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EX-10.9 - EX-10.9 - EXACT SCIENCES CORPexas-20161231ex1092161a3.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10‑K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2016

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

 

Commission file number 001-35092


EXACT SCIENCES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

DELAWARE
(State or other jurisdiction of
incorporation or organization)

02‑0478229
(IRS Employer
Identification No.)

441 Charmany Drive, Madison, WI
(Address of principal executive offices)

53719
(Zip Code)

 

Registrant’s telephone number, including area code: (608) 284‑5700

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

 

 

Common Stock, $.01 Par Value (including
attached Preferred Stock Purchase Rights)

The NASDAQ Stock Market LLC
(The NASDAQ Stock Market LLC)

 

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

None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒  No ☐

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 ☐  No ☒

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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 ☒  No ☐

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 registrant’s 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. ☒

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):

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

Non‑accelerated filer ☐
(Do not check if a
smaller reporting company)

Smaller reporting company ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐  No ☒

The aggregate market value of the voting and non‑voting common equity held by non‑affiliates of the Registrant, as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $1,177,885,275 (based on the closing price of the Registrant’s Common Stock on June 30, 2016 of $12.25 per share).

The number of shares outstanding of the Registrant’s $.01 par value Common Stock as of February 20, 2017 was 110,603,808.

DOCUMENT INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days after the end of the fiscal year ended December 31, 2016. Portions of such proxy statement are incorporated by reference into Part III of this Form 10‑K.

 

 

 

 


 

EXACT SCIENCES CORPORATION

ANNUAL REPORT ON FORM 10‑K

YEAR ENDED DECEMBER 31, 2016

TABLE OF CONTENTS

 

 

Page No.

Part I 

 

 

Item 1. 

Business

Item 1A. 

Risk Factors

15 

Item 1B. 

Unresolved Staff Comments

32 

Item 2. 

Properties

32 

Item 3. 

Legal Proceedings

32 

Item 4. 

Mine Safety Disclosures

32 

Part II 

 

 

Item 5. 

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

33 

Item 6. 

Selected Financial Data

34 

Item 7. 

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

35 

Item 7A. 

Quantitative and Qualitative Disclosures about Market Risk

47 

Item 8. 

Financial Statements and Supplementary Data

48 

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

84 

Item 9A. 

Controls and Procedures

84 

Item 9B. 

Other Information

84 

Part III 

 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

85 

Item 11. 

Executive Compensation

85 

Item 12. 

Security and Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

85 

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

85 

Item 14. 

Principal Accountant Fees and Services

85 

Part IV 

 

 

Item 15. 

Exhibits and Financial Statement Schedules

85 

Item 16. 

Form 10-K Summary

85 

SIGNATURES 

86 

 

2


 

PART I

This Annual Report on Form 10‑K contains forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward‑looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward‑looking terms such as “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “estimate,” “anticipate” or other comparable terms. All statements other than statements of historical facts included in this Annual Report on Form 10‑K regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding expected future operating results, anticipated results of our sales and marketing efforts, expectations concerning payor reimbursement and the anticipated results of our product development efforts.  Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: our ability to successfully and profitably market our products and services; the acceptance of our products and services by patients and healthcare providers; our ability to meet demand for our products and services; the willingness of health insurance companies and other payors to cover Cologuard and reimburse us for our performance of the Cologuard test; the amount and nature of competition from other cancer screening products and services; the effects of the adoption, modification or repeal of any healthcare reform law, rule, order, interpretation or policy; the effects of changes in healthcare pricing, coverage and reimbursement; recommendations, guidelines and quality metrics issued by various organizations such as the U.S. Preventive Services Task Force, the American Cancer Society and the National Committee for Quality Assurance regarding cancer screening or our products and services; our ability to successfully develop new products and services; our success establishing and maintaining collaborative, licensing and supplier arrangements; our ability to maintain regulatory approvals and comply with applicable regulations; and the other risks and uncertainties described in the Risk Factors and in Management's Discussion and Analysis of Financial Condition and Results of Operations sections of this Annual Report on Form 10‑K and our subsequently filed Quarterly Reports on Form 10-Q. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

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Item 1.  Business

Overview

Exact Sciences Corporation (together with its subsidiaries, “Exact,” “we,” “us,” “our” or the “Company”) is a molecular diagnostics company currently focused on the early detection and prevention of some of the deadliest forms of cancer. We have developed an accurate, non-invasive, patient friendly screening test called Cologuard® for the early detection of colorectal cancer and pre-cancer, and we are currently working on the development of additional tests for other types of cancer, with the goal of becoming a leader in cancer diagnostics.

Our Cologuard Test

Colorectal cancer is the second leading cause of cancer deaths in the United States and the leading cause of cancer deaths in the U.S. among non-smokers. Each year in the U.S. there are approximately:

 

·

135,000 new cases of colorectal cancer

·

50,000 deaths from colorectal cancer

 

Colorectal cancer treatment represents a significant, growing healthcare cost. As of 2010, $14 billion was spent annually in the U.S. on colorectal cancer treatment, and the projected annual treatment costs are expected to be $20 billion in 2020. The incidence of colorectal cancer in Medicare patients is expected to rise from 106,000 cases in 2010 to more than 180,000 cases in 2030.

 

It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers. Colorectal cancer can take up to 10-15 years to progress from a pre-cancerous lesion to metastatic cancer and death. Patients who are diagnosed early in the progression of the disease—with pre-cancerous lesions or polyps or early-stage cancer—are more likely to have a complete recovery and to be treated less expensively. Accordingly, the American Cancer Society (“ACS”) recommends that all people age 50 and older undergo regular colorectal cancer screening. Of the more than 80 million people in the U.S. for whom routine colorectal cancer screening is recommended, 42 percent have not been screened according to current guidelines. Poor compliance with screening guidelines has meant that nearly two-thirds of colorectal cancer diagnoses are made in the disease’s late stages. The five-year survival rates for stages 3 and 4 are 67 percent and 12 percent, respectively. We believe the large underserved population of unscreened and inadequately screened patients represents a significant opportunity for a patient-friendly screening test.

 

Our Cologuard test is a non-invasive stool-based DNA (“sDNA”) screening test which utilizes a multi-target approach to detect DNA and hemoglobin biomarkers associated with colorectal cancer and pre-cancer. Ten biomarkers are targeted that have been shown to be strongly associated with colorectal cancer and pre-cancer. Methylation, mutation, and hemoglobin results are combined in the laboratory analysis through a proprietary algorithm to provide a single positive or negative reportable result.

 

On August 11, 2014 the U.S. Food and Drug Administration (“FDA”) approved Cologuard for use as the first and only sDNA non-invasive colorectal cancer screening test. Our submission to the FDA for Cologuard included the results of our pivotal DeeP-C clinical trial that had over 10,000 patients enrolled at 90 sites in the U.S. and Canada. The results of our DeeP-C clinical trial for Cologuard were published in the New England Journal of Medicine in April 2014. The peer-reviewed study, “Multi-target Stool DNA Testing for Colorectal-Cancer Screening,” highlighted the performance of Cologuard in the trial population:

 

·

Cancer Sensitivity: 92%

·

Stage I and II Cancer Sensitivity: 94%

·

High-Grade Dysplasia Sensitivity: 69%

·

Specificity: 87%

 

The competitive advantages of sDNA screening may provide a significant market opportunity. If the test were used by 30-percent of the eligible screening population at a three-year screening interval rate, we estimate the potential U.S. market for sDNA screening would be more than $4 billion, annually.

 

4


 

Our Cologuard Commercialization Strategy

 

Our commercialization strategy includes three main elements focusing on physicians, patients, and payors.

 

Physicians and Patients 

 

Our sales team actively engages with physicians and their staffs to emphasize the need for colorectal cancer screening, educate them on the value of Cologuard, and enroll them in our physician ordering system to enable them to prescribe the test. We focus on specific physicians based on Cologuard order history and on physician groups and larger regional and national health systems.

 

Securing inclusion in guidelines and quality measures is a key part of our physician engagement strategy since many physicians rely on such guidelines and quality measures when making screening recommendations. In June 2016, the US Preventive Services Task Force (“USPSTF”) issued an updated recommendation statement for colorectal cancer screening and gave an "A" grade to colorectal cancer screening starting at age 50 and continuing until age 75. The statement specifies seven screening methods, including FIT-DNA (which is Cologuard).

 

Professional colorectal cancer screening guidelines in the U.S., including those of the ACS, the American College of Gastroenterology (“ACG”), the American Gastroenterological Association (“AGA”) and the National Comprehensive Cancer Network (“NCCN”), recommend regular screening by a variety of methods. Since 2008, joint colorectal cancer screening guidelines endorsed by the ACS and the U.S. Multi-Society Task Force on Colorectal Cancer (“CRC Task Force”) have included sDNA screening technology as a screening option for the detection of colorectal cancer in average risk, asymptomatic individuals age 50 and older. The CRC Task Force is a consortium of several organizations that includes representatives of the ACG, AGA, the American Society for Gastrointestinal Endoscopy, and the American College of Physicians/Society of Internal Medicine. In October 2014, the ACS updated its colorectal cancer screening guidelines to specifically include Cologuard as a recommended sDNA screening test. In June 2016, the NCCN updated its Colorectal Cancer Screening Guidelines to add sDNA screening, at a once-every-three-years interval, to its list of recommended screening tests.

In October 2016, the National Committee for Quality Assurance (“NCQA”) included Cologuard testing on a three-year interval in the final 2017 Healthcare Effectiveness Data and Information set (“HEDIS”) measures. More than 90 percent of America’s health plans measure quality based on HEDIS. In February 2017, the Centers for Medicare & Medicaid Services (“CMS”) proposed including Cologuard in the 2018 Star Ratings program, which uses HEDIS as a primary data source. The Star Ratings program is designed to measure quality in Medicare Advantage plans, help beneficiaries find a plan, and determine potential quality bonus payments. The proposal to include Cologuard in the Star Ratings program, as set forth in the Medicare Advantage Advance Notice and Draft Call letter dated February 1, 2017, is subject to a public comment period.

