UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended:
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number:
000-51541
GENOMIC HEALTH, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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77-0552594
(I.R.S. Employer
Identification Number)
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301 Penobscot Drive
Redwood City, California
(Address of principal
executive
offices)
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94063
(Zip Code)
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(650) 556-9300
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered:
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Common Stock, par value $0.0001 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act and Title of Class:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2009, the aggregate market value of voting
and non-voting common stock held by non-affiliates of the
registrant was approximately $277.8 million, based on the
closing price of the common stock as reported on the NASDAQ
Global Market for that date.
There were 28,730,568 shares of the registrants
Common Stock issued and outstanding on February 26, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial
Ownership Reporting Compliance), 11, 12, 13 and 14 of
Part III incorporate by reference information from the
registrants proxy statement to be filed with the
Securities and Exchange Commission in connection with the
solicitation of proxies for the registrants 2010 Annual
Meeting of Stockholders to be held on June 10, 2010.
PART I
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 for breast cancer; the factors that may
impact our financial results; the extent and duration of our net
losses and our ability to achieve or maintain profitability; our
ability to recognize revenues other than on a cash basis; our
expectations regarding the receipt of certain delayed payments;
our business strategy and our ability to achieve our strategic
goals; our expectations regarding product revenues; the amount
of future revenues that we may derive from Medicare patients or
categories of patients; our plans to pursue reimbursement on a
case-by-case
basis; our ability, and expectations as to the amount of time it
will take, to achieve reimbursement from third-party payors and
government insurance programs for new tests or markets; our
expectations regarding our international expansion and
opportunities, and our expectations regarding revenues from
international sales; our intent to enter into additional foreign
distribution arrangements; the factors we believe to be driving
demand for our tests and our ability to sustain or increase such
demand; our success in increasing patient and physician demand
as a result of our direct sales approach and our sales
forces capacity to sell our tests; the level of investment
in our sales force; plans for, and the timeframe for the
development or commercial launch of, future tests or
enhancements to address different patient populations of breast
or colon cancer or specific cancer treatments; the factors that
we believe will drive the establishment of coverage policies;
the capacity of our clinical reference laboratory to process
tests and our expectations regarding capacity; our dependence on
collaborative relationships and the success of those
relationships; whether any tests will result from our
collaborations; the applicability of clinical results to actual
outcomes; our estimates and assumptions with respect to disease
incidence; the occurrence, timing, outcome or success of
clinical trials or studies; our expectations regarding timing of
publication of research results; the benefits of our technology
platform; the economic benefits of our tests to the healthcare
system; the ability of our tests to impact treatment decisions;
our beliefs regarding our competitive benefits; our expectations
regarding the ability of our technology to continue to increase
throughput; our expectations regarding our future technologies
and their potential benefits; our belief that multi-gene
analysis provides better analytical information; our beliefs
regarding the benefits of genomic analysis in various patient
populations; our expectations regarding clinical development
processes future tests may follow; our beliefs regarding the
benefits of individual gene reporting; our expectation that our
research and development, general and administrative and sales
and marketing expenses will increase and our anticipated uses of
those funds; our expectations regarding capital expenditures;
our ability to comply with the requirements of being a public
company; our ability to attract and retain experienced
personnel; the adequacy of our product liability insurance; how
we intend to spend our existing cash and how long we expect our
existing cash to last; our anticipated cash needs and our
estimates regarding our capital requirements and our needs for
additional financing; our expected future sources of cash; our
belief that we are in material compliance with financial
covenants; our expectations regarding repayment of debt or
incurrence of additional debt; our compliance with federal,
state and foreign regulatory requirements; the potential impact
resulting from the regulation of our tests by the U.S. Food
and Drug Administration, or FDA, and our belief that our tests
are properly regulated under the Clinical Laboratory Improvement
Amendments of 1988, or CLIA; the impact of new or changing
policies, regulation or legislation on our business; our belief
that we have taken reasonable steps to protect our intellectual
property; our strategies regarding filing additional patent
applications to strengthen our intellectual property rights; the
impact of changing interest rates; our beliefs regarding our
unrecognized tax benefits or our valuation allowance; the impact
of accounting pronouncements and our critical accounting
policies, judgments, estimates, models and assumptions on our
financial results; the impact of the economy on our business,
patients and payors; and anticipated trends and challenges in
our business and the markets in which we operate.
Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those expected. These risks and uncertainties
include, but are not limited to, those risks discussed in
Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays
in research and development efforts; the risk that we may not
obtain or maintain reimbursement for our
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existing tests or any future tests we may develop; the risk
that reimbursement pricing may change; the risks and
uncertainties associated with the regulation of our tests by
FDA; the impact of new legislation or regulations on our
business; our ability to compete against third parties; our
ability to obtain capital when needed; the economic environment;
and our history of operating losses. These forward-looking
statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to update any
forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement
is based.
This report contains statistical data attributable to both
the Mattson Jackson Group, Inc.s CancerMpact database and
the Summary of Globocan 2002 Data published by the Journal of
Clinical Oncology in May 2006, or data that we derived from
these sources. These sources generally indicate that they
believe their information is reliable but do not guarantee the
accuracy and completeness of their information. Although we
believe that the sources are reliable, we have not independently
verified their data.
In this report, all references to Genomic Health,
we, us, or our mean Genomic
Health, Inc.
Genomic Health, the Genomic Health logo, Oncotype, Oncotype
DX 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.
Company
Overview
Genomic Health is a life science company focused on the
development and commercialization of genomic-based clinical
diagnostic tests for cancer. Our goal is to improve the quality
of treatment decisions for cancer patients by providing
individualized information to patients and their physicians
through the genomic analysis of tumor biopsies. Our Oncotype
DX platform utilizes quantitative genomic analysis in
standard tumor pathology specimens to provide tumor-specific
information, or the oncotype of a tumor. In January
2004, we launched our first test using our Oncotype DX
platform for early stage breast cancer patients. Our Oncotype
DX breast cancer test has extensive clinical evidence
validating its ability to predict the likelihood of breast
cancer recurrence and the likelihood of chemotherapy benefit. We
offer the Oncotype DX breast cancer test as a clinical
service, where we analyze the expression levels of 21 genes in
tumor tissue samples and provide physicians with a quantitative
gene expression profile expressed as a single quantitative
score, which we call a Recurrence Score. The test also provides
measurements of quantitative gene expression for estrogen
receptor, or ER, progesterone receptor, or PR, and human
epidermal growth factor receptor 2, or HER2, genes, which are
used in the calculation of the Recurrence Score result, in order
to provide additional clinical information.
The Oncotype DX breast cancer test has been extensively
evaluated in thirteen independent studies involving more than
4,000 breast cancer patients, including a large validation study
published in The New England Journal of Medicine in
December 2004 and a chemotherapy benefit study published in the
Journal of Clinical Oncology in May 2006. As of
December 31, 2009, more than 135,000 tests had been
delivered for use in treatment planning. Reimbursement on behalf
of patients covered by Medicare comprised 20%, 22% and 23% of
product revenues for the years ended December 31, 2009,
2008 and 2007, respectively. Reimbursement on behalf of patients
covered by UnitedHealthcare Insurance Company comprised 9%, 9%
and 13% of product revenues for the years ended
December 31, 2009, 2008 and 2007, respectively. The
American Society of Clinical Oncologists, or ASCO, and the
National Comprehensive Cancer Network, or NCCN, clinical
practice guidelines include the use of our Oncotype DX
breast cancer test to predict the likelihood of disease
recurrence and the likelihood of chemotherapy benefit for a
large portion of early stage breast cancer patients.
In January 2010, we launched our second product, the Oncotype
DX colon cancer test, the first multigene expression test
developed to assess the risk of recurrence in patients with
stage II disease. For our Oncotype DX colon cancer
test, we used the same rigorous clinical development strategy
and standardized quantitative technology designed for our
Oncotype DX breast cancer test. We conducted studies of
selected genes from four clinical studies across over
1,800 patient samples in order to identify clinically
useful markers for colon cancer recurrence and response to
chemotherapy. We selected a final set of genes that have been
observed to be statistically significantly correlated to
clinical outcome in stage II colon cancer. We conducted an
independent clinical validation study in stage II colon
cancer for our 12-gene colon cancer test, utilizing more than
1,400 patient
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samples, which demonstrated that the Oncotype DX colon
cancer test can independently predict individual recurrence risk
in stage II colon cancer patients following surgery.
The Oncotype DX breast and colon cancer tests are
commercially available at a list price of $3,975 and $3,200,
respectively, through our clinical reference laboratory located
in Redwood City, California, which is accredited under the
Clinical Laboratory Improvement Amendments of 1988, or CLIA, and
by the College of American Pathologists, or CAP.
Scientific
Background
Limits
of Existing Approaches for Determining Cancer
Treatments
Cancer is a group of complex molecular diseases characterized by
the uncontrolled growth and spread of abnormal cells resulting
from genetic mutations or damage that can severely disrupt
normal body functions. In 2009, approximately 1.6 million
people in the U.S. and 10.9 million people worldwide were
diagnosed with cancer. Common types of cancer include breast,
prostate, lung and colon. Cancers are difficult to treat because
each type responds differently, depending upon the individual
and the type and location of the cancer.
To treat cancer effectively, physicians diagnose and gauge the
stage of a patients disease to determine the best course
of therapy. The most common practice used to diagnose cancer is
through pathologic evaluation of tumors under a microscope. For
solid tumors, tumor tissue is typically removed through surgery
or needle biopsy, fixed in a chemical preservative and embedded
in paraffin wax. A pathologist places thin sections of this
fixed paraffin embedded, or FPE, tissue onto glass slides so it
can be studied under a microscope. In many cases, pathologists
also use molecular staining techniques, including
protein-specific staining, to improve the quality of their
diagnosis. After visually examining the sample, the pathologist
judges whether the biopsy contains normal or cancerous cells.
The pathologist may also grade the tumor based on how aggressive
the cancer cells appear under the microscope.
Once a pathologist diagnoses cancer, the patients
physician determines the stage of the cancer based on further
analysis of the patients condition using a variety of
clinical measures, including the tumor pathology grade, size of
the tumor, how deeply the tumor has invaded tissues at the site
of origin and the extent of any invasion into surrounding
organs, lymph nodes or distant sites. Patient history, physical
signs, symptoms and information obtained from other tests are
also evaluated and considered.
Physicians use tumor pathology grade and stage when predicting
whether a cancer will recur, which is the key determinant in
treatment decisions. Because tumor pathology and staging are
heavily dependent on visual assessment and human interpretation,
physicians and patients often make treatment decisions using
subjective and qualitative information that may not reflect the
molecular nature of the patients cancer. As a result, many
patients are misclassified as high risk when they are low risk
for recurrence or low risk when they are high risk for
recurrence, resulting in over-treatment for some and
under-treatment for others.
For many cancer patients, chemotherapy is commonly used as a
treatment. Chemotherapy involves the use of highly toxic drugs
to kill cancer cells. It is often given after surgery to kill
remaining cancer cells that could not be physically removed in
order to reduce the risk of disease recurrence. Chemotherapy can
take months to complete and can dramatically impact a
patients quality of life. Patients usually experience a
wide range of acute toxicities, including infection, pain in the
mouth and throat, weight loss, fatigue, hair loss, rashes and
injection site reactions. In addition, long-term effects of
chemotherapy can include cognitive impairment, cardiac tissue
damage, infertility, disease of the central nervous system,
chronic fatigue, secondary malignancies and personality changes.
Overall benefits of chemotherapy vary significantly across
cancer populations, and the benefit of treatment may not always
justify the cost of the therapy or the physical and mental
burden patients endure.
Use of
Genomics to Understand Cancer
Genomics is the study of complex sets of genes, their expression
and their function in a particular organism. A gene is a set of
instructions or information that is embedded in the DNA of a
cell. For a gene to be turned on or expressed by a
cell, the cell must first transcribe a copy of its DNA sequence
into messenger RNA, which is then translated by the cell into
protein. Proteins are large molecules that control most
biological processes and make up molecular pathways, which cells
use to carry out their specific functions.
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Genomics can also be used to understand diseases at the
molecular level. Diseases can occur when mutated or defective
genes inappropriately activate or block molecular pathways that
are important for normal biological function. Disease can result
from inheriting mutated genes or from developing mutations in
otherwise normal cells. Such mutations can be the cause of
cancer. The ability to detect a mutation or its functional
results and to understand the process by which the mutation
contributes to disease is crucial to understanding the molecular
mechanisms of a disease.
A common form of genomic analysis is the measurement of gene
expression, or the presence and amount of one or more RNA
sequences in a particular cell or tissue. Mutations may change
the gene expression pattern of a cell as the cell responds to an
altered genetic code. Quantifying the differences in gene
expression has become a common way to study the behavior of an
altered cell. This method allows for the measurement of the
expression of single or multiple genes. These expression levels
can be correlated with disease and clinical outcomes.
Advances in genomic technology have accelerated the rate and
lowered the cost of gene expression analysis, thus providing
unprecedented opportunity for clinical utility. We believe gene
expression technology has the potential to improve the quality
of diagnosis and treatment of disease by arming patients and
physicians with an understanding of disease at a molecular level
that is specific to each patient.
Cancer results from alterations in cells caused by the molecular
changes of mutated genes. The behavior of cancer is dependent on
many different genes and how they interact. Cancer is
complicated and it may not be possible to identify a single gene
that adequately signals a more aggressive or less aggressive
type of cancer. The ability to analyze multiple genes expressed
by the tumor provides more valuable information, which enables
individualized cancer assessment and treatment.
The key to utilizing genomics in cancer is identifying specific
sets of genes and gene interactions that are important for
diagnosing different subsets of cancers. Studies can be
performed which link the likelihood of recurrence or response to
therapy to the pattern of gene expression in tumors. These
results can then be used to develop tests that quantify gene
expression of an individuals tumor, allowing physicians to
better understand what treatments are most likely to work for an
individual patient or how likely a cancer is to recur.
Oncotype
DX Platform
Our Oncotype DX platform uses our quantitative molecular
pathology approach to improve cancer treatment decisions. Our
diagnostic approach correlates gene expression to clinical
outcomes and provides an individualized analysis of each
patients tumor. We have built a diagnostic infrastructure
that allows us to move from research into development through to
processing actual patient samples in our clinical reference
laboratory. We have optimized technology for quantitative gene
expression on FPE tissue by developing methods and processes for
screening hundreds of genes at a time using minimal amounts of
tissue. This technology allows us to analyze archived samples of
tissue, retained by hospitals for most cancer patients, to
correlate gene expression analysis with known clinical outcomes,
such as the likelihood of cancer recurrence or progression or
responsiveness to therapy. Once we have established and
validated a test, we can then analyze a patients tumor and
correlate the result to these clinical outcomes.
We believe that our multi-gene analysis, as opposed to
single-gene analysis, provides a more powerful approach to
distinguish tumors as being more or less likely to recur or
progress. This information ultimately allows the physician and
patient to choose a course of treatment that is individualized
for each patient.
Our service fits within current clinical practice and
therapeutic protocols, facilitating product adoption. We offer
Oncotype DX as a clinical laboratory test, where we
analyze tumor tissue samples in our clinical reference
laboratory in Redwood City, California and provide physicians
with genomic information specific to the patients tumor.
We analyze tissues as they are currently handled, processed and
stored by clinical pathology laboratories. Once a patient is
diagnosed and the treating physician places an order for an
Oncotype DX test, the local pathology laboratory provides
us with the tumor block or thin sections from the biopsy
specimen utilized for the diagnosis. Because the specimens are
chemically preserved and embedded in paraffin wax, they require
no special handling and can be sent by overnight mail to our
clinical reference laboratory. We believe this provides an
advantage over tests using fresh or frozen tissue that generally
require special handling, such as shipping frozen tissue on dry
ice.
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Once we receive the tumor sample, it is logged in and processed
by our pathology department. Anatomic pathologists perform
quality control by reviewing each sample that comes into our
clinical reference laboratory, ensuring that the indicated
cancer is present and that the specimen is suitable for further
processing. Suitable samples then undergo a process by which RNA
is extracted and purified. We then analyze the resulting
material and produce a report that shows a single quantitative
score, which we call a Recurrence Score result, on a continuum
between 0-100. The Recurrence Score report is delivered to the
treating physician within 10 to 14 days of our receipt of
the tissue sample. This is within the crucial decision window
after the tumor has been surgically removed and before the
patient and the treating physician discuss additional treatment
options. The continuous range of scores differentiates
Oncotype DX testd from other tests that predict only high
or low risk by providing an individualized level of risk. The
higher the Recurrence Score, the more aggressive the tumor and
the more likely it is to recur. The lower the Recurrence Score,
the less aggressive the tumor and the less likely it is to
recur. The Recurrence Score, along with other data and tests
that physicians obtain, forms the basis for the treatment
decision.
We believe our service provides information that has the
following benefits:
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Improved Quality of Treatment Decisions. We
believe our approach to genomic-based cancer analysis improves
the quality of cancer treatment decisions by providing an
individualized analysis of each patients tumor that is
correlated to clinical outcome. Our approach represents a
substantial departure from existing approaches to treatment,
which often use subjective, anatomic and qualitative factors to
determine treatments. Oncotype DX has been shown in
clinical studies to classify many patients into recurrence risk
categories different from classifications based primarily on
tumor pathology grade and stage. Thus, our solution enables
patients and physicians to make more informed decisions about
treatment risk-benefit considerations and, consequently, design
an individualized treatment plan.
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Improved Economics of Cancer Care. We believe
that improving the quality of treatment decisions can result in
significant economic benefits. For example, in early stage
breast cancer, our data shows that many patients are
misclassified as high or low risk under existing treatment
guidelines. Many low risk patients misclassified as high risk
receive toxic and expensive chemotherapy treatment regimens.
Chemotherapy and related costs may exceed $20,000, as compared
to the Oncotype DX breast cancer tests list price
of $3,975. On the other hand, some high risk patients
misclassified as low risk are not provided chemotherapy
treatment, possibly necessitating future treatment costing up to
$50,000 or more if the cancer recurs.
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Oncotype
DX Breast Cancer Test
In 2009, approximately 275,000 people in the U.S. and
1.2 million people worldwide were diagnosed with breast
cancer, including ductal carcinoma in situ, or DCIS. Following
diagnosis, a physician determines the stage of the breast cancer
by examining the following:
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the pathology of the tumor,
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the size of the tumor,
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nodal status, referred to as node positive, or N+, where the
tumor has spread to the lymph nodes, and node negative, or N-,
where the tumor has not spread to the lymph nodes, and
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the extent to which the cancer has spread to other parts of the
body.
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Breast cancer tumors are classified as stage
0, I, II, III or IV. Stage 0, which includes
DCIS, generally refers to a pre-invasive tumor with reduced risk
of recurrence. DCIS is typically not treated with chemotherapy
but may be treated with lumpectomy or mastectomy, followed by
radiation therapy and hormonal therapy. Stage I and II are
generally referred to as early stage breast cancer, and
stage III and IV are generally referred to as late
stage breast cancer. Prior to the inclusion of our Oncotype
DX breast cancer test in clinical guidelines, standard
treatment guidelines weighed the stage of the cancer and
additional factors to predict cancer recurrence and determine
treatment protocol such as:
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the presence or absence of estrogen receptors, referred to as
estrogen receptor positive, or ER+, where estrogen receptors are
present, and estrogen receptor negative, or ER-, where estrogen
receptors are not present,
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the abundance of human epidermal growth factor receptor-type 2,
or HER2, genes or protein in the tumor,
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the age of the patient, and
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the histological type and grading of the tumor as reported by
the pathologist.
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Because these diagnostic factors have limited capability to
predict future recurrence and chemotherapy benefit, and some are
subjective, a large percentage of early stage breast cancer
patients were classified as high risk. As a consequence, the use
of chemotherapy became standard practice in stage I and II
patients even though the benefit to this patient group as a
whole is small. Most early stage breast cancer patients have N-,
ER+ tumors. These patients have been demonstrated to respond
well to hormonal therapy, such as tamoxifen. Identifying which
of these patients will further benefit from chemotherapy was a
difficult decision under these guidelines. A National Surgical
Adjuvant Breast and Bowel, or NSABP, study published by The
New England Journal of Medicine in December 2004
demonstrated that the incremental survival benefit of
chemotherapy in N-, ER+ patients also treated with tamoxifen is
only 4%. Our test is designed to help identify those patients
with aggressive tumors who are most likely to benefit from
chemotherapy and to identify those patients with less aggressive
tumors who may receive minimal clinical benefit from
chemotherapy.
In breast cancer, we developed our gene panel by narrowing the
field of approximately 25,000 human genes down to 250
cancer-related genes through review of existing research
literature and computer analysis of genomic databases. We
evaluated the 250 genes in three independent clinical studies to
identify a 21-gene panel whose composite gene expression profile
can be represented by a breast cancer Recurrence Score. Our
clinical validation study with the NSABP Study B-14 population,
published by The New England Journal of Medicine in
December 2004, demonstrated that the breast cancer Recurrence
Score correlated with an individuals likelihood of distant
recurrence within 10 years of diagnosis. Moreover, our
study with the NSABP B-20 population, published in the
Journal of Oncology in May 2006, demonstrated that the
breast cancer Recurrence Score also correlates with the
likelihood of chemotherapy benefit.
Clinical
Utility and Health Economic Benefit
Node
Negative, Estrogen Receptor Positive (N-, ER+)
In December 2007, eight studies were presented at the
San Antonio Breast Cancer Symposium, or SABCS, reinforcing
the clinical utility of our Oncotype DX breast cancer
test. Three of the studies assessing the impact of our test on
treatment decisions concluded that use of the test resulted in
fewer recommendations for and less use of chemotherapy,
demonstrating the actionable nature of our Oncotype DX
breast cancer test in its ability to help reduce unnecessary use
of chemotherapy. In September 2008, the Journal of Clinical
Oncology published clinical results suggesting that the
Oncotype DX breast cancer Recurrence Score result
provides additional prognostic information in patients with
early stage breast cancer beyond that derived from Adjuvant!
Online, an online tool that evaluates clinical variables to help
physicians and patients assess the risks and benefits of getting
additional therapy after surgery.
In October 2008, The American Journal of Surgery
published clinical results from a study of N-, ER+ patients
indicating that our test significantly changed treatment
recommendations versus standard measures alone. In January 2010,
the Journal of Clinical Oncology published a study
showing knowledge of a patients breast cancer Recurrence
Score changed approximately 30% of treatment decisions, and a
separate study demonstrating that our test significantly
predicts local or regional breast cancer recurrence.
Single
Gene Reporting (ER, PR, HER2)
We introduced quantitative gene expression reporting for ER and
PR genes with the Oncotype DX breast cancer test
Recurrence Score report in February 2008 and for HER2 in
September 2008. We believe that reporting individual gene scores
in addition to the Recurrence Score result may have additional
utility in predicting outcomes for specific therapies or disease
subtypes. For example, a quantitative ER score may be a
clinically useful predictor of tamoxifen benefit based on our
clinical studies of the NSABP Study B-14 population. In June
2008, the Journal of Clinical Oncology published results
of a study demonstrating the utility of our Oncotype DX
breast cancer test in measuring gene expression for ER and PR
status, indicating that quantitative reverse transcription
polymerase chain
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reaction, or RT-PCR, a well-established technology that we
license, is a reliable method for determining hormone receptor,
or HR, status in breast cancer. At the September 2008 ASCO
Breast Cancer Symposium, we presented results from two studies
supporting the use of the our breast cancer test in assessing
HER2 status.
Node
Positive, Estrogen Receptor Positive (N+, ER+)
Many patients diagnosed with N+ breast cancer may not benefit
from chemotherapy or may have other health issues that increase
the risk of chemotherapy treatment. Results from studies of our
Oncotype DX breast cancer test in N+ patients utilizing
tumor samples from chemotherapy treated patients (anthracycline
plus cytoxin or anthracycline plus taxotere), completed in
collaboration with the Eastern Cooperative Oncology Group, or
ECOG, and Aventis, Inc., a member of the sanofi-aventis group,
or Aventis, were presented at the June 2007 ASCO annual meeting.
The results of these studies suggest that Oncotype DX
breast cancer Recurrence Score results provide accurate
recurrence risk information for patients with ER+ breast cancer,
regardless of whether they are N- or N+. At SABCS in December
2007, we presented results from a second study conducted in
conjunction with the Southwest Oncology Group, or SWOG,
suggesting that our test may be useful in predicting survival
without disease recurrence and the benefit of chemotherapy for
N+ patients, in addition to N-, ER+ patients.
At SABCS in December 2009, we presented two studies reinforcing
the clinical utility of our Oncotype DX breast cancer
test for N+ patients. One study, completed in collaboration with
SWOG, reinforced the conclusion that chemotherapy does not
appear to benefit patients with either 1-3 or 4 or more positive
nodes for disease-free survival over 10 years, if their
tumors had a low Recurrence Score result. A separate abstract
presented at SABCS in December 2009 demonstrated that physicians
who use our Oncotype DX breast cancer test for N+
patients frequently change their treatment decisions based on
Recurrence Score results, with an overall reduction in
chemotherapy treatment recommendations.
Aromatase
Inhibitors
We conducted studies of our Oncotype DX breast cancer
test with clinical samples from postmenopausal women with breast
cancer who were treated with aromatase inhibitors. Aromatase
inhibitors and tamoxifen are both used as standard treatment for
early stage ER+ breast cancer patients. In December 2008 at
SABCS, we presented results from a European study using our test
to analyze tumor samples from over 1,200 patients in the
ATAC (Arimedix, Tamoxifen, Alone or in Combination) trial, which
established the wide use of aromatase inhibitors for adjuvant
treatment of post-menopausal women with HR positive breast
cancer. The study demonstrated that, along with other standard
measures such as tumor size, our Oncotype DX breast
cancer test contributes independently to provide a more complete
picture of prognosis for N- and N+ patients treated with
aromatase inhibitors. On March 9, 2010, these study results
were published online in the Journal of Clinical Oncology.
ER
Assessment
In September 2009, we began accepting all appropriate breast
cancer tumor samples, regardless of immunohistochemistry, or
IHC, ER status, to facilitate assessment of uncertain ER status
by either IHC or RT-PCR testing. An Oncotype DX breast
cancer Recurrence Score is generated if the ER status is
positive by IHC or positive by RT-PCR, even if the sample was
negative by IHC when submitted, allowing more patients to
benefit from the information provided by our test.
Health
Economic Benefits
We sponsor third-party studies conducted by researchers
affiliated with academic institutions to examine the health
economic implications of our Oncotype DX breast cancer
test. Two such studies, one of which was published in The
American Journal of Managed Care in May 2005, demonstrated
that our test provided a more accurate classification of risk
than the NCCN guidelines in place at that time as measured by
10 year distant recurrence-free survival. Based on these
results, a model was designed to forecast quality-adjusted
survival and expected costs, or the net present value of all
costs of treatment until death, if our Oncotype DX breast
cancer test was used in patients classified as low risk or high
risk by NCCN guidelines. The model, when applied to a
hypothetical population of 100 patients with the
demographic and disease characteristics of the patients entered
in the NSABP Study B-14,
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demonstrated an increase to quality-adjusted survival in this
population of 8.6 years and a reduction in projected
aggregate costs of approximately $200,000. Furthermore, the
model showed that as the expected costs and anticipated toxicity
of chemotherapy regimens increase, the use of the Recurrence
Score to identify which patients would benefit from chemotherapy
should lead to larger reductions in projected overall costs.
According to this model, if all early stage breast cancer
patients and their physicians used our test and acted on the
information provided by the breast cancer Recurrence Score
result, there would be significant economic benefit to the
healthcare system.
International
Adoption Oncotype DX Breast Cancer
Test
As of December 31, 2009, we had received Oncotype DX
breast cancer test samples from more than 50 countries and
established exclusive distribution agreements for our
Oncotype DX breast cancer test with partners in 12
countries outside of the U.S. We have completed or
initiated multiple international clinical studies intended to
support the adoption of our test outside of the U.S. In
April 2009, we announced results of a multi-center study in
Japan demonstrating that our test had significant prognostic
value in Japanese women with ER+ early stage breast cancer. This
was the first study to examine the utility of our Oncotype
DX breast cancer test in a specific ethnic population.
During the second quarter of 2009, we initiated our first
Taiwanese Chinese population study in collaboration with the
National Taiwan University. In September 2009, we announced
results of a study confirming that the distribution of
Oncotype DX Recurrence Scores in European and Middle
Eastern breast cancer patients is consistent with those observed
in patients in the U.S. In addition, we initiated a large
adjuvant breast cancer trial with clinical researchers in
Germany using the Oncotype DX breast cancer test to
select patients for study randomization and treatment. We also
initiated breast cancer clinical utility trials of Oncotype
DX with clinical researchers in Japan, Spain and the United
Kingdom. Although we have continued to expand our sales,
marketing and reimbursement efforts outside of the U.S., we do
not expect international Oncotype DX breast cancer test
revenues to comprise more than 10% of our total revenues for at
least the next year or more.
Oncotype
DX Colon Cancer Test
In 2009, approximately 105,000 people in the U.S. and
740,000 people worldwide were diagnosed with colon cancer.
Following diagnosis, a physician determines the stage of the
colon cancer by examining the following:
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the pathology of the tumor,
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the size of the tumor,
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nodal status, referred to as node positive, or N+, where the
tumor has spread to the lymph nodes, and node negative, or N-,
where the tumor has not spread to the lymph nodes, and
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the extent to which the cancer has spread to other parts of the
body.
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Colon cancer tumors are classified as stage
0, I, II, III or IV. Stage 0 generally refers to
a pre-invasive tumor with reduced risk of recurrence that is
typically not treated with chemotherapy but may be treated with
surgery. Standard treatment guidelines weigh the stage of the
cancer and additional factors to predict cancer recurrence and
determine treatment protocol including:
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the age of the patient,
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the histological type and grading of the tumor as reported by
the pathologist,
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the level of mismatch repair, or MMR, also known as
microsatellite instability, or MSI, and
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T-stage, an index of tumor penetration through the bowel.
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In 2009, stage II colon cancer affected approximately
30,000 people United States, and the current treatment
paradigm is unclear. The decision to treat patients with
chemotherapy following surgery is based on an assessment of how
likely their disease is to recur. However, accurately
identifying those patients with high recurrence risk is a
critical issue for physicians because the available markers to
determine likelihood of disease recurrence are limited,
resulting in both over-treatment and under-treatment of patients
following surgery. About a third of patients receive adjuvant
chemotherapy; however, research indicates that only 2% to 4% of
patients benefit from this treatment,
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which has significant associated toxicity. While there are
existing clinical markers associated generally with higher risk
in colon cancer patients, there was no clinically validated
genomic test available that predicted the likelihood of
recurrence for individual patients prior to the availability of
our test.
