collaborative relationships and the success of those relationships; whether any tests
will result from our collaborations; our belief that clinical results support our development of a
test for colon cancer; our expectations regarding clinical development processes future tests may
follow; the applicability of clinical results to actual outcomes; our estimates and assumptions
with respect to disease incidence; the ability of our test to impact treatment decisions; the
economic benefits of our test to the healthcare system; our compliance with federal, state and
foreign regulatory requirements; our expectation that product revenues will increase; how we intend
to spend our existing cash and cash equivalents and how long we expect our existing cash to last;
our expected future sources of cash; our plans to borrow additional amounts under existing or new
financing arrangements; the potential impact resulting from the regulation of Oncotype DX by the
U.S. Food and Drug Administration, or FDA, and our belief that Oncotype DX is properly regulated
under the Clinical Laboratory Improvement Amendments of 1988, or CLIA; the impact of new or
changing regulation or legislation on our business; our plans to pursue reimbursement on a
case-by-case basis; our ability, and expectations as to the amount of time it will take, to achieve
successful reimbursement from third-party payors and government insurance programs; our intent to
enter into additional foreign distribution arrangements; the factors that we believe will drive the
establishment of coverage policies; the impact of changing interest rates; the amount of future
revenues that we may derive from Medicare patients or categories of patients; our success in
increasing patient and physician demand as a result of our direct sales approach; plans for
enhancements of Oncotype DX to address different patient populations of breast cancer or to report
single gene results; plans for, and the timeframe for the development or commercial launch of,
future tests addressing different patient populations or other cancers; our expectation regarding
when we may move another potential test into development; the occurrence, timing, outcome or
success of clinical trials; our intellectual property and our strategies regarding filing
additional patent applications to strengthen our intellectual property rights; the impact of
accounting pronouncements and our critical accounting policies, estimates, models and assumptions
on our financial results; our anticipated cash needs and our estimates regarding our capital
requirements and our needs for additional financing; and anticipated trends and challenges in our
business and the markets in which we operate.
Forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expected. These risks and uncertainties include, but are
not limited to, those risks discussed in Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays in research and development
efforts; the risk that we may not obtain reimbursement for our existing test and any future tests
we may develop; the risks and uncertainties associated with the regulation of our test by FDA; our
ability to compete against third parties; our ability to obtain capital when needed; and our
history of operating losses. These forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation or undertaking to update any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
In the section of this report entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations, all references to Genomic Health, we, us, or our mean
Genomic Health, Inc.
Genomic Health, the Genomic Health logo, Oncotype, Oncotype DX and Recurrence Score are
trademarks or registered trademarks of Genomic Health, Inc. We also refer to trademarks of other
corporations and organizations in this Report.
Business Overview
We are a life science company focused on the development and commercialization of
genomic-based clinical diagnostic tests for cancer that allow physicians and patients to make
individualized treatment decisions.
Our diagnostic test, Oncotype DX, is used for early-stage breast cancer patients to predict
the likelihood of breast cancer recurrence and the likelihood of chemotherapy benefit. All tumor
samples are sent to our laboratory in Redwood City, California for analysis. Upon generation and
delivery of a Recurrence Score report to the physician, we generally bill third-party payors for
Oncotype DX. Effective June 1, 2007, we increased the list price of our test from $3,460 to $3,650.
We have experienced a significant increase in demand for Oncotype DX since the test was
launched in January 2004. For the three months ended September 30, 2007, more than 5,950 test
reports were delivered for use in treatment planning, compared to
approximately 3,800 for the three
months ended September 30, 2006. As of September 30, 2007, more than 39,000 test reports had been
delivered for use in treatment planning by more than 6,600 physicians. We believe this increased
demand resulted from the continued publication of
11
peer-reviewed articles on studies we sponsored, conducted or collaborated on that support the
use and reimbursement of Oncotype DX, clinical presentations at major symposia, and the continued
expansion of our domestic field sales organization. However, this increased demand is not
necessarily indicative of future growth rates, and we cannot assure you that this level of
increased demand can be sustained or that future appearances or presentations at medical
conferences, publication of articles or increases in sales personnel will have a similar impact on
demand for Oncotype DX. Moreover, we believe that each year we may experience softer demand for our
test in the second and third calendar quarters, which may be attributed to physicians and patients
scheduling vacations during this time. As of September 30, 2007, our laboratory had the capacity to
process up to 9,000 tests per quarter. We believe that with additional equipment and personnel, the
capacity of our existing facility can be significantly increased in the future.
In
October 2007, the American Society of Clinical Oncology, or ASCO, issued updated clinical practice
guidelines that include the use of Oncotype DX to predict the likelihood of disease recurrence and
the likelihood of chemotherapy benefit for a large portion of early-stage breast cancer patients.
In addition to the inclusion of Oncotype DX in clinical treatment guidelines, we believe the key
factors that will drive broader adoption of Oncotype DX will be acceptance by healthcare providers
of its clinical benefits, demonstration of the cost-effectiveness of using our test, expanded
reimbursement by third-party payors, and increased marketing and sales efforts.
Reimbursement of Oncotype DX by third-party payors is essential to our commercial success. As
a relatively new test, Oncotype DX may be considered investigational by payors and not covered
under their reimbursement policies. Consequently, we have pursued case-by-case reimbursement and
expect the test will continue to be reviewed on this basis until policy decisions have been made by
individual payors. We are also working with public and private payors and health plans to secure
coverage for Oncotype DX based upon clinical evidence showing the utility of the test.
Cigna HealthCare, Humana, Inc., Health Net, Inc., United HealthCare Insurance Company, Aetna,
Inc., Kaiser Foundation Health Plan, Inc. and National Heritage Insurance Company, or NHIC, the
current local Medicare carrier for California with jurisdiction for claims submitted by us for
Medicare patients, have issued positive coverage determinations for Oncotype DX. In October 2007,
WellPoint, Inc., a leading health benefits provider, adopted a policy covering Oncotype DX with
certain restrictions. In addition, a number of regional payors have issued policies supporting
reimbursement for our test. In July 2007, the Blue Cross and Blue Shield Association Technology
Evaluation Center, or BCBSA TEC, concluded that the use of Oncotype DX to inform decision making about
adjuvant chemotherapy meets the BCBSA TEC criteria for women with
estrogen receptor positive, or ER+, node negative, or N-, tumors who have been
treated with tamoxifen. More than half of all U.S. insured lives are now covered by health plans
that provide reimbursement for Oncotype DX through contracts, agreements and policy decisions.
Until we reach agreement with a payor on contract terms or a payor establishes a policy for
payment of Oncotype DX and collectibility from that payor is reasonably assured based upon
collection experience, we recognize revenue on a cash basis. Where contracts or policies are not in
place, we pursue case-by-case reimbursement. We are working with many payors to establish
policy-level reimbursement which, if in place, should allow us to recognize revenues upon
completing our test, generating and delivering a Recurrence Score report to the physician and
submitting an invoice to the payor when we have established enough history with each payor to
reliably estimate their individual payment patterns. We do not expect to recognize the majority of
revenues in this manner until 2008 or later.
We are conducting studies with the goal of expanding the clinical utility of Oncotype DX in
breast cancer. Our test is currently used for breast cancer patients with tumors that are ER+ and N-. In early 2008, we plan to introduce single gene
reporting for estrogen receptor, or ER, and progesterone receptor, or PR, genes with the Oncotype DX
Recurrence Score report to provide better information for improved treatment decision-making. We
are also conducting studies using Oncotype DX in ER+, N- patients who were treated with an
aromatase inhibitor. We are continuing to work on extending Oncotype DX for breast cancer into
estrogen receptor negative, or ER-, and node positive, or N+, populations. At the June 2007 ASCO
meeting, we presented a study suggesting that Oncotype DX Recurrence Score results provide accurate
recurrence risk information for patients with ER+ breast cancer, regardless of whether they were N-
or N+. In October 2007, we announced preliminary results from a second study suggesting that
Oncotype DX may be useful in predicting survival without disease recurrence and the benefit of
chemotherapy for N+ patients, in addition to those with ER+, N- breast cancer. Based upon the final
results from these studies, we may offer Oncotype DX for N+ patients in 2008.
We continue to conduct research and early development studies in a variety of cancers other
than breast cancer. In January 2007 we announced that we had moved our program for early-stage
colon cancer patients into full-scale development. We expect our colon cancer program will follow a
clinical development process similar to that of our Oncotype DX breast cancer test. We have
established a collaborative agreement with the National Surgical Adjuvant Breast and Bowel Project,
or NSABP, as well as other academic groups to access colon cancer tissue samples that have
associated clinical outcome data. At the June 2007 ASCO meeting, we
12
presented data from two colon cancer gene identification studies. Further, we developed an
investigational gene panel for colon cancer and completed two additional studies to enable the
refinement of a final gene set and algorithm. We expect to complete analytical validation work with
the final gene set and algorithm and a clinical validation study in 2008.
The FDA has issued draft guidance on a new class of tests called In Vitro Diagnostic
Multivariate Index Assays. Under this draft guidance, Oncotype DX could be classified as either a
Class II or a Class III medical device, which may require varying levels of FDA pre-market review
depending upon intended use and on the level of control necessary to assure the safety and
effectiveness of the test. We are continuing our ongoing dialogue with FDA and the Department of
Health and Human Services regarding the Oncotype DX breast cancer assay. If the draft guidance is
finalized and pre-market review is required, our business could be negatively impacted until such
review is completed and approval or clearance to market is obtained, and FDA could require that we
stop selling our test pending pre-market approval or clearance. We may
also decide voluntarily to pursue FDA pre-market review of Oncotype DX if we determine that doing so
would be appropriate.