 

A critical part of the value proposition of Cologuard is our compliance program, which involves active engagement with patients and physicians. This activity is focused on enabling patients to complete Cologuard tests that have been ordered for them by their physicians and supporting physicians in their efforts to have their patients screened.

 

After the launch of Cologuard, we initiated a significant public relations effort to engage patients in the United States. We have conducted targeted direct-to-patient advertising campaigns through social media, print and other channels. In 2016 we began a national television advertising campaign. To date, we have focused our efforts on cable television most commonly viewed by our target patient demographic, and we have begun testing advertising campaigns on network television. In 2017, we plan to continue our targeted direct-to-patient advertising initiatives and launch new content for our television advertising campaign.

5


 

Payors

 

The cornerstone of our payor-engagement strategy was securing Medicare coverage from CMS. Medicare covers 47% of patients in the screening population for Cologuard. On October 9, 2014, CMS issued a final National Coverage Determination (“NCD”) for Cologuard following a parallel review process with FDA.  Cologuard was the first screening test approved by FDA and covered by CMS through that process. As outlined in the NCD, Medicare Part B covers Cologuard once every three years for beneficiaries who meet all of the following criteria:

 

·

age 50 to 85 years,

·

asymptomatic (no signs or symptoms of colorectal disease including but not limited to lower gastrointestinal pain, blood in stool, positive guaiac fecal occult blood test or fecal immunochemical test), and

·

at average risk for developing colorectal cancer (e.g., no personal history of adenomatous polyps, colorectal cancer, or inflammatory bowel disease, including Crohn’s Disease and ulcerative colitis; no family history of colorectal cancers or adenomatous polyps, familial adenomatous polyposis, or hereditary non-polyposis colorectal cancer).

 

In the 2017 Clinical Laboratory Fee Schedule, CMS set reimbursement for Cologuard at $512.43. Payments from CMS are subject to sequestration. Under the Protecting Access to Medicare Act of 2014 (“PAMA”), effective January 1, 2018, the CMS reimbursement rate for Cologuard will be calculated based on the volume-weighted median of private payor rates for Cologuard. The initial data collection period for that purpose was the period between January 1, 2016 and June 30, 2016. The CMS reimbursement rate will subsequently be reset every three years, or every year if the Company applies for, and is granted, Advanced Diagnostic Laboratory Test status for Cologuard, based on the volume-weighted median of private payor rates experienced in the applicable six-month data collection period. The data for the initial collection period must be submitted to CMS by March 31, 2017 and will be subject to review by CMS prior to the finalization of the new reimbursement rate.

 

In addition to Medicare reimbursement, we believe it is necessary to secure favorable coverage and reimbursement from commercial payors for Cologuard to achieve its full commercial potential. Some commercial payors have issued positive coverage decisions for Cologuard and others have agreed to cover Cologuard as an in-network service. We believe that commercial payors’ reimbursement of Cologuard will depend on a number of factors, including payors’ determination that it is: sensitive and specific for colorectal cancer; not experimental or investigational; approved or recommended by major organizations’ guidelines; subject to applicable federal and state coverage mandates; reliable, safe and effective; medically necessary; appropriate for the specific patient; and cost-effective. Also, some payors may require that they give prior authorization for a Cologuard test before they are willing to pay for it.  Prior authorization requirements may include requirements that we, patients, or physicians provide the payor with extensive medical records and other information.

 

Coverage of Cologuard may also depend, in whole or in part, on whether payors determine, or courts and/or governmental agencies determine, coverage is required under applicable federal or state laws mandating coverage of certain colorectal cancer screening services. For example, Section 2713 of the Patient Protection and Affordable Care Act (“ACA”) mandates that certain health insurers cover evidence-based items or services that have in effect a rating of “A” or “B” in the current recommendations of USPSTF without imposing any patient cost-sharing (“ACA Mandate”). Similarly, federal regulations require that Medicare Advantage plans cover “A” or “B” graded preventive services without patient cost-sharing. Following the updated USPSTF recommendation statement, the CMS issued an updated Evidence of Coverage notice for Medicare Advantage plans that affirms such plans must include coverage of Cologuard every three years without patient cost-sharing. While we believe the ACA Mandate will require certain health insurers to cover Cologuard without patient cost-sharing (following an initial phase-in period between one and two years from when the USPSTF recommendation statement was issued), it is possible that certain health insurers will disagree, in which case courts and/or governmental agencies may need to resolve this matter.  It is also possible that the ACA Mandate will be repealed or significantly modified in the future. 

 

Similarly, we believe the laws of several states currently mandate coverage of Cologuard by certain health insurance companies. While some of those insurance companies have agreed with our interpretation, in certain states, others have disagreed. In some cases, we have filed lawsuits in an effort to enforce state laws we believe require coverage of Cologuard, and we may file additional suits in the future.  We may or may not be successful in any such lawsuit.

6


 

 

We are pursuing a variety of strategies to increase commercial payor coverage for Cologuard, including providing cost effectiveness data to payors to make the case for Cologuard reimbursement.  We are focusing our efforts on large national and regional insurers, insurers in states with coverage mandates for colorectal cancer screening, and health plans that have affiliated health systems.

 

We believe quality metrics will help shape payors’ coverage decisions, as well as physicians’ cancer screening procedures. Some government and private payors are adopting pay-for-performance programs that differentiate payments for healthcare services based on the achievement of documented quality metrics, cost efficiencies or patient outcomes. Payors may look to quality measures such as the HEDIS and CMS Star Ratings measures to assess quality of care.  We believe inclusion in the HEDIS measures and the Star Ratings measures (if the Star Ratings are revised to include Cologuard, as proposed by CMS in February 2017) will have a positive impact on payors’ willingness to reimburse Cologuard, as well as on physicians’ willingness to prescribe the test.

Our Clinical Lab Facility

As part of our commercialization strategy, we established a state-of-the-art, highly automated lab facility that is certified pursuant to federal Clinical Laboratory Improvement Amendments (“CLIA”) requirements to process Cologuard tests and provide patient results. Our commercial lab operation is housed in a 50,000 square foot facility in Madison, Wisconsin. At our lab, we currently have the capacity to process approximately one million tests per year, and we have capacity to expand, if needed. 

 

Product Pipeline

We also are developing a pipeline of potential future products and services. We are continuing to collaborate with MAYO Foundation for Medical Education and Research (“MAYO”) on developing new tests, with the goal of becoming a leader in cancer diagnostics. We believe Cologuard’s technological platform provides a strong foundation for the development of additional cancer diagnostic tests. Through our collaboration with MAYO, we have identified proprietary methylation markers for several major cancers. We have successfully performed validation studies on tissue samples for seven major cancers, including lung cancer, and on blood samples for four major cancers.  

 

The ACS estimates that lung cancer will be diagnosed in 223,000 Americans and cause 156,000 deaths in the United States in 2017. Currently, more than half of lung cancer cases are diagnosed at an advanced stage, after symptoms appear, when the five-year survival rate is in the low single digits. If lung cancer is detected at an early stage, its five-year survival rate can be as high as 80%. We are currently developing a blood-based biomarker test to aid in the early detection of lung cancer in individuals with lung nodules discovered through a computerized tomography (“CT”) or other scan. Such a test may help reduce the number of unnecessary biopsies and other follow-up procedures, and thereby reduce costs and improve health outcomes. We recently completed a 400 patient lung cancer study which has been submitted for publication in the spring of 2017.

 

We also plan to continue to explore opportunities for improving Cologuard, including improvements that could lower our cost of sales. 

 

Competition

The market for colorectal cancer and pre-cancer screening is large, consisting of more than 80 million Americans age 50 and above, and has attracted numerous competitors, some of which possess significantly greater financial and other resources and development capabilities than us. Our Cologuard test faces competition from procedure‑based detection technologies such as flexible sigmoidoscopy, colonoscopy, and “virtual” colonoscopy, a radiological imaging approach that visualizes the inside of the bowel by CT scan (spiral computerized axial tomography), as well as traditional screening tests, such as the fecal occult blood test (“FOBT”) and FIT, and newer screening technologies such as the PillCam® COLON cleared by FDA in February 2014. Our competitors may also be developing additional methods of detecting colorectal cancer and pre-cancer that have not yet been announced.

 

In addition, a number of companies and institutions are working to develop new blood and serum‑based tests for the detection of colorectal cancer or pre-cancer, including tests based on the detection of proteins, nucleic acids, or the presence of fragments of mutated genes in the blood that are produced by colorectal cancer or pre-cancer. We are aware

7


 

of at least six other companies—Epigenomics AG, Applied Proteomics, Inc., Gene News, EDP Biotech Corporation, Illumina, Inc., and Quest Diagnostics—that are developing blood-based tests for the detection of colorectal cancer. Epigenomics AG completed a large, multi-center study designed to demonstrate the performance of its blood-based screening test for colorectal cancer and received FDA approval for its product, Epi proColon, in April 2016. On January 10, 2016, Illumina, Inc. announced the formation of GRAIL, a new company aiming to develop a blood-based, pan-cancer screening test that would seek to measure circulating nucleic acids in blood using next-generation sequencing (“NGS”) technology.  We believe other companies are also working on so-called “liquid biopsy” tests using NGS technology, and these tests could represent significant competition for Cologuard and other tests we may develop.

 

Notwithstanding that the market for colorectal cancer screening is highly competitive, we believe that Cologuard, as the first and only sDNA-based non-invasive colorectal cancer screening test on the market today, compares favorably to other products and services. All other colorectal cancer detection methods in use today are constrained by some combination of poor sensitivity, poor compliance, and high cost. The leading method, colonoscopy, involves advance dietary restrictions and bowel cleansing and can be uncomfortable, time‑consuming, hazardous, and expensive. Colonoscopy requires sedation, potential lost time from work, and someone to drive the patient home from the procedure. A 2010 study shows that seven out of 10 people age 50 and older who were told they should get a colonoscopy did not do so primarily due to fears. Fecal blood testing, including FIT testing, suffers from poor sensitivity, with only a 74 percent detection rate for cancer and 24 percent detection rate for pre‑cancers. Blood‑based DNA tests currently available are also disadvantaged by low sensitivity. Data from a validation study of one blood‑based test was released in late 2011 and published in the journal Gut in February 2013, demonstrating 48 percent sensitivity across all stages of cancer, with little sensitivity for pre‑cancer above the background false positive rate. Additionally, FIT testing suffers from low adherence over time. One study published in the American Journal of Managed Care demonstrated that only two out of every 1,000 patients studied adhered to FIT screening guidelines.