In developing our colon cancer product, we used the same
rigorous clinical development strategy and standardized
quantitative technology designed for our Oncotype DX
breast cancer test. We developed our gene panel by identifying
761 cancer-related genes through review of existing research
literature and computer analysis of genomic databases. The NSABP
conducted three development studies and the Cleveland Clinic
Foundation conducted one development study, which were funded by
Genomic Health, analyzing the 761 genes from over
1,800 patients with stage II colon cancer. Detailed
analysis of gene expression and colon cancer recurrence was
performed to identify specific genes with the potential to
predict the likelihood of cancer recurrence and response to
chemotherapy. The 761 candidate genes were also examined to
determine whether they would be useful beyond other key
variables including tumor stage, tumor grade, lymph nodes
examined and MMR/MSI.
We selected a final set of 12 genes which were then
independently evaluated in over 1,400 stage II colon cancer
patients in the QUASAR validation study. This international,
multi-center randomized trial examined the recurrence risk and
the benefit associated with 5-fluorouracil/leucovorin, or
5FU/LV, adjuvant chemotherapy. Gene expression was quantified by
RT-PCR from manually microdissected FPE primary colon cancer
tissue, and recurrence-free interval, disease-free survival and
overall survival were analyzed.
In May 2009, we announced positive results from this clinical
validation study. The study met its primary endpoint to predict
the likelihood of recurrence for stage II colon cancer
patients following surgery and showed that the colon cancer
Recurrence Score provided additional independent clinical value
beyond standard measures of risk. The study showed that the
colon cancer Recurrence Score maintained significance,
independent of MMR/MIS, T-stage, nodes examined, grade and
lymphovascular invasion. We believe this addresses an unmet need
in the treatment of colon cancer by validating a clinical tool
that can significantly improve risk assessment in the treatment
planning for stage II colon cancer patients. T4 stage and
MMR deficiency were also independently beneficial in predicting
recurrence, and together comprise approximately 25 percent
of patients. T4 stage indicates growth of the tumor through the
wall of the bowel and is associated with higher risk of
recurrence. MMR/MSI is an alteration observed in approximately
15 percent of colon cancers. Patients with tumors
identified as MSI high, or MMR deficient, are considered to be
at low risk of recurrence.
We expect to incur additional expenses related to the January
2010 commercial launch of our colon cancer test, such as
infrastructure costs, information technology costs, and selling
and marketing costs. Based upon our experience in obtaining
adoption and reimbursement for our Oncotype DX breast
cancer test, we do not expect product revenues from our colon
cancer test to comprise more than 10% of our total revenues for
at least the next year or more.
Clinical
Utility
We believe the Oncotype DX colon cancer Recurrence Score
will provide the greatest clinical utility for treatment
selection in the more than 70 percent of patients for whom
MMR/MSI and T-stage are uninformative. At the January 2010 ASCO
Gastrointestinal Cancers Symposium, we presented results from a
study demonstrating that the Oncotype DX colon cancer
Recurrence Score result and number of nodes examined are
independent predictors of recurrence in stage II colon
cancer and both should be considered when assessing individual
recurrence risk in this patient population. We have identified a
study cohort for a second stage II colon cancer recurrence
study and are planning additional studies to support the
clinical utility and assess the treatment impact and health
economic benefit of our Oncotype DX colon cancer test.
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Product
Development
We developed our Oncotype DX tests using the following
multi-phased clinical development program that we are also using
to develop future products for breast, colon and other cancers:
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Research phase. Prior to development, we may
conduct exploratory studies to identify genes, pathways or new
disease opportunities of potential scientific interest.
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Early development phase. In this phase, we
establish a product definition and development plan and select
from the approximately 25,000 genes in the human genome to
identify candidate genes. To date, we have compiled a library of
over 3,000 individual gene assays. Typically, we secure access
to archival tumor biopsy samples correlated with clinical data
in order to identify genes that correlate with a specific
clinical outcome.
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Development phase. If early development
studies successfully identify genes, we conduct additional
clinical studies to refine the gene set in the specific patient
population of interest. We select the final gene panel through
statistical modeling of the gene correlation data. With a gene
panel established, we then finalize the remaining assay
parameters.
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Validation phase. Once the gene panel, assay
chemistry, automation and analysis specifications are finalized,
tested and verified, we begin clinical validation. In this
phase, we conduct one or more validation studies with
prospectively designed endpoints to test our candidate gene
panel and the corresponding quantitative expression score. We
are often able to conduct large validation studies using
archived samples with years of clinical outcomes, thus saving
clinical development time.
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Commercialization and product expansion
phase. Once a test is commercialized, we may
perform additional studies designed to support the tests
clinical utility and potentially to broaden its use in
additional patient populations or for additional indications.
These studies may include prospective studies to verify that our
test is changing physician behavior as well as tests of a
commercial product in new populations. In addition, through our
investigator sponsored trial program, we provide physicians with
our tests for use in specific patient populations to be used in
treatment decisions.
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Product
Development Opportunities
Ductal
Carcinoma in Situ (DCIS)
In 2009, approximately 55,000 patients in the U.S. and
230,000 patients worldwide were diagnosed with stage 0
breast cancer, including DCIS. We are investigating the utility
of Oncotype DX in patients with DCIS. We plan to evaluate
the use of the Oncotype DX 21-gene breast cancer panel
and are also in the early development stage of identifying other
existing or new genes and gene combinations that may be used for
treatment planning in DCIS. At SABCS in December 2008, we
presented feasibility study results demonstrating that
quantitative RT-PCR analysis is possible in DCIS that is
adjacent to invasive ductal carcinoma of the breast. We are
conducting clinical studies and expect to report study results
in 2010. Depending upon the results of these studies, we expect
to launch a DCIS test that predicts likelihood of recurrence in
2011 if the test uses the existing Oncotype DX 21-gene
breast cancer panel, or 2013 if the test uses other existing or
new genes and gene combinations.
Other
Breast Cancer Populations
We continue to conduct research and development studies in other
breast cancer populations. At the May 2009 ASCO meeting, we
presented results from a clinical study that summarized the gene
signatures of male patients for whom the Oncotype DX
breast cancer test was used to guide chemotherapy treatment,
indicating that breast cancer in men displays similar gene
signatures to female breast cancer. We also presented a separate
study at the ASCO meeting demonstrating that there were
significant differences in gene expression between hormone
receptor negative, or triple negative, breast cancer compared
with hormone receptor positive disease.
Stage III
Colon Cancer Recurrence
We are investigating the utility of the Oncotype DX colon
cancer test in stage III colon cancer, which affects over
25,000 patients each year in the U.S. At the January 2010
ASCO Gastrointestinal Cancers Symposium, we
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presented study results from an analysis of various biological
similarities and differences between stage II and
stage III colon cancer suggesting the Oncotype DX
colon cancer Recurrence Score result is stage independent, and
that it may also predict recurrence risk in stage III colon
cancer. Based on similarities in this study, we plan to conduct
additional early development studies to evaluate our Oncotype
DX colon cancer test for treatment planning in
stage III disease. Depending upon the results of these
studies, we expect to launch a test that predicts likelihood of
recurrence in stage III colon cancer in 2013.
Stage II
and III Colon Cancer Chemotherapy Benefit
We are conducting both early development and development studies
to investigate the Oncotype DX colon cancer tests
ability to predict chemotherapy benefit in stage II and
stage III colon cancer patients treated with oxaliplatin.
Depending upon the outcome of these studies, we expect to launch
a test that predicts the benefit of oxaliplatin chemotherapy for
stage II and stage III colon cancer patients in 2013.
Prostate
Cancer
Approximately 680,000 men worldwide were diagnosed with prostate
cancer in 2009. Based upon the results of prostate-specific
antigen, or PSA, testing, biopsies were performed on over
750,000 men in the U.S. in 2009, and approximately 235,000 of
these patients were diagnosed with prostate cancer. The vast
majority of these patients receive aggressive treatment,
including surgery and radiation therapy. Less than 10% of
patients choose active surveillance even though, for most of
these patients, their disease will never cause clinical symptoms
or death. We have completed feasibility studies demonstrating
that quantitative RT-PCR analysis is possible in prostate
biopsies. We have initiated our first prostate gene
identification study, and we expect to report study results in
2010. Depending upon these study results, we expect to launch a
prognostic test for prostate biopsies in 2014 which, in
conjunction with the Gleason score, or tumor grading, may
improve treatment decisions for prostate cancer patients.
Renal
Cancer
In 2009, approximately 45,000 people in the U.S. and
210,000 people worldwide were diagnosed with renal cancer.
We completed our first renal gene identification study under our
collaboration agreement with Pfizer Inc. for the development of
a genomic test to estimate the risk of recurrence following
surgery for patients with stage I-III renal carcinoma, clear
cell type that has not spread to other parts of the body. The
clear cell type of renal carcinoma is the most common type of
kidney cancer in adults. We expect to report study results in
2010. Depending on the study results, we expect to launch a
prognostic test for renal cancer test in 2013.
Other
Cancers
In 2009, approximately 175,000 people in the U.S. and
1.2 million people worldwide were diagnosed with non-small
cell lung cancer. We are conducting early development studies
for a test to predict risk of recurrence for early stage
non-small cell lung cancer patients. In 2009, approximately
75,000 people in the U.S. and 160,000 people worldwide
were diagnosed with melanoma. We have conducted initial
feasibility studies for the development of a test to predict
risk of recurrence in melanoma patients.
Pre-malignant
Lesions
We are also conducting research on pre-malignant lesions
requiring technology that can evaluate smaller amounts of
tissue. We have completed preliminary studies to determine
whether colon polyps carry a gene expression signature related
to risk of developing cancer elsewhere in the colon. We are also
conducting research on Barretts esophagus, which refers to
an abnormal change in the cells of the lower end of the
esophagus associated with an increased risk of esophageal cancer.
Targeted
Cancer Therapeutics
Anti-cancer drugs recently approved by the U.S. Food and
Drug Administration, or FDA, and new anti-cancer drugs in
clinical development are designed to provide more targeted
treatment, which should improve efficacy and reduce side
effects. A need exists to identify those patients who, based on
the genomic profile of their tumors, are
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most likely to benefit from these therapies. We believe genomic
analysis has the potential to improve patient selection for
these therapies. We have had a number of discussions with
pharmaceutical companies regarding the use of Oncotype DX
or our clinical development platform to identify subsets of
patients more likely to respond to a particular therapy.
EGFR inhibitor response test
We are in the development phase for tests to predict the
likelihood of response to the epidermal growth factor receptor,
or EGFR, inhibitor class of drugs. For example, we entered into
a collaborative agreement with Bristol-Myers Squibb Company and
ImClone Systems Incorporated to develop a genomic test to
predict the likelihood of response to Erbitux in colorectal
cancer. Erbitux is a targeted therapy currently approved for the
treatment of metastatic colorectal cancer. The agreement
provides us commercial rights to diagnostic tests that result
from the collaboration. We completed early studies with
Bristol-Myers Squibb and ImClone and identified a small number
of genes that could predict response to Erbitux. We are planning
further studies for the development of an EGFR inhibitor
response test.
Targeted therapies in breast cancer
We entered into collaborative agreements with Aventis and ECOG
to investigate the ability of gene expression in FPE tissues to
predict the likelihood of response to adjuvant chemotherapy,
including the taxane Taxotere, in patients with early stage
breast cancer and 0-3 involved lymph nodes. The agreements
provide us with commercial rights to diagnostic tests that may
result from the collaboration. Initial study results indicated
that in patients with HR positive disease who had a breast
cancer Recurrence Score indicating intermediate risk of
recurrence or above, a number of candidate genes strongly
predicted benefit from treatment with Taxotere. A genomic
classifier predicting differential benefit was identified and,
if validated through additional studies, could lead to the
development of a test to predict the likelihood of benefit from
Taxotere.
Technology
We utilize existing technologies, such as RT-PCR, and
information technologies and optimize and integrate them into
new processes. We expect to continue to extend the capabilities
of the various components of our process to develop effective
products. Our technology allows us to:
Extract
RNA from FPE-tumor Biopsies
Our product development process requires that we be able to
quantify the relative amounts of RNA in patients FPE
tissue specimens. We have developed proprietary technology,
intellectual property and know-how for optimized and automated
methods for extraction and analysis of RNA from FPE tissue.
Amplify
and Detect Diminished Amounts of RNA Consistently
We use RT-PCR as the basis for our quantitative molecular
pathology assays. This technology uses polymerase chain
reaction, or PCR, along with fluorescent detection methods to
quantify the relative amount of RNA in a biological specimen. We
believe our technology platform has the following advantages:
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Sensitivity. We have developed protocols for
extracting and quantifying RNA utilizing RT-PCR. Our method for
amplifying small fragmented RNA is designed to allow us in the
future to conduct studies with hundreds to thousands of genes
from 10 micron sections of FPE tissue. The ability to amplify
RNA allows us to maintain a repository of RNA from limited
tissue samples that can be used for later studies.
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Specificity. Our RT-PCR platform is highly
specific because it works only when three different test
reagents, called DNA probes and primers, independently match
each target RNA sequence to be measured. In addition, we have
designed and implemented proprietary software for selecting
optimal probe and primer sequences in an automated,
high-throughput process. The ability to utilize these sequences
allows us to design highly specific assays for closely related
sequences.
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Precision and Reproducibility. The reagents,
materials, instruments and controls in our processes are used by
trained personnel following validated standard operating
procedures. Validation studies have shown that
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these standard operating procedures precisely quantify tested
RNA with minimal variability in the assay system across days,
instruments and operators. This enables our clinical reference
laboratory to produce consistently precise and accurate gene
expression results. Our quality control methods for our reagents
and processes, along with our software for automation, sample
tracking, data quality control and statistical analysis, add to
the reproducibility and precision of our test.
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Dynamic Range. Because our RT-PCR platform can
amplify small amounts of RNA in proportion to the amount present
in the sample, we are able to measure RNA levels across as much
as a hundred thousand fold range of differing RNA expression.
Having a broad range of high resolution testing capability
increases the quality of our correlations with clinical outcomes
and therefore the predictive power of our tests.
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Analyze
Hundreds of Genes
The methods and know-how we have developed allow us to expand
RT-PCR technology to a scale that enables screening of hundreds
of genes at a time while using minimal amounts of tissue. During
our initial years of operation, we typically screened 48 to 96
genes from a standard FPE tissue sample using RNA from three 10
micron sections of tissue. By 2003, we routinely screened 192
genes from each sample and, by 2004, we screened 384 genes per
sample. We now have the capability to screen up to 1,536
different genes per sample without sacrificing the sensitivity,
specificity and reproducibility of RT-PCR. With continued
investment in miniaturization and automation, we believe that
our technology will be capable of continued increases in
throughput.
Employ
Advanced Information Technology
We have developed computer programs to automate our RT-PCR assay
process. We have also developed a laboratory information
management system to track our gene-specific reagents,
instruments, assay processes and the data generated. Similarly,
we have automated data analysis, storage and process quality
control. We use statistical methods to optimize and monitor
assay performance and to analyze data from our early development
and development studies. We are investigating methods to further
automate our workflow by automating the RNA extraction process.
New
Technologies
We are investigating technologies for assaying low liquid
volumes and amplifying trace amounts of RNA in order to develop
products that can evaluate smaller amounts of available tissue,
including Barretts esophagus, prostate biopsies and DCIS.
We are also focusing research efforts on developing
high-throughput sequencing, or HTS, to be our primary technology
for future gene discovery. HTS technologies parallelize the
sequencing process, producing thousands or millions of sequences
at once. HTS sequencing technologies are intended to lower the
cost of DNA sequencing beyond what is possible with standard
methods. We have created proprietary methods for HTS of nucleic
acids from FPE tissue, put bioinformatics programs and
infrastructure for data storage and analysis in place and plan
to rely on HTS as the basic source of new biomarkers in the
future.
Commercial
Operations
Our commercial infrastructure, including our sales force,
managed care group, and patient support network, is critical to
our future success. We are continuing to build a strong domestic
sales, marketing and reimbursement effort by interacting
directly with medical and surgical oncologists, pathologists and
payors. Because oncology is a concentrated specialty, we believe
that a focused marketing organization and specialized sales
force with regional and local experience is necessary in order
to effectively serve the oncology community. We believe our
direct sales approach, targeting oncologists and cancer
surgeons, and our medical education and scientific liaisons,
targeting key opinion leaders, coupled with our plans to
continue to conduct multiple clinical studies with the objective
of having results published in peer-reviewed journals, is the
best approach to increase patient and physician demand and the
number of favorable reimbursement coverage decisions by payors.
In January 2010, we hired an additional 8 U.S. sales
representatives, increasing our domestic sales force to a total
of 88 sales representatives. Due to significant overlap between
breast and colon oncologists and surgeons, we believe our
current sales force has sufficient capacity to market both our
Oncotype DX breast and colon cancer tests.
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We have a managed care department that works with our contract
and reimbursement teams to ensure our tests are being used
effectively. Our call center and patient support network handle
benefits investigation, preauthorization, and precertification
for patients who use our tests. We have the infrastructure, if
needed, to appeal every claim for our tests that is denied by a
third-payor in order to support the use and encourage adoption
of our tests. In addition, we provide patient education through
our website, material provided to local advocacy groups, local
and national media campaigns and materials provided to
oncologists and surgeons.
All Oncotype DX assays are processed in our clinical
reference laboratory facility in Redwood City, California. For
the year ended December 31, 2009, we delivered more than
49,030 test reports for use in treatment planning. Our current
clinical reference laboratory processing capacity is 17,000
tests per calendar quarter. In December 2008, we launched an
online physician portal with enhanced real-time delivery of
patient results to physicians and the capability for placing
Oncotype DX orders online. As test processing for our
Oncotype DX breast and colon cancer tests is essentially
the same, except that the tests utilize different RNA extraction
methods, we believe that we currently have sufficient capacity
to process both of our tests.
We believe our future success is also dependent on our ability
to continue to expand internationally. While we plan to use
essentially the same business model as we use in the U.S., there
are significant differences between countries that need to be
considered. For example, different countries may have a public
healthcare system, a combination of public and private
healthcare system or a cash-based payment system. We may decide
to work directly on our own in certain countries while
continuing to utilize distribution agreements in other
countries. We established a European subsidiary in February 2009
and have lead executives with assignments in the Americas,
Europe and Asia to support our international efforts. Although
we have continued to expand our sales, marketing and
reimbursement efforts outside the U.S., we do not expect
international product revenues to comprise more than 10% of our
total revenues for at least the next year or more.
Reimbursement
Revenues for clinical laboratory tests may come from several
sources, including commercial third-party payors, such as
insurance companies and health maintenance organizations,
government payors, such as Medicare and Medicaid, patients and,
in some cases, from hospitals or referring laboratories who, in
turn, bill third-party payors for testing. Reimbursement of our
Oncotype DX tests by third-party payors is essential to
our commercial success.
Commercial Third-party Payors and Patient
Pay. Where there is a payor policy, contract or
agreement in place, we bill the payor, the hospital or referring
laboratory as well as the patient (for deductibles and
coinsurance or copayments, where applicable) in accordance with
established policy terms. Where there is no payor policy in
place, we pursue reimbursement on behalf of each patient on a
case-by-case
basis. Our efforts on behalf of these patients take a
substantial amount of time, and bills may not be paid for many
months, if at all. Furthermore, if a third-party payor denies
coverage after final appeal, it may take a substantial amount of
time to collect from the patient, and we may not be successful.
Medicare and Medicaid. In determining whether
or not Medicare will pay for a test, the Centers for Medicare
and Medicaid Services, or CMS, which oversees Medicare, can
permit third party contractors who process and pay Medicare
claims to make that determination or it can make a national
coverage determination, which will bind all Medicare
contractors. To date, CMS has not issued a national coverage
determination on an Oncotype DX test, and the local
Medicare carrier for California with jurisdiction to process
claims submitted by us decides whether or not and at what rate
Medicare will cover the test when billed by us. In addition,
each state Medicaid program, which pays for services furnished
to the eligible medically indigent, will usually make its own
decision whether or not to cover our Oncotype DX tests.
We believe that it may take several years to achieve broad
reimbursement with nearly all payors for any one of our
Oncotype DX tests. However, we cannot predict whether, or
under what circumstances, payors will reimburse for our tests.
Payment amounts, once established, are subject to change,
including reductions, and can also vary across individual
policies and coverage and payment policies, when adopted, are
generally applied prospectively rather than retroactively.
Denial of coverage by payors, or payment at inadequate levels,
could have a material adverse impact on market acceptance of our
tests.
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We expect that international sales of our Oncotype DX
tests will be heavily dependent on reimbursement in the future.
In many countries, governments are primarily responsible for
reimbursing diagnostic tests. Governments often have significant
discretion in determining whether a test will be reimbursed at
all, and if so, how much will be paid. We expect that it will
take several years to establish broad coverage and reimbursement
for our tests in countries outside of the U.S.
Oncotype
DX Breast Cancer Test
We have focused substantial resources on obtaining reimbursement
coverage from third-party payors for our Oncotype DX
breast cancer test. We believe the key factors driving adoption
of our Oncotype DX breast cancer test include our ongoing
commercial efforts, continued publication of peer-reviewed
articles on studies we sponsored, conducted or collaborated on
that support the use and reimbursement of our Oncotype DX
breast cancer test, clinical presentations at major symposia,
and the inclusion of our Oncotype DX breast cancer test
in clinical practice guidelines.
Several large national third-party payors, a number of regional
payors, and the local Medicare carrier for California with
jurisdiction for claims submitted by us for Medicare patients,
have issued positive coverage determinations for our Oncotype
DX breast cancer test for patients with node negative, or
N-, estrogen receptor positive, or ER+, disease through
contracts, agreements or policy decisions.
Beginning in the second half of 2008 and continuing through
2009, we experienced an increase in usage of our Oncotype
DX breast cancer test for node positive, or N+, patients.
While some payors provide policy coverage for the use of our
test in patients with lymph node micro-metastasis (greater than
0.2 mm, but not greater than 2.0 mm in size), a substantial
portion of our existing reimbursement coverage has been limited
to women with early stage N-, ER+ breast cancer. Effective
June 28, 2009, the local carrier with jurisdiction for
claims submitted for us by Medicare extended its coverage for
our Oncotype DX breast cancer test to include ER+
patients with N+ disease (up to three positive lymph nodes).
However, we may not be able to obtain additional reimbursement
coverage from other payors for our test for breast cancer
patients with N+, ER+ disease.
Under current Medicare billing rules, claims for Oncotype
DX breast cancer tests performed on Medicare beneficiaries
who were hospital inpatients at the time the tumor tissue
samples were obtained and whose tests were ordered less than
14 days from discharge must be incorporated in the payment
that the hospital receives for the inpatient services provided.
Medicare billing rules also require hospitals to bill for the
test when ordered for hospital outpatients less than
14 days following the date of the hospital procedure where
the tumor tissue samples were obtained. Accordingly, we are
required to bill individual hospitals for tests performed on
Medicare beneficiaries during these time frames. Because we
generally do not have a written agreement in place with these
hospitals to purchase these tests, we may not be paid for our
tests or may have to pursue payment from the hospital on a
case-by-case
basis. We believe patients coming under this rule represent
approximately 2% of our total breast cancer testing population.
We believe these billing rules may lead to confusion regarding
whether Medicare provides adequate reimbursement for our test,
and could discourage Medicare patients from using our test.
Although we are working with Medicare and Congress, as well as
other diagnostic laboratories, to revise or reverse these
billing rules, we have no assurance that Medicare will do so or
that Congress will require Medicare to do so, and we also cannot
ensure that hospitals will agree to arrangements to pay us for
tests performed on patients falling under these rules.
In January 2008, Medi-Cal became the first Medicaid payor to
establish a policy covering our Oncotype DX breast cancer
test. We have also received a limited number of approvals from
other state Medicaid programs.
The majority of our international Oncotype DX breast
cancer test revenues come from patient self pay, payor
reimbursement through our distributor in Israel and clinical
collaborations in various countries. In 2009, our distributor in
Greece secured reimbursement covering our Oncotype DX
breast cancer test for an eligible population comprising more
than 20% of the countrys total population. Although we
have agreements with distributors in several countries, we do
not have direct contracts, agreements or policy decisions with
international payors for reimbursement coverage of our
Oncotype DX breast cancer test. We expect that it will
take several years to establish broad coverage and reimbursement
for our Oncotype DX breast cancer test with payors in
countries outside of the U.S.
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Oncotype
DX Colon Cancer Test
We have not obtained reimbursement coverage from third-party
payors for our Oncotype DX colon cancer test launched in
January 2010. We expect to focus substantial resources on
obtaining adoption of and reimbursement coverage for this test.
We believe the key factors that will drive adoption of our
Oncotype DX colon cancer test include our continued
publication of peer-reviewed articles on studies we sponsored,
conducted or collaborated on that support the use and
reimbursement of our test, clinical presentations at major
symposia and our ongoing commercial efforts.
As a new test, our Oncotype DX colon cancer test may be
considered investigational by payors and therefore may not be
covered under their reimbursement policies. Consequently, we
intend to pursue
case-by-case
reimbursement and expect that 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 our Oncotype
DX colon cancer test based upon clinical evidence showing
the utility of the test. We believe it may take several years to
achieve reimbursement with a majority of third-party payors.
However, we cannot predict whether, or under what circumstances,
payors will reimburse for our test.
Payment
Clinical laboratory testing services, when covered by
third-party payors, are paid under various methodologies,
including prospective payment systems and fee schedules. Under
Medicare, payment is generally made under the Clinical
Laboratory Fee Schedule with amounts assigned to specific
procedure billing codes. Each Medicare carrier jurisdiction has
a fee schedule that establishes the price for each specific
laboratory billing code. The Social Security Act establishes
that these fee schedule amounts are to be increased annually,
subject to certain limitations, by the percentage increase in
the consumer price index, or CPI, for the prior year. Congress
has frequently legislated that the CPI increase not be
implemented. For example, in the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or MMA, Congress
eliminated the CPI update through 2008. In addition, the
National Limitation Amount, or NLA, which acts as a ceiling on
Medicare reimbursement, is set at a percentage of the median of
all the carrier fee schedule amounts for each test code. In the
past, Congress has frequently lowered the percentage of the
median used to calculate the NLA in order to achieve budget
savings. Currently, the NLA ceiling is set at 74% of the medians
for established tests and 100% of the median for diagnostic
tests for which no limitation amount was established prior to
2001. Thus, no Medicare carrier can pay more than the NLA amount
for any specific code.
There is no specific Current Procedural Terminology, or CPT,
procedure code or group of codes to report the Oncotype
DX breast cancer test. The test is reported under a
non-specific, unlisted procedure code, which is subject to
manual review of each claim. We were informed that, under the
local coverage determination, claims are to be paid consistent
with the average allowed reimbursement rate for claims that were
billed and processed to completion as of September 30,
2005. This reimbursement rate remains in effect as of the date
of this report, but is subject to review and adjustment.
A Healthcare Common Procedure Coding System, or HCPCS code has
been issued effective January 1, 2006 that some private
third-party payors may accept on claims for our Oncotype
DX breast cancer test. However, Medicare will not accept
this HCPCS code. In the future, we may move forward with plans
to obtain specific CPT procedure coding for our Oncotype
DX tests. If we do move forward with plans to obtain
specific CPT coding, there is no assurance that specific coding
will be adopted. Whether or not we obtain a specific CPT code
for our tests, there can be no assurance that an adequate
payment rate will continue to be assigned to the tests.
On several occasions, including in 2003 during the negotiations
over the MMA, Congress has considered imposing a 20%
co-insurance amount on clinical laboratory services, which would
require beneficiaries to pay a portion of the cost of their
clinical laboratory testing. Although that requirement has not
been enacted at this time, Congress could decide to impose such
an obligation at some point in the future. If so, these
additional co-insurance payments for our Oncotype DX
tests could be difficult to collect.
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Competition
We believe that we compete primarily on the basis of:
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the value of the quantitative information our Oncotype DX
platform provides;
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the clinical validation of our Oncotype DX breast cancer
tests ability to predict recurrence and survival, and
demonstration of its ability to predict the likelihood of
chemotherapy benefit;
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the level of reimbursement coverage for our Oncotype DX
breast cancer test;
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the inclusion of our Oncotype DX breast cancer test in
clinical practice guidelines.
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the clinical validation of our Oncotype DX colon cancer
tests ability to predict recurrence and survival;
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our ability to perform clinical studies using archival tissue as
it is currently processed, handled and stored;
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our ability to screen hundreds of genes at a time;
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our ability to commercialize products through our clinical
development platform;
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our clinical collaborations with clinical study groups;
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the quality of our clinical reference laboratory, which enables
consistent, reproducible results;
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the level of customer service we provide, both to patients and
health care professionals; and
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our ability to obtain appropriate regulatory approvals in a
timely fashion.
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We believe that we compete favorably with respect to these
factors, although we cannot assure you that we will be able to
continue to do so in the future or that new products that
perform better than our Oncotype DX tests will not be
introduced. We believe that our continued success depends on our
ability to:
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continue to innovate and maintain scientifically advanced
technology;
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successfully market and sell our Oncotype DX tests;
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enhance our Oncotype DX tests to provide information in
response to additional indications;
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continue to validate our products, especially with respect to
chemotherapy benefit;
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continue to obtain positive reimbursement decisions from payors;
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expand our Oncotype DX platform for use in types of
cancer other than breast and colon;
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expand in countries outside of the U.S.;
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attract and retain skilled personnel;
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obtain patents or other protection for our products and
technology; and
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obtain and maintain our clinical reference laboratory
accreditations and licenses.
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Our principal competition comes from existing 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 ours that are performed outside the
pathology laboratory. In addition, few diagnostic methods are as
expensive as our Oncotype DX tests.
We also face competition from many public and private companies
that offer products or have conducted research to profile genes,
gene expression or protein expression in breast or colon cancer,
such as Celera Corporation, Clarient Incorporated, Agendia B.V.,
bioTheranostics, Exagen Diagnostics, Qiagen, Hologic and
University Genomics. Commercial laboratories with strong
distribution networks for diagnostic tests, such as Genzyme
Corporation, Quest Diagnostics Incorporated and Laboratory
Corporation of America Holdings may become competitors. Other
potential competitors include companies that develop diagnostic
tests such as Siemens
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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 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. In
addition, competitors may develop their own versions of our
tests in countries where we did not apply for patents or where
our patents have not issued and compete with us in those
countries, including encouraging the use of their test by
physicians or patients in other countries.