Since our inception, we have generated significant net losses. We incurred a net loss of $21.3
million for the nine months ended September 30, 2007. Our accumulated deficit was $146.4 million at
September 30, 2007. We expect our net losses to continue for at least the next year. We anticipate
that a substantial portion of our capital resources and efforts over the next several years will be
focused on research and development, both to develop additional tests for breast cancer and to
develop tests for colon and other cancers, to scale up our commercial organization, and for other
general corporate purposes. Our financial results will be limited by a number of factors, including
establishment of coverage policies by third-party insurers and government payors, our ability in
the short term to collect from payors, which often requires that we pursue a case-by-case manual
appeals process, and our ability to recognize revenues on an accrual basis. Until we have
established consistent payment patterns with most of our contracted payors, we will be unable to
record the majority of our revenues as tests are performed and reports delivered.
13
Financial Operations Overview
Revenues
We derive our revenues from product sales and contract research arrangements. We operate in
one industry segment. Our product revenues are derived solely from the sale of our Oncotype DX
test. Payors are billed upon generation and delivery of a Recurrence Score report to the physician.
Product revenues are recorded on a cash basis unless a contract or agreement is in place with the
payor at the time of billing and collectibility is reasonably assured based upon collection
experience. Contract revenues are derived from studies conducted with biopharmaceutical and
pharmaceutical companies and are recognized as costs are incurred, assays are processed or
milestones are completed.
Cost of Product Revenues
Cost of product revenues represents the direct material costs, direct labor costs, equipment
costs and other infrastructure costs associated with processing tissue samples (including
histopathology, anatomical pathology, paraffin extraction, reverse transcription polymerase chain
reaction, or RT-PCR, and quality control analyses), license fees and shipping charges necessary to
provide an individualized test result. Costs associated with performing our test are recorded as
tests are processed. License fees are recorded at the time product revenues are recognized or in
accordance with other contractual obligations. License fees represent a significant component of
our cost of product revenues and are expected to remain so for the foreseeable future.
Research and Development Expenses
Research and development expenses represent costs incurred to develop our technology and carry
out our clinical studies to validate our multi-gene tests and include salaries and benefits,
allocated overhead and facility occupancy costs, contract services and other outside costs, and
costs to acquire in-process research and development projects and technologies that have no
alternative future use. Research and development expenses also include costs related to activities
performed under contracts with biopharmaceutical and pharmaceutical companies.
We charge all research and development expenses to operations as they are incurred. All
potential future product programs outside of breast and colon cancer are in the early development
phase. The expected time frame in which a test for one of these other cancers can be brought to
market is uncertain given the technical challenges and clinical variables that exist between
different types of cancers.
We do not record or maintain information regarding costs incurred in research and development
on a product-program specific basis. Our research and development staff and associated
infrastructure resources are deployed across several product programs. Many of our costs are
therefore not attributable to individual product programs. We believe that allocating costs on the
basis of time incurred by our employees does not accurately reflect the actual costs of individual
product programs.
As a result of the uncertainties discussed above, we are unable to determine the duration and
completion costs of our research and development programs or when, if ever, and to what extent we
will receive cash inflows from the commercialization and sale of a product.
Selling and Marketing Expenses
Our selling and marketing expenses consist primarily of personnel costs and education and
promotional expenses associated with Oncotype DX. These expenses include the costs of educating
physicians, laboratory personnel and other healthcare professionals regarding our genomic
technologies, how our Oncotype DX test was developed and validated and the value of the
quantitative information that Oncotype DX provides. Selling and marketing expenses also include the
costs of sponsoring continuing medical education, medical meeting participation and dissemination
of our scientific and economic publications related to Oncotype DX.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel-related costs, legal
costs, including intellectual property, accounting costs, billing and collections costs, bad debt
expense and other professional and administrative costs.
14
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of operations is based on
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as revenues and expenses during the reporting periods. We evaluate
our estimates and judgments on an ongoing basis. We base our estimates on historical experience and
on various other factors we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could therefore differ materially from those
estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our financial statements.
Revenue Recognition
Product revenues for Oncotype DX, from its commercial launch in January 2004 through September
30, 2007, have largely been recognized on a cash basis because we have limited collection
experience and a limited number of contracts or agreements with payors. We recognize a portion of
product revenue from third-party payors, including some private payors and Medicare, on an accrual
basis.
Our product revenues for tests performed are recognized when the following revenue recognition
criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured. Criterion (2) is satisfied when we perform the test and generate and deliver a report to
the physician. Determination of criteria (3) and (4) is based on managements judgments regarding
the nature of the fee charged for products or services delivered, contractual agreements entered
into, and the collectibility of those fees under any contract or agreement. Product revenues where
all the criteria set forth above are not met are recognized when cash is received.
We generally bill third-party payors for Oncotype DX upon generation and delivery of a
Recurrence Score report to the physician. As such, we take assignment of benefits and the risk of
collection with the third-party payor. We usually bill the patient directly for amounts owed after
multiple requests for payment have been denied or only partially paid by the insurance carrier. As
a relatively new test, Oncotype DX may be considered investigational by payors and therefore not
covered under their reimbursement policies. Consequently, we pursue case-by-case reimbursement
where policies are not in place or payment history has not been established.
In late 2006 we began accruing an allowance for doubtful accounts against our accounts
receivable consistent with historical payment experience. Bad debt expense is included in general
and administrative expense in our condensed consolidated statements of operations. Accounts
receivable are written off against the allowance when the appeals process is exhausted, when an
unfavorable coverage decision is received, or when there is other substantive evidence that the
account will not be paid. As of September 30, 2007, our allowance for doubtful accounts was
$147,000 compared to $510,000 at December 31, 2006. Changes in our estimate of allowance for
doubtful accounts resulted in a $101,000 reduction of bad debt expense for the first nine months of
2007. Write-offs for doubtful accounts of $261,000 were recorded against the allowance during the
nine months ended September 30, 2007; no write-offs were recorded during the year ended December
31, 2006.
Contract revenues are generally derived from studies conducted with biopharmaceutical and
pharmaceutical companies and are recognized on a contract-specific basis. Under certain contracts,
our input, measured in terms of full-time equivalent level of effort or running a set of assays
through our laboratory under a contractual protocol, triggers payment obligations and revenues are
recognized as costs are incurred or assays are processed. Certain contracts have payment
obligations that are triggered as milestones are completed, such as completion of a successful set
of experiments. In these cases, revenues are recognized when the milestones are achieved.
Stock-based Compensation Expense
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised
2004), Share-Based Payment, or SFAS 123R. SFAS 123R addresses the accounting for stock-based
payment transactions whereby an entity receives employee services in exchange for equity
instruments, including stock options. SFAS 123R requires that such transactions be accounted for
using a fair-value based method. The application of SFAS 123R requires significant judgment and the
use of estimates, particularly surrounding assumptions used in determining fair value. We use the
Black-Scholes valuation method, which requires the use of estimates such as
15
stock price volatility and expected option lives, as well as expected option forfeiture rates,
to value stock-based compensation. We have limited historical evidence with respect to developing
these assumptions. Our common stock has been publicly traded for less than three years, so expected
volatility is based primarily on comparable peer data. The expected life of options granted is
estimated based on historical option exercise data and assumptions related to unsettled options.
We elected the modified prospective transition method, which requires that stock-based
compensation expense be recorded for all new and unvested stock options that are ultimately
expected to vest as the requisite service is rendered beginning on January 1, 2006. Stock-based
compensation expense resulting from the adoption of SFAS 123R represents expense related to stock
options granted since January 1, 2006, as well as stock options granted prior to, but not yet
vested as of, January 1, 2006. As of September 30, 2007, total unrecognized compensation expense
related to unvested stock options, net of estimated forfeitures, was $14.2 million. We expect to
recognize this expense over a weighted-average period of 41 months.
Equity instruments granted to non-employees are valued using the Black-Scholes method and
accounted for as prescribed by SFAS 123R and Emerging Issues Task Force Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services, and will be subject to periodic revaluation over their vesting
terms.
Clinical Collaborator Costs
We enter into collaboration and clinical trial agreements with clinical collaborators and
record these costs as research and development expenses. We record accruals for estimated study
costs upon completion of work performed by our collaborators under contract terms.
In addition to costs for research and development, we make annual payments resulting from the
commercial launch of Oncotype DX under one of our collaboration agreements. These payments are
recorded in cost of product revenues as a license payment. Expense is recorded ratably over the
year before the relevant payment is made. If at any time we discontinue the sale of commercial
products or services resulting from the collaboration, including Oncotype DX, no future milestone
payments will be payable and we will have no further obligation under the agreement.
Results of Operations
Three Months Ended September 30, 2007 and 2006
Revenues. Total revenues were $15.9 million for the three months ended September 30, 2007
compared to $7.1 million for the comparable period in 2006. Product revenues from Oncotype DX were
$15.8 million for the three months ended September 30, 2007 compared to $6.9 million for the
comparable period in 2006. This increase resulted from increased adoption and expanded
reimbursement coverage for our test. As in prior periods, the majority of product revenues were
recognized upon cash collection as payments were received. Approximately $4.8 million, or 31%, of
product revenue for the three months ended September 30, 2007 was recorded on an accrual basis,
reflecting established payment patterns from payors with coverage policies in place, compared to
$3.2 million, or 47%, of product revenue for the three months ended September 30, 2006. Product
revenue from Medicare, which was recorded on an accrual basis, was $3.3 million, representing 21%
of product revenue for the three months ended September 30,
2007, compared to $2.8 million, or 41%,
of product revenue for the three months ended September 30, 2006. Medicare revenue for the nine
months ended September 30, 2006 included the receipt of $264,000 in payments for services provided
to Medicare patients prior to Medicares February 27, 2006 effective coverage date for Oncotype DX.