 

Beyond our Cologuard test, as we seek to develop other tools to detect cancer and pre-cancer, we expect to compete with a broad range of organizations in the U.S. and other countries that are engaged in the development, production and commercialization of cancer diagnostic tools. These competitors include:

 

·

biotechnology, diagnostic and other life science companies;

·

academic and scientific institutions;

·

governmental agencies; and

·

public and private research organizations.

 

We may be unable to compete effectively against our competitors either because their products and services are superior or because they may have more expertise, experience, financial resources, or stronger business relationships. These competitors may have broader product lines and greater name recognition than we do. We have limited experience developing tests for detecting non-colorectal cancers and cannot guarantee that our research and development activities will be successful in developing any marketable testing products or services. Furthermore, even if we do develop new marketable products or services, our current and future competitors may develop products and services that are more commercially attractive than ours, and they may bring those products and services to market earlier than us.

 

How We Recognize Revenue

For tests performed where we have an agreed-upon reimbursement rate or where we can estimate the amount that we will ultimately collect at the time delivery is complete, such as in the case of Medicare and certain other payors, we recognize the related revenue on an accrual basis upon delivery of a test result to an ordering physician. Accrual rates are based on the established billing rates less contractual and other adjustments, which arrive at the amount that we expect to ultimately collect. We determine the amount we expect to ultimately collect on a per-payor or per-agreement basis. The expected amount is typically lower than, if applicable, the agreed-upon reimbursement amount due to several factors, such as the amount of any patient co-payments, the existence of secondary payors, and claim denials. Upon ultimate collection, the amount received from Medicare and other payors where reimbursement was estimated is compared to previous collection estimates and, if necessary, the contractual allowance is adjusted.  Finally, should we recognize revenue from payors on an accrual basis and later determine the judgments underlying estimated collections change, our financial results could be negatively impacted in future periods. A portion of our revenue is recognized upon cash receipt, as we are currently unable to reasonably estimate the amount that will ultimately be collected from many payors. 

 

8


 

Our average reimbursement per test, as further defined below, was approximately $405 through December 31, 2016. This cumulative average Cologuard reimbursement rate will change over time due to a number of factors, including medical coverage decisions by payors, changes in the payor mix, the effects of contracts signed with payors, changes in allowed amounts by payors, our ability to successfully win appeals for payment, settlements reached with payors regarding previously denied claims, and our ability to collect cash payments from payors and individual patients. Historical average reimbursement is not necessarily indicative of future average reimbursement. 

We calculate the average Cologuard reimbursement per test from all payors on a trailing twelve-month basis, whether they are on a cash or an accrual basis, for tests that are at least six months old, since it can often take that long, or in some cases longer, to collect from some payors. Thus, the average reimbursement per test represents the total cash collected through December 31, 2016 for tests performed during the relevant period divided by the number of tests performed during that same period. 

We incur expense for tests in the period in which the testing activities occur and recognize revenue for tests in the period in which our revenue recognition criteria are met. Accordingly, any revenue that we recognize as a result of cash collection related to previously performed but unpaid tests will favorably impact our liquidity and results of operations in future periods. 

The components of our revenue, as recognized upon accrual or cash receipt, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

(In thousands)

 

2016

    

2015

    

 

2014

 

Revenue recognized on an accrual basis

 

$

87,037

 

$

36,364

 

$

1,388

 

 

Revenue recognized when cash is received

 

 

12,339

 

 

3,073

 

 

116

 

 

Total

 

$

99,376

 

$

39,437

 

$

1,504

 

 

 

Of the revenue recognized in the year ended December 31, 2016, approximately $3.0 million relates to tests processed in the prior year for which our accrual revenue recognition criteria were not met until 2016 and for which we waited to recognize revenue until cash was received.

Research and Development

Research and development costs account for a substantial portion of our operating expenses. Our research and development expenses were $33.5 million, $33.9 million and $28.7 million for the years ended December 31, 2016, 2015, and 2014, respectively. Research and development expenses are expected to increase in the future as we work on developing additional products related to cancer diagnostic testing and improving Cologuard.

Seasonality

We are in the early stages of Cologuard’s commercialization and are continuing to learn how seasonal factors may affect our business.  Based on our experience to date, we expect some seasonal variations in our financial results due to a variety of factors, such as the year-end holiday period and other major holidays, vacation patterns of both patients and physicians, climate and weather conditions in our markets and other factors relating to the timing of patient deductibles and co-insurance limits. 

Government Regulation

Certain of our activities are subject to regulatory oversight by the FDA under provisions of the Federal Food, Drug, and Cosmetic Act and regulations thereunder, including regulations governing the development, marketing, labeling, promotion, manufacturing, and export of diagnostic products. Our clinical laboratory is subject to oversight by CMS pursuant to CLIA, as well as agencies in various states, including New York.  Failure to comply with applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil money penalties, injunctions, and criminal prosecution.

U.S. Food and Drug Administration

FDA granted premarket approval (“PMA”) for Cologuard in August 2014.  That PMA approval places substantial restrictions on how Cologuard is marketed and sold, specifically, by prescription only. Additionally, the regulations governing our approval require controls on Cologuard, including, but not limited to, manufacturing facility registration,

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product listing with the FDA, complying with labeling requirements, maintenance of a satisfactory quality management system, and meeting post-market surveillance requirements. In addition, as a condition of our FDA approval, we are required to conduct a post-approval study. There can be no assurance that the results of this study will be satisfactory and will not cause the FDA to modify or withdraw our approval for Cologuard.

We may develop new diagnostic products and services that are regulated by the FDA as medical devices.  We may also develop diagnostic products or services that, under today’s laws, would be regulated as laboratory developed tests (“LDTs”) under CLIA.  However, as noted below, the regulation of LDTs may be in flux, as the FDA has recently retracted a proposal for increased LDT oversight.

FDA-Regulated Medical Devices

Unless otherwise exempted, medical devices must receive from the FDA either “510(k) clearance” or PMA before marketing them in the United States.  Both the 510(k) clearance and PMA processes may be costly and time consuming, but the PMA approval process is typically more costly, lengthy, and uncertain.

The FDA determines whether a medical device will require either 510(k) clearance or the PMA process based on statutory criteria that utilize a risk-based classification system. If the FDA decides one of our future products may undergo the 510(k) clearance process (class II), we would typically be required to submit a premarket notification.  In the premarket notification, we would need to demonstrate that our proposed device is “substantially equivalent” in intended use, safety, and effectiveness to certain existing, legally marketed devices. This is a traditional 510k clearance. In some instances, the risk criteria of a device may be deemed low enough for premarket clearance, but the FDA may reject the substantial equivalence argument that is presented. In these instances, a de novo 510k pathway (“de novo”) may be available. The regulatory requirements of the de novo are similar to a PMA except that clinical evidence requirements may be less, and premarket inspections are not required.  If we were to obtain 510(k) clearance for a product and then make changes to that product, we would need to seek a new 510(k) clearance.

The PMA process, which would be necessary if the product classification is high risk (class III), involves submitting extensive data to the FDA. These data allow the FDA to determine if the device is safe and effective for its intended use. The PMA process may include the convening of expert panels, inspection of our manufacturing facilities, and providing additional data and updates to the FDA, or new or supplemented PMA submissions, if the product is modified during the process or after approval.

Even if granted, a 510(k) clearance or PMA may place substantial restrictions on how a device is marketed or sold, and regulations governing any medical device products require controls, including but not limited to registering manufacturing facilities, listing the products with the FDA, complying with labeling requirements, maintaining an adequate quality management system, and meeting post-market surveillance requirements. The studies required in connection with our seeking either a 510(k) clearance or PMA for any of our new diagnostics products would be costly and time intensive. There can be no assurance that the FDA would ultimately clear any 510(k) premarket notification or approve any PMA request submitted by us in a timely manner or at all.

Laboratory Developed Tests (“LDTs”)

 

LDTs are clinical laboratory tests that are developed and validated by a laboratory for its own use.  Historically, LDTs have been regulated under CLIA while the FDA has exercised enforcement discretion and not required approvals or clearances for many LDTs performed by CLIA-certified laboratories. The FDA has traditionally chosen not to exercise its authority to regulate LDTs because LDTs were limited in number, were relatively simple tests, and were typically used to diagnose rare disease and uncommon conditions.

In October 2014, the FDA published two draft guidance documents describing a proposed risk-based framework under which the FDA might regulate LDTs. The FDA’s draft framework proposed, among other things, premarket review for higher-risk LDTs, such as those that have the same intended use as FDA-approved or cleared diagnostics currently on the market. In November 2015, the FDA issued a report citing evidence for the need for additional regulation of LDTs and stated the FDA is continuing to work to finalize premarket review requirements for LDTs. However, in November 2016 FDA confirmed it would not finalize its guidance on the regulation of LDTs to allow more time for public discussion and time for the congressional authorizing committees to develop a legislative solution. The

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FDA’s guidance documents, if and when finalized, or action by FDA to exercise enforcement discretion over LDTs, may materially impact our development and commercialization of LDTs.

Laboratory Certification, Accreditation and Licensing

We are also subject to U.S. and state laws and regulations regarding the operation of clinical laboratories. CLIA requirements and laws of certain states impose certification requirements for clinical laboratories, and establish standards for quality assurance and quality control, among other things. Clinical laboratories are subject to inspection by regulators and to sanctions for failing to comply with applicable requirements. Sanctions available under CLIA include prohibiting a laboratory from running tests, requiring a laboratory to implement a corrective plan, and imposing civil monetary penalties. If we fail to meet any applicable requirements of CLIA or state law, that failure could adversely affect any future CMS consideration of our technologies, prevent their approval entirely, and/or interrupt the commercial sale of any products and services and otherwise cause us to incur significant expense.