Our Oncotype DX tests are considered relatively expensive
for diagnostic tests. We have changed the list price of our
breast cancer test in the past and we may change prices for our
tests in the future. Any increase or decrease in pricing could
impact reimbursement of and demand for our tests. Many of our
present and potential competitors have widespread brand
recognition and substantially greater financial and technical
resources and development, production and marketing capabilities
than we do. Others may develop lower-priced, less complex tests
that could be viewed by physicians and payors as functionally
equivalent to our tests, which could force us to lower the list
price of our tests and impact our operating margins and our
ability to achieve profitability. 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 our tests, and that may discourage
adoption and reimbursement of our tests. If we are unable to
compete successfully against current or future competitors, we
may be unable to increase market acceptance for and sales of our
tests.
Regulation
Clinical
Laboratory Improvement Amendments of 1988
As a clinical reference laboratory, we are required to hold
certain federal, state and local licenses, certifications and
permits to conduct our business. Under CLIA, we are required to
hold a certificate applicable to the type of work we perform and
to comply with standards covering personnel, facilities
administration, quality systems and proficiency testing.
We have a current certificate of accreditation under CLIA to
perform testing and are accredited by CAP. To renew our CLIA
certificate, we are subject to survey and inspection every two
years to assess compliance with program standards. The standards
applicable to the testing which we perform may change over time.
We cannot assure you that we will be able to operate profitably
should regulatory compliance requirements become substantially
more costly in the future.
If our clinical reference laboratory is out of compliance with
CLIA requirements, we may be subject to sanctions such as
suspension, limitation or revocation of our CLIA certificate, as
well as directed plan of correction, state
on-site
monitoring, civil money penalties, civil injunctive suit or
criminal penalties. We must maintain CLIA compliance and
certification to be eligible to bill for tests provided to
Medicare beneficiaries. If we were to be found out of compliance
with CLIA program requirements and subjected to sanction, our
business could be harmed.
U.S.
Food and Drug Administration
Diagnostic kits that are sold and distributed through interstate
commerce are regulated as medical devices by FDA. Devices
subject to FDA regulation must undergo pre-market review prior
to commercialization unless the device is of a type exempted
from such review. In addition, manufacturers of medical devices
must comply with various regulatory requirements under the
Federal Food, Drug and Cosmetic Act and regulations promulgated
under that Act, including quality system review regulations,
unless exempted from those requirements for particular types of
devices. Entities that fail to comply with FDA requirements can
be liable for criminal or civil penalties, such as recalls,
detentions, orders to cease manufacturing and restrictions on
labeling and promotion.
Clinical laboratory tests like our Oncotype DX tests are
regulated under CLIA, as administered by CMS, as well as by
applicable state laws. Clinical laboratory tests that are
developed and validated by a laboratory for its own
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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 our Oncotype
DX tests are not diagnostic kits and also believe that they
are LDTs. As a result, we believe our tests should not be
subject to regulation under established FDA policies. The
container we provide for collection and transport of tumor
samples from a pathology laboratory to our clinical reference
laboratory may be considered 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 our
Oncotype DX breast cancer test 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, or
IVDMIAs. Under this draft guidance, our Oncotype DX tests
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 a transition period of FDA enforcement
discretion of up to 18 months following release of final
guidance for currently marketed 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. 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 PMAs, 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, requested that its Advisory Committee on
Genetics, Health and Society make recommendations about the
oversight of genetic testing. A final report was published in
April 2008. If the reports recommendations for increased
oversight of genetic testing were to result in further
regulatory burdens, it could have a negative impact on our
business and could delay the commercialization of tests in
development. In April 2009, we joined a diverse coalition of
organizations that submitted a letter to the new Secretary of
HHS calling on the Secretary to create and implement a
reasonable and responsible regulatory framework for genetic
tests and other advanced medical diagnostic tests.
We cannot provide any assurance that FDA regulation, including
pre-market review, will not be required in the future for our
tests, 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 our tests.
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 tests pending pre-market clearance or approval.
If our tests are allowed to remain on the market but there is
uncertainty about our tests, if they are labeled investigational
by FDA, or if labeling claims FDA allows us to make are limited,
orders or reimbursement may decline. The regulatory approval
process may involve, among other things, successfully completing
additional clinical trials and submitting a pre-market clearance
notice or filing a PMA application with FDA. If pre-market
review is required by FDA, there can be no assurance that our
tests 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 our tests if we determine
that doing so would be appropriate.
Should any of the reagents obtained by us from vendors and used
in conducting our tests be affected by future regulatory
actions, our business could be adversely affected by those
actions, including increasing the cost of testing or delaying,
limiting or prohibiting the purchase of reagents necessary to
perform testing.
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Health
Insurance Portability and Accountability Act
Under the federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, HHS has issued regulations
to protect the privacy and security of protected health
information used or disclosed by health care providers, such as
us. HIPAA also regulates standardization of data content, codes
and formats used in health care transactions and standardization
of identifiers for health plans and providers. Penalties for
violations of HIPAA regulations include civil and criminal
penalties.
We developed policies and procedures to comply with these
regulations by the respective compliance enforcement dates. The
requirements under these regulations may change periodically and
could have an effect on our business operations if compliance
becomes substantially more costly than under current
requirements.
In addition to federal privacy regulations, there are a number
of state laws governing confidentiality of health information
that are applicable to our operations. New laws governing
privacy may be adopted in the future as well. We have taken
steps to comply with health information privacy requirements to
which we are aware that we are subject. However, we can provide
no assurance that we are or will remain in compliance with
diverse privacy requirements in all of the jurisdictions in
which we do business. Failure to comply with privacy
requirements could result in civil or criminal penalties, which
could have a materially adverse impact on our business.
Federal
and State Physician Self-referral Prohibitions
We are subject to the federal physician self-referral
prohibitions, commonly known as the Stark Law, and to similar
restrictions under Californias Physician Ownership and
Referral Act, commonly known as PORA. Together these
restrictions generally prohibit us from billing a patient or any
governmental or private payor for any test when the physician
ordering the test, or any member of such physicians
immediate family, has an investment interest in or compensation
arrangement with us, unless the arrangement meets an exception
to the prohibition.
Both the Stark Law and PORA contain an exception for referrals
made by physicians who hold investment interests in a publicly
traded company that has stockholders equity exceeding
$75 million at the end of its most recent fiscal year or on
average during the previous three fiscal years, and which
satisfies certain other requirements. In addition, both the
Stark Law and PORA contain an exception for compensation paid to
a physician for personal services rendered by the physician. We
have compensation arrangements with a number of physicians for
personal services, such as speaking engagements and specimen
tissue preparation. We have structured these arrangements with
terms intended to comply with the requirements of the personal
services exception to Stark and PORA.
However, we cannot be certain that regulators would find these
arrangements to be in compliance with Stark, PORA or similar
state laws. We would be required to refund any payments we
receive pursuant to a referral prohibited by these laws to the
patient, the payor or the Medicare program, as applicable.
Sanctions for a violation of the Stark Law include the following:
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denial of payment for the services provided in violation of the
prohibition;
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refunds of amounts collected by an entity in violation of the
Stark Law;
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a civil penalty of up to $15,000 for each service arising out of
the prohibited referral;
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possible exclusion from federal healthcare programs, including
Medicare and Medicaid; and
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a civil penalty of up to $100,000 against parties that enter
into a scheme to circumvent the Stark Laws prohibition.
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These prohibitions apply regardless of the reasons for the
financial relationship and the referral. No finding of intent to
violate the Stark Law is required for a violation. In addition,
under an emerging legal theory, knowing violations of the Stark
Law may also serve as the basis for liability under the Federal
False Claims Act.
Further, a violation of PORA is a misdemeanor and could result
in civil penalties and criminal fines. Finally, other states
have self-referral restrictions with which we have to comply
that differ from those imposed by federal and California law.
While we have attempted to comply with the Stark Law, PORA and
similar laws of other states,
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it is possible that some of our financial arrangements with
physicians could be subject to regulatory scrutiny at some point
in the future, and we cannot provide assurance that we will be
found to be in compliance with these laws following any such
regulatory review.
Federal
and State Anti-kickback Laws
The Federal Anti-kickback Law makes it a felony for a provider
or supplier, including a laboratory, to knowingly and willfully
offer, pay, solicit or receive remuneration, directly or
indirectly, in order to induce business that is reimbursable
under any federal health care program. A violation of the
Anti-kickback Law may result in imprisonment for up to five
years and fines of up to $250,000 in the case of individuals and
$500,000 in the case of organizations. Convictions under the
Anti-kickback Law result in mandatory exclusion from federal
health care programs for a minimum of five years. In addition,
HHS has the authority to impose civil assessments and fines and
to exclude health care providers and others engaged in
prohibited activities from Medicare, Medicaid and other federal
health care programs.
Actions which violate the Anti-kickback Law or similar laws may
also involve liability under the Federal False Claims Act, which
prohibits the knowing presentation of a false, fictitious or
fraudulent claim for payment to the U.S. Government.
Actions under the Federal False Claims Act may be brought by the
Department of Justice or by a private individual in the name of
the government.
Although the Anti-kickback Law applies only to federal health
care programs, a number of states, including California, have
passed statutes substantially similar to the Anti-kickback Law
pursuant to which similar types of prohibitions are made
applicable to all other health plans and third-party payors.
Both Californias fee-splitting statute, Business and
Professions Section 650, and its Medi-Cal anti-kickback
statute, Welfare and Institutions Code Section 14107.2,
have been interpreted by the California Attorney General and
California courts in substantially the same way as HHS and the
courts have interpreted the Anti-kickback Law. A violation of
Section 650 is punishable by imprisonment and fines of up
to $50,000. A violation of Section 14107.2 is punishable by
imprisonment and fines of up to $10,000.
Federal and state law enforcement authorities scrutinize
arrangements between health care providers and potential
referral sources to ensure that the arrangements are not
designed as a mechanism to induce patient care referrals and
opportunities. The law enforcement authorities, the courts and
Congress have also demonstrated a willingness to look behind the
formalities of a transaction to determine the underlying purpose
of payments between health care providers and actual or
potential referral sources. Generally, courts have taken a broad
interpretation of the scope of the Anti-kickback Law, holding
that the statute may be violated if merely one purpose of a
payment arrangement is to induce future referrals.
In addition to statutory exceptions to the Anti-kickback Law,
regulations provide for a number of safe harbors. If an
arrangement meets the provisions of a safe harbor, it is deemed
not to violate the Anti-kickback Law. An arrangement must fully
comply with each element of an applicable safe harbor in order
to qualify for protection. There are no regulatory safe harbors
to Californias Section 650.
Among the safe harbors that may be relevant to us is the
discount safe harbor. The discount safe harbor potentially
applies to discounts provided by providers and suppliers,
including laboratories, to physicians or institutions where the
physician or institution bills the payor for the test, not when
the laboratory bills the payor directly. If the terms of the
discount safe harbor are met, the discounts will not be
considered prohibited remuneration under the Anti-kickback Law.
This safe harbor may therefore be potentially applicable to our
agreements to sell tests to hospitals where the hospital submits
a claim to the payor.
California does not have a discount safe harbor. However, as
noted above, Section 650 has generally been interpreted
consistent with the Anti-kickback Law.
The personal services safe harbor to the Anti-kickback Law
provides that remuneration paid to a referral source for
personal services will not violate the Anti-kickback Law
provided all of the elements of that safe harbor are met. One
element is that, if the agreement is intended to provide for the
services of the physician on a periodic, sporadic or part-time
basis, rather than on a full-time basis for the term of the
agreement, the agreement specifies exactly the schedule of such
intervals, their precise length, and the exact charge for such
intervals. Our personal
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services arrangements with some physicians did not meet the
specific requirement of this safe harbor that the agreement
specify exactly the schedule of the intervals of time to be
spent on the services because the nature of the services, such
as speaking engagements, does not lend itself to exact
scheduling and therefore meeting this element of the personal
services safe harbor is impractical. Failure to meet the terms
of the safe harbor does not render an arrangement illegal.
Rather, such arrangements must be evaluated under the language
of the statute, taking into account all facts and circumstances.
While we believe that we are in compliance with the
Anti-kickback Law and Section 650, there can be no
assurance that our relationships with physicians, hospitals and
other customers will not be subject to investigation or a
successful challenge under such laws. If imposed for any reason,
sanctions under the Anti-kickback Law and Section 650 could
have a negative effect on our business.
Other
Federal and State Fraud and Abuse Laws
In addition to the requirements that are discussed above, there
are several other health care fraud and abuse laws that could
have an impact on our business. For example, provisions of the
Social Security Act permit Medicare and Medicaid to exclude an
entity that charges the federal health care programs
substantially in excess of its usual charges for its services.
The terms usual charge and substantially in
excess are ambiguous and subject to varying
interpretations.
Further, the Federal False Claims Act prohibits a person from
knowingly submitting a claim, making a false record or statement
in order to secure payment or retaining an overpayment by the
federal government. In addition to actions initiated by the
government itself, the statute authorizes actions to be brought
on behalf of the federal government by a private party having
knowledge of the alleged fraud. Because the complaint is
initially filed under seal, the action may be pending for some
time before the defendant is even aware of the action. If the
government is ultimately successful in obtaining redress in the
matter or if the plaintiff succeeds in obtaining redress without
the governments involvement, then the plaintiff will
receive a percentage of the recovery. Finally, the Social
Security Act includes its own provisions that prohibit the
filing of false claims or submitting false statements in order
to obtain payment. Violation of these provisions may result in
fines, imprisonment or both, and possible exclusion from
Medicare or Medicaid programs. California has an analogous state
false claims act applicable to all payors, as do many other
states.
California
Laboratory Licensing
In addition to federal certification requirements of
laboratories under CLIA, licensure is required and maintained
for our clinical reference laboratory under California law. Such
laws establish standards for the
day-to-day
operation of a clinical reference laboratory, including the
training and skills required of personnel and quality control.
In addition, California laws mandate proficiency testing, which
involves testing of specimens that have been specifically
prepared for the laboratory.
If our clinical reference laboratory is out of compliance with
California standards, the California Department of Health
Services, or DHS, may suspend, restrict or revoke our license to
operate our clinical reference laboratory, assess substantial
civil money penalties, or impose specific corrective action
plans. Any such actions could materially affect our business. We
maintain a current license in good standing with DHS. However,
we cannot provide assurance that DHS will at all times in the
future find us to be in compliance with all such laws.
New
York Laboratory Licensing
Because we receive specimens from New York State, our clinical
reference laboratory is required to be licensed by New York,
under New York laws and regulations, which establish standards
for:
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day-to-day
operation of a clinical laboratory, including training and skill
levels required of laboratory personnel;
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physical requirements of a facility;
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equipment; and
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quality control.
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We maintain such licensure for our clinical reference laboratory
for our Oncotype DX breast cancer test. The availability
of our Oncotype DX colon cancer test in New York is
pending approval by the state, as is required for all LDTs. New
York law also mandates proficiency testing for laboratories
licensed under New York state law, regardless of whether or not
such laboratories are located in New York. If a laboratory is
out of compliance with New York statutory or regulatory
standards, the New York State Department of Health, or DOH, may
suspend, limit, revoke or annul the laboratorys New York
license, censure us as the holder of the license or assess civil
money penalties. Statutory or regulatory noncompliance may
result in a laboratorys operator being found guilty of a
misdemeanor under New York law. Should we be found out of
compliance with New York laboratory requirements, we could be
subject to such sanctions, which could harm our business. We
maintain a current license in good standing with DOH. However,
we cannot provide assurance that DOH will at all times find us
to be in compliance with all such laws.
Other
States Laboratory Testing
Florida, Maryland, Pennsylvania and Rhode Island require
out-of-state
laboratories which accept specimens from those states to be
licensed. We have obtained licenses in those four states and
believe we are in compliance with applicable licensing laws.
From time to time, we may become aware of other states that
require
out-of-state
laboratories to obtain licensure in order to accept specimens
from the state, and it is possible that other states do have
such requirements or will have such requirements in the future.
If we identify any other state with such requirements or if we
are contacted by any other state advising us of such
requirements, we intend to follow instructions from the state
regulators as to how we should comply with such requirements.
Environmental
Laws
We are subject to regulation under federal, state and local laws
and regulations governing environmental protection and the use,
storage, handling and disposal of hazardous substances. The cost
of complying with these laws and regulations may be significant.
Our activities currently require the controlled use of
potentially harmful biological materials, hazardous materials
and chemicals. We cannot eliminate the risk of accidental
contamination or injury to employees or third parties from the
use, storage, handling or disposal of these materials. In the
event of contamination or injury, we could be held liable for
any resulting damages, and any liability could exceed our
resources or any applicable insurance coverage we may have.
Regulation Outside
of the U.S.
When marketing our tests outside of the U.S., we are subject to
foreign regulatory requirements governing human clinical testing
and marketing approval for our products. These requirements vary
by jurisdiction, differ from those in the U.S. and may require
us to perform additional pre-clinical or clinical testing. In
many countries outside of the U.S., coverage, pricing and
reimbursement approvals are also required. We are also required
to maintain accurate information and control over sales and
distributors activities that may fall within the purview
of the Foreign Corrupt Practices Act, its books and records
provisions and its anti-bribery provisions.
Patents
and Proprietary Technology
In order to remain competitive, we must develop and maintain
protection on the proprietary aspects of our technologies. To
that end, we rely on a combination of patents, patent
applications, copyrights and trademarks, as well as contracts,
such as confidentiality, material data transfer, license and
invention assignment agreements. We also rely upon trade secret
laws to protect unpatented know-how and continuing technological
innovation. In addition, we have what we consider to be
reasonable security measures in place to maintain
confidentiality. Our intellectual property strategy is intended
to develop and maintain our competitive position.
25
As of December 31, 2009, we had six issued patents in the
U.S., covering genes and methods that are components of the
Oncotype DX breast cancer test, four of which were issued
jointly to us and our collaborators, three Australian patents
and one European patent for methods used to determine gene
expression, and a number of pending U.S. patent
applications, including provisional and non-provisional filings.
Our issued U.S. patents expire at various times between
2024 and 2026. Some of these U.S. patent applications also
have corresponding pending or granted applications under the
Patent Cooperation Treaty in Canada, Europe, Japan, Australia
and other jurisdictions. In these patent applications, we have
either sole or joint ownership positions. In those cases where
joint ownership positions were created, we have negotiated
contractual provisions providing us with the opportunity to
acquire exclusive rights under the patent applications. Under
some patent applications, we have elected to allow exclusive
options to lapse without exercising the option. The joint
ownership agreements generally are in the form of material data
transfer agreements that were executed at the onset of our
collaborations with third parties.
Our patent applications relate to two main areas: gene
expression technology methods, and gene markers for cancer
recurrence and drug response in certain forms of cancer. We
intend to file additional patent applications in the U.S. and
abroad to strengthen our intellectual property rights. Our
pending and future patent applications may not result in issued
patents, and we cannot assure you that our issued patents or any
patents that might ultimately be issued by the U.S. Patent
and Trademark Office, or USPTO, will protect our technology. Any
patents issued to U.S. 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 of our intellectual
property, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the U.S.
We have received notices of claims of infringement and
misappropriation or misuse of other parties proprietary
rights in the past 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 these 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 patents issued to us in the
future, will not be asserted or prosecuted against us, We may
also initiate claims to defend our intellectual property.
Assertions of misappropriation, infringement or misuse, or
actions seeking to establish the validity of our patents could
materially or adversely affect our business, financial condition
and results of operations.
An adverse determination in litigation or interference
proceedings to which we may become a party relating to any
patents issued to us in the future, or any patents owned by
third parties, could subject us to significant liabilities to
third parties or require us to seek licenses from third parties.
Furthermore, if we are found to willfully infringe these
patents, we could, in addition to other penalties, be required
to pay treble damages. Although patent and intellectual property
disputes in this area have often been settled through licensing
or similar arrangements, costs associated with such arrangements
may be substantial and could include ongoing royalties. We may
be unable to obtain necessary licenses on satisfactory or
commercially feasible terms, if at all. If we do not obtain
necessary licenses, we may not be able to redesign our
Oncotype DX tests or other tests to avoid infringement,
or such redesign may take considerable time, and force us to
reassess our business plans. Adverse determinations in a
judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and
selling our tests, which would have a significant adverse impact
on our business.
All employees and technical consultants working for us are
required to execute confidentiality agreements in connection
with their employment and consulting relationships with us.
Confidentiality agreements provide that all confidential
information developed or made known to others during the course
of the employment, consulting or business relationship shall be
kept confidential except in specified circumstances. In
addition, agreements with employees provide that all inventions
conceived by the individual while employed by us are our
exclusive property. We cannot provide any assurance that
employees and consultants will abide by the confidentiality or
assignment terms of these agreements. Despite measures taken to
protect our intellectual property, unauthorized parties might
copy aspects of our technology or obtain and use information
that we regard as proprietary.
26
Roche
License Agreement
We license from Roche Molecular Systems, Inc., on a
non-exclusive basis, a number of U.S. patents claiming
nucleic acid amplification processes known as PCR, homogeneous
polymerase chain reaction, and RT-PCR. We use these processes in
our research and development activities and in the processing of
our Oncotype DX tests. The Roche license is limited to
clinical laboratory services performed within the U.S. and
Puerto Rico, and does not include the right to make or sell
products using the patented processes. The license continues as
long as the underlying patent rights are in effect, but is
subject to early termination by Roche under the following
circumstances:
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a change in our ownership;
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a declaration of bankruptcy or insolvency, the making of an
assignment for the benefit of our creditors, having a receiver
appointed, or losing the federal or state licenses necessary for
our operation;
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a change in our status to a non-profit entity or government
institution; or
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our breach of or default under a material term of the license.
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If the Roche license is terminated, we will be unable to use the
licensed processes to conduct research and development
activities or to perform our tests. As payment for the licenses
granted to us, we make royalty payments to Roche consisting of a
specified percentage of our net product revenues.
Research
and Development Expenses
Research and development expenses were $35.7 million,
$28.6 million and $22.1 million for the years ended
December 31, 2009, 2008, and 2007, respectively. During
2009, we continued to conduct research and development studies
in breast cancer, colon cancer and other cancers. We completed
our first renal cancer gene identification study under our
collaboration agreement for the development of a genomic test to
estimate the risk of recurrence following surgery for patients
with stage I-III renal carcinoma, clear cell type. We initiated
our first prostate cancer gene identification study and
identified a study cohort for a second stage II colon
cancer recurrence study. In addition, we have started discovery
work for the development of a test for non-small cell lung
cancer and are doing research on pre-malignant lesions,
including colon polyps and Barretts esophagus.
Employees
As of December 31, 2009, we had 453 employees,
including 84 in clinical reference laboratory operations, 109 in
research and development, 152 in sales and marketing, 60 in
information technology and systems, including bioinformatics,
and 48 in general and administrative functions, including
finance, human resources and facilities. None of our employees
are covered by collective bargaining arrangements, and our
management considers its relationships with employees to be good.
Available
Information
We were incorporated in Delaware in August 2000, and our website
is located at www.genomichealth.com. We make available
free of charge on our website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the Securities and Exchange Commission. Our website
and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on
Form 10-K.
We
have a history of net losses, we may incur net losses in the
future, and we may not achieve or maintain
profitability.
We have incurred substantial net losses since our inception. For
the year ended December 31, 2009, we incurred a net loss of
$9.4 million. From our inception in August 2000 through
December 31, 2009, we had an
27
accumulated deficit of $177.9 million. To date, we have
not, and we may never, achieve sustained revenues sufficient to
offset expenses. We expect to devote substantially all of our
resources to continue to invest in our product pipeline,
including our current Oncotype DX tests and future
products, and our commercial and laboratory infrastructure. We
may incur additional losses in the future and we may never
achieve or maintain profitability.
We
expect to continue to incur significant expenses to develop and
market out tests, which may make it difficult for us to achieve
profitability.
In recent years, we have incurred significant costs in
connection with the development of our Oncotype DX
platform. For the year ended December 31, 2009, our
research and development expenses were $35.7 million and
our sales and marketing expenses were $61.1 million. We
expect our expense levels to continue to increase in absolute
dollars for the foreseeable future as we seek to expand the
clinical utility of our Oncotype DX breast cancer test,
drive adoption of and reimbursement for our Oncotype DX
colon cancer 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.
Changes
in healthcare policy could increase our costs and impact sales
of and reimbursement for our tests.
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 our tests based on existing healthcare policies. Clinical
laboratory tests that are developed and validated by a
laboratory for its own use are called laboratory developed
tests, or LDTs. Changes in healthcare policy, such as changes in
the FDA regulatory policy for LDTs, the creation of broad test
utilization limits for diagnostic products in general or
requirements that Medicare patients pay for portions of clinical
laboratory tests or services received, could substantially
impact the sales of our tests, increase costs and divert
managements attention from our business. 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. In addition, sales of our tests
outside of the U.S. makes us subject to foreign regulatory
requirements, which may also change over time. 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.
Several proposals to reform the system of health care delivery
in the U.S. are currently being considered by the federal
and many state governments. Some of the reforms call for a
government sponsored health plan. A number of states are also
contemplating significant reform of their healthcare policies. A
proposal for additional government-funded health care could
subject expenditures for health care to governmental budget
constraints and limits on spending. We cannot predict what
healthcare policy reforms, if any, will be adopted or the effect
that such adoption may have on our taxes, fees and other costs,
which could impact our business, financial condition and results
of operations. Some of the health reform proposals under
consideration by Congress include reductions to payments for
laboratory tests under the Medicare Clinical Laboratory Fee
Schedule. In addition, proposals to implement fees or taxes on
medical product manufacturers and clinical laboratories have
been considered. At this point, it is not clear whether health
reform legislation will be enacted by Congress and whether it
will include any new taxes or fees on clinical laboratories or
medical device manufacturers or reductions in laboratory
payments under Medicare. If such fees, taxes, or reductions in
payments are adopted, these could have a negative impact on our
business.
If
third-party payors, including managed care organizations and
Medicare, do not provide reimbursement, breach, rescind or
modify their contracts or reimbursement policies or delay
payments for our Oncotype DX tests, our commercial success could
be compromised.
Physicians and patients may not order our Oncotype DX
tests 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 test price.
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,
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supported by peer-reviewed publications, and
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included in clinical practice guidelines.
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There is uncertainty concerning third-party payor reimbursement
of any test incorporating new technology, including tests
developed using our Oncotype DX platform. 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 as
grounds to deny coverage for a test or procedure. Although there
are a number of favorable assessments of our Oncotype DX
breast cancer test, the test has received negative assessments
in the past and our tests may receive negative assessments in
the future.
Since each payor makes its own decision as to whether to
establish a policy to reimburse our test, seeking these
approvals is a time-consuming and costly process. To date, we
have secured policy-level reimbursement approval for our
Oncotype DX breast cancer test for N- patients from a
number of third-party payors. We cannot be certain that coverage
for this test will be provided in the future by additional
third-party payors or that existing reimbursement policies or
contracts or reimbursement levels will remain in place or be
fulfilled within existing terms and provisions.
Following the reporting of clinical studies to support the use
of our Oncotype DX breast cancer test in patients with
N+, ER+ disease, we experienced an increase in usage for N+
patients. We may not be able to obtain reimbursement coverage
for our test for breast cancer patients who are N+, ER+ that is
similar to the coverage we have obtained for early stage N-, ER+
patients.
We have not obtained reimbursement coverage from third-party
payors for our Oncotype DX colon cancer test launched in
January 2010. We expect to focus substantial resources on
obtaining adoption of and reimbursement coverage for this test.
Because it is new, our Oncotype DX colon cancer test may
be considered investigational by payors and therefore may not be
covered under their reimbursement policies. We believe it may
take several years to achieve reimbursement with a majority of
third-party payors. However, we cannot predict whether, or under
what circumstances, payors will reimburse for our test. If we
fail to establish broad adoption of and reimbursement for our
Oncotype DX colon cancer test, our reputation could be
harmed and our future prospects and our business could suffer.
If we are unable to obtain reimbursement from private payors and
Medicare and Medicaid programs for our tests or new tests or
test enhancements we may develop in the future, our ability to
generate revenues could be limited. We have in the past, and
will likely in the future, experience delays and temporary
interruptions in the receipt of payments from third-party payors
due to contract implementation steps, documentation requirements
and other issues, which could cause our revenues to fluctuate
from period to period.
The
prices at which our tests are reimbursed may be reduced by
Medicare and private and other payors, and any such changes
could have a negative impact on our revenues.
Even if we are being reimbursed for our tests, Medicare and
private and other payors may withdraw their coverage policies or
cancel their contracts with us at any time, review and adjust
the rate of reimbursement or stop paying for our tests, which
would reduce our total revenues. In addition, insurers,
including managed care organizations as well as government
payors such as Medicare and Medicaid, have increased their
efforts to control the cost, utilization and delivery of
healthcare services. These measures have resulted in reduced
payment rates and decreased utilization for the clinical
laboratory industry. From time to time, Congress has considered
and implemented changes to the Medicare fee schedules in
conjunction with budgetary legislation, and pricing for tests
covered by Medicare is subject to change at any time. Reductions
in the reimbursement rate of payors have occurred and may occur
in the future. Reductions in the prices at which our tests are
reimbursed could have a negative impact on our revenues.
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If we
are unable to obtain reimbursement for our tests outside of the
U.S., our ability to expand internationally will be
compromised.
The majority of our international product revenues are currently
generated by patient self-pay and third party reimbursement for
our Oncotype DX breast cancer test and through clinical
collaborations. In many countries outside of the U.S., various
coverage, pricing and reimbursement approvals are required. We
expect that it will take several years to establish broad
coverage and reimbursement for our tests with payors in
countries outside of the U.S., and our efforts may not be
successful. In addition, because we rely on distributors to
obtain reimbursement for our tests, to the extent we do not have
direct reimbursement arrangements with payors, we may not be
able to retain reimbursement coverage with a particular payor if
our agreement with a distributor is terminated or expires.
Because
of Medicare billing rules, we may not receive reimbursement for
all tests provided to Medicare patients.
Under current Medicare billing rules, claims for our Oncotype
DX breast cancer tests performed on Medicare beneficiaries
who were hospital inpatients at the time the tumor tissue
samples were obtained and whose tests were ordered less than
14 days from discharge must be incorporated in the payment
that the hospital receives for the inpatient services provided.
Medicare billing rules also require hospitals to bill for the
test when ordered for hospital outpatients less than
14 days following the date of the hospital procedure where
the tumor tissue samples were obtained. Accordingly, we are
required to bill individual hospitals for tests performed on
Medicare beneficiaries during these time frames. Because we
generally do not have a written agreement in place with these
hospitals to purchase these tests, we may not be paid for our
tests or may have to pursue payment from the hospital on a
case-by-case
basis. We believe patients coming under this rule represent
approximately 2% of our total breast cancer testing population.