Contract revenues were $120,000 for the three months ended September 30, 2007, compared to
$191,000 for the comparable period in 2006. Contract revenues are from studies assessing our gene
expression technology or collaborative work in gene selection and protocol design with our
pharmaceutical partners and include ongoing collaboration work with Bristol-Meyers Squibb and
Imclone Systems as well as Aventis, Inc., a member of the sanofi-aventis group, and the Eastern
Cooperative Oncology Group, or ECOG. The decrease in contract revenues for the three months ended
September 30, 2007, as compared with the three months ended September 30, 2006, was due to the
timing of milestones related to our collaboration work with Aventis and ECOG.
Cost of Product Revenues. For the three months ended September 30, 2007, cost of product
revenues was $4.4 million for Oncotype DX, consisting of tissue sample processing costs of $3.2
million and license fees of $1.2 million. For the three months ended September 30, 2006, cost of
product revenues was $2.7 million, consisting of tissue sample processing costs of $2.1 million and
license fees of $541,000. Test volume for the three months ended September 30, 2007 increased 57%
from the comparable period in
16
2006, resulting in a decrease in the cost per test delivered. During the three months ended
September 30, 2007 and 2006, we recorded tissue sample processing costs for Oncotype DX that
included direct material costs, direct labor costs, equipment costs, shipping costs and other
infrastructure costs. All costs recorded for tissue sample processing in those periods represent
the cost of all tests processed regardless of whether revenue was recognized with respect to a
specific test. License fees were recorded in cost of product revenues for contractual obligations
and royalties due on product revenues recognized.
Research and Development Expenses. Research and development expenses increased to $5.6 million
for the three months ended September 30, 2007 from $3.2 million for the comparable period in 2006.
The increase in research and development expenses was primarily due to a $1.6 million increase in
personnel-related costs, a $312,000 increase in infrastructure-related expenses and a $354,000
increase in reagents and lab supplies. We expect that our research and development expenses will
increase as we increase investment in our product pipeline for a variety of cancers, including
cancers other than breast and colon.
Selling and Marketing Expenses. Selling and marketing expenses increased to $9.5 million for
the three months ended September 30, 2007 from $6.4 million for the comparable period in 2006. The
$3.1 million increase in selling and marketing expenses was primarily due to a $1.6 million
increase in personnel-related costs, mostly to expand our domestic field sales organization,
$603,000 in higher travel-related expenses associated with field sales personnel, $604,000 in
higher promotional field and marketing expenses and $232,000 in higher infrastructure-related
expenses. We expanded our field sales team to 60 representatives during the first half of 2007, up
from 40 representatives at September 30, 2006. We expect that selling and marketing expenses will
continue to increase in future periods as we expand our marketing and sales programs, including
ongoing physician and patient education programs.
General and Administrative Expenses. General and administrative expenses increased to $4.5
million for the three months ended September 30, 2007 from $3.5 million for the comparable period
in 2006. The $1.0 million increase in general and administrative expenses was primarily due to a
$1.0 million increase in personnel-related costs and $333,000 in higher billing and collection fees
paid to third-party billing and collection vendors, partially offset by a $344,000 decrease in
infrastructure-related expenses. We expect general and administrative expenses to continue to
increase as we spend more on fees for billing and collections due to revenue growth and continue to
incur costs associated with being a public company and other expenses related to the growth of our
business.
Interest and Other Income. Interest and other income was $1.0 million for the three months
ended September 30, 2007 compared to $602,000 for the comparable period in 2006. The increase was
due to increased interest income from higher average short-term investment balances resulting from
our investment of a large portion of the cash proceeds from our May 2007 public offering of common
stock.
Interest Expense. Interest expense was $162,000 for the three months ended September 30, 2007
compared to $105,000 for the comparable period in 2006. This increase was related to higher
borrowings on our equipment financing line under which draws have been made and interest expense
has been incurred.
Nine Months Ended September 30, 2007 and 2006
Revenues. Total revenues were $44.7 million for the nine months ended September 30, 2007
compared to $20.6 million for the nine months ended September 30, 2006. Product revenues from
Oncotype DX were $43.5 million for the nine months ended September 30, 2007 compared to $18.9
million for the comparable period in 2006. This increase resulted from increased adoption and
expanded reimbursement coverage for our test. Approximately $14.4 million, or 33%, of product
revenue for the nine months ended September 30, 2007 was recorded on an accrual basis compared to
$6.6 million, or 35%, for the nine months ended September 30, 2006. The majority of product revenue
was recognized upon cash collection as payments were received. Product revenue from Medicare, which
was recorded on an accrual basis, was $9.9 million, representing 23% of total product revenue for
the nine months ended September 30, 2007, compared to
$9.6 million, or 51%, of total product revenue
for the nine months ended September 30, 2006. Medicare revenue for the nine months ended September
30, 2006 included the receipt of $4.6 million in payments for services provided to Medicare
patients prior to Medicares February 27, 2006 effective coverage date for Oncotype DX. Contract
revenues were $1.2 million for the nine months ended September 30, 2007, compared to $1.6 million
for the nine months ended September 30, 2006.
Cost of Product Revenues. For the nine months ended September 30, 2007, cost of product
revenues was $12.4 million for Oncotype DX, consisting of tissue sample processing costs of $9.0
million and license fees of $3.4 million. For the nine months ended September 30, 2006, cost of
product revenues was $7.2 million, consisting of tissue sample processing costs of $5.7 million and
license fees of $1.5 million. During the nine months ended September 30, 2007 and 2006, we recorded
tissue sample processing costs for Oncotype DX that included direct material costs, direct labor
costs, equipment costs, shipping costs and other infrastructure costs.
17
Research and Development Expenses. Research and development expenses increased to $16.0
million for the nine months ended September 30, 2007 from $8.7 million for the comparable period
in 2006. The $7.3 million increase was primarily due to a $4.4 million increase in
personnel-related costs, a $1.2 million increase in infrastructure-related expenses, a $654,000
increase in clinical collaboration expenses, a $751,000 increase in reagents and lab supplies and
$214,000 in higher travel and meeting expenses.
Selling and Marketing Expenses. Selling and marketing expenses increased to $26.4 million for
the nine months ended September 30, 2007 from $17.3 million for the comparable period in 2006. The
$9.1 million increase in selling and marketing expenses was primarily due to a $4.7 million
increase in personnel-related costs, $1.8 million in higher promotional field and marketing
expenses, $1.8 million in higher travel-related expenses and $863,000 in higher
infrastructure-related expenses.
General and Administrative Expenses. General and administrative expenses increased to $12.8
million for the nine months ended September 30, 2007 from $8.9 million for the comparable period in
2006. The $3.9 million increase in general and administrative expenses was primarily due to a $3.1
million increase in personnel-related costs and $621,000 in higher billing and collection fees paid
to third-party billing and collection vendors.
Interest and Other Income. Interest and other income was $2.1 million for the nine months
ended September 30, 2007 compared to $1.9 million for the comparable period in 2006. The increase
was due to increased interest income from higher average short-term investment balances.
Interest Expense. Interest expense was $535,000 for the nine months ended September 30, 2007
compared to $312,000 for the comparable period in 2006. This increase was related to higher
borrowings on our equipment financing line under which draws have been made and interest expense
has been incurred.
Liquidity and Capital Resources
Since our inception in August 2000, we have incurred significant losses and, as of September
30, 2007, we had an accumulated deficit of $146.4 million. We have not yet achieved profitability
and anticipate that we will continue to incur net losses for at least the next year. We expect that
our research and development, selling and marketing and general and administrative expenses will
continue to increase and, as a result, we will need to generate significant product revenue to
achieve profitability. We may never achieve profitability.
Sources of Liquidity
At September 30, 2007, cash, cash equivalents and short-term investments and working capital
increased to $73.9 million and $68.9 million, respectively, from $44.2 million and $37.5 million,
respectively, at December 31, 2006. These increases were primarily attributable to net proceeds of
$49.7 million from the public offering of 3,450,000 shares of our common stock in May 2007.
Historically we have financed our operations primarily through sales of our equity securities.
Purchases of equipment and leasehold improvements have been partially financed through loans. Notes
payable under our equipment loan were $5.4 million and $7.3 million at September 30, 2007 and
December 31, 2006, respectively.
Cash Flows
For the nine months ended September 30, 2007, we used $15.4 million of net cash for operating
activities principally as the result of our net loss of $21.3 million and a net increase in
operating assets of $1.4 million, partially offset by non-cash charges for stock-based compensation
of $4.5 million and depreciation and amortization of $2.8 million. For the nine months ended
September 30, 2006, we used $15.0 million of cash for operating activities due primarily to our net
loss for the period of $19.9 million, partially offset by a net increase in operating liabilities
of $1.1 million, non-cash charges for stock-based compensation of $2.0 million and depreciation and
amortization of $1.8 million.
Net cash used by investing activities was $20.8 million for the nine months ended September
30, 2007, compared to $22.6 million of cash provided by investing activities for the nine months
ended September 30, 2006. The increase of $43.4 million of cash used in investing activities was
due primarily to a $46.8 million increase in net purchases of short-term investments as we invested
of a portion of the cash proceeds from our May 2007 public offering of common stock, partially
offset by a $3.4 million decrease in cash used for the acquisition of property and equipment and
for leasehold improvements.
Net cash provided by financing activities was $48.1 million for the nine months ended
September 30, 2007, compared to $128,000 of net cash provided by financing activities for the nine
months ended September 30, 2006, The increase in net cash provided by
18
financing activities was due to $49.7 million in net proceeds from our May 2007 public
offering of common stock and $202,000 in higher net proceeds from the exercise of stock options by
employees and outside consultants, partially offset by $1.9 million in payments on our capital
equipment financing loan.