HIPAA and Other Privacy Laws

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, established for the first time comprehensive protection for the privacy and security of health information. The HIPAA standards apply to three types of organizations, or “Covered Entities”: health plans, healthcare clearinghouses, and healthcare providers that conduct certain healthcare transactions electronically. Covered Entities and their business associates must have in place administrative, physical, and technical standards to guard against the misuse of individually identifiable health information. We perform activities that may implicate HIPAA, such as providing clinical laboratory testing services and entering into specific kinds of relationships with Covered Entities and business associates of Covered Entities.

Our activities must also comply with other applicable privacy laws. For example, there are also state and international privacy laws that impose restrictions on the access, use, and disclosure of health information. All of these laws may impact our business. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability to obtain stool and other patient samples and associated patient information could significantly impact our business and our future business plans.

Federal and State Billing and Fraud and Abuse Laws

Antifraud Laws/Overpayments.  We are subject to numerous federal and state antifraud and abuse laws, including the Federal False Claims Act. Many of these antifraud laws are broad in scope, and neither the courts nor government agencies have extensively interpreted these laws. Prohibitions under some of these laws include:

·

the submission of false claims or false information to government programs;

·

the retention of any overpayments by governmental payors;

·

deceptive or fraudulent conduct;

·

excessive or unnecessary services or services at excessive prices; and

·

defrauding private sector health insurers.

We are subject to substantial penalties for violations of anti-fraud and abuse laws, including denial of payment and refunds, suspension of payments from Medicare, Medicaid or other federal healthcare programs, and exclusion from participation in federal and state healthcare programs, as well as civil monetary and criminal penalties and imprisonment. Numerous federal and state agencies enforce the antifraud and abuse laws. In addition, private insurers may also bring private actions. In some circumstances, private whistleblowers are authorized to bring fraud suits on behalf of the government against providers and are entitled to receive a portion of any final recovery.

In addition, amendments to the False Claims Act impose severe penalties for the knowing and improper retention of overpayments collected from governmental payors. Within 60 days of identifying an overpayment, a provider is required to notify CMS or the Medicare contractor of the overpayment and the reason for it and return the overpayment. These amendments could subject our procedures for identifying and processing payments to greater scrutiny.  On February 11, 2016, CMS published a final rule clarifying the obligation to report and return federal healthcare program overpayments.  Overpayments may occur from time to time in the healthcare industry without any fraudulent intent. For example, overpayments may result from mistakes in reimbursement claim forms or from improper processing by

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governmental payors. We maintain protocols intended to identify any overpayments. From time to time we may identify overpayments and be required to refund those amounts to government payors.

To avoid liability, we must carefully and accurately code claims for reimbursement, proactively monitor the accuracy and appropriateness of Medicare claims and payments received, diligently investigate any credible information indicating that we may have received an overpayment, and promptly return any overpayments.

Federal and State “Self‑Referral” and “Anti-Kickback” Restrictions

If we or our operations are found to be in violation of applicable laws and regulations prohibiting improper referrals for healthcare services or products, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal or state healthcare programs, and the curtailment or restructuring of our operations.

Anti‑Kickback Statute.  The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs, unless an exception applies. The term “remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair market value. Sanctions for violations of the federal Anti-Kickback Statute may include imprisonment and other criminal penalties, civil monetary penalties and exclusion from participation in federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs, and do not contain identical safe harbors.

Self‑Referral law.  The federal “self‑referral” law, commonly referred to as the “Stark” law, provides that physicians who, personally or through a family member, have ownership interests in or compensation arrangements with a laboratory are prohibited from making a referral to that laboratory for laboratory tests reimbursable by Medicare, and also prohibits laboratories from submitting a claim for Medicare payments for laboratory tests referred by physicians who, personally or through a family member, have ownership interests in or compensation arrangements with the testing laboratory. The Stark law contains a number of specific exceptions which, if met, permit physicians who have ownership or compensation arrangements with a testing laboratory to make referrals to that laboratory and permit the laboratory to submit claims for Medicare payments for laboratory tests performed pursuant to such referrals. We are subject to comparable state laws, some of which apply to all payors regardless of source of payment, and do not contain identical exceptions to the Stark law.

Any action against us for violation of these or similar foreign laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

Sunshine Act

In 2010, Congress enacted a statute commonly known as the Sunshine Act, which aims to promote transparency. The Sunshine Act requires manufacturers of drugs, devices, biologicals and medical supplies covered by Medicare, Medicaid or the Children’s Health Insurance Program, or CHIP, to report annually to CMS any payments or other transfers of value made to physicians and teaching hospitals, unless an exception applies. Manufacturers must also disclose to CMS any physician ownership or investment interests. Our failure to comply with the reporting requirements of this law may subject us to substantial penalties.

Other Laws

Occupational Safety and Health.  In addition to its comprehensive regulation of health and safety in the workplace in general, the Occupational Safety and Health Administration has established extensive requirements aimed specifically at laboratories and other healthcare‑related facilities. In addition, because our operations require employees to use certain hazardous chemicals, we also must comply with regulations on hazard communication and hazardous chemicals in laboratories. These regulations require us, among other things, to develop written programs and plans, which must

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address methods for preventing and mitigating employee exposure, the use of personal protective equipment, and training.

Specimen Transportation.  Our commercialization activities for Cologuard subject us to regulations of the Department of Transportation, the United States Postal Service, and the Centers for Disease Control and Prevention that apply to the surface and air transportation of clinical laboratory specimens.

Environmental. The cost of compliance with federal, state and local provisions related to the protection of the environment has had no material effect on our business.  There were no material capital expenditures for environmental control facilities in the year ended December 31, 2016, and there are no material expenditures planned for such purposes for the year ended December 31, 2017.

Intellectual Property

We have intellectual property rights pertaining to sample type, sample preparation, sample preservation, biomarkers, and related methods and formulations.

Our success depends to a significant degree upon our ability to protect our technologies through patent coverage. As of December 31, 2016, we owned 26 issued patents and 36 pending patent applications in the United States, and 34 issued patents and 47 pending patent applications in foreign jurisdictions. In addition, as part of our 2009 strategic transaction with Genzyme Corporation, we exclusively license back from Genzyme, in the fields of colorectal cancer screening and stool‑based detection of any disease or condition, the 24 patents issued and 2 pending patent applications in the United States, and 36 patents issued in foreign jurisdictions sold to Genzyme.

Each of our patents generally has a term of 20 years from its respective priority filing date. The earliest of our issued patents to expire will expire in 2017, and the last of these to expire will expire in 2033.

License Agreements

We license certain technologies that are, or may be, incorporated into our technology under several license agreements. Generally, the license agreements require us to pay royalties based on certain net revenues received, and may require minimum royalty amounts, milestone payments, and maintenance fees.

MAYO

On June 11, 2009, we entered into a license agreement with MAYO Foundation for Medical Education and Research (“MAYO”). Our license agreement with MAYO was amended and restated in February 2015 and further amended in January 2016. Under the license agreement, MAYO granted us an exclusive, worldwide license to certain MAYO patents and patent applications, as well as a non‑exclusive, worldwide license with regard to certain MAYO know‑how. The scope of the license covers any screening, surveillance or diagnostic tests or tools for use in connection with any type of cancer, pre-cancer, disease or condition. 

The licensed MAYO patents and patent applications contain both method and composition‑of‑matter claims that relate to sample processing, analytical testing, and data analysis associated with nucleic screening for cancers and other diseases. The jurisdictions covered by these patents and patent applications include the U.S., Canada, the European Union, and Japan. In addition to granting us a license to the covered MAYO intellectual property, MAYO agreed to make available personnel to provide us product development and research and development assistance. Under the license agreement, we assumed the obligation and expense of prosecuting and maintaining the licensed MAYO patents and are obligated to make commercially reasonable efforts to bring to market products using the licensed MAYO intellectual property.

MAYO has agreed to make available personnel through January 2020 to provide us product development and research and development assistance.

Pursuant to our agreement with MAYO, we are required to pay MAYO a low single-digit royalty on our net sales of products using the licensed MAYO intellectual property, with minimum annual royalty fees of $25,000 each year through 2033, the year the last patent expires. The January 2016 amendment to the MAYO license agreement established

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various low single-digit royalty rates on net sales of current and future products and clarified how net sales will be calculated.  As part of the amendment, the royalty rate on our net sales of Cologuard increased and, if in the future, improvements are made to the Cologuard product, the royalty rate may further increase. However, the amendment provides that the Cologuard royalty will remain a low single-digit percentage of net sales. 

In addition to the royalty rates described above, we are also required to issue MAYO shares of our common stock with a value of $0.2 million upon commercial launch of our second and third products that use the licensed MAYO intellectual property, as well as to pay MAYO, for each of our products that use licensed MAYO intellectual property, $0.2 million cash upon such product reaching $5.0 million in cumulative net sales, $0.8 million cash upon such product reaching $20 million in cumulative net sales, and $2 million cash upon such product reaching $50 million in cumulative net sales.

As part of the February 2015 amendment and restatement of the license agreement, we agreed to pay MAYO an additional $5.0 million, payable in five annual installments, through 2019.

The license agreement will remain in effect, unless earlier terminated by the parties in accordance with the agreement, until the last of the licensed patents expires in 2033 (or later, if certain licensed patent applications are issued). However, if we are still using the licensed MAYO know‑how or certain MAYO‑provided biological specimens or their derivatives on such expiration date, the term shall continue until the earlier of the date we stop using such know‑how and materials and the date that is five years after the last of the licensed patents expires. The license agreement contains customary termination provisions and permits MAYO to terminate the license agreement if we sue MAYO or its affiliates, other than any such suit claiming an uncured material breach by MAYO of the license agreement.