We believe these billing rules may lead to confusion regarding
whether Medicare provides adequate reimbursement for our breast
cancer test, and could discourage Medicare patients from using
our test. Although we are working with Medicare and Congress, as
well as with other diagnostic laboratories, to revise or reverse
these billing rules, we have no assurance that Medicare will do
so or that Congress will require Medicare to do so, and we also
cannot ensure that hospitals will agree to arrangements to pay
us for Oncotype DX breast cancer tests performed on
patients falling under these rules.
We
depend on a limited number of payors for a significant portion
of our product revenues and if these or other payors stop
providing reimbursement or decrease the amount of reimbursement
for our tests, our revenues could decline.
Reimbursement on behalf of patients covered by Medicare
accounted for 20%, 22% and 23% of our product revenues for the
years ended December 31, 2009, 2008 and 2007, respectively.
Reimbursement on behalf of patients covered by United HealthCare
Insurance Company accounted for 9%, 9% and 13% of product
revenues for the years ended December 31, 2009, 2008 and
2007, respectively. There were no other third-party payors with
product revenues of 10% or more for those years. In addition,
because the majority of stage II colon cancer patients in
the U.S. are age 65 and over, we may become more
dependent on Medicare reimbursement in the future. It is
possible that these or other third-party payors that provide
reimbursement for our test may suspend, revoke or discontinue
coverage at any time, or may reduce the reimbursement rates
payable to us. Any such action could have a negative impact on
our revenues.
Our
financial results depend on sales of one test, our Oncotype DX
breast cancer test, 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, our Oncotype
DX breast cancer test. We have been selling this test since
January 2004. While we launched our test for colon cancer in
January 2010, we do not expect to recognize significant revenues
from this test until adoption of and reimbursement for this test
have been established. We are in various stages of research and
development for other tests that we may offer as well as for
enhancements to our existing tests. We may not be able to
successfully commercialize tests for other cancers. If we are
unable to increase sales of our breast cancer test, establish
adoption of and reimbursement for our colon cancer test, or
successfully develop and commercialize other tests or
enhancements, our revenues and our ability to achieve
profitability would be impaired.
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If FDA
were to begin regulating our tests, we could incur substantial
costs and time delays associated with meeting requirements for
pre-market clearance or approval or we could experience
decreased demand for or reimbursement of our
tests.
Clinical laboratory tests like ours are regulated under CLIA, as
administered by 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. Most LDTs are
not currently subject to FDA regulation, although reagents or
software provided by third parties and used to perform LDTs may
be subject to regulation. We believe that our Oncotype DX
tests are not diagnostic kits and also believe that they are
LDTs. As a result, we believe our tests should not be subject to
regulation under established FDA policies. The container we
provide for collection and transport of tumor samples from a
pathology laboratory to our clinical reference laboratory may be
a medical device subject to FDA regulation but is currently
exempt from pre-market review by FDA.
In January 2006, we received a letter from FDA regarding our
Oncotype DX breast cancer test 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, or
IVDMIAs. Under this draft guidance, our tests 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 a transition
period of FDA enforcement discretion of up to 18 months
following release of final guidance for currently marketed 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. 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 PMAs, 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, requested that its Advisory Committee on
Genetics, Health and Society make recommendations about the
oversight of genetic testing. A final report was published in
April 2008. If the reports recommendations for increased
oversight of genetic testing were to result in further
regulatory burdens, it could have a negative impact on our
business and could delay the commercialization of tests in
development.
We cannot provide any assurance that FDA regulation, including
pre-market review, will not be required in the future for our
tests, 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 our tests.
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 tests pending pre-market clearance or approval.
If our tests are allowed to remain on the market but there is
uncertainty about our tests, if they are labeled investigational
by FDA, or if labeling claims FDA allows us to make are very
limited, orders or reimbursement may decline. The regulatory
approval process may involve, among other things, successfully
completing additional clinical trials and 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 tests 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 our tests
if we determine that doing so would be appropriate.
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Should any of the reagents obtained by us from vendors and used
in conducting our tests be affected by future regulatory
actions, our business could be adversely affected by those
actions, including increasing the cost of testing or delaying,
limiting or prohibiting the purchase of reagents necessary to
perform testing.
If we
were required to conduct additional clinical trials prior to
continuing to sell our breast and colon cancer tests or any
other tests we may develop, those trials could lead to delays or
failure to obtain necessary regulatory approval, which could
cause significant delays in commercializing any future products
and harm our ability to become profitable.
If FDA decides to regulate our tests, it may require additional
pre-market clinical testing prior to submitting a regulatory
notification or 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 tests. In
addition, we may not be able to establish or maintain
relationships with these parties on favorable terms, if at all.
Each of these outcomes would harm our ability to market our
tests, or to 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 U.S. 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 clinical reference 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 reference laboratory, including the
training and skills required of personnel and quality control.
Because we receive specimens from New York State, our clinical
reference laboratory is required to be licensed by New York. We
maintain such licensure for our clinical reference laboratory
for our Oncotype DX breast cancer test. The availability
of our Oncotype DX colon cancer test in New York is
dependent upon approval by the state, as is required for all
LDTs. New York law also mandates proficiency testing for
laboratories licensed under New York state law, regardless of
whether or not such laboratories are located in New York.
Moreover, several other states require that we hold licenses to
test specimens from patients in those states. Other states may
have similar requirements or may adopt similar requirements in
the future. Finally, we may be subject to regulation in foreign
jurisdictions as we seek to expand international distribution of
our tests.
If we were to lose our CLIA accreditation or California license,
whether as a result of a revocation, suspension or limitation,
we would no longer be able to sell our tests, which would limit
our revenues and harm our business. If
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we were to lose our license in New York or 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 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 False Claims Act civil and criminal penalties and
state equivalents.
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We have adopted policies and procedures designed to comply with
these laws, including policies and procedures relating to
financial arrangements between us and physicians who refer
patients to us. In the ordinary course of our business, we
conduct internal reviews of our compliance with these laws. Our
compliance is also subject to governmental review. The 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.
Declining
general economic or business conditions could have a negative
impact on our business.
Continuing concerns over inflation, deflation, energy costs,
geopolitical issues, the availability and cost of credit, the
Federal stimulus package, Federal budget proposals, the
U.S. mortgage market and a declining real estate market in
the U.S. have contributed to increased volatility and
diminished expectations for the global economy and expectations
of slower global economic growth going forward. These factors,
combined with volatile oil prices, declining business and
consumer confidence, a volatile stock market and increased
unemployment, have precipitated an economic slowdown and
recession. If the economic climate in the U.S. does not
improve or continues to deteriorate, our business, including our
patient population, our suppliers and our third-party payors,
could be negatively affected, resulting in a negative impact on
our product revenues.
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 early development and devote
considerable resources to research and development. For example,
we are conducting early development studies in colon cancer for
stage III patients, prostate, renal cell and lung cancers.
There can be no assurance that our technologies will be capable
of reliably predicting the recurrence of cancers other than
breast and colon cancer with the sensitivity and specificity
necessary to be clinically and commercially useful, or that our
colon cancer test will result in a commercially successful
product. 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.
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This product development process involves a high degree of risk
and may take 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.
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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 might choose to abandon the
development of the product or product feature that was the
subject of the clinical trial, which could harm our business.
If we
are unable to support demand for our tests, including
successfully managing the evolution of our technology and
manufacturing platforms, our business could
suffer.
As our test volume grows, we will need to continue to ramp up
our testing capacity, implement increases in scale and related
processing, customer service, billing and systems process
improvements, and expand our internal quality assurance program,
technology and manufacturing platforms to support testing on a
larger scale. We will also need additional certified laboratory
scientists and other scientific and technical personnel to
process higher volumes of our tests. We cannot assure you that
any increases in scale, related improvements and quality
assurance will be successfully implemented or that appropriate
personnel will be available. As our colon cancer test and
additional products are commercialized, we will need to bring
new equipment on-line, implement new systems, technology,
controls and procedures and hire personnel with different
qualifications. Failure to implement necessary procedures or to
hire the necessary personnel could result in higher cost of
processing or an inability to meet market demand. There can be
no assurance that we will be able to perform tests on a timely
basis at a level consistent with demand, that our efforts to
scale our commercial operations will not negatively affect the
quality of our test results, or that we will be successful in
responding to the growing complexity of our testing operations.
If we encounter difficulty meeting market demand or quality
standards for our tests, our reputation could be harmed and our
future prospects and our business could suffer.
We may
experience limits on our revenues if physicians decide not to
order our tests.
If medical practitioners do not order our Oncotype DX
tests 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 each type of test 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.
Prior to the inclusion of our Oncotype DX breast cancer
test in clinical guidelines, guidelines and practices regarding
the treatment of breast cancer often recommended that
chemotherapy be considered in most cases, including many cases
in which our test might indicate that, based on our clinical
trial results, chemotherapy would be of little or no benefit.
Accordingly, physicians may be reluctant to order a test that
may suggest recommending against chemotherapy in treating breast
cancer. 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 our test for their patients, which could
limit our ability to generate revenues and achieve profitability.
34
Our Oncotype DX colon cancer test predicts recurrence
but, unlike our breast cancer test, does not predict
chemotherapy benefit. We will need to educate physicians,
patients and payors about the benefits and cost-effectiveness of
our colon cancer test and to establish reimbursement
arrangements for this test with payors. We may need to hire
additional scientific, technical and other personnel to support
this process. If our marketing and educational efforts do not
result in sufficient physician or patient demand, we may not be
able to obtain adequate reimbursement for our colon cancer test.
If we fail to successfully establish adoption of and
reimbursement for our colon cancer test, our reputation could be
harmed and our business could suffer.
We may
experience limits on our revenues if patients decide not to use
our tests.
Some patients may decide not to use our Oncotype DX tests
due to their 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 tests, patients may still decide not to
use our tests, either because they do not want to be made aware
of the likelihood of recurrence or they wish to pursue a
particular course of therapy regardless of test results.
Additionally, the current economic slowdown could negatively
impact patients, resulting in loss of healthcare coverage,
delayed medical checkups or inability to pay for a relatively
expensive test. If only a small portion of the patient
population decides to use our tests, we will experience limits
on our revenues and our ability to achieve profitability.
If we
are unable to develop products to keep pace with rapid
technological, medical and scientific change, our operating
results and competitive position could be harmed.
In recent years, there have been numerous advances in
technologies relating to the diagnosis and treatment of cancer.
For example, technologies in addition to ours now reportedly
permit measurement of gene expression in FPE tissue specimens.
New chemotherapeutic or biologic 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 tests could become obsolete unless we
continually innovate and expand our products to demonstrate
recurrence and treatment benefit in patients treated with new
therapies. New treatment therapies typically have only a few
years of clinical data associated with them, which limits our
ability to perform clinical studies and correlate sets of genes
to a new treatments effectiveness. If we are unable to
demonstrate the applicability of our tests 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 that
we use to analyze genes for possible inclusion in our tests and
that we use in our clinical reference laboratory to conduct our
tests. 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
technologies 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. Companies that attempt
to replicate our tests could be set up in countries that do not
recognize our intellectual property. Such companies could send
test results into the U.S. and therefore reduce sales of our
tests.
If we
are unable to maintain intellectual property protection, our
competitive position could be harmed.
Our ability to compete and to achieve and maintain profitability
is impacted by our ability to protect our proprietary
discoveries and technologies. We currently rely on a combination
of patent applications, copyrights, trademarks, and
confidentiality, material data transfer, license and invention
assignment agreements to protect our intellectual property
rights. We also rely upon trade secret laws to protect
unpatented know-how and continuing technological innovation. Our
intellectual property strategy is intended to develop and
maintain our competitive position. Patents may be granted to us
jointly with other organizations, and while we may have a right
of first refusal,
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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 December 31, 2009, we had six issued patents in the
U.S. covering genes and methods that are components of the
Oncotype DX breast cancer test, four of which were issued
jointly to us and our collaborators, three Australian patents
and one European patent for methods used to determine gene
expression, and a number of pending U.S. patent applications.
Our pending patent applications may not result in issued
patents, and we cannot assure you that our issued patents or any
patents that might ultimately be issued by the USPTO 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 U.S.
From time to time, the U.S. Supreme Court, other federal courts,
the U.S. Congress or the USPTO may change the standards of
patentability and any such changes could have a negative impact
on our business. In addition, competitors may develop their own
versions of our test in countries where we did not apply for
patents or where our patents have not issued and compete with us
in those countries, including encouraging the use of their test
by physicians or patients in other countries.
On October 30, 2008, the Court of Appeals for the Federal
Circuit issued a decision that methods or processes cannot be
patented unless they are tied to a machine or involve a physical
transformation. Although that case, entitled In re
Bilski, involved a business method patent, the court
indicated that the
machine-or-transformation
test for patentability should be applied to all inventions. This
ruling could open the door to patentability challenges to our
existing patents and pending applications if our pre-Bilski
claims do not recite the requisite connection to a machine
or physical transformation. The U.S. Supreme Court has
granted certiorari in the Bilski case. We cannot
assure you that our patent portfolio will not be negatively
impacted by this decision.
A suit brought by multiple plaintiffs, including the American
Civil Liberties Union, or ACLU, against Myriad Genetics and the
USPTO, could also impact biotechnology patents. That case
involves certain of Myriads U.S. patents related to
the breast cancer susceptibility genes BRCA1 and BRCA2. Related
European patents were canceled in 2004 by the European Patent
Office after opposition. The plaintiffs in the Myriad case have
filed motions for summary judgment in the Southern District of
New York requesting that the court, among other things, finds
that the breast cancer genes are not patentable subject matter.
We joined other diagnostic companies in filing an amici
brief in this case. The hearing on the motions for summary
judgment took place on February 2, 2010. It is unknown how
the district court will rule on these motions, or whether any
such ruling will have an impact on gene patents generally,
however, a broad ruling could have a significant impact on the
ability of biotechnology companies to patent genes.
Also, on February 5, 2010, the Secretarys Advisory
Committee on Genetics, Health and Society for HHS voted to
approve a report entitled Gene Patents and Licensing
Practices and Their Impact on Patient Access to Genetic
Tests. That report defines patent claims on
genes broadly to include claims to isolated nucleic acid
molecules as well as methods of detecting particular sequences
or mutations. The report also contains six recommendations,
including the creation of an exemption from liability for
infringement of patent claims on genes for anyone making, using,
ordering, offering for sale, or selling a test developed under
the patent for patient care purposes, or for anyone using the
patent-protected genes in the pursuit of research. In addition,
the report recommended that the Secretary should explore,
identify, and implement mechanisms that will promote more
voluntary adherence to current guidelines that promote
non-exclusive in-licensing of diagnostic genetic and genomic
technologies. It is unclear whether these recommendations will
be acted upon by the HHS, or if the recommendations would result
in a change in law or process that could negatively impact our
patent portfolio or future research and development efforts.
We may
face intellectual property infringement claims that could be
time-consuming and costly to defend, and could result in our
loss of significant rights and the assessment of treble
damages.
We have received notices of claims of infringement and
misappropriation or misuse of other parties proprietary
rights in the past and may from time to time receive additional
notices. Some of these claims may lead to litigation. We
36
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 tests or using
technology that contains the allegedly infringing intellectual
property or enter into royalty or license agreements that may
not be available on acceptable or commercially practical terms,
if at all. Our failure to develop non-infringing technologies or
license the proprietary rights on a timely basis could harm our
business. In addition, revising our tests to include the
non-infringing technologies would require us to re-validate our
tests, which would be costly and time-consuming. Also, we may be
unaware of pending patent applications that relate to our tests.
Parties making infringement claims on future issued patents may
be able to obtain an injunction that could prevent us from
selling our tests or using technology that contains the
allegedly infringing intellectual property, which could harm our
business.
It is possible that a third party or patent office might take
the position that one or more patents or patent applications
constitute prior art in the field of genomic-based diagnostics.
In such a case, we might be required to pay royalties, damages
and costs to firms who own the rights to these patents, or we
might be restricted from using any of the inventions claimed in
those patents.
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 ours that are performed outside the
pathology laboratory. In addition, few diagnostic methods are as
expensive as our Oncotype DX tests.
We also face competition from many public and private companies
that offer products or have conducted research to profile genes,
gene expression or protein expression in breast cancer, such as
Celera Corporation, Clarient Incorporated, Agendia B.V.,
bioTheranostics, Exagen Diagnostics, Qiagen, Hologic and
University Genomics. Commercial laboratories with strong
distribution networks for diagnostic tests, such as Genzyme
Corporation, Quest Diagnostics Incorporated and Laboratory
Corporation of America Holdings, may become competitors. Other
potential competitors include companies that develop diagnostic
tests such as 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 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. In addition, competitors
may develop their own versions of our tests in countries where
we did not apply for patents or where our patents have not
issued and compete with us in those countries, including
encouraging the use of their test by physicians or patients in
other countries.
We have changed the list price of our breast cancer test in the
past and we may change prices for our tests in the future. Any
increase or decrease in pricing could impact reimbursement of
and demand for our tests. Many of our present and potential
competitors have widespread brand recognition and substantially
greater financial and technical resources and development,
production and marketing capabilities than we do. Others may
develop lower-priced, less complex tests that could be viewed by
physicians and payors as functionally equivalent to our tests,
which could force us to lower the list prices of our tests 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
37
differentiation or perception that an FDA-cleared test is more
desirable than Oncotype DX tests, and that may discourage
adoption and reimbursement of our tests. If we are unable to
compete successfully against current or future competitors, we
may be unable to increase market acceptance for and sales of our
tests, which could prevent us from increasing or sustaining our
revenues or achieving 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 U.S., 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 clinical partners, 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 the
contracted activities successfully and in a timely manner, the
research, development or commercialization of the products
contemplated by the collaboration could be delayed or
terminated. If any of our collaboration agreements are
terminated, or if we are unable to renew those agreements on
acceptable terms, we would be required to seek alternatives. We
may not be able to negotiate 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.
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 collaboration agreement or the
entitys announcement of a collaboration with an entity
other than us could 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
38
critical to us as we continue to develop our technologies and
testing processes and as we 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 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
could adversely affect our ability to support our research and
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 tests and our business will be
harmed.
We do not have redundant clinical reference laboratory
facilities outside of Redwood City, California. Redwood City is
situated 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 or the backlog of tests that could develop if
our facility is inoperable for even a short period of time may
result in the loss of customers or harm our reputation, and we
may be unable to regain those customers in the future. Although
we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient
to cover all of our potential losses and may not continue to be
available to us on acceptable terms, if at all.
In order to rely on a third party to perform our tests, we could
only use another facility with established state licensure and
CLIA accreditation under the scope of which Oncotype DX
tests could be performed following validation and other required
procedures. We cannot assure you that we would be able to find
another CLIA-certified facility willing to comply with the
required procedures, that this laboratory would be willing to
perform the tests for us on commercially reasonable terms, or
that it would be able to meet our quality standards. In order to
establish a redundant clinical reference 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. We may not be able, or it may take considerable time,
to replicate our testing processes or results in a new facility.
Additionally, any new clinical reference laboratory facility
opened by us would be subject to certification under CLIA and
licensed by several states, including California and New York,
which could take a significant amount of time and result in
delays in our ability to begin operations.
We are
dependent on our information technology and telecommunications
systems, and any failure of these systems could harm our
business.
We depend on information technology, or IT, and
telecommunications systems for significant aspects of our
operations. In addition, our third-party billing and collections
provider is dependent upon telecommunications and data systems
provided by outside vendors and information it receives from us
on a regular basis. These IT and telecommunications systems
support a variety of functions, including test processing,
sample tracking, quality control, customer service and support,
billing and reimbursement, research and development activities,
and our general and administrative activities. Failures or
significant downtime of our IT or telecommunications systems or
those used by our third-party service providers could prevent us
from processing tests, providing test results to
39
physicians, billing payors, processing reimbursement appeals,
handling patient or physician inquiries, conducting research and
development activities, and managing the administrative aspects
of our business. Any disruption or loss of IT or
telecommunications systems on which critical aspects of our
operations depend could have an adverse effect on our business
and our product revenues.
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 Life
Technologies 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 our
Oncotype DX platform. 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 our tests, we may need to
reconfigure our test processes, 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.
We may
be unable to manage our future growth effectively, which could
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 may place strain on our administrative and
operational infrastructure, including customer service and our
clinical reference 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 or professional liability, we
could face substantial liabilities that exceed our
resources.
The marketing, sale and use of our tests could lead to the
filing of product liability claims if someone were to allege
that our tests failed to perform as it was designed. We may also
be subject to liability for errors in the test results we
provide to physicians or for a misunderstanding of, or
inappropriate reliance upon, the information we provide. For
example, physicians sometimes order our Oncotype DX
breast cancer test for patients who do not have the same
specific clinical attributes indicated on the report form as
those for which the test provides clinical experience
information from validation studies. It is our practice to offer
medical consultation to physicians ordering our test for such
patients, including ER-breast cancer patients. A product
liability or professional liability claim could result in
substantial damages and be costly and time consuming for us to
defend. Although we believe that our existing product and
professional liability insurance is adequate, we cannot assure
you that our insurance would fully protect us from the financial
impact of defending against product liability or professional
liability claims. Any product liability or professional
liability claim brought against us, with or without merit, could
increase our insurance rates or prevent us from securing
insurance coverage in the future. Additionally, any product
liability lawsuit could cause injury to our reputation, result
in the recall of our products, or cause current clinical
partners to
40
terminate existing agreements and potential clinical partners to
seek other partners, any of which could impact our results of
operations.
If we
use biological and hazardous materials in a manner that causes
injury, we could be liable for damages.
Our activities currently require the controlled use of
potentially harmful biological materials, 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
may become significant and could negatively affect our operating
results.
International
expansion of our business exposes us to business, regulatory,
political, operational, financial and economic risks associated
with doing business outside of the U.S.
Our business strategy incorporates international expansion,
including establishing direct sales and physician outreach and
education capabilities outside of the U.S. and expanding our
relationship with distributors. In February 2009, we established
a subsidiary in Switzerland and we may establish operations in
other countries in the future. Doing business internationally
involves a number of risks, including:
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multiple, conflicting and changing laws and regulations such as
tax laws, export and import restrictions, employment laws,
regulatory requirements and other governmental approvals,
permits and licenses;
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failure by us or our distributors to obtain regulatory approvals
for the use of our tests in various countries;
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difficulties in staffing and managing foreign operations;
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complexities associated with managing multiple payor
reimbursement regimes or self-pay systems;
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logistics and regulations associated with shipping tissue
samples, including infrastructure conditions and transportation
delays;
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limits in our ability to penetrate international markets if we
are not able to process tests locally;
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financial risks, such as longer payment cycles, difficulty
collecting accounts receivable and exposure to foreign currency
exchange rate fluctuations;
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political and economic instability, including wars, terrorism,
and political unrest, outbreak of disease, boycotts, curtailment
of trade and other business restrictions; and
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regulatory and compliance risks that relate to maintaining
accurate information and control over sales and
distributors activities that may fall within the purview
of the Foreign Corrupt Practice Act, its books and records
provisions or its anti-bribery provisions.
|
Any of these factors could significantly harm our future
international expansion and operations and, consequently, our
revenues and results of operations.
Our
dependence on distributors for foreign sales of our Oncotype DX
tests could limit or prevent us from selling our test in foreign
markets and from realizing long-term international revenue
growth.
As of December 31, 2009, we had exclusive distribution
agreements for our Oncotype DX breast cancer test in 12
countries outside of the U.S., and we may enter into other
similar arrangements in other countries in the future. We intend
to grow our business internationally, and to do so we may need
to attract additional distributors to expand the territories in
which we sell our test. Distributors may not commit the
necessary resources to market and sell our test 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, costs of
doing business outside of the U.S. and the reimbursement process
in foreign
41
markets may also impact our revenues from international sales or
impact our ability to increase international sales in the future.
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 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. The market price of our common stock has
been particularly volatile during the recent period of upheaval
in the capital markets and world economy, and may continue to be
volatile in the future. 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
marketable securities are subject to risks that could adversely
affect our overall financial position.
We invest our cash in accordance with an established internal
policy in instruments which historically have been highly liquid
and carried relatively low risk. However, with recent credit
market conditions, similar types of investments have experienced
losses in value or liquidity issues which differ from historical
patterns. Should a portion of our marketable securities lose
value or have their liquidity impaired, it could adversely
affect our overall financial position by imperiling our ability
to fund our operations and forcing us to seek additional
financing sooner than we would otherwise. Such financing, if
available, may not be available on commercially attractive terms.
Our
inability to raise additional capital on acceptable terms in the
future may limit our ability to develop and commercialize new
tests and technologies and expand our operations.
We expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure,
commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other
things:
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sustain commercialization of our Oncotype DX tests and
enhancements to those tests;
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fund commercialization of any future tests we may develop;
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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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expand our research and development activities;
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acquire or license technologies; and
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finance capital expenditures and general and administrative
expenses.
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Our present and future funding requirements will depend on many
factors, including:
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the level of research and development investment required to
maintain and improve our technology position;
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42
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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.
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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. The credit markets and the financial services industry have
been experiencing a period of unprecedented turmoil and upheaval
characterized by the bankruptcy, failure, collapse or sale of
various financial institutions and an unprecedented level of
intervention from the U.S. federal government. These events have
generally made equity and debt financing more difficult to
obtain. Accordingly, additional equity or debt financing might
not be available on reasonable terms, if at all. If adequate
funds are not available, we may have to scale back our
operations or limit our research and development activities.
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.
We are
subject to increasingly complex taxation rules and practices,
which may affect how we conduct our business and our results of
operations.
As our business grows, we are required to comply with
increasingly complex taxation rules and practices. We are
subject to tax in multiple U.S. tax jurisdictions and
foreign tax jurisdictions as we expand internationally. The
development of our tax strategies will require additional
expertise and may impact how we conduct our business. Our future
effective tax rates could be unfavorably affected by changes in,
or interpretations of, tax rules and regulations in the
jurisdictions in which we do business, by lapses of the
availability of the U.S. research and development tax
credit or by changes in the valuation of our deferred tax assets
and liabilities. In addition, we are subject to the examination
of our tax returns by federal, state and foreign tax
authorities, which could focus on our intercompany transfer
pricing methodology as well as other matters. If our tax
strategies are ineffective or we are
43
not in compliance with domestic and international tax laws, our
financial position, operating results and cash flows could be
adversely affected.
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ITEM 1B.
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Unresolved
Staff
Comments.
|
None.
At December 31, 2009, we occupied approximately
96,000 square feet of laboratory and office space in
Redwood City, California under operating leases that expire in
February 2012, with options for us to extend the term of each
lease for an additional five years. In October 2009, we entered
into an operating lease agreement for an additional
30,500 square feet of office space that commences in April
2010 and expires in March 2018, with an option for us to extend
the term of the lease for an additional five years. We believe
that these facilities are adequate to meet our business
requirements for the near term and that additional space, when
needed, will be available on commercially reasonable terms.
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ITEM 3.
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Legal
Proceedings.
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We were not a party to any legal proceedings, other than
immaterial proceedings in the ordinary course of our business,
at December 31, 2009, or at the date of this report.
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ITEM 4.
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(Removed
and Reserved).
|
Executive
Officers of the Registrant
The names of our executive officers and their ages as of
March 1, 2010, are as follows:
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Name
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Age
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Position
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Randal W. Scott, Ph.D.
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52
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Executive Chairman of the Board
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Kimberly J. Popovits
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51
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President and Chief Executive Officer and Director
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G. Bradley Cole
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54
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Chief Operating Officer and Chief Financial Officer; Secretary
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Steven Shak, M.D.
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59
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Chief Medical Officer
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Joffre B. Baker, Ph.D.
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62
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Chief Scientific Officer
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Randal W. Scott, Ph.D., has served as our Executive
Chairman of the Board since January 2009, Chairman of the Board
and Chief Executive Officer since our inception in August 2000
until December 2008, President from August 2000 until February
2002, Chief Financial Officer from December 2000 until April
2004, and Secretary from August 2000 until December 2000 and
from May 2003 until February 2005. Dr. Scott was a founder
of Incyte Corporation, a genomic information company, and served
Incyte in various roles, including Chairman of the Board from
August 2000 to December 2001, President from January 1997 to
August 2000, and Chief Scientific Officer from March 1995 to
August 2000. Dr. Scott holds a B.S. in Chemistry from
Emporia State University and a Ph.D. in Biochemistry from the
University of Kansas.
Kimberly J. Popovits has served as our President and
Chief Executive Officer since January 2009, President and Chief
Operating Officer since February 2002 and as a director since
March 2002. From November 1987 to February 2002,
Ms. Popovits served in various roles at Genentech, Inc., a
biotechnology company, most recently serving as Senior Vice
President, Marketing and Sales from February 2001 to February
2002, and as Vice President, Sales from October 1994 to February
2001. Prior to joining Genentech, she served as
Division Manager, Southeast Region, for American Critical
Care, a division of American Hospital Supply, a supplier of
health care products to hospitals. Ms. Popovits holds a
B.A. in Business from Michigan State University.
G. Bradley Cole has served as our Chief Operating
Officer and Chief Financial Officer since January 2009,
Executive Vice President, Operations from January 2008 until
December 2008, Executive Vice President and Chief Financial
Officer from July 2004 until December 2008 and Secretary since
February 2005. From December 1997 to May 2004, he served in
various roles at Guidant Corporation, a medical device company,
most recently serving as Vice President, Finance and Business
Development for the Endovascular Solutions Group from January
2001 until
44
May 2004. From July 1994 to December 1997, Mr. Cole was
Vice President, Finance and Chief Financial Officer of
Endovascular Technologies, Inc., a medical device company that
was acquired by Guidant Corporation. From December 1988 to
February 1994, he served as Vice President, Finance and Chief
Financial Officer of Applied Biosystems Incorporated, a life
sciences systems company. Mr. Cole holds a B.S. in Business
from Biola University and an M.B.A. from San Jose State
University.
Steven Shak, M.D., has served as our Chief Medical
Officer since December 2000. From July 1996 to October 2000,
Dr. Shak served in various roles in Medical Affairs at
Genentech, most recently as Senior Director and Staff Clinical
Scientist. From November 1989 to July 1996, Dr. Shak served
as a Director of Discovery Research at Genentech, where he was
responsible for Pulmonary Research, Immunology, and Pathology.
Prior to joining Genentech, Dr. Shak was an Assistant
Professor of Medicine and Pharmacology at the New York
University School of Medicine. Dr. Shak holds a B.A. in
Chemistry from Amherst College and an M.D. from the New York
University School of Medicine, and completed his post-doctoral
training at the University of California, San Francisco.