Contractual Obligations
The following summarizes our significant contractual obligations as of September 30, 2007 and
the effect those obligations are expected to have on our liquidity and cash flows in future
periods:
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Payments Due by Period |
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More |
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Less than |
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than 5 |
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Total |
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1 Year |
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1-3 Years |
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3-5 Years |
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Years |
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(In thousands) |
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Notes payable obligations |
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$ |
6,050 |
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$ |
3,155 |
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|
$ |
2,852 |
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|
$ |
43 |
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|
$ |
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|
Non-cancelable operating lease obligations |
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|
6,811 |
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|
|
1,299 |
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|
|
3,086 |
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|
|
2,426 |
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Total |
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$ |
12,861 |
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$ |
4,454 |
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$ |
5,938 |
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$ |
2,469 |
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$ |
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Our notes payable obligations are for principal and interest payments on capital equipment
financing. In March 2005, we entered into an arrangement to finance the acquisition of laboratory
equipment, computer hardware and software, leasehold improvements and office equipment. In
connection with this arrangement, we granted the lender a security interest in the assets purchased
with these borrowings. We can prepay all, but not part, of the amounts owing under the arrangement
so long as we also pay a 5% premium on the remaining payments. This premium will be reduced to 4%
in 2008. As of September 30, 2007, notes payable under this arrangement totaled $5.4 million at
annual interest rates ranging from 10.23% to 11.30%, depending upon the applicable note.
Our non-cancelable operating lease obligations are for laboratory and office space. In January
2007, we executed an agreement to lease an additional 48,000 square feet of office space. This
space is located near 48,000 square feet of laboratory and office space we occupy under a lease we
entered into in September 2005. Both leases expire in February 2012.
In addition, we are required to make a series of annual payments under one of our
collaboration agreements beginning on the date that we commercially launched Oncotype DX. For a
period of seven years on each anniversary of this first payment, we are required to make additional
payments in increasing amounts. The initial payment of $150,000 was made in January 2004.
Subsequent payments of $150,000, $300,000 and $300,000 were made in January 2005, 2006 and 2007,
respectively. We are required to make additional payments of $475,000 in each of the years 2008
through 2011. However, because either party may terminate the agreement upon thirty days prior
written notice, these payments are not included in the table above.
Off-Balance Sheet Arrangements
As of September 30, 2007, we have no material off-balance sheet arrangements other than the
lease obligations and collaboration payments discussed above.
Operating Capital and Capital Expenditure Requirements
We expect to continue to incur substantial operating losses in the future and to make capital
expenditures to keep pace with the expansion of our research and development programs and to scale
our commercial operations. It may take several years to move any one of a number of product
candidates in research through development and validation to commercialization. We expect that our
cash and cash equivalents will be used to fund working capital and for capital expenditures and
other general corporate purposes, such as licensing technology rights, partnering arrangements for
our tests outside the United States or reduction of debt obligations. We may also use cash to
acquire or invest in complementary businesses, technologies, services or products. We have no
current plans, agreements or commitments with respect to any such acquisition or investment, and we
are not currently engaged in any negotiations with respect to any such transaction.
The amount and timing of actual expenditures may vary significantly depending upon a number of
factors, such as the progress of our product development, regulatory requirements,
commercialization efforts, the amount of cash used by operations and progress in reimbursement. As
reimbursement contracts with third-party payors continue to be put into place, we expect an
increase in the number and level of payments received for Oncotype DX billings.
19
We currently anticipate that our cash, cash equivalents and short-term investments, together
with collections for Oncotype DX and amounts available under our equipment financing facility, will
be sufficient to fund our operations and expansion plans for at least the next twelve months. We
cannot be certain that any of our reimbursement contract programs or development of future products
will be successful or that we will be able to raise sufficient additional funds to see these
programs through to a successful result.
Our future funding requirements will depend on many factors, including the following:
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the rate of progress in establishing reimbursement arrangements with third-party payors; |
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the cost of expanding our commercial and laboratory operations, including our selling and
marketing efforts; |
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the rate of progress and cost of research and development activities associated with
product expansion of Oncotype DX for breast cancer; |
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the rate of progress and cost of research and development activities associated with
products in the early development and development phase focused on cancers other than breast
cancer; |
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the cost of acquiring or achieving access to tissue samples and technologies; |
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the cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; |
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the effect of competing technological and market developments; |
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the cost and delays in product development as a result of any changes in regulatory
oversight applicable to our products or operations; and |
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the economic and other terms and timing of any collaborations, licensing or other
arrangements into which we may enter. |
Until we can generate a sufficient amount of product revenues to finance our cash
requirements, which we may never do, we expect to finance future cash needs primarily through
public or private equity offerings, debt financings, borrowings or strategic collaborations. The
issuance of equity securities may result in dilution to stockholders, or may provide for rights,
preferences or privileges senior to those of our holders of common stock. If we raise funds by
issuing debt securities, these debt securities would have rights, preferences and privileges senior
to those of holders of our common stock. The terms of debt securities or borrowings could impose
significant restrictions on our operations. We do not know whether additional funding will be
available on acceptable terms, or at all. If we are not able to secure additional funding when
needed, we may have to delay, reduce the scope of or eliminate one or more research and development
programs or selling and marketing initiatives. In addition, we may have to work with a partner on
one or more of our product development programs or market development programs, which would lower
the economic value of those programs to our company.
Recent Accounting Pronouncements
In June 2007, FASB ratified the consensus reached by the Emerging Issues Task Force on Issue
No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities, or EITF 07-3. Pursuant to EITF 07-3, nonrefundable
advance payments for goods or services that will be used or rendered for future research and
development activities should be deferred and capitalized. Such amounts should be recognized as an
expense as the related goods are delivered or services are performed, or when the goods or services
are no longer expected to be received. EITF 07-3 is effective for fiscal years beginning after
December 15, 2007, and is to be applied prospectively for contracts entered into on or after the
effective date. We are in the process of determining the impact that EITF 07-3 will have on our
financial condition or results of operations.
In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities, or SFAS 159. SFAS 159, which includes
an amendment to Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, permits entities the option to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We are in the process of determining the impact that SFAS 159 will have on
our financial condition or results of operations.
20
In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements, or SFAS 157.
SFAS 157, which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements, is effective for fiscal years beginning after
November 15, 2007. We are in the process of determining the impact that SFAS 157 will have on our
financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our investment portfolio. Our
marketable securities consist of high-quality debt securities with maturities beyond ninety days at
the date of acquisition, which mature within one year or less. As of September 30, 2007, we had
cash, cash equivalents and short-term investments totaling $73.9 million. Our investment policy
provides for investments in short-term, low risk, investment-grade instruments. Based on our
portfolio content and our ability to hold investments to maturity, we believe that, if market
interest rates were to increase immediately and uniformly by 10% from levels at September 30, 2007,
the decline in fair value would not be material.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,
or Exchange Act, that are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and
procedures are met. Our disclosure controls and procedures have been designed to meet reasonable
assurance standards. Additionally, in designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in internal control over financial reporting. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
occurred during our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS.
RISKS RELATED TO OUR COMPANY
We are an early stage company with a history of losses, and we expect to incur net losses for the
foreseeable future.
We have incurred substantial net losses since our inception. For the nine months ended
September 30, 2007 and the year ended December 31, 2006, we incurred net losses of $21.3 million
and $28.9 million, respectively. From our inception in August 2000 through September 30, 2007, we
had an accumulated deficit of $146.4 million. To date, we have not, and we may never, achieve
revenues sufficient to offset expenses. We expect to devote substantially all of our resources to
continue commercializing and enhancing our existing test, Oncotype DX, and to develop future tests.
We expect to incur additional losses in the future and we may never achieve profitability. We
do not expect our losses to be substantially mitigated by revenues from Oncotype DX or future
products, if any, at least the next year.
21
We expect to continue to incur significant research and development expenses, which may make it
difficult for us to achieve profitability.
In recent years, we have incurred significant costs in connection with the development of
Oncotype DX. Our research and development expenses were $16.0 million for the nine months ended
September 30, 2007 and $12.8 million for the year ended December 31, 2006. We expect our research
and development expense levels to remain high for the foreseeable future as we seek to expand the
clinical utility of our existing test and develop new tests. As a result, we will need to generate
significant revenues in order to achieve profitability. Our failure to achieve profitability in the
future could cause the market price of our common stock to decline.
If third-party payors, including managed care organizations and Medicare, do not provide
reimbursement or rescind their reimbursement policies for Oncotype DX, its commercial success
could be compromised.
Oncotype DX has a current list price of $3,650. Physicians and patients may decide not to
order Oncotype DX unless third-party payors, such as managed care organizations as well as
government payors such as Medicare and Medicaid, pay a substantial portion of the tests price.
There is significant uncertainty concerning third-party reimbursement of any test incorporating new
technology, including Oncotype DX. Reimbursement by a third-party payor may depend on a number of
factors, including a payors determination that tests using our technologies are:
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not experimental or investigational, |
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medically necessary, |
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appropriate for the specific patient, |
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cost-effective, and |
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supported by peer-reviewed publications. |
Since each payor makes its own decision as to whether to establish a policy to reimburse,
seeking these approvals is a time-consuming and costly process. To date, we have secured
policy-level reimbursement approval from a number of third-party payors and have a limited number
of approvals for state Medicaid programs. We cannot be certain that coverage for Oncotype DX will
be provided in the future by additional third-party payors or that reimbursement policies will
remain in place in the future.
Several entities conduct technology assessments of new medical tests and devices and provide
the results of their assessments for informational purposes to other parties. These assessments may
be used by third-party payors and health care providers such as Blue Cross and Blue Shield plans,
which collectively provide healthcare coverage for nearly one-third of all Americans, as grounds to
deny coverage for a test or procedure. Oncotype DX has received negative assessments and may
receive additional negative assessments in the future.