Hologic

In October 2009, we entered into a technology license agreement with Hologic, Inc. (“Hologic”). Under the license agreement, Hologic granted us an exclusive, worldwide license within the field of human stool based colorectal cancer and pre‑cancer detection or identification with regard to certain Hologic patents, patent applications and improvements, including Hologic’s Invader detection chemistry (the “Covered Hologic IP”). The licensed patents and patent applications contain both method and composition‑of‑matter claims. The jurisdictions covered by these patents and patent applications include the U.S., Canada, the European Union, Australia and Japan. The license agreement also provided us with non‑exclusive, worldwide licenses to the Covered Hologic IP within the field of clinical diagnostic purposes relating to colorectal cancer (including cancer diagnosis, treatment, monitoring or staging) and the field of detection or identification of colorectal cancer and pre‑cancers through means other than human stool samples. In December 2012, we entered into an amendment to this license agreement with Hologic pursuant to which Hologic granted us a non‑exclusive worldwide license to the Covered Hologic IP within the field of any disease or condition within, related to or affecting the gastrointestinal tract and/or appended mucosal surfaces.

We are required to pay Hologic a low single-digit royalty on our net sales of products using the Covered Hologic IP.

Unless earlier terminated in accordance with the agreement, the license agreement will remain in effect until the last of the licensed patents expires in 2029. The agreement contains customary termination provisions which, among other things, permit termination in the event of material uncured breaches.

MDx Health

In July 2010, we entered into a technology license agreement with MDx Health S.A. (formerly Oncomethylome Sciences, S.A.) (“MDx Health”). Under the license agreement, MDx Health granted us an exclusive, worldwide license to sell products, and a license to sell services in the United States, in the field of in vitro diagnostic testing of fecal samples for detection of colorectal cancer and colorectal pre‑cancer to certain patents and patent applications related to DNA methylation biomarkers. The licensed patents and patent applications contain both method and composition‑of‑matter claims. The jurisdictions covered by these patents and patent applications include the U.S., Canada, the European Union, China and Japan. Under the agreement, we are obligated to make commercially reasonable efforts to bring to market products using the licensed MDx Health patents. We are required to pay MDx Health a minimum royalty fee of $0.1 million on each anniversary of the agreement for the life of the contract. In 2015, we paid

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MDx Health $0.2 million after we reached net sales of $10 million of a licensed product after receipt of FDA approval. In 2016, we paid MDx Health $0.8 million after we reached cumulative net sales of $50 million. Additionally, we will pay them $1 million after we reach net sales of $50 million in a single calendar year. We are also required to pay MDx Health a low single-digit royalty on our net sales of licensed products and services. Unless earlier terminated by the parties in accordance with the agreement, the license agreement will remain in effect until the last of the licensed patents expires in 2028. The agreement contains customary termination provisions which, among other things, permit termination in the event of material uncured breaches.

Employees

As of December 31, 2016, we had 736 full‑time employees. None of our employees are represented by a labor union. We consider our relationship with our employees generally to be good.

Financial Information

See our consolidated financial statements included elsewhere in this Form 10‑K and accompanying notes to the consolidated financial statements.

Available Information

We were incorporated in the State of Delaware on February 10, 1995. Our corporate headquarters are located at 441 Charmany Drive, Madison, Wisconsin 53719. Our telephone number is 608‑284‑5700. Our Internet website address is www.exactsciences.com. Our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, including exhibits, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10‑K.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks that may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. We cannot be certain that we will successfully address these risks. If we are unable to address these risks, our business may not grow, our stock price may suffer and we may be unable to stay in business. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations.

We may never become profitable.

We have incurred losses since we were formed and only began generating revenue from Cologuard, our only product, in 2014. From our date of inception on February 10, 1995 through December 31, 2016, we have accumulated a total deficit of approximately $745.8 million. We expect that our losses will continue for at least the next several years and that we will be required to invest significant additional funds toward development and commercialization of our colorectal cancer screening technology and other products and services. If our revenue does not grow significantly, we will not be profitable. We cannot be certain that the revenue from the sale of any products or services based on our technologies will be sufficient to make us profitable.

We may need additional capital to execute our business plan.

Although we believe that we have sufficient capital to fund our operations for at least the next twelve months, we may require additional capital to fully fund our current strategic plan, which includes successfully commercializing Cologuard and developing a pipeline of future products and services.  Additional financing may not be available in amounts or on terms satisfactory to us or at all.  Our success in raising additional capital may be significantly affected by general market conditions, the market price of our common stock, our financial condition, uncertainty about the future commercial success of Cologuard, the development and commercial success of future products or services, regulatory

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developments, the status and scope of our intellectual property, any ongoing litigation, our compliance with applicable laws and regulations and other factors.  If we raise additional funds through the sale of equity, convertible debt or other equity-linked securities, our stockholders’ ownership will be diluted. We may issue securities that have rights, preferences and privileges senior to our common stock. If we raise additional funds through collaborations, licensing arrangements or other structured financing transactions, we may relinquish rights to certain of our technologies or products or services, grant security interests in our assets or grant licenses to third parties on terms that are unfavorable to us.

Our success depends heavily on our Cologuard colorectal cancer screening test.

For the foreseeable future, our ability to generate revenues will depend almost entirely on the commercial success of our Cologuard test. The commercial success of our Cologuard test and our ability to generate revenues will depend on a variety of factors, including the following:

·

acceptance in the medical community; 

·

inclusion of Cologuard in healthcare guidelines, such as those developed by ACS and USPSTF; 

·

inclusion of Cologuard in quality measures including the HEDIS measures and the CMS Star ratings;

·

recommendations and studies regarding Cologuard specifically or colorectal cancer screening generally that may be published by government agencies, professional organizations, academic or medical journals or other key opinion leaders;

·

patient acceptance of and demand for the Cologuard test;

·

successful sales, marketing, and educational programs, including successful direct-to-patient marketing such as television advertising;

·

the number of patients tested for colorectal cancer, as well as the number of patients who use Cologuard for that purpose; 

·

sufficient coverage and reimbursement by third-party payors, which may depend in whole or in part on multiple factors, including federal or state laws that mandate coverage for colorectal cancer screening and the extent to which those laws mandate coverage of Cologuard; 

·

the amount and nature of competition from other colorectal cancer or pre-cancer screening products and procedures; 

·

maintaining FDA marketing approval of Cologuard;

·

the ease of use of our ordering process for physicians;

·

maintaining and defending patent protection for the intellectual property relevant to Cologuard; and 

·

our ability to establish and maintain adequate commercial manufacturing, distribution, sales and CLIA laboratory testing capabilities.

If we are unable to develop and maintain substantial sales of our Cologuard test or if we are significantly delayed or limited in doing so, our business prospects, financial condition and results of operation would be adversely affected.

Our quarterly operating results could be subject to significant fluctuation, which could increase the volatility of our stock price and cause losses to our stockholders.

Our revenues and results of operations may fluctuate significantly, depending on a variety of factors, including the following:

·

our success in marketing and selling, and changes in demand for, our Cologuard test, and the level of reimbursement and collection obtained for Cologuard;

·

seasonal variations affecting physician recommendations for colorectal cancer screenings and patient compliance with physician recommendations;

·

our success in collecting payments from third-party payors, patients and collaborative partners, variation in the timing of these payments and recognition of these payments as revenues;

·

the pricing of our Cologuard test, including potential changes in CMS or other reimbursement rates;

·

fluctuations in the amount and timing of our selling and marketing costs and our ability to manage costs and expenses and effectively implement our business; and

·

our research and development activities, including our ability to develop new and improved products and the timing of expensive clinical trials.

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Other companies or institutions may develop and market novel or improved methods for detecting colorectal cancer or pre-cancer, which may make our technologies less competitive or obsolete.

The market for colorectal cancer and pre-cancer screening is large, consisting of more than 80 million Americans age 50 and above for whom routine colorectal cancer screening is recommended. As a result, this market has attracted competitors, some of which possess significantly greater financial and other resources and development capabilities than we do. Some companies and institutions are developing serum-based tests and screening tests based on the detection of proteins, nucleic acids or the presence of fragments of mutated genes in the blood that are produced by colorectal cancer or pre-cancer. We are aware of at least six companies — Epigenomics AG, Applied Proteomics, Inc., Gene News, EDP Biotech Corporation, Illumina, Inc. and Quest Diagnostics — that have developed, or are developing blood-based tests for the detection of colorectal cancer. Epigenomics AG completed a large multi-center study designed to demonstrate the performance of its blood-based screening test for colorectal cancer and received FDA approval for its product, Epi proColon, in April 2016. On January 10, 2016, Illumina, Inc. announced the formation of GRAIL, a new company aiming to develop a blood-based, pan-cancer screening test that would seek to measure circulating nucleic acids in blood using next-generation sequencing (“NGS”) technology.  We believe other companies are also working on so-called “liquid biopsy” tests using NGS technology, and these tests could represent significant competition for Cologuard and other tests we may develop. Our Cologuard test also faces competition from procedure-based detection technologies such as flexible sigmoidoscopy, colonoscopy and “virtual” colonoscopy (a radiological imaging approach that visualizes the inside of the bowel by use of spiral computerized axial tomography known as a CT scan) as well as traditional screening tests such as FOBT and FIT and newer screening technologies such as the PillCam COLON cleared by FDA in February 2014. Our competitors may also be working on additional methods of detecting colorectal cancer and pre-cancer that have not yet been announced.

Beyond our Cologuard test, as we seek to develop other tools to detect cancer and pre-cancer, we expect to compete with a broad range of organizations in the U.S. and other countries that are engaged in the development, production and commercialization of cancer diagnostic tools.  These competitors include:

·

biotechnology, diagnostic and other life science companies;

·

academic and scientific institutions;

·

governmental agencies; and

·

public and private research organizations.

We may be unable to compete effectively against our competitors either because their products and services are superior or because they may have more expertise, experience, financial resources or stronger business relationships. Our competitors may have broader product lines and greater name recognition than we do. We have limited experience developing tests for the detection of non-colorectal cancers and we cannot guarantee that our research and development activities will be successful in developing any marketable testing products or services. Further, even if we do develop new marketable products or services, our current and future competitors may develop products and services that are more commercially attractive than ours and they may bring those products and services to market, sooner than we are able to.

We face uncertainty related to healthcare reform, pricing, coverage and reimbursement, which could reduce our revenue.