Joffre B. Baker, Ph.D., has served as our Chief
Scientific Officer since December 2000. From March 1997 to
October 2000, Dr. Baker served as Vice President for
Research Discovery at Genentech. From March 1993 to October
2000, Dr. Baker oversaw Research Discovery at Genentech,
which included the departments of Cardiovascular Research,
Oncology, Immunology, Endocrinology, and Pathology. From July
1991 to October 1993, he served as Genentechs Director of
Cardiovascular Research. Prior to joining Genentech,
Dr. Baker was a member of the faculty of the Department of
Biochemistry at the University of Kansas. He holds a B.S. in
Biology and Chemistry from the University of California,
San Diego and a Ph.D. in Biochemistry from the University
of Hawaii.
PART II
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ITEM 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity
Securities.
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Our common stock, par value $0.0001, is traded on the NASDAQ
Global Market under the symbol GHDX. The following
table sets forth the range of high and low sales prices for our
common stock for the periods indicated:
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2009
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First
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Second
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Third
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Fourth
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Quarter
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Quarter
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Quarter
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Quarter
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Stock price high
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$
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25.16
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$
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27.22
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$
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22.00
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$
|
21.73
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Stock price low
|
|
$
|
18.63
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|
|
$
|
16.25
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|
|
$
|
15.81
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|
|
$
|
18.29
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|
|
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|
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2008
|
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First
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Second
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Third
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Fourth
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Quarter
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|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Stock price high
|
|
$
|
27.02
|
|
|
$
|
22.42
|
|
|
$
|
25.50
|
|
|
$
|
22.91
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|
Stock price low
|
|
$
|
16.45
|
|
|
$
|
16.58
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|
|
$
|
18.86
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|
|
$
|
16.00
|
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According to the records of our transfer agent, we had 91
stockholders of record as of February 26, 2010.
Dividends
We have never declared or paid any cash dividends on our capital
stock, and we do not currently intend to pay any cash dividends
on our common stock in the foreseeable future. We expect to
retain future earnings, if any, to fund the development and
growth of our business. Our board of directors will determine
future cash dividends, if any. There are currently no
contractual restrictions on our ability to pay dividends.
Stock
Performance Graph
The following information is not deemed to be soliciting
material or to be filed with the Securities
and Exchange Commission or subject to Regulation 14A or 14C
under the Securities Exchange Act of 1934 or to the liabilities
of Section 18 of the Securities Exchange Act of 1934, and
will not be deemed to be incorporated by
45
reference into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, except to the extent we
specifically incorporate it by reference into such a filing.
Set forth below is a line graph showing the cumulative total
stockholder return (change in stock price plus reinvested
dividends) assuming the investment of $100 on September 29,
2005 (the day of our initial public offering) in each of our
common stock, the NASDAQ Market Index and the NASDAQ
Biotechnology Index for the period commencing on
September 29, 2005 and ending on December 31, 2009.
The comparisons in the table are required by the Securities and
Exchange Commission and are not intended to forecast or be
indicative of future performance of our common stock.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG GENOMIC HEALTH, INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
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|
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September 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
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2005
|
|
|
2005
|
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2006
|
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2007
|
|
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2008
|
|
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2009
|
Genomic Health, Inc.
|
|
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$
|
100.00
|
|
|
|
$
|
78.87
|
|
|
|
$
|
161.04
|
|
|
|
$
|
196.02
|
|
|
|
$
|
168.66
|
|
|
|
$
|
169.35
|
|
NASDAQ Market Index
|
|
|
$
|
100.00
|
|
|
|
$
|
102.82
|
|
|
|
$
|
113.41
|
|
|
|
$
|
125.37
|
|
|
|
$
|
75.19
|
|
|
|
$
|
109.26
|
|
NASDAQ Biotechnology Index
|
|
|
$
|
100.00
|
|
|
|
$
|
104.08
|
|
|
|
$
|
104.72
|
|
|
|
$
|
107.25
|
|
|
|
$
|
99.86
|
|
|
|
$
|
109.86
|
|
|
|
|
|
|
|
|
|
|
|
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ITEM 6.
|
Selected
Financial
Data.
|
The following selected consolidated financial data should be
read together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this report. The selected consolidated
balance sheets data at December 31, 2009 and 2008 and the
selected consolidated statements of operations data for each
year ended December 31, 2009, 2008 and 2007 have been
derived from our audited consolidated financial statements that
are included elsewhere in this report. The selected consolidated
balance sheets data at December 31, 2007, 2006 and 2005 and
the selected consolidated statements of operations data for each
year ended December 31, 2006 and 2005 have been derived
46
from our audited consolidated financial statements not included
in this report. Historical results are not necessarily
indicative of the results to be expected in the future.
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Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
146,581
|
|
|
$
|
108,658
|
|
|
$
|
62,745
|
|
|
$
|
27,006
|
|
|
$
|
4,823
|
|
Contract revenues
|
|
|
2,967
|
|
|
|
1,921
|
|
|
|
1,282
|
|
|
|
2,168
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
149,548
|
|
|
|
110,579
|
|
|
|
64,027
|
|
|
|
29,174
|
|
|
|
5,202
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
32,562
|
|
|
|
27,185
|
|
|
|
17,331
|
|
|
|
9,908
|
|
|
|
6,249
|
|
Research and development
|
|
|
35,691
|
|
|
|
28,624
|
|
|
|
22,053
|
|
|
|
12,841
|
|
|
|
9,465
|
|
Selling and marketing
|
|
|
61,132
|
|
|
|
46,668
|
|
|
|
36,456
|
|
|
|
24,625
|
|
|
|
15,348
|
|
General and administrative
|
|
|
29,564
|
|
|
|
25,617
|
|
|
|
17,849
|
|
|
|
12,765
|
|
|
|
6,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
158,949
|
|
|
|
128,094
|
|
|
|
93,689
|
|
|
|
60,139
|
|
|
|
37,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,401
|
)
|
|
|
(17,515
|
)
|
|
|
(29,662
|
)
|
|
|
(30,965
|
)
|
|
|
(32,345
|
)
|
Interest and other income, net
|
|
|
550
|
|
|
|
1,365
|
|
|
|
2,370
|
|
|
|
2,045
|
|
|
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(8,851
|
)
|
|
|
(16,150
|
)
|
|
|
(27,292
|
)
|
|
|
(28,920
|
)
|
|
|
(31,361
|
)
|
Income tax expense (benefit)
|
|
|
560
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,411
|
)
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic and diluted net
loss per share
|
|
|
28,563,412
|
|
|
|
28,297,705
|
|
|
|
26,759,798
|
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes non-cash charges for employee stock-based compensation
expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
364
|
|
|
$
|
491
|
|
|
$
|
375
|
|
|
$
|
167
|
|
|
$
|
53
|
|
Research and development
|
|
|
3,098
|
|
|
|
2,913
|
|
|
|
1,882
|
|
|
|
821
|
|
|
|
323
|
|
Selling and marketing
|
|
|
3,171
|
|
|
|
2,622
|
|
|
|
1,876
|
|
|
|
779
|
|
|
|
274
|
|
General and administrative
|
|
|
3,522
|
|
|
|
3,112
|
|
|
|
2,152
|
|
|
|
1,137
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,155
|
|
|
$
|
9,138
|
|
|
$
|
6,285
|
|
|
$
|
2,904
|
|
|
$
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2006, we adopted the fair value recognition
provisions of the Financial Accounting Standards Boards
Accounting Standard Codification Topic 718, Stock
Compensation (formerly Statement of Financial Accounting
Standard No. 123R, Share-based Payment), using the
modified prospective method. Prior to 2006, stock-based
compensation was recognized in accordance with Accounting
Principles Board Opinion No. 25.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
57,448
|
|
|
$
|
56,670
|
|
|
$
|
68,360
|
|
|
$
|
44,215
|
|
|
$
|
69,527
|
|
Working capital
|
|
|
55,541
|
|
|
|
52,693
|
|
|
|
63,948
|
|
|
|
37,516
|
|
|
|
65,801
|
|
Total assets
|
|
|
88,107
|
|
|
|
86,689
|
|
|
|
87,929
|
|
|
|
58,024
|
|
|
|
75,799
|
|
Notes payable, current portion
|
|
|
225
|
|
|
|
1,814
|
|
|
|
2,687
|
|
|
|
2,547
|
|
|
|
1,052
|
|
Notes payable, long-term portion
|
|
|
|
|
|
|
225
|
|
|
|
2,039
|
|
|
|
4,726
|
|
|
|
2,621
|
|
Accumulated deficit
|
|
|
(177,895
|
)
|
|
|
(168,484
|
)
|
|
|
(152,395
|
)
|
|
|
(125,103
|
)
|
|
|
(96,183
|
)
|
Total stockholders equity
|
|
|
68,509
|
|
|
|
66,175
|
|
|
|
71,166
|
|
|
|
41,829
|
|
|
|
67,517
|
|
|
|
ITEM 7.
|
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 our
consolidated financial statements and the related notes included
in Item 8 of this report. Historical results are not
necessarily indicative of future results.
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 Oncotype DX platform utilizes
quantitative genomic analysis in standard tumor pathology
specimens to provide tumor-specific information, or the
oncotype of a tumor, In January 2004, we launched
our first Oncotype DX test, which is used to predict the
likelihood of cancer recurrence and the likelihood of
chemotherapy benefit in early stage breast cancer patients.
Effective July 1, 2009, we increased the list price of our
Oncotype DX breast cancer test from $3,820 to $3,975. In
January 2010, we launched our second Oncotype DX test,
which is used to predict the likelihood of cancer recurrence in
stage II colon cancer patients. The list price for our
Oncotype DX colon cancer test is $3,200. Substantially
all of our historical revenues have been derived from the sale
of Oncotype DX breast cancer tests ordered by physicians
in the U.S.
All of our tests are conducted at our clinical reference
laboratory in Redwood City, California. Our current clinical
reference laboratory processing capacity is approximately 17,000
tests per calendar quarter. As test processing for our
Oncotype DX breast and colon cancer tests is essentially
the same, except that the tests use different RNA extraction
methods, we believe that we currently have sufficient capacity
to process both of our tests.
Oncotype
DX Breast Cancer Test
For the year ended December 31, 2009, more than 49,030
Oncotype DX breast cancer test reports were delivered for
use in treatment planning, compared to more than 39,640 and more
than 24,450 test reports delivered for the years ended
December 31, 2008 and 2007, respectively. As of
December 31, 2009, more than 135,000 breast cancer tests
had been delivered for use in treatment planning. We believe
increased demand resulted from our ongoing commercial efforts,
continued publication of peer-reviewed articles on studies we
sponsored, conducted or collaborated on that support the use and
reimbursement of test, clinical presentations at major symposia,
and the inclusion of our breast cancer test in clinical practice
guidelines. 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
publication of articles, future appearances or presentations at
medical conferences or increased commercial efforts will have a
similar impact on demand for our breast cancer test in the
future. We have in the past, and may in the future, experience
slower sequential growth in demand for our test in the second
and third calendar quarters, which we believe may be attributed
to physicians, surgeons and patients scheduling vacations during
this time.
We depend upon third-party payors to provide reimbursement for
our test. Accordingly, we have focused substantial resources on
obtaining reimbursement coverage from third-party payors.
Several large national third-
48
party payors, a number of regional payors, and the local
Medicare carrier for California with jurisdiction for claims
submitted by us for Medicare patients, have issued positive
coverage determinations for our Oncotype DX breast cancer
test for patients with node negative, or N-, estrogen receptor
positive, or ER+, disease through contracts, agreements or
policy decisions.
Beginning in the second half of 2008 and continuing through
2009, we experienced an increase in usage of our Oncotype
DX breast cancer test for node positive, or N+, patients.
While some payors provide policy coverage for the use of our
test in patients with lymph node micro-metastasis (greater than
0.2 mm, but not greater than 2.0 mm in size), a substantial
portion of our existing reimbursement coverage has been limited
to women with early stage N-, ER+ breast cancer. Effective
June 28, 2009, the local carrier with jurisdiction for
claims submitted for us by Medicare extended its coverage for
breast cancer test to include ER+ patients with N+ disease (up
to three positive lymph nodes). However, we may not be able to
obtain additional reimbursement coverage from other payors for
our test for breast cancer patients with N+, ER+ disease.
In September 2009, we began accepting all appropriate breast
cancer tumor samples, regardless of immunohistochemistry, or
IHC, ER status, to facilitate assessment of uncertain ER status
by either IHC or reverse transcription polymerase chain
reaction, or RT-PCR, testing. An Oncotype DX breast
cancer Recurrence Score is generated if the ER status is
positive by IHC or positive by RT-PCR, even if the sample was
negative by IHC when submitted. In these cases, the tests will
be billed to the third-party insurer or to the patient. If the
sample is ER negative by both IHC and RT-PCR, neither the
third-party payor nor the patient will be billed. The processing
of tests that we do not bill payors or patients for will
increase our expenses.
In January 2010, we hired an additional 8 U.S. sales
representatives, increasing our domestic sales force to a total
of 88 sales representatives. We have also continued to expand
internationally. As of December 31, 2009, we had received
test samples from more than 50 countries and established
exclusive distribution agreements for our Oncotype DX
breast cancer test with partners in 12 countries outside of the
U.S. We established a European subsidiary in February 2009
and have lead executives with assignments in the Americas,
Europe, and Asia to support our international efforts. We have
completed or initiated multiple international clinical studies
intended to support the adoption of our breast cancer test
outside of the U.S. While we plan to use essentially the
same business model as we use in the U.S., there are significant
differences between countries that need to be considered. For
example, different countries may have a public healthcare
system, a combination of public and private healthcare system or
a cash-based payment system. We may decide to work directly on
our own in certain countries while continuing to utilize
distribution agreements in other countries. Although we have
continued to expand our sales, marketing and reimbursement
efforts outside the U.S., we do not expect international product
revenues to comprise more than 10% of our total revenues for at
least the next year or more.
Oncotype
DX Colon Cancer Test
At the May 2009 American Society of Clinical Oncology, or ASCO,
meeting, we announced positive results from our independent
clinical validation study in stage II colon cancer for our
Oncotype DX colon cancer test. The study demonstrated
that our test can independently predict the individual
recurrence risk in stage II colon cancer patients following
surgery, and indicated that the colon cancer Recurrence Score
provided additional independent clinical value beyond standard
measures of risk. Based upon these study results, we proceeded
with commercialization activities in 2009 and launched our colon
cancer test in January 2010.
We expect to focus substantial resources on obtaining adoption
of our Oncotype DX colon cancer test. We believe the key
factors that will drive adoption of this test include our
continued publication of peer-reviewed articles on studies we
sponsored, conducted or collaborated on that support the use and
reimbursement of our test, clinical presentations at major
symposia and our ongoing commercial efforts. We are working with
public and private payors and health plans to secure coverage
for our colon cancer test based upon clinical evidence showing
the utility of the test. We may need to hire additional
scientific, technical and other personnel to support this
process.
We have not obtained reimbursement coverage from third-party
payors for our Oncotype DX colon cancer test. As a new
test, our colon cancer test may be considered investigational by
payors and therefore may not be covered under their
reimbursement policies. Consequently, we intend to pursue
case-by-case
reimbursement and expect that the test will continue to be
reviewed on this basis until policy decisions have been made by
individual payors. We
49
believe it may take several years to achieve reimbursement with
a majority of third-party payors. However, we cannot predict
whether, or under what circumstances, payors will reimburse for
our test. Based upon our experience in obtaining adoption and
reimbursement for our Oncotype DX breast cancer test, we
do not expect product revenues from our colon cancer test to
comprise more than 10% of our total revenues for at least the
next year or more.
Product
Pipeline
We are investigating the utility of Oncotype DX in
patients with ductal carcinoma in situ, or DCIS, which generally
refers to a pre-invasive tumor with reduced risk of recurrence.
We plan to evaluate the use of the Oncotype DX 21-gene
breast cancer panel and also seek to identify other genes that
may be used for treatment planning in DCIS. We plan to continue
conducting early development tests to evaluate our colon cancer
test for treatment planning in stage III disease, and we
are also conducting studies to investigate our colon cancer
tests ability to predict chemotherapy benefit in
stage II and stage III colon cancer patients treated
with oxaliplatin.
In 2009, we initiated our first prostate gene identification
study. We also completed our first renal gene identification
study under our collaboration agreement with Pfizer Inc. for the
development of a genomic test to estimate the risk of recurrence
following surgery for patients with stage I-III renal carcinoma,
clear cell type, that has not spread to other parts of the body.
Economic
Environment
Continuing concerns over inflation, deflation, energy costs,
geopolitical issues, the availability and cost of credit, the
Federal stimulus plan, Federal budget proposals, the
U.S. mortgage market and a declining real estate market in
the U.S. have contributed to increased volatility and
diminished expectations for the global economy and expectations
of slower global economic growth going forward. These factors,
combined with volatile oil prices, declining business and
consumer confidence, a volatile stock market and increased
unemployment, have precipitated an economic slowdown and
recession. We have evaluated the impact of this environment on
our cash management, cash collection activities and volume of
tests delivered.
As of the date of this report, we have not experienced a loss of
principal on any of our investments, and we expect that we will
continue to be able to access or liquidate these investments as
needed to support our business activities. From time to time, we
monitor the financial position of our significant third-party
payors, which include Medicare and managed care companies. As of
the date of this report, we do not expect the current economic
environment to have a material negative impact on our ability to
collect payments from third-party payors in the foreseeable
future. The economic slowdown could negatively impact the volume
of tests we deliver if patients lose healthcare coverage, delay
medical checkups or are unable to pay for our test. We intend to
continue to assess the impact of the economic environment on our
business activities. If the economic climate in the
U.S. does not improve or continues to deteriorate, our cash
position, cash collection activities and volume of tests
delivered could be negatively impacted and we could experience
lower revenues.
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 U.S. 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.
50
Revenue
Recognition
We determine whether revenue is recognized on an accrual basis
when test results are delivered or on a cash basis when cash is
received from the payor. Our revenues for tests performed are
recognized when the following criteria are met:
(1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. We assess whether
the fee is fixed or determinable based on the nature of the fee
charged for the products or services delivered and existing
contractual agreements. When evaluating collectibility, we
consider whether we have sufficient history to reliably estimate
a payors individual payment patterns. Based upon at least
several months of payment history, we review the number of tests
paid against the number of tests billed and the payors
outstanding balance for unpaid tests to determine whether
payments are being made at a consistently high percentage of
tests billed and at appropriate amounts given the contracted
payment amount. To the extent all criteria set forth above are
not met, including where there is no evidence of payment history
at the time test results are delivered, product revenues are
recognized on a cash basis when cash is received from the payor.
As of December 31, 2009, we had distributor agreements in
12 countries outside of the U.S. The distributor provides
us with certain marketing and administrative services within its
territory. As a condition of these agreements, the distributor
pays us an agreed upon fee per test and we process the tests.
The same revenue recognition criteria described above generally
apply to tests received through international distributors.
Product revenues for tests performed are recognized on an
accrual basis when the following revenue recognition criteria
are met: (1) persuasive evidence that an arrangement
exists; (2) delivery has occurred or services have been
rendered; (3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. To the extent all
criteria set forth above are not met when test results are
delivered, product revenues are generally recognized when cash
is received from the distributor.
From time to time, we receive requests for refunds of payments,
generally due to overpayments made by third-party payors. Upon
becoming aware of a refund request, we establish an accrued
liability for tests covered by the refund request until such
time as we determine whether or not a refund is due. If we
determine that a refund is due, we credit cash and reduce the
accrued liability. Accrued refunds were $757,000 and
$1.4 million at December 31, 2009 and 2008,
respectively.
Contract revenues are generally derived from studies conducted
with biopharmaceutical and pharmaceutical companies and are
recognized on a contract-specific basis. Under certain
contracts, revenues are recognized as costs are incurred or
assays are processed. We may exercise judgment when estimating
full-time equivalent level of effort, costs incurred and time to
project completion. For certain contracts, we utilize the
performance-based method of revenue recognition, which requires
that we estimate the total amount of costs to be expended for a
project and recognize revenue equal to the portion of costs
expended to date. The estimated total costs to be expended are
necessarily subject to revision from
time-to-time
as the underlying facts and circumstances change.
Allowance
for Doubtful Accounts
We accrue an allowance for doubtful accounts against our
accounts receivable based on estimates consistent with
historical payment experience. Our allowance for doubtful
accounts is evaluated quarterly and adjusted when trends or
significant events indicate that a change in estimate is
appropriate. As of December 31, 2009 and 2008, our
allowance for doubtful accounts was $545,000 and $881,000,
respectively. The year over year decrease in our allowance for
doubtful accounts reflected the impact of writedowns and
improved collections on outstanding accounts receivable.
Research
and Development Expenses
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 comprised of work performed by our collaborators under
contract terms. We record accruals for estimated study costs
based on estimates of services received and effort expended by
our collaborators pursuant to these agreements. The financial
terms of these agreements are subject to negotiations, may vary
from contract to contract, and may result in uneven payment
flows. We determine our estimates through discussion with
internal clinical development personnel and outside service
51
providers as to the progress or stage of completion of services
provided and the agreed upon fee to be paid for such services.
Advance payments for goods or services that will be used or
rendered for research and development activities are deferred
and capitalized and recognized as an expense as the goods are
delivered or the related services are performed.
All potential future product programs outside of breast and
colon cancer are in the research or early development phase.
Although we have estimated the time frame in which some of these
products may be brought to market, the timing is uncertain given
the technical challenges and clinical variables that exist
between different types of cancers. In 2008, we began
maintaining information regarding costs incurred for activities
performed under certain contracts with biopharmaceutical and
pharmaceutical companies. However, we do not generally record or
maintain information regarding costs incurred in research and
development on a program-specific basis. Our research and
development staff and associated infrastructure resources are
deployed across several programs. Many of our costs are thus not
attributable to individual programs. As a result, 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.
Stock-based
Compensation Expense
Our employee stock-based compensation is estimated at the date
of grant based on the fair value of the award using the
Black-Scholes option valuation model and is recognized as
expense ratably over the requisite service period. The
application of option valuation models requires significant
judgment and the use of estimates, particularly surrounding
assumptions used in determining fair value. The Black-Scholes
option valuation model requires the use of estimates such as
stock price volatility and expected option lives, as well as
expected option forfeiture rates, to value stock-based
compensation. Prior to January 2008, our assumptions regarding
expected volatility were based primarily on comparable peer data
because our common stock had been publicly traded for less than
two years. As of January 2008, our assumptions regarding
expected volatility are based on the historical volatility of
our common stock. The expected life of options is estimated
based on historical option exercise data and assumptions related
to unsettled options. Expected option forfeiture rates are based
on historical data, and compensation expense is adjusted for
actual results.
We review our valuation assumptions on an ongoing basis, and, as
a result, our valuation assumptions used to value employee
stock-based awards granted in future periods may change. See
Note 10, Stock-Based Compensation, in
the Notes to Consolidated Financial Statements in Part II,
Item 8 of this Annual Report on
Form 10-K
for more information.
Deferred
Tax Assets
We are required to reduce our deferred tax assets by a valuation
allowance if it is more likely than not that some or all of our
deferred tax assets will not be realized. We must use judgment
in assessing the potential need for a valuation allowance, which
requires an evaluation of both negative and positive evidence.
The weight given to the potential effect of negative and
positive evidence should be commensurate with the extent to
which it can be objectively verified. In determining the need
for and amount of our valuation allowance, if any, we assess the
likelihood that we will be able to recover our deferred tax
assets using historical levels of income, estimates of future
income and tax planning strategies. As a result of recent
cumulative losses, we determined that, based on all available
evidence, there was substantial uncertainty as to our ability to
realize recorded net deferred taxes in future periods.
Accordingly, we recorded a valuation allowance against all of
our net deferred tax assets for the years ended
December 31, 2009 and 2008, respectively.
Results
of Operations
Comparison
of Years Ended December 31, 2009, 2008 and
2007
We recorded a net loss for the years ended December 31,
2009, 2008 and 2007 of $9.4 million, $16.1 million and
$27.3 million, respectively. On a basic and diluted per
share basis, net loss was $0.33, $0.57 and $1.02 for the years
ended December 31, 2009, 2008 and 2007, respectively. We
may incur net losses in future periods due to future spending,
and we do not expect to achieve sustained profitability for at
least the next year or more.
52
Revenues
We derive our revenues primarily from product sales and, to a
lesser extent, from contract research arrangements. We operate
in one industry segment. As of December 31, 2009, all of
our product revenues have been derived solely from the sale of
our Oncotype DX breast cancer 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 arrangement to pay is in place with the payor at
the time of billing and collectibility is reasonably assured.
Contract revenues are derived from studies conducted with
biopharmaceutical and pharmaceutical companies and are recorded
as contractual obligations are completed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Product revenues
|
|
$
|
146,581
|
|
|
$
|
108,658
|
|
|
$
|
62,745
|
|
Contract revenues
|
|
|
2,967
|
|
|
|
1,921
|
|
|
|
1,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
149,548
|
|
|
$
|
110,579
|
|
|
$
|
64,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase in product revenues
|
|
$
|
37,923
|
|
|
$
|
45,913
|
|
|
|
|
|
Year over year percentage increase in product revenues
|
|
|
35
|
%
|
|
|
73
|
%
|
|
|
|
|
The year over year increases in product revenues resulted from
increased adoption, as evidenced by a 24% increase in test
volume for 2009 compared to 2008 and a 62% increase in test
volume for 2008 compared to 2007. We also experienced expanded
reimbursement coverage and an increase in the amount of revenue
recognized per test. Product revenues for the year ended
December 31, 2009 were affected by delayed receipt of
approximately $2.5 million in payments from two third-party
payors. The delays resulted from interruptions in payments due
to contract and documentation requirements, which have since
been resolved. These payments are expected to be recognized as
product revenue when received. The timing of recognition of
revenue related to these and other third-party payments may
cause fluctuations in product revenues from period to period.
Approximately $75.3 million, or 51%, of product revenues
for the year ended December 31, 2009, were recorded on an
accrual basis and recognized at the time the test results were
delivered, compared to $55.1 million, or 51%, and
$23.0 million, or 37%, of product revenues for the years
ended December 31, 2008 and 2007, respectively. For all
periods, the balance of product revenues was recognized upon
cash collection as payments were received.
Product revenues on behalf of Medicare patients for the year
ended December 31, 2009 were $28.8 million, or 20%, of
product revenues, compared to $23.7 million, or 22%, and
$14.3 million, or 23%, of product revenues for the years
ended December 31, 2008 and 2007, respectively. Product
revenues from United HealthCare Insurance Company for the year
ended December 31, 2009 were $13.0 million, or 9%, of
product revenues, compared to $9.8 million, or 9%, and
$8.2 million, or 13%, of product revenues for the years
ended December 31, 2008 and 2007, respectively. There were
no other third-party payors with product revenues of 10% or more
for those years.
Contract revenues were $3.0 million, $1.9 million and
$1.3 million for the years ended December 31, 2009,
2008 and 2007, respectively. Contract revenues represented
studies assessing our gene expression technology or
collaborative work in gene selection and protocol design with
our pharmaceutical partners. The increase in contract revenues
for 2009 compared to 2008 was due entirely to ongoing activities
related to our collaboration with Pfizer Inc. The increase in
contract revenues for 2008 compared to 2007 included the
recognition of $1.4 million in 2008 related to the
completion of a contract. We expect that our contract revenues
will continue to fluctuate based on the number and timing of
studies being conducted.
53
Cost of
Product Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Tissue sample processing costs
|
|
$
|
22,209
|
|
|
$
|
18,998
|
|
|
$
|
12,071
|
|
Employee stock-based compensation
|
|
|
364
|
|
|
|
491
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tissue sample processing costs
|
|
|
22,573
|
|
|
|
19,489
|
|
|
|
12,446
|
|
License fees
|
|
|
9,989
|
|
|
|
7,696
|
|
|
|
4,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product revenues
|
|
$
|
32,562
|
|
|
$
|
27,185
|
|
|
$
|
17,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
5,377
|
|
|
$
|
9,854
|
|
|
|
|
|
Year over year percentage increase
|
|
|
20
|
%
|
|
|
57
|
%
|
|
|
|
|
Cost of product revenues represents the cost of materials,
direct labor, equipment and infrastructure expenses associated
with processing tissue samples (including histopathology,
anatomical pathology, paraffin extraction, RT-PCR, quality
control analyses and shipping charges to transport tissue
samples) and license fees. Infrastructure expenses include
allocated facility occupancy and information technology costs.
Costs associated with performing our test are recorded as tests
are processed. Costs recorded for tissue sample processing
represent the cost of all the tests processed during the period
regardless of whether revenue was recognized with respect to
that test. Royalties for licensed technology calculated as a
percentage of product revenues and fixed annual payments
relating to the launch and commercialization of Oncotype
DX tests are recorded as license fees in cost of product
revenues 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.
Test volume increased 24% in 2009 compared to 2008, and 62% in
2008 compared to 2007, driving the $3.1 million, or 16%,
and $7.0 million, or 57%, year over year increases in
tissue sample processing costs. License fees increased
$2.3 million, or 30%, in 2009 compared to 2008 and
$2.8 million, or 58%, in 2008 compared to 2007. While
license fees are generally calculated as a percentage of product
revenues, the percentage increase in license fees does not
correlate exactly to the percentage increase in product revenues
because certain agreements contain provisions for fixed annual
payments and other agreements have tiered rates and payments
that may be subject to annual minimum or maximum amounts. We
expect the cost of product revenues to increase in future
periods to the extent we process more tests, including our
Oncotype DX colon cancer test launched in January 2010.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
18,413
|
|
|
$
|
16,534
|
|
|
$
|
11,487
|
|
Employee stock-based compensation
|
|
|
3,098
|
|
|
|
2,913
|
|
|
|
1,882
|
|
Collaboration expenses
|
|
|
2,134
|
|
|
|
1,433
|
|
|
|
1,320
|
|
Reagents and laboratory supplies
|
|
|
3,034
|
|
|
|
1,972
|
|
|
|
1,709
|
|
Infrastructure and all other costs
|
|
|
9,012
|
|
|
|
5,772
|
|
|
|
5,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
35,691
|
|
|
$
|
28,624
|
|
|
$
|
22,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
7,067
|
|
|
$
|
6,571
|
|
|
|
|
|
Year over year percentage increase
|
|
|
25
|
%
|
|
|
30
|
%
|
|
|
|
|
Research and development expenses represent costs incurred to
develop our technology and carry out clinical studies and
include personnel-related expenses, reagents and supplies used
in research and development laboratory work, infrastructure
expenses, including allocated overhead and facility occupancy
costs, contract services and other outside costs. Research and
development expenses also include costs related to activities
performed under contracts with biopharmaceutical and
pharmaceutical companies.