In January 2006, NHIC, the current California Medicare contractor with responsibility for
processing and paying claims submitted by us, released a local coverage determination providing
coverage for Oncotype DX when used in accordance with the terms of the determination. As a result,
we are permitted to submit claims to NHIC for the Oncotype DX tests performed on Medicare
beneficiaries who were hospital inpatients or outpatients at the time the tumor tissue samples were
obtained, but only if the test was ordered at least 14 days following the date of the patients
discharge from the hospital and where other specified conditions are met. The local coverage
determination is effective for Oncotype DX tests provided on or after February 27, 2006. Until
recently, there had been some question as to whether claims for Oncotype DX tests performed on
Medicare beneficiaries who were hospital patients at the time the tumor tissue samples were
obtained may be billed by us to NHIC or must be incorporated in the payment that the hospital
receives for their services related to the patients breast cancer. We have confirmed that the
policy is intended to apply to outpatients as well as inpatients, and we are notifying hospitals
accordingly. We are in the process of making arrangements with hospitals for payment of the test
when performed for the small portion of Medicare beneficiaries, representing approximately 2-3% of
our total testing population, who are hospital inpatients or outpatients at the time specimens are
collected and who do not meet criteria under the final rule for billing by us.
Insurers, including managed care organizations as well as government payors such as Medicare,
have increased their efforts to control the cost, utilization and delivery of health care services.
From time to time, Congress has considered and implemented changes in the Medicare fee schedules in
conjunction with budgetary legislation. Further reductions of reimbursement for Medicare services
may be implemented from time to time. Reductions in the reimbursement rates of other third-party
payors have occurred and may occur in the future. These measures have resulted in reduced prices,
added costs and decreased test utilization for the clinical
laboratory industry.
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The Centers for Medicare and Medicaid Services, or CMS, recently announced that Palmetto
Government Benefits Administrators, or Palmetto, will be replacing NHIC as the Medicare
administrative contractor with jurisdiction over claims submitted by us to Medicare. Medicare
claims processing responsibility will transition from NHIC to Palmetto over the next several months
with Palmetto assuming full responsibility by July 2008. It is possible that Palmetto will adopt
different coverage or payment policies from those of NHIC, and its policies may not include
reimbursement for Oncotype DX or may provide for reimbursement
on different terms than are presently in effect.
If we are unable to obtain reimbursement approval from private payors and Medicare and
Medicaid programs for Oncotype DX, or if the amount reimbursed is inadequate, our ability to
generate revenues from Oncotype DX could be limited. Even if
we are being reimbursed, insurers may withdraw their coverage policies or cancel their contracts with us at any
time or stop paying for our test, which would reduce our revenue.
If the U.S. Food and Drug Administration, or FDA, were to begin regulating our test, we could be
forced to stop sales of Oncotype DX, we could experience significant delays in commercializing any
future products, we could incur substantial costs and time delays associated with meeting
requirements for pre-market clearance or approval or we could experience decreased demand for or
reimbursement of our test.
Clinical laboratory tests like Oncotype DX are regulated under the Clinical Laboratory
Improvement Amendments of 1988, or CLIA, as administered through CMS, as well as by applicable
state laws. Diagnostic kits that are sold and distributed through interstate commerce are regulated
as medical devices by FDA. Clinical laboratory tests that are developed and validated by a
laboratory for its own use are called laboratory developed tests, or LDTs. Most LDTs currently are
not subject to FDA regulation, although reagents or software provided by third parties and used to
perform LDTs may be subject to regulation. We believe that Oncotype DX is not a diagnostic kit and
also believe that it is an LDT. As a result, we believe Oncotype DX should not be subject to
regulation under established FDA policies. The container we provide for collection and transport of
tumor samples from a pathology laboratory to our laboratory is a medical device subject to FDA
regulation but is currently exempt from pre-market review by FDA.
In January 2006, we received a letter from FDA regarding Oncotype DX inviting us to meet with
FDA to discuss the nature and appropriate regulatory status of and the least burdensome ways that
we may fulfill any FDA pre-market review requirements that may apply. In September 2006, FDA issued
draft guidance on a new class of tests called In Vitro Diagnostic Multivariate Index Assays.
Under this draft guidance, Oncotype DX could be classified as either a Class II or a Class III
medical device, which may require varying levels of FDA pre-market review depending upon intended
use and on the level of control necessary to assure the safety and effectiveness of the test. In
July 2007, FDA posted revised draft guidance that addressed some of the comments submitted in
response to the September 2006 draft guidance. The revised draft guidance includes an 18 month
transition period of FDA enforcement discretion following release of final guidance for currently
available tests if the laboratory submits a pre-market review submission within 12 months of the
publication of final guidance. The comment period for this revised guidance expired in October
2007.
In May 2007, FDA issued a guidance document Class II Special Controls Guidance Document: Gene
Expression Profiling Test System for Breast Cancer Prognosis. This guidance document was developed
to support the classification of gene expression profiling test systems for breast cancer prognosis
into Class II. We may submit comments on the guidance to FDA in the future. In addition, in June
2007, FDA issued a guidance document Pharmacogenetic Tests and Genetic Tests for Heritable
Markers which provides recommendations to sponsors and FDA reviewers in preparing and reviewing
pre-market approval applications, or PMA, and pre-market notification, or 510(k), submissions for
pharmacogenetic and other human genetic tests, whether testing is for single markers or for
multiple markers simultaneously (multiplex tests). In addition, the Secretary of the Department of
Health and Human Services, or HHS, has requested that its Advisory Committee on Genetics, Health
and Society make recommendations about the oversight of genetic testing. Draft recommendations were
published in November 2007 and are open for public comment through late December 2007. A final
report is expected in the spring of 2008.
We are continuing our ongoing dialogue with FDA and HHS regarding the Oncotype DX breast
cancer assay. We cannot provide any assurance that FDA regulation, including pre-market review,
will not be required in the future for Oncotype DX, either through new enforcement policies adopted
by FDA or new legislation enacted by Congress. It is possible that legislation will be enacted into
law and may result in increased regulatory burdens for us to continue to offer the Oncotype DX
assay.
If pre-market review is required, our business could be negatively impacted until such review
is completed and clearance to market or approval is obtained, and FDA could require that we stop
selling our test pending pre-market clearance or approval. If our test is allowed to remain on the
market but there is uncertainty about our test or if it is labeled investigational by FDA, orders
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reimbursement may decline. The regulatory approval process may involve, among other things,
successfully completing additional clinical trials and submitting a pre-market clearance notice or
filing a PMA application with FDA. If pre-market review is required by FDA, there can be no
assurance that our test will be cleared or approved on a timely basis, if at all. Ongoing
compliance with FDA regulations would increase the cost of conducting our business, and subject us
to inspection by FDA and to the requirements of FDA and penalties for failure to comply with these
requirements. We may also decide voluntarily to pursue FDA pre-market review
of Oncotype DX if we determine that doing so would be appropriate.
Should any of the reagents obtained by us from vendors and used in conducting our test be
affected by future regulatory actions, our business could be adversely affected by those actions,
including increasing the cost of testing or delaying, limiting or prohibiting the purchase of
reagents necessary to perform testing.
If we were required to conduct additional clinical trials prior to continuing to sell Oncotype DX
or marketing any new test, those trials could lead to delays or failure to obtain necessary
regulatory approvals and harm our ability to become profitable.
If FDA decides to regulate our tests, it may require extensive pre-market clinical testing
prior to submitting a regulatory application for commercial sales. If we are required to conduct
pre-market clinical trials, whether using prospectively acquired samples or archival samples,
delays in the commencement or completion of clinical testing could significantly increase our test
development costs and delay commercialization. Many of the factors that may cause or lead to a
delay in the commencement or completion of clinical trials may also ultimately lead to delay or
denial of regulatory clearance or approval. The commencement of clinical trials may be delayed due
to insufficient patient enrollment, which is a function of many factors, including the size of the
patient population, the nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the clinical trial. We may find it necessary to engage contract research
organizations to perform data collection and analysis and other aspects of our clinical trials,
which might increase the cost and complexity of our trials. We may also depend on clinical
investigators, medical institutions and contract research organizations to perform the trials
properly. If these parties do not successfully carry out their contractual duties or obligations or
meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they
obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons,
our clinical trials may have to be extended, delayed or terminated. Many of these factors would be
beyond our control. We may not be able to enter into replacement arrangements without undue delays
or considerable expenditures. If there are delays in testing or approvals as a result of the
failure to perform by third parties, our research and development costs would increase, and we may
not be able to obtain regulatory clearance or approval for our test. In addition, we may not be
able to establish or maintain relationships with these parties on favorable terms, if at all. Each
of these outcomes would harm our ability to market our test, or to become profitable.
Complying with numerous regulations pertaining to our business is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties.
We are subject to CLIA, a federal law that regulates clinical laboratories that perform
testing on specimens derived from humans for the purpose of providing information for the
diagnosis, prevention or treatment of disease. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the United States by mandating specific standards in the
areas of personnel qualifications, administration, and participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. We have a current
certificate of accreditation under CLIA to perform testing. To renew this certificate, we are
subject to survey and inspection every two years. Moreover, CLIA inspectors may make random
inspections of our laboratory.
We are also required to maintain a license to conduct testing in California. California laws
establish standards for day-to-day operation of our clinical laboratory, including the training and
skills required of personnel and quality control. Moreover, several states require that we hold
licenses to test specimens from patients residing in those states. Other states have similar
requirements or may adopt similar requirements in the future. Finally, we may be subject to
regulation in foreign jurisdictions as we seek to expand international distribution of our test.