Recent healthcare reform laws, including the Patient Protection and Affordable Care Act (the “ACA”) and the Protecting Access to Medicare Act of 2014 (“PAMA”), are significantly affecting the U.S. healthcare and medical services industry.  Existing legislation, and possible future legal and regulatory changes, including potential repeal of the ACA following the 2016 elections, could substantially change the structure and finances of the health insurance system and the methodology for reimbursing medical services, drugs and devices, including our current and future products and services.  Any change in reimbursement policy could result in a change in patient co-payments, which could adversely affect patient willingness and ability to use our Cologuard test and any other product or service we may develop.  Healthcare reforms, which may intend to reduce healthcare costs, may have the effect of discouraging third-party payors from covering certain kinds of medical products and services, particularly newly developed technologies, such as our Cologuard test or other products or tests we may develop in the future.

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The ACA requires that non-grandfathered health plans cover, without patient cost-sharing, preventive services that have in effect a grade of “A” or “B” in the current recommendations of USPSTF.  The requirement to cover, without cost-sharing, a newly recommended preventive service applies to each non-grandfathered health plan starting with the first plan year that begins at least one year after the date of the recommendation.  In June 2016, USPSTF issued an updated colorectal screening recommendation, assigning an A grade to “screening for colorectal cancer starting at age 50 years and continuing until age 75 years.”  We believe the “A” grade should be interpreted to apply to the seven types of colorectal cancer tests specifically identified by USPSTF in its recommendation – including Cologuard – for adults ages 50 to 75 and that Cologuard should therefore be included within the ACA Mandate for colorectal cancer screening tests.  However, health plans may assert that they are not required to cover Cologuard under the ACA Mandate. Enforcement of the ACA Mandate may depend, in whole or in part, on state, federal or other third party enforcement actions that we would not control.  Further, a court or regulatory agency may agree with arguments made by insurers and determine that the ACA Mandate does not require that they cover Cologuard.  Also, following the 2016 elections, Congress may repeal all or part of the ACA, and any such repeal may include repeal of the ACA Mandate for preventive services.  If the ACA Mandate for preventive services is repealed or modified, including through any potential ACA replacement legislation, if the ACA Mandate is determined not to require coverage of Cologuard, or if the company is unable to secure effective enforcement of the ACA Mandate, even if it is held to require coverage of Cologuard, our business prospects, financial condition and results of operation may be adversely affected.

Several states have laws mandating coverage for preventive services, such as colorectal cancer screening services, applicable to certain health insurers.  Not all of these laws apply to Cologuard, however.  Further, if the ACA is repealed or replaced, or even if it is not, states may decide to modify their laws, which may include repeal of those coverage mandates that we believe currently apply to Cologuard. 

Under PAMA, effective January 1, 2018, the CMS reimbursement rate for Cologuard will be calculated based on the volume-weighted median of private payor rates for Cologuard. The initial data collection period for that purpose was the period between January 1, 2016 and June 30, 2016. The CMS reimbursement rate will subsequently be reset every three years, or every year if the Company applies for, and is granted, Advanced Diagnostic Laboratory Test status for Cologuard, based on the volume-weighted median of private payor rates experienced in the applicable six-month data collection period. If the CMS reimbursement rate for Cologuard is reduced pursuant to PAMA or otherwise, our revenues would likely be adversely affected. PAMA presents significant uncertainty for future CMS reimbursement rates for Cologuard. Because Medicare currently covers 47% of patients in the screening population for Cologuard, any reduction in the CMS reimbursement rates for Cologuard would negatively affect our revenues and our business prospects.

 

If third-party payors, including managed care organizations, do not approve and maintain reimbursement for our Cologuard test at adequate reimbursement rates, we may be unable to successfully commercialize our Cologuard test which, we expect, would limit or slow our revenue generation and likely have a material adverse effect on our business.

Successful commercialization of our Cologuard test depends, in large part, on the availability of adequate reimbursement from government insurance plans, managed care organizations and private insurance plans. Although we received a positive coverage decision and what we believe is an adequate reimbursement rate from CMS for our Cologuard test, it is also critical that other third-party payors approve and maintain reimbursement for our Cologuard test at adequate reimbursement rates. Third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new healthcare products approved for marketing by the FDA. As a result, there is significant uncertainty surrounding whether the use of tests that incorporate new technology, such as our Cologuard test, will be eligible for coverage by third-party payors or, if eligible for coverage, what the reimbursement rates will be. Reimbursement of sDNA colorectal cancer screening by a third-party payor may depend on a number of factors, including a payor’s determination that tests using our technologies are: sensitive and specific for colorectal cancer and pre-cancer; not experimental or investigational; approved or recommended by the major guidelines organizations; subject to applicable federal or state coverage mandates; reliable, safe and effective; medically necessary; appropriate for the specific patient; and cost-effective.

If we are unable to obtain positive decisions from third-party payors, including managed care organizations, approving reimbursement for our Cologuard test at adequate levels, its commercial success will be compromised and our revenues would be significantly limited. We may also experience material delays in obtaining such reimbursement decisions and payment for our Cologuard test that are beyond our control. Further, there can be no assurance that CMS

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and commercial payors who initially decide to cover Cologuard will continue to do so. We are pursuing a variety of strategies to increase commercial payor coverage and reimbursement of Cologuard. In certain situations, where we believe payors are obligated to cover Cologuard under Medicare laws and state laws that mandate coverage for certain colorectal cancer screening tests, we have sued to enforce coverage obligations. We may pursue similar litigation in the future. Such litigation may be costly, may divert management attention from other responsibilities, may cause payors, including those not directly involved in the litigation, to resist contracting with us, and may ultimately prove unsuccessful.    

As noted above, federal and state coverage mandates may be deemed not to apply to Cologuard, may be difficult to enforce and are subject to repeal or modification.  In particular, following the 2016 elections, the ACA may be repealed or materially modified, in whole or in part, or replaced with an alternative legal framework governing healthcare matters.  Such repeal modification or replacement may eliminate or modify the coverage mandate for preventive services, and any such elimination or modification may have an adverse effect on our business prospects.

Moreover, coverage determinations and reimbursement rates are subject to change, and we cannot guarantee that even if we initially achieve adequate coverage and reimbursement rates, they will be applicable to our Cologuard test in the future. As noted above, under PAMA, our Medicare reimbursement rate will be subject to adjustment based on our volume-weighted median commercial reimbursement rate. A reduction in our Medicare reimbursement rate could significantly and adversely affect our business products, financial condition and results of operation.

Even where a third-party payor agrees to cover Cologuard, other factors may have a significant impact on the actual reimbursement we receive for a Cologuard test from that payor.  For example, if we do not have a contract with a given payor, we may be deemed an “out-of-network” provider by that payor, which could result in a greater portion of the cost of the Cologuard test being borne by the patient.  To the extent Cologuard is out of network for a given payor, physicians may be less likely to prescribe Cologuard for their patients and their patients may be less likely to comply with any such orders.  Also, some payors may require that they give prior authorization for a Cologuard test before they are willing to pay for it or review claims post-service to ensure the service was medically appropriate for specific patients.  Prior authorization and other medical management requirements may require that we, patients or physicians provide the payor with extensive medical records and other information.  Prior authorization and other medical management requirements impose a significant additional cost on us, may be difficult to comply with given our position as a laboratory, may make physicians less likely to prescribe Cologuard for their patients, and may make patients less likely to comply with physician orders for Cologuard, all or any of which may have an adverse effect on our revenues. 

If our clinical studies do not satisfy providers, payors, patients and others as to the reliability, effectiveness and superiority of our Cologuard test, we may experience reluctance or refusal on the part of physicians to order, and third-party payors to pay for, our test.

Although we have received FDA approval for our Cologuard test, if the results of our research and clinical studies and our sales and marketing activities relating to communication of these results, do not convince guidelines organizations, physicians and other healthcare providers, third-party payors and patients that our Cologuard test is reliable, effective and superior to alternative screening methods, we may experience reluctance or refusal on the part of physicians to order, and third-party payors to pay for, our Cologuard test, which could adversely affect our business prospects.

We have finite selling and marketing resources and only limited sales, marketing, customer support, manufacturing, distribution and commercial laboratory experience, which may restrict our success in commercializing Cologuard and other products we may develop.

To grow our business as planned, we must expand our sales, marketing and customer support capabilities, which will involve developing and administering our commercial infrastructure and/or collaborative commercial arrangements and partnerships. We must also maintain satisfactory arrangements for the manufacture and distribution of our Cologuard test. Also, in connection with the launch of Cologuard in late 2014, we began operating a CLIA certified lab facility to process Cologuard tests and provide patient results. We have limited experience managing a sales force, customer support operation and operating a manufacturing operation and clinical lab facility and we may encounter difficulties retaining and managing the specialized workforce these activities require. We may seek to partner with others

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to assist us with any or all of these functions. However, we may be unable to find appropriate third parties with whom to enter into these arrangements. Furthermore, if we do enter into these arrangements, these third parties may not perform as expected.

If we are unable to deploy and maintain effective sales and marketing capabilities, we will have difficulty achieving market awareness and selling our products and services.

To achieve commercial success for our Cologuard test and our future products and services, we must continue to develop and grow our sales and marketing organization and our sales organization must effectively explain to healthcare providers the reliability, effectiveness and benefits of Cologuard as compared to alternative screening methods. We may not be able to successfully manage our dispersed or inside sales forces or our sales force may not be effective. Because of the competition for their services, we may be unable to partner with or retain additional qualified sales representatives, either as our employees or independent contractors or through independent sales organizations. Further, we may not be able to enter into agreements with sales representatives on commercially reasonable terms, if at all.

Establishing and maintaining sales and marketing capabilities will be expensive and time-consuming. Our expenses associated with maintaining our sales force may be disproportional compared to the revenues we may be able to generate on sales of the Cologuard test.

The success of our Cologuard test depends on the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community.

Our Cologuard test may not gain market acceptance by physicians, healthcare payors and others in the medical community. The degree of market acceptance of our Cologuard test will depend on a number of factors, including:

·

its demonstrated sensitivity and specificity for detecting colorectal cancer and pre-cancer;

·

its price;

·

the availability and attractiveness of alternative screening methods; 

·

the willingness of physicians to prescribe Cologuard;

·

the ease of use of our ordering process for physicians; and

·

adequate third-party coverage or reimbursement.