54
The $7.1 million increase in research and development
expenses for 2009 compared to 2008 included a $2.5 million
increase in allocated information technology salaries and
benefits and other costs related to the development of our colon
cancer test, a $1.9 million increase in personnel-related
expenses, a $1.1 million increase in reagents and
laboratory supplies, a $701,000 increase in collaborations
expense due primarily to gene discovery work and a $740,000
increase in infrastructure and other costs. The
$1.9 million increase in personnel-related expenses
included $1.6 million in salary increases and $266,000 in
higher benefits and other expenses. The increases in reagents,
laboratory supplies and collaboration expenses were primarily
due to early development studies for renal, prostate, and
small-cell lung cancer programs.
The $6.6 million increase in research and development
expenses for 2008 compared to 2007 included a $5.0 million
increase in personnel-related expenses, a $1.0 million
increase in stock-based compensation and a $263,000 increase in
costs incurred for reagents and laboratory supplies. The
$5.0 million increase in personnel-related expenses was
primarily due to higher salaries and benefits expenses related
to an increase in headcount year over year. We expect that our
research and development expenses will continue to increase in
absolute dollars in future periods as we increase investment in
our product pipeline for a variety of cancers, including cancers
other than breast and colon.
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
29,589
|
|
|
$
|
21,208
|
|
|
$
|
17,225
|
|
Employee stock-based compensation
|
|
|
3,171
|
|
|
|
2,622
|
|
|
|
1,876
|
|
Promotional and marketing materials
|
|
|
12,402
|
|
|
|
10,961
|
|
|
|
8,972
|
|
Travel, meetings and seminars
|
|
|
7,468
|
|
|
|
6,086
|
|
|
|
5,294
|
|
Infrastructure and all other costs
|
|
|
8,502
|
|
|
|
5,791
|
|
|
|
3,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling and marketing expenses
|
|
$
|
61,132
|
|
|
$
|
46,668
|
|
|
$
|
36,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
14,464
|
|
|
$
|
10,212
|
|
|
|
|
|
Year over year percentage increase
|
|
|
31
|
%
|
|
|
28
|
%
|
|
|
|
|
Our selling and marketing expenses consist primarily of
personnel-related expenses, education and promotional expenses
and infrastructure expenses, including allocated facility
occupancy and information technology costs. These expenses
include the costs of educating physicians, laboratory personnel
and other healthcare professionals regarding our genomic
technologies, how our Oncotype DX tests are developed and
validated and the value of the quantitative information that our
tests provide. Selling and marketing expenses also include the
costs of sponsoring continuing medical education, medical
meeting participation and dissemination of scientific and
economic publications related to our Oncotype DX
platform. Our sales force compensation includes annual salaries
and eligibility for quarterly commissions based on the
achievement of predetermined sales goals.
The $14.5 million increase in selling and marketing
expenses for 2009 compared to 2008 was primarily due to an
$8.4 million increase in personnel-related expenses, a
$2.7 million increase in infrastructure and other expenses,
a $1.5 million increase in promotional field expenses and
marketing materials, a $1.4 million increase in
travel-related expenses, and a $549,000 increase in stock-based
compensation. These increases included costs related to the
addition of 20 U.S. sales representatives in January 2009
and to our international expansion activities. Of the
$8.4 million increase in personnel-related expenses,
$6.3 million was attributable to increases in salaries,
benefits and related expenses, $1.0 million was
attributable to higher consulting expenses to support our
international expansion and colon product launch, $866,000 was
attributable to higher commissions and bonus payments, and
$213,000 was attributable to increases in recruiting and
relocation expenses.
The $10.2 million increase in selling and marketing
expenses for 2008 compared to 2007 was primarily due to a
$4.0 million increase in personnel-related expenses,
reflecting our investment in our field sales and support
organization, a $2.7 million increase in infrastructure and
other expenses, including allocations for facilities expansion
and improvements and medical affairs support for breast cancer
product enhancements, a $2.0 million
55
increase in promotional field expenses and marketing materials,
a $792,000 increase in travel-related expenses, primarily
associated with field sales personnel, and a $746,000 increase
in stock-based compensation. Of the $4.0 million increase
in personnel-related expenses, $3.3 million was
attributable to increases in salaries, benefits and related
expenses, $528,000 was attributable to higher commissions and
bonus payments and $218,000 was attributable to higher contract
labor and consulting expenses.
We expect selling and marketing expenses will continue to
increase in absolute dollars in future periods due to our
efforts to establish adoption of and reimbursement for our
Oncotype DX colon cancer test, the increase in our sales
force, and the expansion of our commercial efforts in
international markets. In January 2010, we hired an additional 8
U.S. sales representatives, increasing our domestic sales
force to a total of 88 sales representatives.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
10,001
|
|
|
$
|
9,184
|
|
|
$
|
6,053
|
|
Employee stock-based compensation
|
|
|
3,522
|
|
|
|
3,112
|
|
|
|
2,152
|
|
Professional fees and all other costs
|
|
|
16,041
|
|
|
|
13,321
|
|
|
|
9,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
29,564
|
|
|
$
|
25,617
|
|
|
$
|
17,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
3,947
|
|
|
$
|
7,768
|
|
|
|
|
|
Year over year percentage increase
|
|
|
15
|
%
|
|
|
44
|
%
|
|
|
|
|
Our general and administrative expenses consist primarily of
personnel-related expenses and professional fees and other
costs, including legal fees, advisory and auditing expenses,
billing and collection costs, bad debt expense and other
professional and administrative costs and related infrastructure
expenses, including allocated facility occupancy and information
technology costs.
The $3.9 million increase in general and administrative
expenses for 2009 compared to 2008 included a $1.7 million
increase in billing and collection fees related to increases in
the number of tests processed and cash collections, an $817,000
increase in personnel-related expenses, due primarily to salary
increases and benefits expenses, a $547,000 increase in
professional fees, due primarily to legal fees related to
regulatory and international matters, a $410,000 increase in
stock-based compensation, a $213,000 increase in infrastructure
expenses, a $176,000 increase in travel-related expenses and a
$161,000 increase in bad debt expense.
The $7.8 million increase in general and administrative
expenses for 2008 compared to 2007 included a $3.1 million
increase in personnel-related expenses due primarily to an
increase in headcount year over year, a $1.4 million
increase in bad debt expense related to a change in our estimate
of allowance for doubtful accounts and growth in our aged
accounts receivable balances, a $1.1 million increase in
billing and collections expense related to increases in the
number of tests processed and cash collected, a $960,000
increase in stock-based compensation and a $768,000 increase in
professional fees, due primarily to legal fees related to
regulatory and other matters, and a $406,000 increase in
infrastructure and other expenses.
We expect general and administrative expenses to increase in
absolute dollars in future periods as we hire additional staff
and incur other expenses to support the growth of our business
and to the extent we spend more on fees for billing and
collections as we process more tests.
Interest
and Other Income
Interest and other income was $670,000 for the year ended
December 31, 2009 compared to $1.8 million and
$3.0 million for the years ended December 31, 2008 and
2007, respectively. The decrease in interest and other income
for 2009 compared to 2008 reflected lower market yields on our
investments in 2009. The decrease in interest and other income
for 2008 compared to 2007 reflected decreased interest income
due to lower average cash and short-term investment balances
compared to the prior year, which reflected the investment of a
portion of the proceeds from our May 2007 common stock offering,
and lower market yields on our investments in 2008.
56
We expect our interest and other income may continue to decrease
if the overall decline in the interest rate environment related
to the current economic crisis continues.
Interest
Expense
Interest expense was $120,000 for the year ended
December 31, 2009 compared to $386,000 and $678,000 for the
years ended December 31, 2008 and 2007, respectively. The
year over year decreases were due to lower average balances on
our equipment financing notes as we paid them down.
We expect our interest expense to decline as we continue to make
payments on these notes, which are scheduled to be paid in full
by November 2010. We do not anticipate using additional
equipment financing as a funding source in the next twelve
months.
Income
Tax Expense (Benefit)
For the year ended December 31, 2009, we recorded income
tax expense of approximately $560,000, which was principally
comprised of California state income tax, federal alternative
minimum tax and foreign taxes which were based on our estimated
taxable income for the year ended December 31, 2009. For
the year ended December 31, 2008, we recorded an income tax
benefit of approximately $61,000. For the years ended
December 31, 2008 and 2007, we did not record a provision
for income taxes because we estimated and incurred a taxable
loss for both years.
As a result of cumulative losses since inception and based on
all available evidence, we continue to believe that there is
substantial uncertainty as to whether we will recover recorded
net deferred taxes in future periods. Accordingly, we continue
to maintain a full valuation allowance on our net deferred tax
assets for the years ended December 31, 2009 and 2008,
respectively. We intend to maintain a full valuation allowance
on our deferred tax assets until sufficient evidence exists to
support the reversal of all or some portion of these allowances.
Liquidity
and Capital Resources
As of December 31, 2009, we had an accumulated deficit of
$177.9 million. We have not yet achieved profitability, we
may incur net losses in the future, and we cannot provide
assurance as to when, if ever, we will achieve or maintain
profitability. 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 revenues to achieve profitability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
57,448
|
|
|
$
|
56,670
|
|
|
$
|
68,360
|
|
Working capital
|
|
|
55,541
|
|
|
|
52,693
|
|
|
|
63,948
|
|
For the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
4,826
|
|
|
|
(818
|
)
|
|
|
(18,706
|
)
|
Investing activities
|
|
|
(6,837
|
)
|
|
|
(26,167
|
)
|
|
|
(4,744
|
)
|
Financing activities
|
|
|
(78
|
)
|
|
|
(1,008
|
)
|
|
|
47,688
|
|
Capital expenditures (included in investing activities above)
|
|
|
(3,744
|
)
|
|
|
(10,057
|
)
|
|
|
(4,881
|
)
|
Sources
of Liquidity
At December 31, 2009, we had cash, cash equivalents and
short-term investments of $57.4 million compared to
$56.7 million at December 31, 2008. The $778,000
increase was attributable to increased cash collections from
sales of our tests and payments from collaborators, which were
offset by investments in the growth of our business, including
research and development, international expansion and activities
related to our colon product launch in January 2010. In
accordance with our investment policy, available cash is
invested in short-term, low-risk,
57
investment-grade debt instruments. Our cash and short-term
investments are held in a variety of interest-bearing
instruments including money market accounts, U.S Treasury
securities, debt obligations of U.S. government-sponsored
entities, high-grade corporate bonds and commercial paper. At
December 31, 2009, our holdings of debt obligations of
U.S. government-sponsored entities consisted entirely of
debt securities issued by the Federal Home Loan Bank, the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation.
Historically we have financed our operations primarily through
sales of our equity securities and cash received in payment for
our tests. In May 2007, we completed a public offering of our
common stock, resulting in net proceeds of $49.7 million.
Purchases of equipment and leasehold improvements have been
partially financed through capital equipment financing
arrangements. At December 31, 2009 and December 31,
2008, we had notes payable under these equipment financing
arrangements of $225,000 and $2.0 million, respectively.
Our existing notes payable under these arrangements are
scheduled to be paid in full by November 2010.
Cash
Flows
We achieved positive net operating cash flow for the year ended
December 31, 2009. Net cash provided by operating
activities was $4.8 million, compared to net cash used in
operating activities of $818,000 and $18.7 million for the
years ended December 31, 2008 and 2007, respectively. Net
cash provided by (used in) operating activities includes net
loss adjusted for certain non-cash items and changes in assets
and liabilities. Net cash provided by operating activities for
the year ended December 31, 2009 reflected a net loss of
$9.4 million, adjusted for $16.7 million of
depreciation and stock-based compensation expense, and a
$2.0 million increase in accrued compensation expense,
partially offset by a $3.4 million increase in accounts
receivable, prepaid assets and other assets and a
$1.6 million decrease in deferred revenues. Net cash used
in operating activities of $818,000 for the year ended
December 31, 2008 reflected a net loss of
$16.1 million, adjusted for $14.1 million of
depreciation and stock-based compensation expense, and a
$5.4 million increase in accounts receivable, prepaid
assets and other assets, partially offset by a $3.2 million
increase in accrued expenses and other liabilities, a
$2.8 million increase in deferred revenue, which included
$3.7 million in advance collaboration contract payments,
and a $485,000 increase in accrued compensation expense. Net
cash used in operating activities of $18.7 million for the
year ended December 31, 2007 reflected a net loss of a
$27.3 million, adjusted for $10.3 million of
depreciation and stock-based compensation expense, and a
$4.9 million increase in accounts receivable, prepaid
expenses and other assets, partially offset by a
$1.8 million increase in accrued compensation expense and a
$1.7 million increase in accrued expenses and other
liabilities.
Net cash used in investing activities was $6.8 million for
the year ended December 31, 2009, compared to net cash used
in investing activities of $26.2 million and
$4.7 million for the years ended December 31, 2008 and
2007, respectively. Our investing activities have consisted
predominantly of purchases and maturities of marketable
securities and capital expenditures. Net cash used in investing
activities for the year ended December 31, 2009 included
$3.1 million in net purchases of marketable securities and
$3.7 million of capital expenditures. Net cash used in
investing activities of $26.2 million for the year ended
December 31, 2008 included $16.1 million in net
purchases of marketable securities as we invested a portion of
the cash proceeds from our May 2007 public offering of common
stock and $10.1 million of capital expenditures for
facility expansion and improvements. Net cash used in investing
activities of $4.7 million for the year ended
December 31, 2007 was primarily due to capital expenditures
for facility expansion and improvements.
Net cash used in financing activities was $78,000 for the year
ended December 31, 2009, compared to net cash used in
financing activities of $1.0 million and net cash provided
by financing activities of $47.7 million for the years
ended December 31, 2008 and 2007, respectively. Our
financing activities included sales of our equity securities and
capital equipment financing arrangements. Net cash used in
financing activities for the year ended December 31, 2009
included $1.8 million in payments on our equipment
financing notes payable, partially offset by $1.7 million
in proceeds from issuance of common stock. Net cash used in
financing activities of $1.0 million for the year ended
December 31, 2008 included $2.7 million in payments on
our notes payable, partially offset by $1.7 million in
proceeds from issuance of common stock. Net cash provided by
financing activities of $47.7 million for the year ended
December 31, 2007 included $49.7 million in net
proceeds from our May 2007 public offering of common stock,
partially offset by $2.5 million in payments on our notes
payable.
58
Contractual
Obligations
The following table summarizes our significant contractual
obligations as of December 31, 2009 and the effect those
obligations are expected to have on our liquidity and cash flows
in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Non-cancelable operating lease obligations
|
|
$
|
8,930
|
|
|
$
|
2,079
|
|
|
$
|
3,890
|
|
|
$
|
2,051
|
|
|
$
|
910
|
|
Notes payable obligations
|
|
|
238
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,168
|
|
|
$
|
2,317
|
|
|
$
|
3,890
|
|
|
$
|
2,051
|
|
|
$
|
910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our non-cancelable operating lease obligations are for
laboratory and office space. In September 2005, we entered into
a non-cancelable lease for 48,000 square feet of laboratory
and office space in Redwood City, California. In January 2007,
we entered into a non-cancelable lease for 48,000 square
feet of additional laboratory and office space in a nearby
location. Both leases expire in February 2012. In October 2009,
we entered into a non-cancelable agreement to lease an
additional 30,500 square feet of office space near our
current locations, which commences in April 2010. This lease
expires in March 2018.
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 4% premium on the remaining payments. As of
December 31, 2009, the outstanding principal balance under
this arrangement was $225,000 at annual interest rates ranging
from 11.18% to 11.30%, depending upon the applicable note. The
notes payable under this arrangement are scheduled to be paid in
full by November 2010.
We are required to make a series of fixed annual payments under
one of our collaboration agreements beginning on the date that
we commercially launched our Oncotype DX breast cancer
test. We made payments under this agreement of $475,000 in each
of the years 2007, 2008 and 2009. At December 31, 2009,
future annual payments under this agreement totaled $950,000, of
which $475,000 is due in each of the years 2010 and 2011. We are
also required to make a series of fixed annual payments under a
separate collaboration agreement totaling $2.0 million
beginning with the January 2010 launch of our Oncotype DX
colon cancer test. We are required to make payments of $150,000
in 2010, $200,000 in 2011, $300,000 in 2012 and $450,000 in each
of 2013, 2014 and 2015. However, because both of these
agreements may be terminated by either party upon
30 days prior written notice, these payments are not
included in the table above.
We have also committed to make potential future payments to
third parties as part of our collaboration agreements. Payments
under these agreements generally become due and payable only
upon achievement of specific project milestones. Because the
achievement of these milestones is generally neither probable
nor reasonably estimable, such commitments have not been
included in the table above.
Off-Balance
Sheet Activities
As of December 31, 2009, we had no material off-balance
sheet arrangements.
Operating
Capital and Capital Expenditure Requirements
We achieved positive operating cash flow for the year ended
December 31, 2009. We currently anticipate that our cash,
cash equivalents and short-term investments, together with
payments for our Oncotype DX tests, will be sufficient to
fund our operations and facilities expansion plans for at least
the next 12 months, including the expansion of our research
and development programs, establishment of adoption of and
reimbursement for our Oncotype DX colon cancer test, and
our international expansion efforts. We expect to spend
approximately $4.6 million over the next 12 months for
planned laboratory equipment, leasehold improvements and other
capital expenditures to support the growth of our business. We
expect that our cash, cash equivalents and short term
59
investments will be also be used to fund working capital and for
other general corporate purposes, such as licensing technology
rights, partnering arrangements for our tests outside of the
U.S, establishing direct sales capabilities outside of the
U.S. or reduction of debt obligations. We may also use cash
to acquire or invest in complementary businesses, technologies,
services or products.
The amount and timing of actual expenditures may vary
significantly depending upon a number of factors, such as the
amount of cash provided by our operations, the progress of our
commercialization efforts, product development, regulatory
requirements and progress in reimbursement for our tests.
We cannot be certain that our international expansion, efforts
to establish adoption of and reimbursement for our Oncotype
DX colon cancer test or the 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. It may take years to move any one of a number of product
candidates in research through development and validation to
commercialization.
Our future funding requirements will depend on many factors,
including the following:
|
|
|
|
|
the rate of progress in establishing reimbursement arrangements
with domestic and international third-party payors;
|
|
|
|
the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts;
|
|
|
|
the rate of progress and cost of research and development
activities associated with expansion of our Oncotype DX
breast and colon cancer tests;
|
|
|
|
the rate of progress and cost of selling and marketing
activities associated with establishing adoption of and
reimbursement for our Oncotype DX colon cancer test;
|
|
|
|
the rate of progress and cost of research and development
activities associated with products in research and early
development focused on cancers other than breast and colon
cancer;
|
|
|
|
the cost of acquiring or achieving access to tissue samples and
technologies;
|
|
|
|
the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
|
|
|
|
the effect of competing technological and market developments;
|
|
|
|
costs related to international expansion;
|
|
|
|
the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our products or
operations; and
|
|
|
|
the economic and other terms and timing of any collaborations,
licensing or other arrangements into which we may enter or
acquisitions we might seek to effect.
|
Until we can generate and maintain sufficient 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 holders of our
common stock. If we raise funds by issuing debt securities,
these debt securities would have rights, preferences and
privileges senior to those of holders of our common stock. The
terms of debt securities or borrowings could impose significant
restrictions on our operations. We do not know whether
additional funding will be available on acceptable terms, if 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 or market development
programs, which could lower the economic value of those programs
to our company.
Recent
Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board, or
FASB, issued authoritative guidance that amends existing
guidance for identifying separate deliverables in a
revenue-generating transaction where multiple
60
deliverables exist, and provides guidance for allocating and
recognizing revenue based on those separate deliverables. The
guidance is expected to result in more multiple-deliverable
arrangements being separable than under current guidance and is
required to be applied prospectively to new or significantly
modified revenue arrangements. This guidance, for which we are
currently assessing the impact on our financial condition and
results of operations, will become effective for us on
January 1, 2011.
In January 2010, FASB issued authoritative guidance intended to
improve disclosures about fair value measurements. The guidance
requires entities to disclose significant transfers in and out
of fair value hierarchy levels and the reasons for the transfers
and to present information about purchases, sales, issuances and
settlements separately in the reconciliation of fair value
measurements using significant unobservable inputs
(Level 3). Additionally, the guidance clarifies that a
reporting entity should provide fair value measurements for each
class of assets and liabilities and disclose the inputs and
valuation techniques used for fair value measurements using
significant other observable inputs (Level 2) and
significant unobservable inputs (Level 3). This guidance is
effective for interim and annual periods beginning after
December 15, 2009 except for the disclosures about
purchases, sales, issuances and settlements in the Level 3
reconciliation, which will be effective for interim and annual
periods beginning after December 15, 2010. As this guidance
provides only disclosure requirements, the adoption of this
guidance will not impact our financial condition or results of
operations.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Interest
Rate Risk
Our exposure to market risk for changes in interest rates
relates primarily to interest earned on our cash equivalents and
marketable securities. The primary objective of our investment
activities is to preserve our capital to fund operations. We
also seek to maximize income from our investments without
assuming significant risk. Our investment policy provides for
investments in short-term, low-risk, investment-grade debt
instruments. Our investments in marketable securities, which are
comprised primarily of money market funds, obligations of
U.S. Government agencies and government-sponsored entities,
high-grade corporate bonds and commercial paper are subject to
default, changes in credit rating and changes in market value.
Due to recent financial and economic conditions, similar
investments have experienced losses in value and liquidity
constraints which differ from historical patterns. These
investments are also subject to interest rate risk and will
decrease in value if market interest rates increase.
Our cash, cash equivalents and marketable securities, totaling
$57.4 million at December 31, 2009, did not include
any auction preferred stock, auction rate securities or
mortgage-backed investments. We currently do not hedge interest
rate exposure, and we do not have any foreign currency or other
derivative financial instruments. The securities in our
investment portfolio are classified as available for sale and
are, due to their short-term nature, subject to minimal interest
rate risk. To date, we have not experienced a loss of principal
on any of our investments. Although we currently expect that our
ability to access or liquidate these investments as needed to
support our business activities will continue, we cannot ensure
that this will not change. We believe that, if market interest
rates were to change immediately and uniformly by 10% from
levels at December 31, 2009, the impact on the fair value
of these securities or our cash flows or income would not be
material.
Foreign
Currency Exchange Risk
Substantially all of our revenues are recognized in
U.S. dollars. Certain expenses related to our international
activities are payable in foreign currencies. As a result, our
financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions
in foreign markets. Our total payables denominated in foreign
currencies as of December 31, 2009 were not material. The
functional currency of our wholly-owned European subsidiary is
the U.S. dollar, so we are not currently subject to gains
and losses from foreign currency translation of the subsidiary
financial statements. We currently do not hedge foreign currency
exchange rate exposure. Although the impact of currency
fluctuations on our financial results has been immaterial in the
past, there can be no guarantee the impact of currency
fluctuations related to our international activities will not be
material in the future.
61
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data.
|
Genomic
Health, Inc.
Index to consolidated financial statements
62
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Genomic Health, Inc.
We have audited the accompanying consolidated balance sheets of
Genomic Health, Inc. as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2009. Our audits
also included the financial statement schedule included in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Genomic Health, Inc. at December 31,
2009 and 2008, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Genomic Health, Inc.s internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 15, 2010
expressed an unqualified opinion thereon.
Palo Alto, California
March 15, 2010
63
GENOMIC
HEALTH, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,082
|
|
|
$
|
11,171
|
|
Short-term investments
|
|
|
48,366
|
|
|
|
45,499
|
|
Accounts receivable (net of allowance for doubtful accounts;
2009 $545, 2008 $881)
|
|
|
11,123
|
|
|
|
8,807
|
|
Prepaid expenses and other current assets
|
|
|
5,677
|
|
|
|
4,781
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
74,248
|
|
|
|
70,258
|
|
Property and equipment, net
|
|
|
12,865
|
|
|
|
15,562
|
|
Restricted cash
|
|
|
500
|
|
|
|
500
|
|
Other assets
|
|
|
494
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
88,107
|
|
|
$
|
86,689
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,304
|
|
|
$
|
1,898
|
|
Accrued compensation
|
|
|
6,188
|
|
|
|
4,157
|
|
Accrued license fees
|
|
|
3,016
|
|
|
|
2,553
|
|
Accrued expenses and other current liabilities
|
|
|
5,372
|
|
|
|
4,398
|
|
Notes payable current portion
|
|
|
225
|
|
|
|
1,814
|
|
Deferred revenues current portion
|
|
|
2,238
|
|
|
|
2,381
|
|
Other current liabilities
|
|
|
364
|
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
18,707
|
|
|
|
17,565
|
|
Notes payable long-term portion
|
|
|
|
|
|
|
225
|
|
Deferred revenues long-term portion
|
|
|
|
|
|
|
1,417
|
|
Other liabilities
|
|
|
891
|
|
|
|
1,307
|
|
Commitments (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, none issued and outstanding at December 31,
2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 28,687,047 and 28,467,327 shares issued and
outstanding at December 31, 2009 and 2008 respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
246,383
|
|
|
|
234,412
|
|
Accumulated other comprehensive income
|
|
|
19
|
|
|
|
245
|
|
Accumulated deficit
|
|
|
(177,895
|
)
|
|
|
(168,484
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
68,509
|
|
|
|
66,175
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
88,107
|
|
|
$
|
86,689
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
64
GENOMIC
HEALTH, INC.
Consolidated
Statements of Operations
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
146,581
|
|
|
$
|
108,658
|
|
|
$
|
62,745
|
|
Contract revenues
|
|
|
2,967
|
|
|
|
1,921
|
|
|
|
1,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
149,548
|
|
|
|
110,579
|
|
|
|
64,027
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
32,562
|
|
|
|
27,185
|
|
|
|
17,331
|
|
Research and development
|
|
|
35,691
|
|
|
|
28,624
|
|
|
|
22,053
|
|
Selling and marketing
|
|
|
61,132
|
|
|
|
46,668
|
|
|
|
36,456
|
|
General and administrative
|
|
|
29,564
|
|
|
|
25,617
|
|
|
|
17,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
158,949
|
|
|
|
128,094
|
|
|
|
93,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,401
|
)
|
|
|
(17,515
|
)
|
|
|
(29,662
|
)
|
Interest and other income
|
|
|
670
|
|
|
|
1,751
|
|
|
|
3,048
|
|
Interest expense
|
|
|
(120
|
)
|
|
|
(386
|
)
|
|
|
(678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(8,851
|
)
|
|
|
(16,150
|
)
|
|
|
(27,292
|
)
|
Income tax expense (benefit)
|
|
|
560
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,411
|
)
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
28,563,412
|
|
|
|
28,297,705
|
|
|
|
26,759,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
65
GENOMIC
HEALTH, INC.
Consolidated
Statements of Stockholders Equity
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance at December 31, 2006
|
|
|
24,548,060
|
|
|
$
|
2
|
|
|
$
|
166,922
|
|
|
$
|
8
|
|
|
$
|
(125,103
|
)
|
|
$
|
41,829
|
|
Issuance of common stock for cash, net of issuance costs
|
|
|
3,450,000
|
|
|
|
|
|
|
|
49,668
|
|
|
|
|
|
|
|
|
|
|
|
49,668
|
|
Issuance of common stock to employees upon exercise of stock
options for cash
|
|
|
174,287
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
552
|
|
Issuance of common stock to consultants upon exercise of stock
options for cash
|
|
|
9,512
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
6,285
|
|
|
|
|
|
|
|
|
|
|
|
6,285
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,292
|
)
|
|
|
(27,292
|
)
|
Change in unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
28,181,859
|
|
|
|
2
|
|
|
|
223,507
|
|
|
|
52
|
|
|
|
(152,395
|
)
|
|
|
71,166
|
|
Issuance of common stock to employees upon exercise of stock
options for cash
|
|
|
245,035
|
|
|
|
|
|
|
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
1,425
|
|
Issuance of common stock to consultants upon exercise of stock
options for cash
|
|
|
34,433
|
|
|
|
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
254
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
9,138
|
|
|
|
|
|
|
|
|
|
|
|
9,138
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,089
|
)
|
|
|
(16,089
|
)
|
Change in unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
28,461,327
|
|
|
|
2
|
|
|
|
234,412
|
|
|
|
245
|
|
|
|
(168,484
|
)
|
|
|
66,175
|
|
Issuance of common stock to employees upon exercise of stock
options for cash
|
|
|
202,383
|
|
|
|
|
|
|
|
1,726
|
|
|
|
|
|
|
|
|
|
|
|
1,726
|
|
Issuance of common stock to consultants upon exercise of stock
options for cash
|
|
|
17,337
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
10,155
|
|
|
|
|
|
|
|
|
|
|
|
10,155
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,411
|
)
|
|
|
(9,411
|
)
|
Change in unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
28,681,047
|
|
|
$
|
2
|
|
|
$
|
246,383
|
|
|
$
|
19
|
|
|
$
|
177,895
|
|
|
$
|
68,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
66
GENOMIC
HEALTH, INC.
Consolidated
Statements of Cash Flows
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,411
|
)
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,591
|
|
|
|
5,012
|
|
|
|
3,995
|
|
Employee stock-based compensation
|
|
|
10,155
|
|
|
|
9,138
|
|
|
|
6,285
|
|
Non-employee stock-based compensation
|
|
|
80
|
|
|
|
88
|
|
|
|
65
|
|
Gain on disposal of property and equipment
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,316
|
)
|
|
|
(3,718
|
)
|
|
|
(3,227
|
)
|
Prepaid expenses and other assets
|
|
|
(1,127
|
)
|
|
|
(1,687
|
)
|
|
|
(1,647
|
)
|
Accounts payable
|
|
|
(594
|
)
|
|
|
(68
|
)
|
|
|
(557
|
)
|
Accrued expenses and other liabilities
|
|
|
1,021
|
|
|
|
3,231
|
|
|
|
1,707
|
|
Accrued compensation
|
|
|
2,031
|
|
|
|
485
|
|
|
|
1,804
|
|
Deferred revenues
|
|
|
(1,560
|
)
|
|
|
2,790
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
4,826
|
|
|
|
(818
|
)
|
|
|
(18,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(3,744
|
)
|
|
|
(10,057
|
)
|
|
|
(4,881
|
)
|
Purchase of short-term investments
|
|
|
(60,318
|
)
|
|
|
(112,109
|
)
|
|
|
(66,021
|
)
|
Maturities of short-term investments
|
|
|
57,225
|
|
|
|
95,999
|
|
|
|
66,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,837
|
)
|
|
|
(26,167
|
)
|
|
|
(4,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments of notes payable
|
|
|
(1,814
|
)
|
|
|
(2,687
|
)
|
|
|
(2,547
|
)
|
Proceeds from issuance of common stock upon exercise of stock
options
|
|
|
1,736
|
|
|
|
1,679
|
|
|
|
565
|
|
Net proceeds from issuance of common stock in public offering
|
|
|
|
|
|
|
|
|
|
|
49,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(78
|
)
|
|
|
(1,008
|
)
|
|
|
47,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,089
|
)
|
|
|
(27,993
|
)
|
|
|
24,238
|
|
Cash and cash equivalents at the beginning of period
|
|
|
11,171
|
|
|
|
39,164
|
|
|
|
14,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
9,082
|
|
|
$
|
11,171
|
|
|
$
|
39,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
120
|
|
|
$
|
386
|
|
|
$
|
678
|
|
Cash paid for income taxes
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes.