If we were to lose our CLIA accreditation or California license, whether as a result of a
revocation, suspension or limitation, we would no longer be able to sell Oncotype DX, which would
limit our revenues and harm our business. If we were to lose our license in other states where we
are required to hold licenses, we would not be able to test specimens from those states.
We are subject to other regulation by both the federal government and the states in which we
conduct our business, including:
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Medicare billing and payment regulations applicable to clinical laboratories; |
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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 federal Health Insurance Portability and Accountability Act of 1996; |
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the Medicare civil money penalty and exclusion requirements; and |
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the federal civil and criminal False Claims Act. |
We have adopted policies and procedures designed to comply with these laws, including policies
and procedures relating to financial arrangements between us and physicians who refer patients to
us. In the ordinary course of our business, we conduct internal reviews of our compliance with
these laws. Our compliance is also subject to governmental review. The growth of our business and
sales organization may increase the potential of violating these laws or our internal policies and
procedures. The risk of our being found in violation of these laws and regulations is further
increased by the fact that many of them have not been fully interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of interpretations. Any
action brought against us for violation of these laws or regulations, even if we successfully
defend against it, could cause us to incur significant legal expenses and divert our managements
attention from the operation of our business. If our operations are found to be in violation of any
of these laws and regulations, we may be subject to any applicable penalty associated with the
violation, including civil and criminal penalties, damages and fines, we could be required to
refund payments received by us, and we could be required to curtail or cease our operations. Any of
the foregoing consequences could seriously harm our business and our financial results.
Our financial results depend on sales of one test, Oncotype DX, and we will need to generate
sufficient revenues from this and other tests to run our business.
For the foreseeable future, we expect to derive substantially all of our revenues from sales
of one test, Oncotype DX. We have been selling this test since January 2004. We are in various
stages of research and development for other tests that we may offer as well as for enhancements to
our existing test. We do not currently expect to commercialize tests for colon cancer until at
least 2009, and we are not currently able to estimate when we may be able to commercialize tests
for other cancers or whether we will be successful in doing so. If we are unable to increase sales
of Oncotype DX or to successfully develop and commercialize other tests or enhancements, our
revenues and our ability to achieve profitability would be impaired, and the market price of our
common stock could decline.
New test development involves a lengthy and complex process, and we may be unable to commercialize
any of the tests we are currently developing.
We have multiple tests in various stages of development and devote considerable resources to
research and development. For example, we are currently in the development stage of the application
of our technology to predict recurrence and the therapeutic benefit of chemotherapy in colon cancer
and N+ breast cancer, and we are conducting early development studies in prostate, renal cell and
lung cancers and melanoma. There can be no assurance that our technologies will be capable of
reliably predicting the recurrence of other types of cancer or other cancers, such as colon, with
the sensitivity and specificity necessary to be clinically and commercially useful for the
treatment of other cancers, or that we can develop those technologies at all. In addition, before
we can develop diagnostic tests for new cancers and commercialize any new products, we will need
to:
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conduct substantial research and development; |
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conduct validation studies; |
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expend significant funds; and |
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develop and scale our laboratory processes to accommodate different tests. |
This process involves a high degree of risk and takes several years. Our product development
efforts may fail for many reasons, including:
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failure of the product at the research or development stage; |
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difficulty in accessing archival tissue samples, especially tissue samples with known
clinical results; or |
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lack of clinical validation data to support the effectiveness of the product. |
Few research and development projects result in commercial products, and success in early
clinical trials often is not replicated in later studies. At any point, we may abandon development
of a product candidate or we may be required to expend considerable
resources repeating clinical trials, which would adversely impact the timing for generating
potential revenues from those product candidates. In addition, as we develop products, we will have
to make significant investments in product development, marketing and selling resources. If a
clinical validation study fails to demonstrate the prospectively defined endpoints of the study, we
would likely abandon the development of the product or product feature that was the subject of the
clinical trial, which could harm our business.
We may experience limits on our revenues if physicians decide not to order our test.
If medical practitioners do not order Oncotype DX or any future tests developed by us, we will
likely not be able to create demand for our products in sufficient volume for us to become
profitable. To generate demand, we will need to continue to make oncologists, surgeons and
pathologists aware of the benefits of Oncotype DX and any products we may develop in the future
through published papers, presentations at scientific conferences and one-on-one education by our
sales force. In addition, we will need to demonstrate our ability to obtain adequate reimbursement
coverage from third-party payors.
Existing guidelines and practices regarding the treatment of breast cancer recommend that
chemotherapy be considered in most cases, including many cases in which our test may indicate that,
based on our clinical trial results, chemotherapy is of little or no benefit. Accordingly,
physicians may be reluctant to order a test that may suggest recommending against chemotherapy in
treating breast cancer where current guidelines recommend consideration of such treatment.
Moreover, our test provides quantitative information not currently provided by pathologists and it
is performed at our facility rather than by the pathologist in a local laboratory, so pathologists
may be reluctant to support our test. These facts may make it difficult for us to convince medical
practitioners to order Oncotype DX for their patients, which could limit our ability to generate
revenues and our ability to achieve profitability.
We may experience limits on our revenues if patients decide not to use our test.
Some patients may decide not to order our test due to its price, part or all of which may be
payable directly by the patient if the applicable payor denies reimbursement in full or in part.
Even if medical practitioners recommend that their patients use our test, patients may still decide
not to use Oncotype DX, either because they do not want to be made aware of the likelihood of
recurrence or they wish to pursue a particular course of therapy regardless of test results. If
only a small portion of the patient population decides to use our test, we will experience limits
on our revenues and our ability to achieve profitability.
If we are unable to develop products to keep pace with rapid technological, medical and scientific
change, our operating results and competitive position would be harmed.
In recent years, there have been numerous advances in technologies relating to the diagnosis
and treatment of cancer. For example, technologies in addition to ours now reportedly permit
measurement of gene expression in fixed, paraffin embedded tissue specimens. Also, new hormonal
therapies such as aromatase inhibitors are viewed by physicians as promising therapies for breast
cancer with more tolerable side effects than those associated with tamoxifen, the hormonal therapy
commonly used today in treatment. For advanced cancer, new chemotherapeutic strategies are being
developed that may increase survival time and reduce toxic side effects. These advances require us
to continuously develop new products and enhance existing products to keep pace with evolving
standards of care. Our test could become obsolete unless we continually innovate and expand our
product to demonstrate recurrence and treatment benefit in patients treated with new therapies. New
treatment therapies typically have only a few years of clinical data associated with them, which
limits our ability to perform clinical studies and correlate sets of genes to a new treatments
effectiveness. If we are unable to demonstrate the applicability of our test to new treatments,
then sales of our test could decline, which would harm our revenues.
Our rights to use technologies licensed from third parties are not within our control, and we may
not be able to sell our products if we lose our existing rights or cannot obtain new rights on
reasonable terms.
We license from third parties technology necessary to develop our products. For example, we
license technology from Roche Molecular Systems, Inc. that we use to analyze genes for possible
inclusion in our tests and that we use in our laboratory to conduct
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our test. In return for the use of a third partys technology, we may agree to pay the
licensor royalties based on sales of our products. Royalties are a component of cost of product
revenues and impact the margin on our test. We may need to license other technology to
commercialize future products. Our business may suffer if these 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.
Our competitive position depends on maintaining intellectual property protection.
Our ability to compete and to achieve and maintain profitability depends on our ability to
protect our proprietary discoveries and technologies. We currently rely on a combination of patent
applications, copyrights, trademarks, trade secret laws and confidentiality agreements, material
data transfer agreements, license agreements and invention assignment agreements to protect our
intellectual property rights. We also rely upon unpatented know-how and continuing technological
innovation to develop and maintain our competitive position. Patents may be granted to us jointly
with other organizations, and while we may have a right of first refusal, we cannot guarantee that
a joint owner will not license rights to another party, and cannot guarantee that a joint owner
will cooperate with us in the enforcement of patent rights.
As of September 30, 2007, we had two issued patents, one of which was issued jointly to us and
to NSABP. Our pending patent applications may not result in issued patents, and we cannot assure
you that our issued patent or any patents that might ultimately be issued by the U.S. Patent and
Trademark Office will protect our technology. Any patents that may be issued to us might be
challenged by third parties as being invalid or unenforceable, or third parties may independently
develop similar or competing technology that avoids our patents. We cannot be certain that the
steps we have taken will prevent the misappropriation and use of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary rights as fully as
in the United States.
From time to time, the United States Supreme Court, other federal courts, the U.S. Congress or
the U.S. Patent and Trademark Office may change the standards of patentability and any such changes
could have a negative impact on our business.
We may face intellectual property infringement claims that could be time-consuming and costly to
defend and could result in our loss of significant rights and the assessment of treble damages.
We have received notices of claims of infringement, misappropriation or misuse of other
parties proprietary rights and may from time to time receive additional notices. Some of these
claims may lead to litigation. We cannot assure you that we will prevail in such actions, or that
other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement
by us of third-party patents and trademarks or the validity of our patents, will not be asserted or
prosecuted against us. We may also initiate claims to defend our intellectual property.
Intellectual property litigation, regardless of outcome, is expensive and time-consuming, could
divert managements attention from our business and have a material negative effect on our
business, operating results or financial condition. If there is a successful claim of infringement
against us, we may be required to pay substantial damages (including treble damages if we were to
be found to have willfully infringed a third partys patent) to the party claiming infringement,
develop non-infringing technology, stop selling our test or using technology that contains the
allegedly infringing intellectual property or enter into royalty or license agreements that may not
be available on acceptable or commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on a timely basis could harm our
business. In addition, revising our test to include the non-infringing technologies would require
us to re-validate our test, which would be costly and time-consuming. Also, we may be unaware of
pending patent applications that relate to our test. Parties making infringement claims on future
issued patents may be able to obtain an injunction that would prevent us from selling our test or
using technology that contains the allegedly infringing intellectual property, which could harm our
business.