Despite the availability of current colorectal cancer screening methods as well as the recommendations of the ACS and others that all Americans be screened for colorectal cancer beginning at age 50, 42 percent of these individuals are not screened according to current guidelines. Use of a stool-based DNA colorectal cancer screening test requires people to collect a stool sample, which some people may be reluctant to do. If our Cologuard test does not achieve an adequate level of acceptance, we may not generate the substantial revenues we need to generate to become profitable.

Our assumptions regarding the market opportunity for Cologuard may not prove true. We estimate the potential market opportunity for Cologuard assuming, among other things, a 30-percent test adoption rate in the screening population and a three-year screening interval. Although ACS guidelines and others recommend a three-year screening interval and CMS has determined that Medicare will cover the test at this interval, physicians, healthcare payors, the FDA and other regulators and opinion leaders could recommend a different testing schedule. Further, patients may not adhere to the recommended testing interval.

Recommendations, guidelines and quality metrics issued by various organizations, including the U.S. Preventative Services Task Force, the American Cancer Society and the National Committee for Quality Assurance, may significantly affect payors’ willingness to cover, and physicians’ willingness to prescribe, our products.

Securing influential recommendations, inclusion in healthcare guidelines and inclusion in quality measures are keys to our physician and payor engagement strategies.  These guidelines, recommendations and quality metrics may shape payors’ coverage decisions and physicians’ cancer screening procedures.

The U.S. Preventive Services Task Force (“USPSTF”), a panel of primary care physicians and epidemiologists and other national experts funded by the U.S. Department of Health and Human Services’ Agency for Healthcare Research and Quality, makes influential recommendations on clinical preventative services without. In June 2016, the USPSTF 

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issued an updated recommendation statement for colorectal cancer screening, and gave an "A" grade to colorectal cancer screening starting at age 50 and continuing until age 75. The statement specifies seven screening methods, including FIT-DNA (which is Cologuard). The updated USPSTF recommendation statement may have certain potentially significant implications. For example, the ACA mandates that certain non-grandfathered health insurers cover evidence-based items or services that have in effect a rating of “A” or “B” in the current recommendations of USPSTF without imposing any patient cost-sharing. Similarly, federal regulations require that Medicare Advantage plans cover “A” or “B” graded preventive services without patient cost-sharing. Following the updated USPSTF recommendation statement, the Centers for Medicare & Medicaid Services (“CMS”) issued an updated Evidence of Coverage notice for Medicare Advantage plans that affirms such plans must include coverage of Cologuard every three years without patient cost-sharing. While we believe the ACA Mandate will require certain health insurers to cover Cologuard without patient cost-sharing (following an initial phase in period between one and two years), it is possible that certain health insurers will disagree, in which case courts and/or government agencies may need to resolve the issue. Enforcement of the ACA Mandate may be difficult and may depend, in whole or in part, on state, federal or other third party enforcement actions that we would not control.  Further, a court or regulatory agency may agree with arguments proposed by insurers and determine that the ACA Mandate does not require that they cover Cologuard.  Also, following the 2016 elections, efforts are underway to repeal all or part of the ACA, and any such repeal may include repeal of the ACA Mandate for preventive services.  If the ACA Mandate for preventive services is repealed or modified, including through any potential ACA replacement legislation, if the ACA Mandate is determined not to require coverage of Cologuard, or if the company is unable to secure effective enforcement of the ACA Mandate, even if it is held to require coverage of Cologuard, our business prospects may be adversely affected.

 

In addition, the healthcare industry in the United States has experienced a trend toward cost containment and value-based purchasing of healthcare services. Some government and private payors are adopting pay-for-performance programs that differentiate payments for healthcare services based on the achievement of documented quality metrics, cost efficiencies or patient outcomes. Payors may look to quality measures such as the National Committee for Quality Assurance (“NCQA”), Healthcare Effectiveness Data and Information Set (“HEDIS”) and the CMS Star Ratings to assess quality of care. These measures are intended to provide incentives to service providers to deliver the same or better results while consuming fewer resources. In October 2016, the NCQA included Cologuard testing on a three-year interval in the final published 2017 HEDIS measures. In Ferbuary 2017, CMS proposed to include Cologuard in the 2018 CMS Star Ratings program, which uses the HEDIS as a primary data source. If for some reason Cologuard was removed from, or not included in, HEDIS, the Star Ratings or other quality metrics, payors may be less inclined to reimburse our Cologuard test at adequate levels, if at all, which could adversely impact our business. Additionally, if Cologuard was removed from, or not included in, HEDIS, the Star Ratings or other quality metrics, physicians may not earn quality credit for prescribing Cologuard and therefore may be less inclined to do so.

We expect to make significant investments to research and develop new cancer diagnostic tools, which may not be successful.

In addition to commercializing our Cologuard test, we are developing a pipeline for future products and services, including screening and diagnostic tests for lung and other types of cancers. We expect to incur significant expenses on these development efforts but they may not be successful.

Developing new cancer diagnostic tools is a speculative and risky endeavor.  Candidate products and services that may initially show promise may fail to achieve the desired results in larger clinical studies or may not achieve acceptable levels of clinical accuracy.  We may need to explore a number of different marker combinations, alter our candidate products and repeat clinical studies before we identify a potentially successful candidate.  Product development is expensive, may take years to complete and can have uncertain outcomes.  Failure can occur at any stage of the development.  If, after development, a candidate product or service appears successful, we may, depending on the nature of the product or service, still need to obtain FDA and other regulatory clearances or approvals before we can market it.  The FDA’s clearance or approval pathways are likely to involve significant time, as well as additional research, development and clinical study expenditures.  There can be no guarantee that the FDA would clear or approve any future product we may develop.  Even if the FDA clears or approves a new product we develop, we would need to commit substantial resources to commercialize, sell and market the product before it could be profitable, and the product may never be commercially viable. Additionally, development of any product may be disrupted or made less viable by the department of competing products.

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If we determine that any of our current or future development programs is unlikely to succeed, we may abandon it without any return on our investment into the program. Given our current levels of cash and resources, and our planned expenditures to support Cologuard commercialization, we expect that we may need to raise significant additional capital to bring any new products to market, which may not be available on acceptable terms, if at all. 

We may not be able to successfully establish and maintain strategic collaborative and licensing arrangements with third parties, which could adversely affect our ability to commercialize our Cologuard test and to develop and commercialize other products and services.

The commercialization of our Cologuard test and the development and commercialization of other products and services rely, directly or indirectly, upon strategic collaborations and licensing agreements with third parties. We currently have a collaborative and licensing arrangements with MAYO Foundation for Medical Education and Research. In addition, we have licensing agreements with Hologic and MDx Health. Such arrangements provide us with intellectual property crucial to our product development and commercialization, including technology that we have incorporated into our Cologuard test. Our dependence on licensing, collaboration and other similar agreements with third parties may subject us to a number of risks. There can be no assurance that any current contractual arrangements between us and third parties or between our strategic partners and other third parties will be continued on materially similar terms and will not be breached or terminated early. Any failure to obtain or retain the rights to necessary technologies on acceptable commercial terms could require us to re-configure our products and services, which could negatively impact their commercial sale or increase the associated costs, either of which could materially harm our business and adversely affect our future revenues.

As we seek to commercialize and market our Cologuard test and develop new products and services, we expect to continue and expand our reliance on collaborative and licensing arrangements. Establishing new strategic collaborations and licensing arrangements is difficult and time-consuming. Discussions with potential collaborators or licensors may not lead to the establishment of collaborations on favorable terms, if at all. To the extent we agree to work exclusively with one collaborator in a given area, our opportunities to collaborate with other entities could be limited. Potential collaborators or licensors may reject collaborations with us based upon their assessment of our financial, regulatory or intellectual property position. Even if we successfully establish new collaborations, these relationships may never result in the successful commercialization of any product or service.

If we fail to meet any applicable requirements of CLIA or similar state laws, that failure could adversely affect any future payor consideration of our technologies, prevent their approval entirely, and/or interrupt the commercial sale of any products and services and otherwise cause us to incur significant expense.

We are subject to federal and state laws and regulations regarding the operation of clinical laboratories. Federal Clinical Laboratory Improvement Amendments (“CLIA”) requirements and laws of certain states impose certification requirements for clinical laboratories, and establish standards for quality assurance and quality control, among other things. Clinical laboratories are subject to inspection by regulators, and to sanctions for failing to comply with applicable requirements. Sanctions available under CLIA include prohibiting a laboratory from running tests, requiring a laboratory to implement a corrective plan, and imposing civil monetary penalties. If we fail to meet any applicable requirements of CLIA or state law, that failure could adversely affect any future payor consideration of our technologies, prevent their approval entirely, and/or interrupt the commercial sale of any products and services and otherwise cause us to incur significant expense.

We must maintain FDA approval for Cologuard and of our Madison, Wisconsin facilities; failure to maintain compliance with FDA requirements may prevent or delay the marketing or manufacture of our Cologuard test.

As a condition of the FDA approval of our Cologuard test, we are required to conduct a post-approval study. We anticipate that the post-approval study will require significant funding and resources to reach its conclusion. There is a risk that the FDA may modify or withdraw the approval of Cologuard if the results of this post-approval study are not satisfactory or are inconsistent with previous studies. We expect to rely on third parties, such as contract research organizations, medical institutions and clinical investigators to conduct the post-approval study. We have limited control over the activities of these third parties and the initiation and completion of the post-approval study may be prevented, delayed or halted for reasons outside our control.

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Additionally, our Madison, Wisconsin facilities are periodically subject to inspection by the FDA and other governmental agencies to ensure they meet production and quality standards. Operations at these facilities could be interrupted or halted if the FDA deems the findings of such inspections unsatisfactory. Failure to comply with FDA or other regulatory requirements could result in fines, unanticipated compliance expenditures, recall or seizures of our products, total or partial suspension of production or distribution, termination of ongoing research, disqualification of data for submission to regulatory authorities, enforcement actions, injunctions and criminal prosecution.

Our inability to obtain without delay any necessary regulatory clearances or approvals for new diagnostic products or services, or improvements to our current offerings, could materially encumber future product commercialization.