67
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2009
|
|
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 product, the Oncotype DX
breast cancer test, 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 may incur
additional losses as its commercial and development efforts
continue. The Company cannot provide assurance as to when, if
ever, it will achieve or maintain profitability.
Principles
of Consolidation
The consolidated financial statements include all the accounts
of the Company and its wholly-owned subsidiaries. The Company
has two wholly-owned subsidiaries, Genomic Health International
LLC, a European subsidiary that was established in 2009 to
support the Companys international sales and marketing
efforts, and Oncotype Laboratories, Inc., which was
established in 2003 and is inactive. The functional currency for
Genomic Health International LLC is the U.S. dollar. All
significant intercompany balances and transactions have been
eliminated.
Basis
of Presentation and Use of Estimates
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The
preparation of financial statements in conformity with GAAP
requires management to make judgments, assumptions and estimates
that affect the amounts reported in the Companys
consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Cash
Equivalents and Short-term Investments
The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash
equivalents.
The Company invests in marketable securities, primarily money
market funds, obligations of U.S. Government agencies and
government-sponsored entities, corporate bonds and commercial
paper. The Company considers all investments with a maturity
date less than one year as of the balance sheet date to be
short-term investments. These securities are carried at
estimated fair value with unrealized gains and losses included
in stockholders equity. Those investments with a maturity
date greater than one year as of the balance sheet date are
considered to be long-term investments. As of December 31,
2009, all investments were classified as available for sale.
Realized gains and losses and declines in value, if any, judged
to be other than temporary on
available-for-sale
securities are reported in other income or expense. When
securities are sold, any associated unrealized gain or loss
initially recorded as a separate component of stockholders
equity is reclassified out of stockholders equity on a
specific-identification basis and recorded in earnings for the
period. The cost of securities sold is determined using specific
identification.
Fair
Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, trade
receivables and accounts payable, approximate fair value due to
their short maturities. Based on borrowing
68
rates currently available to the Company for loans and capital
lease obligations with similar terms, the carrying value of the
Companys debt obligations approximates fair value.
See Note 3, Fair Value Measurements for
further information on the fair value of the Companys
financial instruments.
Concentration
of Risk
Cash equivalents, short-term investments and accounts receivable
are financial instruments which potentially subject the Company
to concentrations of credit risk. The Company invests in money
market funds through a major U.S. bank and is exposed to
credit risk in the event of default by the financial institution
to the extent of amounts recorded on the consolidated balance
sheets. The Company invests in short-term, investment-grade debt
instruments and by policy limits the amount in any one type of
investment, except for securities issued or guaranteed by the
U.S. government. Through December 31, 2009, no
material losses had been incurred.
We are subject to credit risk from our portfolio of cash
equivalents and marketable securities. Under our investment
policy, we limit amounts invested in such securities by credit
rating, maturity, industry group, investment type and issuer,
except for securities issued by the U.S. government. We are
not exposed to any significant concentrations of credit risk
from these financial instruments. The goals of our investment
policy, in order of priority, are as follows: safety and
preservation of principal and diversification of risk; liquidity
of investments sufficient to meet cash flow requirements; and a
competitive after-tax rate of return.
We are also subject to credit risk from our accounts receivable
related to our product sales. We perform evaluations of our
customers financial condition and generally do not require
collateral. The majority of our trade accounts receivable arises
from product sales in the U.S. and Israel. As of
December 31, 2009, all of the Companys product
revenues have been derived from sales of one product, the
Oncotype DX breast cancer test. Substantially all of the
Companys tests to date have been delivered to physicians
in the U.S.; All Oncotype DX tests are processed in the
Companys clinical reference laboratory facility in Redwood
City, California. One third-party payor accounted for
approximately 20%, 22% and 23% of the Companys product
revenues for the years ended December 31, 2009, 2008 and
2007, respectively. This payor represented 46% and 42% of the
Companys net accounts receivable balance as of
December 31, 2009 and 2008, respectively. Another
third-party payor accounted for approximately 9%, 9% and 13% of
the Companys product revenues in 2009, 2008 and 2007,
respectively. This payor represented 15% and 14% of the
Companys net accounts receivable balance as of
December 31, 2009 and 2008, respectively.
Revenue
Recognition
The Company derives its revenues from product sales and contract
research arrangements. The Company operates in one industry
segment. Product revenues have historically been derived solely
from the sale of the Oncotype DX breast cancer test. The
Company generally bills third-party payors upon generation and
delivery of a Recurrence Score report to the physician. As such,
the Company takes assignment of benefits and the risk of
collection with the third-party payor. The Company usually bills
the patient directly for amounts owed after multiple requests
for payment have been denied or only partially paid by the
insurance carrier. The Company pursues
case-by-case
reimbursement where policies are not in place or payment history
has not been established.
The Companys 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 have been rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Criterion
(1) is satisfied when the Company has an arrangement to pay
or a contract with the payor in place addressing reimbursement
for the Oncotype DX test. In the absence of such
arrangements, the Company considers that criterion (1) is
satisfied when a third-party payor pays the Company for the test
performed. Criterion (2) is satisfied when the Company
performs the test and generates and delivers to the physician,
or makes available on its web portal, a Recurrence Score report.
Determination of criteria (3) and (4) is based on
managements judgments regarding whether the fee charged
for products or services delivered is fixed or determinable, a
contractual agreement has been entered into, and the
collectibility of those fees under any contract or agreement.
When evaluating collectibility, the Company considers whether it
has sufficient history to reliably estimate a payors
individual payment patterns. Based upon at least several months
of payment history, the Company reviews the number of tests paid
against the number of tests
69
billed and the payors outstanding balance for unpaid tests
to determine whether payments are being made at a consistently
high percentage of tests billed and at appropriate amounts given
the contracted payment amount. To the extent all criteria set
forth above are not met when test results are delivered, product
revenues are generally recognized when cash is received from the
payor.
Prior to 2008, product revenues had largely been recognized on a
cash basis because the Company had a limited number of contracts
or agreements with third-party payors and limited collections
experience. The Company recognizes a portion of its product
revenues from third-party payors, including some private payors
and Medicare, on an accrual basis prospectively when the
criteria described in the preceding paragraph are satisfied.
Approximately 51% of product revenues were recorded on an
accrual basis for the years ended December 31, 2009 and
2008, respectively, compared to approximately 37% for the year
ended December 31, 2007.
As of December 31, 2009, the Company had distributor
agreements in 12 countries outside of the U.S. The
distributor provides certain marketing and administrative
services for the Company within its territory. As a condition of
these agreements, the distributor pays the Company an agreed
upon fee per test and the Company processes the tests. The same
revenue recognition criteria described above generally apply to
tests received through international distributors. Product
revenues for tests performed are recognized on an accrual basis
when the following revenue recognition criteria are met:
(1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. To the extent all
criteria set forth above are not met when test results are
delivered, product revenues are generally recognized when cash
is received from the distributor.
From time to time, the Company receives requests for refunds of
payments, generally due to overpayments made by third
party-payors. Upon becoming aware of a refund request, the
Company establishes an accrued liability for tests covered by
the refund request until such time as the Company determines
whether or not a refund is due. If a refund is due, cash is
credited and the accrued liability is reduced. Accrued refunds
were $757,000 and $1.4 million at December 31, 2009
and 2008, respectively.
Contract revenues are generally derived from studies conducted
with biopharmaceutical and pharmaceutical companies. The
specific methodology for revenue recognition is determined on a
case-by-case
basis according to the facts and circumstances applicable to a
given contract. Under certain contracts, the Companys
input, measured in terms of full-time equivalent level of effort
or running a set of assays through its clinical reference
laboratory under a contractual protocol, triggers payment
obligations, and revenues are recognized as costs are incurred
or assays are processed. Certain contracts have payments that
are triggered as milestones are completed, such as completion of
a successful set of experiments. Milestones are assessed on an
individual basis and revenue is recognized when these milestones
are achieved, as evidenced by acknowledgment from collaborators,
provided that (1) the milestone event is substantive and
its achievability was not reasonably assured at the inception of
the agreement and (2) the milestone payment is
non-refundable. Where separate milestones do not meet these
criteria, the Company typically defaults to a performance-based
model, such as revenue recognition following delivery of effort
as compared to an estimate of total expected effort.
Advance payments received in excess of revenues recognized are
classified as deferred revenue until such time as the revenue
recognition criteria have been met.
Allowance
for Doubtful Accounts
The Company accrues an allowance for doubtful accounts against
its accounts receivable based on estimates consistent with
historical payment experience. Bad debt expense is included in
general and administrative expense on the Companys
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 December 31, 2009 and 2008, the
Companys allowance for doubtful accounts was $545,000 and
$881,000, respectively. Write-offs for doubtful accounts of
$1.8 million and $595,000 were recorded against the
allowance during the years ended December 31, 2009 and
2008, respectively. Bad debt expense was $1.4 million,
$1.3 million, and ($115,000) for the years ended
December 31, 2009, 2008 and 2007, respectively. Changes in
the Companys estimate of allowance for doubtful accounts
resulted in the reduction of bad debt expense for the year ended
December 31, 2007.
70
Property
and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to five
years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the
assets or the remaining term of the lease, whichever is shorter.
Internal-Use
Software
The Company capitalizes certain costs incurred for software
developed or obtained for internal use, including external
direct material and service costs and employee payroll and
payroll-related costs. Capitalized internal-use software costs,
which are included in property and equipment, are generally
depreciated over three years.
Leases
The Company enters into lease agreements for its laboratory and
office facilities. These leases are classified as operating
leases. Rent expense is recognized on a straight-line basis over
the term of the lease. Incentives granted under the
Companys facilities leases, including allowances to fund
leasehold improvements and rent holidays, are capitalized and
are recognized as reductions to rental expense on a
straight-line basis over the term of the lease.
Intangible
Assets
Intangible assets with finite useful lives are recorded at cost,
less accumulated amortization. Amortization is recognized over
the estimated useful lives of the assets.
Impairment
of Long-lived Assets
The Company reviews long-lived assets, which include property
and equipment and intangible assets, for impairment whenever
events or changes in business circumstances indicate that the
carrying amounts of the assets may not be fully recoverable. An
impairment loss would be recognized when estimated discounted
future cash flows expected to result from the use of the asset
and its eventual disposition are less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows.
There were no impairment losses for the years ended
December 31, 2009, 2008 and 2007.
Guarantees
and Indemnifications
The Company, as permitted under Delaware law and in accordance
with its bylaws, indemnifies its officers and directors for
certain events or occurrences, subject to certain limits, while
the officer or director is or was serving at the Companys
request in such capacity. The term of the indemnification period
is for the officers or directors lifetime. The
maximum amount of potential future indemnification is unlimited;
however, the Company has a director and officer insurance policy
that limits its exposure and may enable it to recover a portion
of any future amounts paid. The Company believes the fair value
of these indemnification agreements is minimal. Accordingly, the
Company has not recorded any liabilities for these agreements as
of December 31, 2009 and 2008.
Income
Taxes
The Company uses the liability method for income taxes, whereby
deferred income taxes are provided on items recognized for
financial reporting purposes over different periods than for
income tax purposes. Valuation allowances are provided when the
expected realization of tax assets does not meet a
more-likely-than-not criterion.
The Company accounts for uncertain income tax positions using a
benefit recognition model with a two-step approach, a
more-likely-than-not recognition criterion and a measurement
attribute that measures the position as the largest amount of
tax benefit that is greater than 50% likely of being realized
upon ultimate settlement, in accordance with the authoritative
guidance for accounting for uncertain tax positions. If it is
not more likely than not that the benefit will be sustained on
its technical merits, no benefit is recorded. Uncertain tax
positions that relate only to timing of when an item is included
on a tax return are considered to have met the recognition
threshold. The
71
Company will recognize accrued interest and penalties related to
unrecognized tax benefits in income tax expense when and if
incurred. See Note 11, Income Taxes, for
additional disclosures regarding unrecognized tax benefits.
Comprehensive
Gain or Loss
The Company displays comprehensive gain or loss and its
components within its consolidated statements of
stockholders equity. Other comprehensive gain or loss
generally consists of unrealized gains and losses on
available-for-sale
investments.
Stock-based
Compensation
The Company uses the Black-Scholes valuation model, which
requires the use of estimates such as stock price volatility and
expected option lives, as well as expected option forfeiture
rates, to value employee stock-based compensation, and
recognizes stock-based compensation expense on a straight-line
basis. 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.
Equity instruments granted to non-employees are valued using the
Black-Scholes method and will be subject to periodic revaluation
over their vesting terms as prescribed by Financial Accounting
Standards Board (FASB) guidance.
401(k)
Plan
Substantially all of the Companys employees are covered by
its defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code. The Company
pays dollar for dollar matching of employee contributions up to
a maximum of $1,000 for each employee per year. The match is
funded concurrently with a participants semi-monthly
contributions to the 401(k) Plan. The Company recorded expense
of for its contributions under the 401(k) Plan of $400,000,
$320,000 and $246,000 for the years ended December 31,
2009, 2008 and 2007 respectively.
Cost
of Product Revenues
Cost of product revenues includes the cost of materials, direct
labor, equipment and infrastructure expenses associated with
processing tissue samples (including histopathology, anatomical
pathology, paraffin extraction,
RT-PCR and
quality control analyses), shipping charges to transport tissue
samples and license fees. Infrastructure expenses include
allocated facility occupancy and information technology costs.
Costs associated with performing the Companys tests are
recorded as tests are processed. Costs recorded for tissue
sample processing and shipping charges represent the cost of all
the tests processed during the period regardless of whether
revenue was recognized with respect to that test. License fees
for royalties due on product revenues and contractual
obligations are recorded in cost of product revenues at the time
product revenues are recognized or in accordance with other
contractual obligations.
Research
and Development
Research and development expenses are comprised of the following
types of costs incurred in performing research and development
activities: salaries and benefits, allocated overhead and
facility occupancy costs, contract services, reagents and
laboratory supplies, 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. Research
and development costs are expensed as incurred.
The Company enters into collaboration and clinical trial
agreements with clinical collaborators and records these costs
as research and development expenses. The Company records
accruals for estimated study costs comprised of work performed
by its collaborators under contract terms.
In June 2007, FASB issued accounting guidance for non-refundable
payments for goods or services received for use in future
research and development activities. The guidance requires that
non-refundable advance payments
72
for goods or services that will be used or rendered for future
research and development activities be deferred and capitalized
and recognized as an expense as the goods are delivered or the
related services are performed. The Company adopted this
guidance effective January 1, 2008 for arrangements that
were entered into after that date. Prior to January 1,
2008, the Company recognized non-refundable advance payments for
goods and services to be used for future research and
development activities as an expense when payments were made. As
a result of the adoption of this guidance, the Companys
research and development expenses decreased by $258,000 and its
net loss per share decreased by $0.01 for the year ended
December 31, 2008. The Company recognized these deferred
and capitalized amounts as expense in 2009 as the related
services were delivered.
Recently
Issued Accounting Pronouncements
In October 2009, FASB issued authoritative guidance that amends
existing guidance for identifying separate deliverables in a
revenue-generating transaction where multiple deliverables
exist, and provides guidance for allocating and recognizing
revenue based on those separate deliverables. The guidance is
expected to result in more multiple-deliverable arrangements
being separable than under current guidance and is required to
be applied prospectively to new or significantly modified
revenue arrangements. This guidance, for which the Company is
currently assessing the impact on its financial condition and
results of operations, will become effective for the Company on
January 1, 2011.
In January 2010, FASB issued authoritative guidance intended to
improve disclosures about fair value measurements. The guidance
requires entities to disclose significant transfers in and out
of fair value hierarchy levels and the reasons for the transfers
and to present information about purchases, sales, issuances and
settlements separately in the reconciliation of fair value
measurements using significant unobservable inputs
(Level 3). Additionally, the guidance clarifies that a
reporting entity should provide fair value measurements for each
class of assets and liabilities and disclose the inputs and
valuation techniques used for fair value measurements using
significant other observable inputs (Level 2) and
significant unobservable inputs (Level 3). This guidance is
effective for interim and annual periods beginning after
December 15, 2009 except for the disclosures about
purchases, sales, issuances and settlements in the Level 3
reconciliation, which will be effective for interim and annual
periods beginning after December 15, 2010. As this guidance
provides only disclosure requirements, the adoption of this
guidance will not impact the Companys financial condition
or results of operations.
|
|
Note 2.
|
Net Loss
Per Share
|
Basic net loss per share is calculated by dividing net loss for
the period by the weighted-average number of common shares
outstanding for the period without consideration for 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 and dilutive potential common
shares for the period determined using the treasury-stock
method. For the purposes of this calculation, options to
purchase common stock are considered to be potential common
shares and are not included in the calculation of diluted net
loss per share because their effect is anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net loss
|
|
$
|
(9,411
|
)
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average net common shares outstanding for basic and
diluted loss per common share
|
|
|
28,563,412
|
|
|
|
28,297,705
|
|
|
|
26,759,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding dilutive securities not included in diluted net loss
per share calculation (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
4,683,763
|
|
|
|
4,665,037
|
|
|
|
3,919,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
Note 3.
|
Fair
Value Measurements
|
On January 1, 2008, the Company adopted FASB accounting
guidance that provides a framework for measuring fair value
under GAAP and requires expanded disclosures regarding fair
value measurements. The Company elected to defer the adoption of
this guidance for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at
fair value in its financial statements on a recurring basis (at
least annually), until January 1, 2009. The accounting
guidance defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability, or an
exit price, in the principal or most advantageous market for
that asset or liability in an orderly transaction between market
participants on the measurement date. A hierarchy of different
fair value measurements requires an entity to maximize the use
of observable inputs, where available, and minimize the use of
unobservable inputs when measuring fair value. There are three
levels of inputs that may be used to measure fair value:
Level 1: Quoted prices in active
markets for identical assets or liabilities.
Level 2: Observable inputs other
than Level 1 prices, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level 3: Unobservable inputs that
are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
The Company did not have any non-financial assets or liabilities
that were measured or disclosed at fair value on a recurring
basis at December 31, 2009 and 2008, respectively. Assets
and liabilities measured at fair value are classified in their
entirety based on the lowest level of input that is significant
to the fair value measurement. The Companys assessment of
the significance of a particular input to the fair value
measurement in its entirety requires management to make
judgments and consider factors specific to the asset or
liability. The following tables set forth the Companys
financial instruments that were measured at fair value on a
recurring basis at December 31, 2009 and 2008 by level
within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted
|
|
Significant Other
|
|
Significant
|
|
|
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
Balance at
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
December 31,
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
2009
|
|
|
(In thousands)
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits
|
|
$
|
6,011
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,011
|
|
U.S. Treasury securities
|
|
|
4,546
|
|
|
|
|
|
|
|
|
|
|
|
4,546
|
|
Debt securities of U.S. government-sponsored agencies
|
|
|
|
|
|
|
44,820
|
(1)
|
|
|
|
|
|
|
44,820
|
(1)
|
|
|
|
(1) |
|
Includes a $1.0 million debt security maturing within three
months of December 31, 2009 and classified as cash
equivalents on the consolidated balance sheets. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted
|
|
Significant Other
|
|
Significant
|
|
|
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
Balance at
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
December 31,
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
2008
|
|
|
(In thousands)
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits
|
|
$
|
5,926
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,926
|
|
U.S. Treasury securities
|
|
|
1,004
|
(1)
|
|
|
|
|
|
|
|
|
|
|
1,004
|
(1)
|
Debt securities of U.S. government-sponsored agencies
|
|
|
|
|
|
|
37,350
|
|
|
|
|
|
|
|
37,350
|
|
Commercial paper
|
|
|
|
|
|
|
8,149
|
|
|
|
|
|
|
|
8,149
|
|
Corporate bonds
|
|
|
|
|
|
|
1,000
|
(1)
|
|
|
|
|
|
|
1,000
|
(1)
|
74
|
|
|
(1) |
|
Matured within three months of December 31, 2008 and
classified as cash equivalents on the consolidated balance
sheets. |
|
|
Note 4.
|
Short-term
Investments
|
The following tables illustrate the Companys
available-for-sale
securities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of U.S. government-sponsored entities
|
|
$
|
43,800
|
|
|
$
|
29
|
|
|
$
|
(9
|
)
|
|
$
|
43,820
|
|
U.S. Treasury securities
|
|
|
4,547
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
4,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,347
|
|
|
$
|
29
|
|
|
$
|
(10
|
)
|
|
$
|
48,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of U.S. government-sponsored entities
|
|
$
|
37,144
|
|
|
$
|
209
|
|
|
$
|
(3
|
)
|
|
$
|
37,350
|
|
Commercial paper
|
|
|
8,110
|
|
|
|
41
|
|
|
|
(2
|
)
|
|
|
8,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,254
|
|
|
$
|
250
|
|
|
$
|
(5
|
)
|
|
$
|
45,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no realized gains or losses on its
available-for-sale
securities for the years ended December 31, 2009, 2008 and
2007, respectively.
As of December 31, 2009, all of the Companys
available-for-sale
securities had contractual maturities of one year or less.
|
|
Note 5.
|
Property
and Equipment
|
The following table summarizes the Companys property and
equipment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Laboratory equipment
|
|
$
|
14,430
|
|
|
$
|
12,236
|
|
Computer equipment
|
|
|
2,377
|
|
|
|
2,262
|
|
Computer software internal use
|
|
|
986
|
|
|
|
669
|
|
Furniture and fixtures
|
|
|
2,655
|
|
|
|
2,357
|
|
Leasehold improvements
|
|
|
12,981
|
|
|
|
12,489
|
|
Construction in progress
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,448
|
|
|
|
30,013
|
|
Less accumulated depreciation and amortization
|
|
|
(20,583
|
)
|
|
|
(14,451
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,865
|
|
|
$
|
15,562
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009, 2008 and 2007, the
Company recorded property and equipment depreciation and
amortization expense of $6.5 million, $4.9 million and
$3.9 million, respectively.
75
|
|
Note 6.
|
Accrued
Expenses and Other Current Liabilities
|
The following table summarizes the Companys accrued
expenses and other current liabilities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accrued expenses
|
|
$
|
1,667
|
|
|
$
|
1,737
|
|
Accrued professional and other service fees
|
|
|
1,278
|
|
|
|
916
|
|
Accrued collaboration expense
|
|
|
962
|
|
|
|
285
|
|
Accrued refunds
|
|
|
757
|
|
|
|
1,359
|
|
Accrued taxes payable
|
|
|
605
|
|
|
|
5
|
|
Other current liabilities
|
|
|
103
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,372
|
|
|
$
|
4,398
|
|
|
|
|
|
|
|
|
|
|
Accrued professional and other service fees include third-party
billing and collections costs, legal expenses, accounting and
audit fees and investor relations expenses. Accrued refunds
include overpayments due to third-party payors.
|
|
Note 7.
|
Collaboration
and Commercial Technology Licensing Agreements
|
The Company has entered into a variety of collaboration and
specimen transfer agreements relating to its development
efforts. The Company recorded collaboration expenses of
$2.2 million, $1.4 million and $1.3 million for
the years ended December 31, 2009, 2008 and 2007,
respectively, relating to services provided in connection with
these agreements. In addition to these expenses, some of the
agreements contain provisions for royalties from inventions
resulting from these collaborations. The Company has specified
options and rights relating to joint inventions arising out of
the collaborations.
The Company is a party to various agreements under which it
licenses technology on a non-exclusive basis in the field of
human diagnostics. Access to these licenses enables the Company
to process its laboratory tests for the Oncotype DX
breast cancer test. While certain agreements contain provisions
for fixed annual payments, license fees are generally calculated
as a percentage of product revenues, with rates that vary by
agreement and may be tiered, and payments that may be subject to
annual minimum or maximum amounts. The Company recognized costs
recorded under these agreements for the years ended
December 31, 2009, 2008 and 2007 of $10.0 million,
$7.7 million and $4.9 million, respectively, which
were included in cost of product revenues.
At December 31, 2009, future fixed annual payments,
exclusive of royalty payments, relating to the launch and
commercialization of the Oncotype DX breast cancer test
totaled $950,000 and are payable as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
|
(In thousands)
|
|
|
Payment Due:
|
|
|
|
|
January 2010
|
|
|
475
|
|
January 2011
|
|
|
475
|
|
|
|
|
|
|
Total
|
|
$
|
950
|
|
|
|
|
|
|
These payments are recorded in cost of product revenues as
license fees. Expense is recorded ratably over the year before
the relevant payment is made. If at any time the Company
discontinues the sale of commercial products or services
resulting from the collaboration, no future annual payments will
be payable and the Company will have no further obligation under
the agreement.
76
Notes
Payable
In March 2005, the Company entered into an arrangement to
finance the acquisition of laboratory and office equipment,
computer hardware and software and leasehold improvements. 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 4% premium on the outstanding principal balance. As
of December 31, 2008, the outstanding notes payable
principal balance under this arrangement was $225,000 at annual
interest rates ranging from 11.18% to 11.30%, depending on the
applicable note. According to the terms of the arrangement, the
Company is required to notify the lender if there is a material
adverse change in its financial condition, business or
operations. The Company believes it has complied with all the
material covenants of the financing arrangement during the years
ended December 31, 2009, 2008 and 2007.
As of December 31, 2009, the Companys aggregate
commitments under its financing arrangement included $238,000
total minimum payments due in 2010, including $225,000 in
current obligations and $13,000 in interest. The notes payable
under this arrangement are scheduled to be paid in full by
November 2010.
Lease
Obligations
In September 2005, the Company entered into a non-cancelable
lease for 48,000 square feet of laboratory and office space
that the Company currently occupies in Redwood City, California.
The lease expires in February 2012, with an option for the
Company to extend the term of the lease for an additional five
years. The agreement included lease incentive obligations of
$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 the consolidated
balance sheets.
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, with an option for the Company to extend the term of the
lease for an additional five years. The agreement included 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 the
consolidated balance sheets.
In October 2009, the Company entered into a non-cancelable
agreement to lease an additional 30,500 square feet of
office space near the locations the Company currently occupies.
The lease commences April 1, 2010 and expires in March
2018, with an option for the Company to extend the term of the
lease for an additional five years. The agreement includes lease
incentive obligations of $307,000 which will be amortized on a
straight-line basis over the life of the lease. In connection
with this lease, the Company paid a $183,000 cash security
deposit, which is included in other assets on the consolidated
balance sheets.
Rent expense under all operating leases amounted to
$1.2 million, $1.1 million and $1.2 million for
the years ended December 31, 2009, 2008 and 2007,
respectively.
Future non-cancelable commitments under these operating leases
at December 31, 2009 were as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
|
(In thousands)
|
|
|
Years Ending December 31,
|
|
|
|
|
2010
|
|
$
|
2,079
|
|
2011
|
|
|
2,331
|
|
2012
|
|
|
915
|
|
2013
|
|
|
644
|
|
2014 and beyond
|
|
|
2,961
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
8,930
|
|
|
|
|
|
|
77
Common
Stock
As of December 31, 2009, the Company had
28,687,047 shares of common stock outstanding. Shares of
common stock reserved for future issuance as of
December 31, 2009 were as follows:
|
|
|
|
|
Shares to be issued upon exercise of outstanding stock options
|
|
|
4,683,763
|
|
Shares available for future stock option grants
|
|
|
4,796,673
|
|
|
|
|
|
|
Shares of common stock reserved for future issuance
|
|
|
9,480,436
|
|
|
|
|
|
|
Public
Offering of Common Stock
On May 25, 2007, the Company closed an underwritten public
offering of 3,450,000 shares of common stock at a price to
the public of $15.50 per share pursuant to the Companys
shelf registration statement on
Form S-3.
Net proceeds from the offering, after deducting the underwriting
discounts and offering expenses, were $49.7 million.
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.
|
|
Note 10.
|
Stock-based
Compensation
|
2005
Stock Incentive Plan
On September 8, 2005, the Board of Directors approved the
2005 Stock Incentive Plan (the 2005 Plan), which was
later approved by the Companys stockholders. Pursuant to
the 2005 Plan, stock options, restricted shares, stock units,
and stock appreciation rights may be granted to employees,
consultants, and outside directors of the Company. Options
granted may be either incentive stock options or nonstatutory
stock options. The Company initially reserved
5,000,000 shares of the Companys common stock for
issuance under the 2005 Plan, effective upon the closing of the
Companys initial public offering on October 4, 2005.
On June 8, 2009, the Companys stockholders approved
an amendment to the 2005 Plan to increase the shares reserved
for issuance under the 2005 Plan by 3,980,000 shares. The
amended and restated plan also extends the term under which
awards may be granted under the 2005 Plan until January 27,
2019.
Stock options are governed by stock option agreements between
the Company and recipients of stock options. Incentive stock
options may be granted under the 2005 Plan at an exercise price
of not less than 100% of the fair market value of the common
stock on the date of grant, determined by the Compensation
Committee of the Board of Directors. Nonstatutory stock options
may be granted under the 2005 Plan at an exercise price of not
less than 80% of the fair market value of the common stock on
the date of grant, determined by the Compensation Committee of
the Board of Directors. Options become exercisable and expire as
determined by the Compensation Committee, provided that the term
of incentive stock options may not exceed 10 years from the
date of grant. Stock option agreements may provide for
accelerated exercisability in the event of an optionees
death, disability, or retirement or other events.
Under the 2005 Plan, each outside director who joins the board
after the effective date of the 2005 Plan will receive an
automatic nonstatutory stock option grant that vests at a rate
of 25% at the end of the first year, with the remaining balance
vesting monthly over the next three years. On the first business
day following the annual meeting of the Companys
stockholders, each outside director who is continuing board
service and who was not initially elected to the board at the
annual meeting will receive an additional nonstatutory stock
option grant, which will vest in full on the first anniversary
of the date of grant or, if earlier, immediately prior to the
next annual meeting of the Companys stockholders.