There are a number of patents and patent applications that may constitute prior art in the
field of genomic-based diagnostics. We may be required to pay royalties, damages and costs to firms
who own the rights to these patents, or we might be restricted from using any of the inventions
claimed in those patents.
If we are unable to compete successfully, we may be unable to increase or sustain our revenues or
achieve profitability.
Our principal competition comes from existing diagnostic methods used by pathologists and
oncologists. These methods have been used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment and kits or reagents to local
pathology laboratories represent another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more readily than tests like Oncotype DX
that are performed outside the pathology laboratory. In addition, few diagnostic methods are as
expensive as Oncotype DX.
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We also face competition from many companies that offer products or have conducted research to
profile genes, gene expression or protein expression in breast cancer, including Agendia B.V.,
Applied Genomics, Inc., AviaraDX, Celera Genomics, a business segment of Applera Corporation, and
Exagen Diagnostics, Inc. Commercial laboratories with strong distribution networks for diagnostic
tests, such as Genzyme Corporation, Laboratory Corporation of America Holdings and Quest
Diagnostics Incorporated, may become competitors. Other potential competitors include companies
that develop diagnostic tests such as Bayer Diagnostics, a division of Siemens AG, Roche
Diagnostics, a division of F. Hoffmann-La Roche Ltd, and Veridex LLC, a Johnson & Johnson company,
as well as other companies and academic and research institutions. Our competitors may invent and
commercialize technology platforms that compete with ours. In addition, in December 2005, the
federal government allocated a significant amount of funding to The Cancer Genome Atlas, a project
aimed at developing a comprehensive catalog of the genetic mutations and other genomic changes that
occur in cancers and maintaining the information in a free public database. As more information
regarding cancer genomics becomes available to the public, we anticipate that more products aimed
at identifying targeted treatment options will be developed and these products may compete with
ours.
Our test is considered relatively expensive for a diagnostic test. We increased the price of
our test from $3,460 to $3,650 effective June 1, 2007, and we may raise prices in the future. This
could impact reimbursement of and demand for Oncotype DX. Many of our present and potential
competitors have widespread brand recognition and substantially greater financial and technical
resources and development, production and marketing capabilities than we do. Others may develop
lower-priced, less complex tests that could be viewed by physicians and payors as functionally
equivalent to our test, which could force us to lower the list price of our test and impact our
operating margins and our ability to achieve profitability. Some competitors have developed tests
cleared for marketing by FDA. There may be a marketing differentiation or perception that an
FDA-cleared test is more desirable than Oncotype DX, and that may discourage adoption and
reimbursement of our test. If we are unable to compete successfully against current or future
competitors, we may be unable to increase market acceptance for and sales of our test, which could
prevent us from increasing or sustaining our revenues or achieving or sustaining profitability and
could cause the market price of our common stock to decline.
Our research and development efforts will be hindered if we are not able to contract with third
parties for access to archival tissue samples.
Under standard clinical practice in the United States, tumor biopsies removed from patients
are chemically preserved and embedded in paraffin wax and stored. Our clinical development relies
on our ability to secure access to these archived tumor biopsy samples, as well as information
pertaining to their associated clinical outcomes. Others have demonstrated their ability to study
archival samples and often compete with us for access. Additionally, the process of negotiating
access to archived samples is lengthy since it typically involves numerous parties and approval
levels to resolve complex issues such as usage rights, institutional review board approval, privacy
rights, publication rights, intellectual property ownership and research parameters. If we are not
able to negotiate access to archival tumor tissue samples with hospitals and collaborators, or if
other laboratories or our competitors secure access to these samples before us, our ability to
research, develop and commercialize future products will be limited or delayed.
If we cannot maintain our current clinical collaborations and enter into new collaborations, our
product development could be delayed.
We rely on and expect to continue to rely on clinical collaborators to perform a substantial
portion of our clinical trial functions. If any of our collaborators were to breach or terminate
its agreement with us or otherwise fail to conduct its collaborative activities successfully and in
a timely manner, the research, development or commercialization of the products contemplated by the
collaboration could be delayed or terminated. If any of our collaboration agreements is terminated,
or if we are unable to renew those collaborations on acceptable terms, we would be required to seek
alternative collaborations. We may not be able to negotiate additional collaborations on acceptable
terms, if at all, and these collaborations may not be successful.
In the past, we have entered into clinical trial collaborations with highly regarded
organizations in the cancer field including, for example, NSABP. Our success in the future depends
in part on our ability to enter into agreements with other leading cancer organizations. This can
be difficult due to internal and external constraints placed on these organizations. Some
organizations may limit the number of collaborations they have with any one company so as to not be
perceived as biased or conflicted. Organizations may also have insufficient administrative and
related infrastructure to enable collaborations with many companies at once, which can extend the
time it takes to develop, negotiate and implement a collaboration. Additionally, organizations
often insist on retaining the rights to publish the clinical data resulting from the collaboration.
The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and
obtaining reimbursement for a test such as ours, and our inability to control when, if ever,
results are published may delay or limit our ability to derive sufficient revenues from any product
that may result from a collaboration.
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From time to time we expect to engage in discussions with potential clinical collaborators
which may or may not lead to collaborations. However, we cannot guarantee that any discussions will
result in clinical collaborations or that any clinical studies which may result will be enrolled or
completed in a reasonable time frame or with successful outcomes. Once news of discussions
regarding possible collaborations are known in the medical community, regardless of whether the
news is accurate, failure to announce a collaborative agreement or the entitys announcement of a
collaboration with an entity other than us may result in adverse speculation about us, our product
or our technology, resulting in harm to our reputation and our business.
The loss of key members of our senior management team or our inability to retain highly skilled
scientists, clinicians and salespeople could adversely affect our business.
Our success depends largely on the skills, experience and performance of key members of our
executive management team and others in key management positions. The efforts of each of these
persons together will be critical to us as we continue to develop our technologies and testing
processes and as we attempt to transition to a company with more than one commercialized product.
If we were to lose one or more of these key employees, we may experience difficulties in competing
effectively, developing our technologies and implementing our business strategies.
Our research and development programs and commercial laboratory operations depend on our
ability to attract and retain highly skilled scientists and technicians, including geneticists,
licensed laboratory technicians, chemists, biostatisticians and engineers. We may not be able to
attract or retain qualified scientists and technicians in the future due to the intense competition
for qualified personnel among life science businesses, particularly in the San Francisco Bay Area.
We also face competition from universities and public and private research institutions in
recruiting and retaining highly qualified scientific personnel. In addition, our success depends on
our ability to attract and retain salespeople with extensive experience in oncology and close
relationships with medical oncologists, surgeons, pathologists and other hospital personnel. We may
have difficulties locating, recruiting or retaining qualified salespeople, which could cause a
delay or decline in the rate of adoption of our products. If we are not able to attract and retain
the necessary personnel to accomplish our business objectives, we may experience constraints that
will adversely affect our ability to support our discovery, development and sales programs. All of
our employees are at-will employees, which means that either we or the employee may terminate their
employment at any time.
If our sole laboratory facility becomes inoperable, we will be unable to perform our test and our
business will be harmed.
We do not have redundant laboratory facilities. We perform all of our diagnostic testing in
our laboratory located in Redwood City, California. Redwood City is situated on or near earthquake
fault lines. Our facility and the equipment we use to perform our tests would be costly to replace
and could require substantial lead time to repair or replace. The facility may be harmed or
rendered inoperable by natural or man-made disasters, including earthquakes, flooding and power
outages, which may render it difficult or impossible for us to perform our tests for some period of
time. The inability to perform our tests may result in the loss of customers or harm our
reputation, and we may be unable to regain those customers in the future. Although we possess
insurance for damage to our property and the disruption of our business, this insurance may not be
sufficient to cover all of our potential losses and may not continue to be available to us on
acceptable terms, or at all.
In order to rely on a third party to perform our tests, we could only use another facility
with established state licensure and CLIA accreditation under the scope of which Oncotype DX could
be performed following validation and other required procedures. We cannot assure you that we would
be able to find another CLIA-certified facility willing to adopt Oncotype DX and comply with the
required procedures, or that this laboratory would be willing to perform the tests for us on
commercially reasonable terms. In order to establish a redundant laboratory facility, we would have
to spend considerable time and money securing adequate space, constructing the facility, recruiting
and training employees, and establishing the additional operational and administrative
infrastructure necessary to support a second facility. Additionally, any new clinical laboratory
facility opened by us would be subject to certification under CLIA and licensed by several states,
including California and New York, which can take a significant amount of time and result in delays
in our ability to begin operations.
Changes in healthcare policy could subject us to additional regulatory requirements that may
interrupt sales of Oncotype DX and increase our costs.
Healthcare policy has been a subject of extensive discussion in the executive and legislative
branches of the federal and many state governments. We developed our commercialization strategy for
Oncotype DX based on existing healthcare policies. Changes in healthcare policy, such as the
creation of broad limits for diagnostic products in general or requirements that Medicare patients
pay for portions of tests or services received, could substantially interrupt the sales of Oncotype
DX, increase costs and divert managements
29
attention. For example, in 1989, the U.S. Congress passed federal self-referral prohibitions
commonly known as the Stark Law, significantly restricting, regulating and changing laboratories
relationships with physicians. We cannot predict what changes, if any, will be proposed or adopted
or the effect that such proposals or adoption may have on our business, financial condition and
results of operations.
We rely on a limited number of suppliers or, in some cases, a sole supplier, for some of our
laboratory instruments and materials and may not be able to find replacements in the event our
suppliers no longer supply that equipment or those materials.