Nonstatutory stock options granted to outside directors must
have an exercise price equal to 100% of the fair market value of
the common stock on the date of grant. Nonstatutory stock
options terminate on the earlier of the day before the tenth
anniversary of the date of grant or the date twelve months after
termination of the outside directors service as a member
of the board of directors.
Restricted shares, stock appreciation rights, and stock units
granted under the 2005 Plan are governed by restricted stock
agreements, SAR agreements, and stock unit agreements between
the Company and recipients of the awards. Terms of the
agreements are determined by the Compensation Committee.
78
2001
Stock Incentive Plan
The Companys 2001 Stock Incentive Plan (the 2001
Plan) was terminated upon completion of the Companys
initial public offering on October 4, 2005. No shares of
common stock are available under the 2001 Plan other than to
satisfy exercises of stock options granted under the 2001 Plan
prior to its termination. Under the 2001 Plan, incentive stock
options and nonstatutory stock options were granted to
employees, officers, and directors of, or consultants to, the
Company and its affiliates. Options granted under the 2001 Plan
expire no later than 10 years from the date of grant.
Employee
Stock-Based Compensation Expense
The Company values its stock option grants using the
Black-Scholes option valuation mode. The Company recorded
employee stock-based compensation expense of $10.2 million,
$9.1 million and $6.2 million for the years ended
December 31, 2009, 2008 and 2007, respectively. Employee
stock-based compensation expense was calculated based on awards
ultimately expected to vest and has been reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Employee stock-based
compensation expense includes expense related to options granted
to outside directors of the Company. The following table
presents the impact of employee stock-based compensation expense
on selected statements of operations line items for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
364
|
|
|
$
|
491
|
|
|
$
|
375
|
|
Research and development
|
|
|
3,098
|
|
|
|
2,913
|
|
|
|
1,882
|
|
Selling and marketing
|
|
|
3,171
|
|
|
|
2,622
|
|
|
|
1,876
|
|
General and administrative
|
|
|
3,522
|
|
|
|
3,112
|
|
|
|
2,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,155
|
|
|
$
|
9,138
|
|
|
$
|
6,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31,
2009, total unrecognized compensation expense related to
unvested stock options, net of estimated forfeitures, was
$16.2 million. The Company expects to recognize this
expense over a weighted-average period of 28 months.
Valuation
Assumptions
Option valuation models require the input of highly subjective
assumptions that can vary over time. Prior to January 2008, the
Companys assumptions regarding expected volatility were
based primarily on comparable peer data because the
Companys common stock had been publicly traded for less
than two years. As of January 2008, the Companys
assumptions regarding expected volatility are based on the
historical volatility of the Companys common stock. 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 weighted-average fair
values and assumptions used in calculating such values during
each fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected volatility
|
|
|
55
|
%
|
|
|
58
|
%
|
|
|
61
|
%
|
Risk-free interest rate
|
|
|
2.33
|
%
|
|
|
1.98
|
%
|
|
|
3.93
|
%
|
Expected life of options in years
|
|
|
5.80
|
|
|
|
5.84
|
|
|
|
5.80
|
|
Weighted-average fair value
|
|
$
|
10.44
|
|
|
$
|
9.79
|
|
|
$
|
12.77
|
|
79
Stock
Options Granted to Non-employees
The Company grants stock options to
non-employee
consultants from time to time in exchange for services performed
for the Company. During the years ended December 31, 2009,
2008 and 2007, the Company granted options to purchase 5,000,
14,400 and 9,600 shares, respectively, to
non-employee
consultants. The fair value of these option grants was
determined using the Black-Scholes option pricing model. In
general, the options vest over the contractual periods of the
respective consulting arrangement and, therefore, the Company
revalues the options periodically and records additional
compensation expense related to these options over the remaining
vesting periods. During the years ended December 31, 2009,
2008 and 2007, stock-based compensation expense related to these
options was $80,000, $88,000 and $65,000, respectively.
Stock
Option Activity
The following is a summary of option activity for the years
ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Shares Available
|
|
Number of
|
|
Weighted-Average
|
|
|
for Grant
|
|
Shares
|
|
Exercise Price
|
|
Balance at December 31, 2006
|
|
|
3,282,836
|
|
|
|
2,916,403
|
|
|
$
|
9.04
|
|
Options granted
|
|
|
(1,287,917
|
)
|
|
|
1,287,917
|
|
|
$
|
21.71
|
|
Options exercised
|
|
|
|
|
|
|
(183,799
|
)
|
|
$
|
3.07
|
|
2001 Plan shares expired
|
|
|
(11,259
|
)
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
100,801
|
|
|
|
(100,801
|
)
|
|
$
|
15.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
2,084,461
|
|
|
|
3,919,720
|
|
|
$
|
13.33
|
|
Options granted
|
|
|
(1,191,380
|
)
|
|
|
1,191,380
|
|
|
$
|
17.96
|
|
Options exercised
|
|
|
|
|
|
|
(279,468
|
)
|
|
$
|
6.01
|
|
2001 Plan shares expired
|
|
|
(4,204
|
)
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
166,595
|
|
|
|
(166,595
|
)
|
|
$
|
18.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
1,055,472
|
|
|
|
4,665,037
|
|
|
$
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in shares reserved for issuance under the 2005 Plan
|
|
|
3,980,000
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(348,150
|
)
|
|
|
348,150
|
|
|
$
|
19.82
|
|
Options exercised
|
|
|
|
|
|
|
(219,720
|
)
|
|
$
|
7.90
|
|
2001 Plan shares expired
|
|
|
(353
|
)
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
109,704
|
|
|
|
(109,704
|
)
|
|
$
|
19.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
4,796,673
|
|
|
|
4,683,763
|
|
|
$
|
15.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of stock options exercised during 2009, 2008
and 2007 was $2.8 million, $4.1 million and
$2.9 million, respectively. The estimated fair value of
options vesting in 2009, 2008 and 2007 was $10.2 million,
$10.1 million and $5.6 million, respectively.
80
The following table summarizes information concerning
outstanding and exercisable options under the 2001 and 2005
Plans as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Options Exercisable
|
|
|
Number
|
|
Years Remaining
|
|
Weighted-Average
|
|
Number
|
|
Weighted-Average
|
Exercise Price Range
|
|
Outstanding
|
|
Contractual Life
|
|
Exercise Price
|
|
Exercisable
|
|
Exercise Price
|
|
$0.58 -$2.88
|
|
|
716,046
|
|
|
|
4.59
|
|
|
$
|
2.11
|
|
|
|
716,046
|
|
|
$
|
2.11
|
|
$9.39 - $10.33
|
|
|
593,693
|
|
|
|
5.44
|
|
|
$
|
9.50
|
|
|
|
591,563
|
|
|
$
|
9.50
|
|
$10.46 - $17.29
|
|
|
333,589
|
|
|
|
6.50
|
|
|
$
|
13.62
|
|
|
|
257,719
|
|
|
$
|
13.10
|
|
$17.33 - $17.33
|
|
|
878,726
|
|
|
|
8.81
|
|
|
$
|
17.33
|
|
|
|
219,005
|
|
|
$
|
17.33
|
|
$17.37 - $18.50
|
|
|
218,059
|
|
|
|
8.21
|
|
|
$
|
18.03
|
|
|
|
133,407
|
|
|
$
|
18.20
|
|
$18.54 - $18.89
|
|
|
611,749
|
|
|
|
6.89
|
|
|
$
|
18.88
|
|
|
|
463,079
|
|
|
$
|
18.89
|
|
$18.90 - $22.77
|
|
|
585,251
|
|
|
|
8.47
|
|
|
$
|
20.67
|
|
|
|
181,373
|
|
|
$
|
20.85
|
|
$22.82 - $25.69
|
|
|
746,650
|
|
|
|
7.74
|
|
|
$
|
23.35
|
|
|
|
379,123
|
|
|
$
|
23.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,683,763
|
|
|
|
|
|
|
|
|
|
|
|
2,941,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the aggregate intrinsic value of the
outstanding options was $23.2 million and the aggregate
intrinsic value of the exercisable options was
$21.1 million. The weighted-average remaining contractual
life for exercisable options was 6.3 years.
The Company recorded a provision for income taxes of $560,000
for the year ended December 31, 2009, compared to an income
tax benefit of $61,000 for the year ended December 31,
2008. The provision for income taxes for the year ended
December 31, 2009 was principally comprised of California
state income tax and, to a lesser extent, federal alternative
minimum tax and foreign taxes. The difference of income tax
expense between the provision and the statutory rate of the
Companys loss before tax and provision actually recorded
was primarily due to the non-deductible stock based compensation
expenses. For federal tax purposes, the provision was offset by
the net operating loss carry-forwards that reduce the federal
regular tax expense to the alternative minimum tax amount. The
State of California suspended the net operating loss utilization
for 2008 and 2009 tax years but allowed 50% utilization of
business credits carry-forwards. Accordingly, the California tax
provision was offset by the California business credits
carry-forwards.
For the year ended December 31, 2008, the Company recorded
minimum state income taxes of $4,000 excluding the impact of a
$65,000 discrete item. The discrete item reflected the
Companys estimated refundable credit receivable as a
result of the enactment of the Housing and Economic Recovery Act
of 2008, under which corporations otherwise eligible for bonus
first-year depreciation may instead elect to claim a refund for
research and development tax credits generated prior to 2006.
For the year ended December 31, 2007, the Company did not
record a provision for income taxes because it incurred a
taxable loss.
The Company is required to reduce its deferred tax assets by a
valuation allowance if it is more likely than not that some or
all of its deferred tax assets will not be realized. Management
must use judgment in assessing the potential need for a
valuation allowance, which requires an evaluation of both
negative and positive evidence. The weight given to the
potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively
verified. In determining the need for and amount of the
valuation allowance, if any, the Company assesses the likelihood
that it will be able to recover its deferred tax assets using
historical levels of income, estimates of future income and tax
planning strategies. As a result of recent cumulative losses,
the Company determined that, based on all available evidence,
there was substantial uncertainty as to whether it will recover
recorded net deferred taxes in future periods. Accordingly, the
Company recorded a valuation allowance against all of its net
deferred tax assets for the years ended December 31, 2009
and 2008, respectively.
As of December 31, 2009 and 2008, the Company had deferred
tax assets of approximately $65.7 million and
$64.4 million, respectively, which have been fully offset
by a valuation allowance. The net valuation allowance
81
increased by approximately $1.3 million and
$4.9 million during the years ended December 31, 2009
and 2008, respectively. Deferred tax assets primarily relate to
net operating loss and tax credit carryforwards.
The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets and
liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
49,917
|
|
|
$
|
52,682
|
|
Research tax credits
|
|
|
6,509
|
|
|
|
4,785
|
|
Capitalized costs
|
|
|
1,196
|
|
|
|
1,216
|
|
Fixed assets
|
|
|
3,278
|
|
|
|
2,163
|
|
Other
|
|
|
4,801
|
|
|
|
3,599
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
65,701
|
|
|
|
64,445
|
|
Valuation allowance
|
|
|
(65,701
|
)
|
|
|
(64,445
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had federal and state
net operating loss carryforwards of approximately
$129.3 million and $129.6 million, respectively, and
federal and state research and development tax credit
carryforwards of approximately $3.5 million and
$3.7 million, respectively. The federal and state net
operating loss and federal tax credit carryforwards will expire
at various dates beginning in 2012 if not utilized. The state
tax credit carryforwards have no expiration date.
The Company tracks a portion of its deferred tax assets
attributable to stock option benefits in a separate memorandum
account. Therefore, these amounts are no longer included in the
Companys gross or net deferred tax assets. The benefit of
these stock options will not be recorded in equity unless it
reduces taxes payable. As of December 31, 2009, the portion
of the federal and state net operating loss related to stock
option benefits was approximately $2.9 million.
Utilization of the net operating loss and tax credit
carryforwards may be subject to a substantial annual limitation
due to ownership change limitations as defined under
Sections 382 and 383 of the Internal Revenue Code of 1986,
as amended, and similar state provisions. The annual limitation
may result in the expiration of net operating losses and credits
before utilization.
The Company had $685,000 and $575,000 of unrecognized tax
benefits as of December 31, 2009 and 2008, respectively.
The following table summarizes the activity related to
unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
575
|
|
|
$
|
413
|
|
Increase (decrease) related to prior year tax positions
|
|
|
(35
|
)
|
|
|
9
|
|
Increase related to current year tax positions
|
|
|
145
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
685
|
|
|
$
|
575
|
|
|
|
|
|
|
|
|
|
|
The Company does not anticipate a material change to its
unrecognized tax benefits over the next twelve months.
Unrecognized tax benefits may change during the next twelve
months for items that arise in the ordinary course of business.
The Company will recognize accrued interest and penalties
related to unrecognized tax benefits in income tax expense when
and if incurred. As of December 31, 2009, the Company had
not recognized any tax related penalties
82
or interest in its consolidated balance sheets or statements of
operations. All tax years from 2000 forward remain subject to
future examination by federal, state and foreign tax authorities.
|
|
Note 12.
|
Subsequent
Event
|
The Company is required to make a series of future fixed annual
payments under a collaboration agreement totaling
$2.0 million triggered by the January 2010 launch of the
Oncotype DX colon cancer test. The Company will make a
payment of $150,000 in January 2010 and will be required to make
payments of $200,000 in 2011, $300,000 in 2012 and $450,000 in
each of 2013, 2014 and 2015. These payments will be recorded in
cost of product revenues as license fees. Expense for the
payments due from 2011 through 2015 will be recorded ratably
over the year before the relevant payment is made. If at any
time the Company discontinues the sale of commercial products or
services resulting from the collaboration, no future annual
payments will be payable and the Company will have no further
obligation under the agreement.
|
|
Note 13.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table contains selected unaudited consolidated
statements of operations information for each of the fiscal
quarters in 2009 and 2008. The Company believes that the
following information reflects all adjustments, consisting of
only normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented. The
operating results for any quarter are not necessarily indicative
of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(In thousands, except per share data)
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
33,896
|
|
|
$
|
36,552
|
|
|
$
|
39,517
|
|
|
$
|
39,583
|
|
Product revenues
|
|
|
33,427
|
|
|
|
35,191
|
|
|
|
38,910
|
|
|
|
39,053
|
|
Cost of product revenues
|
|
|
7,827
|
|
|
|
7,891
|
|
|
|
8,301
|
|
|
|
8,543
|
|
Net loss
|
|
|
(4,625
|
)
|
|
|
(3,943
|
)
|
|
|
(502
|
)
|
|
|
(341
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
23,440
|
|
|
$
|
27,783
|
|
|
$
|
28,121
|
|
|
$
|
31,235
|
|
Product revenues
|
|
|
23,356
|
|
|
|
26,327
|
|
|
|
28,070
|
|
|
|
30,905
|
|
Cost of product revenues
|
|
|
5,884
|
|
|
|
6,850
|
|
|
|
7,140
|
|
|
|
7,311
|
|
Net loss
|
|
|
(6,634
|
)
|
|
|
(4,099
|
)
|
|
|
(3,022
|
)
|
|
|
(2,334
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.24
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.08
|
)
|
The quarterly increases in product revenues and cost of product
revenues during 2009 and 2008 were primarily attributable to
increased adoption of our Oncotype DX breast cancer test
by physicians and increased reimbursement for this test by
third-party payors.
Per share amounts for the quarters and full year have been
calculated separately. Accordingly, quarterly amounts may not
add to the annual amount because of differences in the
weighted-average common shares outstanding during each period,
due primarily to the effect of the Companys issuing shares
of its common stock during the year.
Basic and diluted net loss per common share are identical as
common equivalent shares are excluded from the calculation
because their effect is anti-dilutive.
83
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosures.
|
Not applicable.
|
|
ITEM 9A.
|
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 the 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 Annual Report on
Form 10-K,
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) Managements Annual Report on Internal Control
over Financial Reporting. Our management is
responsible for establishing and maintaining internal control
over our financial reporting. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation
of the effectiveness of internal control to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2009. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway
Commission, or COSO, in Internal Control-Integrated
Framework. Based on the assessment using those criteria, our
management concluded that, as of December 31, 2009, our
internal control over financial reporting was effective. Our
independent registered public accounting firm, Ernst &
Young LLP, audited the effectiveness of our internal control
over financial reporting. Their report appears below:
84
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Genomic Health, Inc.
We have audited Genomic Health, Inc.s internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Genomic Health,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Genomic Health, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
2009 consolidated financial statements of Genomic Health, Inc.
and our report dated March 15, 2010 expressed an
unqualified opinion thereon.
Palo Alto,
California
March 15, 2010
85
(c) Changes in internal controls. There
was no change in our internal control over financial reporting
(as defined in
Rule 13a-15(f)
under the Exchange Act) identified in connection with the
evaluation described in Item 9A(a) above that occurred
during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
Other
Information.
|
None.
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The information required by this item with respect to directors
is incorporated by reference from the information under the
caption Election of Directors contained in our Proxy
Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for
our 2010 Annual Meeting of Stockholders to be held on
June 10, 2010, or Proxy Statement. Certain information
required by this item concerning executive officers is set forth
in Part I of this Report under the caption Executive
Officers of the Registrant and is incorporated herein by
reference.
Item 405 of
Regulation S-K
calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16(a) of the
Exchange Act. This disclosure is contained in the section
entitled Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement and is incorporated
herein by reference.
We have adopted a Code of Business Conduct and Ethics that
applies to all of our officers and employees, including our
Executive Chairman of the Board, our President and Chief
Executive Officer, our Chief Operating Officer and Chief
Financial Officer and other employees who perform financial or
accounting functions. The Code of Business Conduct and Ethics
sets forth the basic principles that guide the business conduct
of our employees. We have also adopted a Senior Financial
Officers Code of Ethics that specifically applies to our
Executive Chairman of the Board, our President and Chief
Executive Officer, our Chief Operating Officer and Chief
Financial Officer, and key management employees. Stockholders
may request a free copy of our Code of Business Conduct and
Ethics and our Senior Financial Officers Code of Ethics by
contacting Genomic Health, Inc., Attention: Chief Financial
Officer, 301 Penobscot Drive, Redwood City, California 94063.
To date, there have been no waivers under our Code of Business
Conduct and Ethics or Senior Financial Officers Code of
Ethics. We intend to disclose future amendments to certain
provisions of our Code of Business Conduct and Ethics or Senior
Financial Officers Code of Ethics or any waivers, if and
when granted, of our Code of Business Conduct and Ethics or
Senior Financial Officers Code of Ethics on our website at
http://www.genomichealth.com
within four business days following the date of such amendment
or waiver.
Our Board of Directors has appointed an Audit Committee,
comprised of Mr. Randall S. Livingston, as Chairman,
Dr. Fred E. Cohen and Ms. Ginger L. Graham. The Board
of Directors has determined that Mr. Livingston qualifies
as an Audit Committee Financial Expert under the definition
outlined by the Securities and Exchange Commission. In addition,
each of the members of the Audit Committee qualifies as an
independent director under the current rules of The
NASDAQ Stock Market and Securities and Exchange Commission rules
and regulations.
|
|
ITEM 11.
|
Executive
Compensation.
|
The information required by this item is incorporated by
reference from the information under the captions Election
of Directors Compensation of Directors and
Executive Compensation contained in the Proxy
Statement.
86
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item is incorporated by
reference from the information under the captions Security
Ownership of Certain Beneficial Owners and Management and
Executive Compensation Equity Compensation
Plan Information contained in the Proxy Statement.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is incorporated by
reference from the information under the caption Election
of Directors Certain Relationships and Related
Transactions contained in the Proxy Statement.
|
|
ITEM 14.
|
Principal
Accounting Fees and
Services.
|
The information required by this item is incorporated by
reference from the information under the caption
Ratification of the Appointment of Independent Registered
Accounting Firm Principal Accountant Fees and
Services contained in the Proxy Statement.
PART IV
|
|
ITEM 15.
|
Exhibits and Financial Statement Schedules.
|
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial
Statements of Genomic Health under Item 8 of Part II
hereof.
(2) Financial Statement Schedules
The following schedule is filed as part of this
Form 10-K:
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 2009, 2008, and 2007.
All other financial statement schedules have been omitted
because they are not applicable or not required or because the
information is included elsewhere in the Consolidated Financial
Statements or the Notes thereto.
(3) Exhibits
See Item 15(b) below. Each management contract or
compensatory plan or arrangement required to be filed has been
identified.
(b) Exhibits
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
3(i)
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.3 filed with
Registration Statement on Form S-1 (File No. 333-126626), as
amended, declared effective on September 28, 2005).
|
3(ii)
|
|
Amended and Restated Bylaws of the Company, as amended and
restated January 8, 2009 (incorporated by reference to exhibit
3.1 to the Companys Current Report on Form 8-K filed on
January 9, 2009).
|
4.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
the exhibit of the same number filed with Registration Statement
on Form S-1 (File No. 333-126626), as amended, declared
effective on September 28, 2005).
|
87
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
4.2
|
|
Amended and Restated Investors Rights Agreement, dated
February 9, 2004 between the Company and certain of its
stockholders (incorporated by reference to the exhibit of the
same number filed with Registration Statement on Form S-1 (File
No. 333-126626), as amended, declared effective on September 28,
2005).
|
10.1#
|
|
Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference to the exhibit
of the same number filed with Registration Statement on Form S-1
(File No. 333-126626), as amended, declared effective on
September 28, 2005).
|
10.2#
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on Form S-1 (File No.
333-126626), as amended, declared effective on September 28,
2005).
|
10.3#
|
|
2005 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on Form S-1 (File No.
333-126626), as amended, declared effective on September 28,
2005).
|
10.4.1
|
|
Sublease Agreement dated June 1, 2001 between the Company and
Corixa Corporation (incorporated by reference to the exhibit of
the same number filed with Registration Statement on Form S-1
(File No. 333-126626), as amended, declared effective on
September 28, 2005).
|
10.4.2
|
|
First Amendment to Sublease Agreement dated October 29, 2003
between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on Form S-1 (File No. 333-126626), as
amended, declared effective on September 28, 2005).
|
10.4.3
|
|
Second Amendment to Sublease Agreement dated January 31, 2005
between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on Form S-1 (File No. 333-126626), as
amended, declared effective on September 28, 2005).
|
10.5
|
|
PCR Patent License Agreement dated February 21, 2005 between the
Company and Roche Molecular Systems, Inc. (incorporated by
reference to exhibit 10.8 filed with Registration Statement on
Form S-1 (File No. 333-126626), as amended, declared effective
on September 28, 2005).
|
10.6.1
|
|
Master Security Agreement dated March 30, 2005 between the
Company and Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.1 filed with Registration Statement on
Form S-1 (File No. 333-126626), as amended, declared effective
on September 28, 2005).
|
10.6.2
|
|
Form of Promissory Note (Equipment) issued by the Company in
favor of Oxford Finance Corporation (incorporated by reference
to exhibit 10.9.2 filed with Registration Statement on Form S-1
(File No. 333-126626), as amended, declared effective on
September 28, 2005).
|
10.6.3
|
|
Form of Promissory Note (Computers and Software) issued by the
Company in favor of Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.3 filed with Registration Statement on
Form S-1 (File No. 333-126626), as amended, declared effective
on September 28, 2005).
|
10.6.4
|
|
Schedule of Promissory Notes issued by the Company in favor of
Oxford Finance Corporation (incorporated by reference to exhibit
10.6.4 filed with the Companys Annual Report on Form 10-K
for the year ended December 31, 2006).
|
10.7
|
|
Lease dated September 23, 2005 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.10 filed with Registration Statement on Form S-1
(File No. 333-126626), as amended, declared effective on
September 28, 2005).
|
10.8
|
|
Lease dated January 2, 2007 between the Company and Metropolitan
Life Insurance Company (incorporated by reference to exhibit
10.8 filed with the Companys Annual Report on Form 10-K
for the year ended December 31, 2006).
|
10.9#
|
|
Form of Non U.S. Employee/Consultant Stock Option Agreement
under the Companys 2005 Stock Incentive Plan (incorporated
by reference to exhibit 10.1 filed with the Companys
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2008).
|
10.10#
|
|
Amended and Restated Genomic Health, Inc. 2005 Stock Incentive
Plan (incorporated by reference to exhibit 10.1 filed with the
Companys Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2009).
|
10.11#
|
|
Form of Stock Option Agreement (incorporated by reference to
exhibit 10.2 filed with the Companys Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2009).
|
88
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
10.10
|
|
Lease dated October 1, 2009 between the Company and Metropolitan
Life Insurance Company (incorporated by reference to exhibit
10.1 filed with the Companys Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2009).
|
12.1*
|
|
Statement Regarding Computation of Ratios.
|
21.1*
|
|
List of Subsidiaries.
|
23.1*
|
|
Consent of independent registered public accounting firm.
|
24.1*
|
|
Power of Attorney (see page 91 of this Form 10-K).
|
31.1*
|
|
Rule 13a 14(a) Certification of Chief Executive Officer.
|
31.2*
|
|
Rule 13a 14(a) Certification of the Chief Financial
Officer.
|
32.1**
|
|
Statement of the Chief Executive Officer under Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
|
32.2**
|
|
Statement of the Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release
No. 34-47986,
the certifications furnished in Exhibits 32.1 and 32.2
hereto are deemed to accompany this Form
10-K and
will not be deemed filed for purposes of
Section 18 of the Exchange Act. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements. |
|
# |
|
Indicates management contract or compensatory plan or
arrangement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.
(c) Financial Statements and Schedules
Reference is made to Item 15(a)(2) above.
89
SCHEDULE II
GENOMIC
HEALTH, INC.
VALUATION
AND QUALIFYING ACCOUNTS
Years
Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
(Credited) to
|
|
|
|
|
|
End of
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
$
|
881
|
|
|
$
|
1,441
|
|
|
$
|
1,777
|
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
133
|
|
|
$
|
1,343
|
|
|
$
|
595
|
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
510
|
|
|
$
|
(115
|
)(1)
|
|
$
|
262
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Changes in the Companys estimate of allowance for doubtful
accounts resulted in the reduction of bad debt expense for the
year ended December 31, 2007. |
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GENOMIC HEALTH, INC.
|
|
|
|
By:
|
/s/ Kimberly
J. Popovits
|
Kimberly J. Popovits
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 15, 2010
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Randal W.
Scott, Kimberly J. Popovits and G. Bradley Cole, and each of
them, his true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities,
to sign any amendments to this report on
Form 10-K
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact or their substitute or substitutes may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Kimberly
J. Popovits
Kimberly
J. Popovits
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ G.
Bradley Cole
G.
Bradley Cole
|
|
Chief Operating Officer and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Randal
W. Scott
Randal
W. Scott, Ph.D.
|
|
Executive Chairman of the Board of Directors
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Julian
C. Baker
Julian
C. Baker
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Brook
H. Byers
Brook
H. Byers
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Fred
E. Cohen
Fred
E. Cohen, MD., D. Phil.
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Samuel
D. Colella
Samuel
D. Colella
|
|
Director
|
|
March 15, 2010
|
91
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Ginger
L. Graham
Ginger
L. Graham
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Randall
S. Livingston
Randall
S. Livingston
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Woodrow
A. Myers
Woodrow
A. Myers Jr., MD
|
|
Director
|
|
March 15, 2010
|
92
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
3(i)
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.3 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
3(ii)
|
|
Amended and Restated Bylaws of the Company, as amended and
restated January 8, 2009 (incorporated by reference to
exhibit 3.1 to the Companys Current Report on
Form 8-K
filed on January 9, 2009).
|
4.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
the exhibit of the same number filed with Registration Statement
on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
4.2
|
|
Amended and Restated Investors Rights Agreement, dated
February 9, 2004 between the Company and certain of its
stockholders (incorporated by reference to the exhibit of the
same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.1#
|
|
Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.2#
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.3#
|
|
2005 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.4.1
|
|
Sublease Agreement dated June 1, 2001 between the Company
and Corixa Corporation (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.4.2
|
|
First Amendment to Sublease Agreement dated October 29,
2003 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.4.3
|
|
Second Amendment to Sublease Agreement dated January 31,
2005 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.5
|
|
PCR Patent License Agreement dated February 21, 2005
between the Company and Roche Molecular Systems, Inc.
(incorporated by reference to exhibit 10.8 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.6.1
|
|
Master Security Agreement dated March 30, 2005 between the
Company and Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.1 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.6.2
|
|
Form of Promissory Note (Equipment) issued by the Company in
favor of Oxford Finance Corporation (incorporated by reference
to exhibit 10.9.2 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.6.3
|
|
Form of Promissory Note (Computers and Software) issued by the
Company in favor of Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.3 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
10.6.4
|
|
Schedule of Promissory Notes issued by the Company in favor of
Oxford Finance Corporation (incorporated by reference to
exhibit 10.6.4 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
10.7
|
|
Lease dated September 23, 2005 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.10 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
93
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
10.8
|
|
Lease dated January 2, 2007 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.8 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
10.9#
|
|
Form of Non U.S. Employee/Consultant Stock Option Agreement
under the Companys 2005 Stock Incentive Plan (incorporated
by reference to exhibit 10.1 filed with the Companys
Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2008).
|
10.10#
|
|
Amended and Restated Genomic Health, Inc. 2005 Stock Incentive
Plan (incorporated by reference to exhibit 10.1 filed with
the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2009).
|
10.11#
|
|
Form of Stock Option Agreement (incorporated by reference to
exhibit 10.2 filed with the Companys Quarterly Report
on
Form 10-Q
for the quarterly period ended June 30, 2009).
|
10.12
|
|
Lease dated October 1, 2009 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.1 filed with the Companys Quarterly
Report on
Form 10-Q
for the quarterly period ended September 30, 2009).
|
12.1*
|
|
Statement Regarding Computation of Ratios.
|
21.1*
|
|
List of Subsidiaries.
|
23.1*
|
|
Consent of independent registered public accounting firm.
|
24.1*
|
|
Power of Attorney (see page 91 this
Form 10-K).
|
31.1*
|
|
Rule 13a 14(a) Certification of Chief Executive
Officer.
|
31.2*
|
|
Rule 13a 14(a) Certification of the Chief
Financial Officer.
|
32.1**
|
|
Statement of the Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
32.2**
|
|
Statement of the Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release
No. 34-47986,
the certifications furnished in Exhibits 32.1 and 32.2
hereto are deemed to accompany this Form
10-K and
will not be deemed filed for purposes of
Section 18 of the Exchange Act. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements. |
|
# |
|
Indicates management contract or compensatory plan or
arrangement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.
94