We rely solely on Applied Biosystems, a division of Applera Corporation, to supply some of the
laboratory equipment on which we perform our tests. We periodically forecast our needs for
laboratory equipment and enter into standard purchase orders with Applied Biosystems based on these
forecasts. We believe that there are relatively few equipment manufacturers other than Applied
Biosystems that are currently capable of supplying the equipment necessary for Oncotype DX. Even if
we were to identify other suppliers, there can be no assurance that we will be able to enter into
agreements with such suppliers on a timely basis on acceptable terms, if at all. If we should
encounter delays or difficulties in securing from Applied Biosystems the quality and quantity of
equipment we require for Oncotype DX, we may need to reconfigure our test process, which would
result in delays in commercialization or an interruption in sales. If any of these events occur,
our business and operating results could be harmed. Additionally, if Applied Biosystems deems us to
have become uncreditworthy, it has the right to require alternative payment terms from us,
including payment in advance. We are also required to indemnify Applied Biosystems against any
damages caused by any legal action or proceeding brought by a third party against Applied
Biosystems for damages caused by our failure to obtain required approval with any regulatory
agency.
We also rely on several sole suppliers for certain laboratory materials which we use to
perform our tests. While we have developed alternate sourcing strategies for these materials, we
cannot be certain that these strategies will be effective. If we should encounter delays or
difficulties in securing these laboratory materials, delays in commercialization or an interruption
in sales could occur.
If we are unable to support demand for our test, our business may suffer.
We recently completed the expansion of our clinical laboratory facilities and have ramped up
our testing capacity. We have begun to implement increases in scale and related processing,
customer service, billing and systems process improvements, and to expand our internal quality
assurance program to support testing on a larger scale. We will also need additional certified
laboratory scientists and other scientific and technical personnel to process our tests. We cannot
assure you that any increases in scale, related improvements and quality assurance will be
successfully implemented or that appropriate personnel will be available. Failure to implement
necessary procedures or to hire the necessary personnel could result in higher cost of processing
or an inability to meet market demand. There can be no assurance that we will be able to perform
tests on a timely basis at a level consistent with demand. If we encounter difficulty meeting
market demand for Oncotype DX, our reputation could be harmed and our future prospects and our
business could suffer.
We may be unable to manage our future growth effectively, which would make it difficult to execute
our business strategy.
Future growth will impose significant added responsibilities on management, including the need
to identify, recruit, train and integrate additional employees. In addition, rapid and significant
growth will place strain on our administrative and operational infrastructure, including customer
service and our clinical laboratory. Our ability to manage our operations and growth will require
us to continue to improve our operational, financial and management controls, reporting systems and
procedures. If we are unable to manage our growth effectively, it may be difficult for us to
execute our business strategy.
If we were sued for product liability, we could face substantial liabilities that exceed our
resources.
The marketing, sale and use of our test could lead to the filing of product liability claims
if someone were to allege that our test failed to perform as it was designed. We may also be
subject to liability for errors in the information we provide to customers or for a
misunderstanding of, or inappropriate reliance upon, the information we provide. A product
liability claim could result in substantial damages and be costly and time consuming for us to
defend. Although we believe that our existing product liability insurance is adequate, we cannot
assure you that our insurance would fully protect us from the financial impact of defending against
product liability claims. 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 products, or cause current collaborators to terminate existing agreements and
potential collaborators to seek other partners, any of which could impact our results of
operations.
30
If we use biological and hazardous materials in a manner that causes injury, we could be liable
for damages.
Our activities currently require the controlled use of potentially harmful biological
materials, hazardous materials and chemicals and may in the future require the use of radioactive
compounds. We cannot eliminate the risk of accidental contamination or injury to employees or third
parties from the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for any resulting damages, and any liability could
exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject
on an ongoing basis to federal, state and local laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste products. The cost of compliance with
these laws and regulations might be significant and could negatively affect our operating results.
Our dependence on distributors for foreign sales of Oncotype DX could limit or prevent us from
selling our test in foreign markets and from realizing long-term international revenue growth.
International sales as a percentage of net revenues are expected to remain minimal in the near
term as we focus our efforts on the sale of Oncotype DX in the United States. We have established
exclusive distribution networks for Oncotype DX in Israel, Japan and the United Kingdom, and may
enter into other similar arrangements in other countries in the future. Over the long term, we
intend to grow our business internationally, and to do so we will need to attract additional
distributors to expand the territories in which we sell Oncotype DX. Distributors may not commit
the necessary resources to market and sell Oncotype DX to the level of our expectations. If current
or future distributors do not perform adequately, or we are unable to locate distributors in
particular geographic areas, we may not realize long-term international revenue growth. Regulatory
requirements in foreign markets may also impact our ability to realize long-term international
revenue growth.
We may acquire other businesses or form joint ventures that could harm our operating results,
dilute our stockholders ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of complementary businesses and
assets, as well as technology licensing arrangements. We also may pursue strategic alliances that
leverage our core technology and industry experience to expand our product offerings or
distribution. We have no experience with respect to acquiring other companies and limited
experience with respect to the formation of collaborations, strategic alliances and joint ventures.
If we make any acquisitions, we may not be able to integrate these acquisitions successfully into
our existing business, and we could assume unknown or contingent liabilities. Any future
acquisitions by us also could result in significant write-offs or the incurrence of debt and
contingent liabilities, any of which could harm our operating results. Integration of an acquired
company also may require management resources that otherwise would be available for ongoing
development of our existing business. We may not identify or complete these transactions in a
timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated
benefits of any acquisition, technology license, strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of our common stock as
consideration, which would dilute the ownership of our stockholders. If the price of our common
stock is low or volatile, we may not be able to acquire other companies for stock. Alternatively,
it may be necessary for us to raise additional funds for acquisitions through public or private
financings. Additional funds may not be available on terms that are favorable to us, or at all.
Our inability to raise additional capital on acceptable terms in the future may limit our ability
to develop and commercialize new tests and technologies.
We expect capital outlays and operating expenditures to increase over the next several years
as we expand our infrastructure, commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other things:
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sustain commercialization of our initial test or enhancements to that test; |
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increase our selling and marketing efforts to drive market adoption and address
competitive developments; |
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further expand our clinical laboratory operations; |
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expand our technologies into other areas of cancer; |
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fund our clinical validation study activities; |
31
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expand our research and development activities; |
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acquire or license technologies; and |
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finance capital expenditures and our general and administrative expenses. |
Our present and future funding requirements will depend on many factors, including:
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the level of research and development investment required to maintain and improve our
technology position; |
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costs of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; |
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our need or decision to acquire or license complementary technologies or acquire
complementary businesses; |
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changes in product development plans needed to address any difficulties in
commercialization; |
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changes in the regulatory environment, including any decision by FDA to regulate our
activities; |
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competing technological and market developments; |
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the rate of progress in establishing reimbursement arrangements with third-party payors;
and |
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changes in regulatory policies or laws that affect our operations. |
If we raise funds by issuing equity securities, dilution to our stockholders could result. Any
equity securities issued also may provide for rights, preferences or privileges senior to those of
holders of our common stock. If we raise funds by issuing debt securities, these debt securities
would have rights, preferences and privileges senior to those of holders of our common stock, and
the terms of the debt securities issued could impose significant restrictions on our operations.
If we raise funds through collaborations and licensing arrangements, we might be required to
relinquish significant rights to our technologies or products, or grant licenses on terms that are
not favorable to us. If adequate funds are not available, we may have to scale back our operations
or limit our research and development activities.
32
We must implement additional and expensive finance and accounting systems, procedures and controls
as we grow our business and organization and to satisfy public company reporting requirements,
which will increase our costs and require additional management resources.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002
and the related rules and regulations of the Securities and Exchange Commission. Compliance with
Section 404 of the Sarbanes-Oxley Act and other requirements has increased our costs and required
additional management resources. We will need to continue to implement additional finance and
accounting systems, procedures and controls as we grow our business and organization and to satisfy
existing reporting requirements. If we fail to maintain or implement adequate controls, if we are
unable to complete the required Section 404 assessment as to the adequacy of our internal control
over financial reporting in future Form 10-K filings, or if our independent registered public
accounting firm is unable to provide us with an unqualified report as to the effectiveness of our
internal control over financial reporting in future Form 10-K filings, our ability to obtain
additional financing could be impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and in the accuracy of our periodic
reports filed under the Exchange Act. A lack of investor confidence in the reliability and accuracy
of our public reporting could cause our stock price to decline.
ITEM 6. EXHIBITS
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Exhibit |
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Number |
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Description |
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31.1
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Rule 13a-14(a) Certification of Chief Executive Officer. |
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31.2
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Rule 13a-14(a) Certification of Chief Financial Officer. |
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32.1#
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Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
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32.2#
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Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
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# |
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In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and
34-47986, Final Rule: Managements Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed
filed for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed
to be incorporated by reference into any filing under the Securities Act or the Exchange Act. |
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GENOMIC HEALTH, INC.
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Date: November 9, 2007 |
By: |
/s/ Randal W. Scott
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Randal W. Scott, Ph.D. |
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Chief Executive Officer and Chairman of the
Board of Directors (Principal Executive Officer) |
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Date: November 9, 2007 |
By: |
/s/ G. Bradley Cole
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G. Bradley Cole |
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Executive Vice President and Chief Financial
Officer (Principal Financial Officer and Principal
Accounting Officer) |
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34
GENOMIC HEALTH, INC.
EXHIBIT INDEX
|
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Exhibit |
|
|
Number |
|
Description |
|
|
|
31.1
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Rule 13a-14(a) Certification of Chief Executive Officer. |
|
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31.2
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|
Rule 13a-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1#
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
32.2#
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|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
# |
|
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and
34-47986, Final Rule: Managements Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed
filed for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed
to be incorporated by reference into any filing under the Securities Act or the Exchange Act. |