We may develop new diagnostic test candidates that are regulated by the FDA as medical devices.  Unless otherwise exempted, medical devices must receive from the FDA either “510(k) clearance” or premarket approval (“PMA”) before marketing them in the United States.  The FDA determines whether a medical device will require either 510(k) clearance or the PMA process based on statutory criteria that include the risk associated with the device and whether the device is similar to an existing, legally marketed product.  The process to obtain either 510(k) clearance or PMA will likely be costly, time-consuming and uncertain.  However, we believe the PMA process is generally more challenging. Even if we design a product that we expect to be eligible for the 510(k) clearance process, the FDA may require that the product undergo the PMA process.  There can be no assurance that the FDA will ever permit us to market any new product or service that we develop. Even if regulatory approval is granted, such approval may include significant limitations on indicated uses, which could materially and adversely affect the prospects of any new product or service.

FDA regulatory approval or clearance is not just required for new products and services we develop, but would also be required for certain enhancements we may seek to make to our Cologuard test. 

Delays in receipt of, or failure to obtain, clearances or approvals could materially delay or prevent us from commercializing our products and services or result in substantial additional costs that could decrease our profitability. In addition, even if we receive FDA clearance or approval for a new or enhanced product or service, the FDA may withdraw or materially modify its clearance or approval.

In the future, we plan to develop tests that could be regulated as laboratory developed tests (“LDTs”). If the FDA proceeds with its plans to actively regulate LDTs or continues to regulate LDTs with enforcement discretion, we may need to obtain additional FDA or other regulatory approvals, which may delay, encumber or block us from commercializing these diagnostic tests.

We may also develop products or services that would be regulated as LDTs under CLIA. LDTs are clinical laboratory tests that are developed, validated and manufactured by a laboratory for its own use.  Historically, LDTs have been regulated under CLIA while the FDA has exercised enforcement discretion and not required approvals or clearances for most LDTs performed by CLIA-certified laboratories. The FDA has historically chosen not to exercise its authority to regulate LDTs because LDTs were limited in number, were relatively simple tests, and typically were used to diagnose rare disease and uncommon conditions.

In October 2014, the FDA published two draft guidance documents describing a proposed risk-based framework under which it might regulate LDTs. The FDA’s draft framework proposed, among other things, premarket review for higher-risk LDTs, such as those that have the same intended use as FDA-approved or cleared diagnostics currently on the market. In November 2015, the FDA issued a report citing evidence for the need for additional regulation of LDTs and stated the FDA is continuing to work to finalize premarket review requirements for LDTs.  In November 2016, FDA confirmed it would not finalize guidance on the regulation of LDTs to allow more time for public discussion and time for the congressional authorizing committees to develop a legislative solution. We cannot predict the timing, content or form of any legislation, regulation or guidance, or the potential effect on our existing molecular diagnostic tests or our tests in development, or the potential impact of such guidance or regulation on our business, financial condition or results of operation.

The FDA’s guidance documents, if and when finalized, or if FDA exercises enforcement discretion may materially impact our development of LDTs and may require us to change our business model in order to maintain compliance with these regulations. New laws and regulations may significantly slow the time it takes us to bring LDTs to market, may materially increase the costs of developing, and decrease the profitability of providing, LDTs, and may prevent us from

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commercializing certain products or services. We cannot provide any assurance that FDA regulation will not be required in the future for any of our tests, whether through additional guidance or regulations issued by the FDA, new enforcement policies adopted by the FDA or new legislation adopted by Congress. It is possible that legislation will be enacted into law, regulations could be promulgated or guidance could be issued by the FDA which may result in increased regulatory burdens for us to continue to offer molecular diagnostic tests or to develop and introduce new tests.  Moreover, if pre-market review is required by the FDA or if we decide to voluntarily pursue the FDA’s pre-market review for any of our tests, there can be no assurance that our diagnostic tests will be cleared or approved on a timely basis, if at all, nor can there be assurance that labeling claims will be consistent with our current claims or adequate to support continued adoption of and reimbursement for our tests.  If pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by any new requirements.

We currently manufacture our Cologuard test predominantly in one facility and perform our Cologuard test in one laboratory facility. As demand for our Cologuard test grows, we may lack adequate facility space and capabilities to meet increased processing requirements. Moreover, if these or any future facilities or our equipment were damaged or destroyed, or if we experience a significant disruption in our operations for any reason, our ability to continue to operate our business could be materially harmed.

We currently perform our Cologuard test in a single laboratory facility in Madison, Wisconsin. Our headquarters and manufacturing facilities are also located in Madison, Wisconsin.

As we expand the commercialization of Cologuard and increase the number of tests processed by our laboratory facility, we may need to expand or modify our existing laboratory facility or acquire new laboratory facilities to increase our processing capacity.  Any failure to do so on terms acceptable to us, if at all, may significantly delay our processing times and capabilities, which may adversely affect our business, financial condition and results of operation.

If these, or any future facilities, were to be damaged, destroyed or otherwise unable to operate, whether due to fire, floods, storms, tornadoes, other inclement weather events or natural disasters, employee malfeasance, terrorist acts, power outages, or otherwise, our business could be severely disrupted. If our Madison, Wisconsin, laboratory is disrupted, we may not be able to perform our Cologuard test or generate test reports as promptly as patients and healthcare providers require or expect, or possibly not at all. If we are unable to perform our Cologuard test or generate test reports within a timeframe that meets patient and healthcare provider expectations, our business, financial results and reputation could be materially harmed.

We currently maintain insurance against damage to our property and equipment and against business interruption and research and development restoration expenses, subject to deductibles and other limitations. If we have underestimated our insurance needs with respect to an interruption, or if an interruption is not subject to coverage under our insurance policies, we may not be able to cover our losses.

We rely upon certain single-source suppliers and loss or interruption of supply from single-source suppliers could have a disruptive effect on our business.

We purchase certain supplies from third-party suppliers and manufacturers. In some cases, due to the unique attributes of products that are incorporated into our Cologuard test, we maintain a single-source supplier relationship. These third parties are independent entities subject to their own unique operational and financial risks that are outside our control. These third parties may not perform their obligations in a timely and cost-effective manner and they may be unwilling to increase production capacity commensurate with demand for our Cologuard test or future products or services. Moreover, we may become dependent on other single-source suppliers as we expand and develop our product pipeline. The loss of a single-source supplier, the failure to perform by a single-source supplier, the deterioration of our relationship with a single-source supplier or any unilateral modification to the contractual terms under which we are supplied materials by a single-source supplier could have a disruptive effect on our business, and could adversely affect our results of operations.

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Failure in our information technology, storage systems or our clinical laboratory equipment could significantly disrupt our operations and our research and development efforts, which could adversely impact our revenues, as well as our research, development and commercialization efforts.

Our ability to execute our business strategy depends, in part, on the continued and uninterrupted performance of our information technology, or IT, systems, which support our operations, including at our clinical laboratory, and our research and development efforts. We are substantially dependent on our IT systems to receive and process Cologuard test orders, securely store patient health records and deliver the results of our Cologuard tests. The integrity and protection of our own data, and that of our customers and employees, is critical to our business. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve.  IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data, and in particular to operate our clinical laboratory, could adversely affect our ability to operate our business. Any interruption in the operation of IT systems could have an adverse effect on our operations. Furthermore, any breach in our IT systems could lead to the unauthorized access, disclosure and use of non-public information, including protected health information, which is protected by HIPAA and other laws. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation.

We rely on courier delivery services to transport Cologuard collection kits to patients and samples back to laboratory facilities for analysis. If these delivery services are disrupted or become prohibitively expensive, customer satisfaction and our business could be negatively impacted.

In most cases, we ship Cologuard collection kits to patients, and patients ship samples to our Madison, Wisconsin, laboratory facility for analysis, by air and ground express courier delivery service. Disruptions in delivery service, whether due to bad weather, natural disaster, terrorist acts or threats, or for other reasons, can adversely affect customer satisfaction, specimen quality and our ability to provide our services on a timely basis.  If the courier delivery services that transport Cologuard collection kits institute significant price increases, our profitability would be negatively affected and we may need to identify alternative delivery methods, if possible, modify our service model, or attempt to raise our pricing, which may not be possible with regard to Medicare claims or commercially practicable with regard to commercial claims.

Due to billing complexities in the diagnostic and laboratory service industry, we may not be able to collect payment for the Cologuard tests we perform.

Billing for diagnostic and laboratory services is a complex process. Laboratories bill many different payors including doctors, patients, hundreds of insurance companies, Medicare, Medicaid, and employer groups, all of which have different billing requirements.  We are continuing to work with third-party payors to cover and reimburse Cologuard tests.  If we are unsuccessful, we may not receive payment for Cologuard tests we perform for patients on a timely basis, if at all, and we may not be able to provide services for patients with certain healthcare plans. We may have to litigate to enforce coverage obligations under Medicare laws and laws that mandate coverage for certain colorectal cancer screening tests or to enforce contractual coverage obligations.  Such litigation may be costly, may divert management attention from other responsibilities, may cause payors, including those not directly involved in the litigation, to resist contracting with us, and may ultimately prove unsuccessful.  We may face write-offs of doubtful accounts, disputes with payors and long collection cycles. We may face patient dissatisfaction, complaints or lawsuits to the extent Cologuard tests are not fully covered by insurers and patients become responsible for all or part of the price of the test.  As a result, patient demand for Cologuard could be adversely affected.  To the extent patients express dissatisfaction with our billing practices to their physicians, those physicians may be less likely to prescribe Cologuard for other patients, and our business would be adversely affected.

Even if payors do agree to cover Cologuard, our billing and collections process may be complicated by the following and other factors, which may be beyond our control:

·

disputes among payors as to which payor is responsible for payment;

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·

disparity in coverage among various payors or among various healthcare plans offered by a single payor;

·

differing information and billing requirements among payors; and

·

failure by patients or physicians to provide complete and correct billing information.

The uncertainty of receiving payment for our Cologuard test and complex laboratory billing processes could negatively affect our business and our operating results. 

We may be subject to substantial costs and liability, or be prevented from using technologies incorporated in our Cologuard test, as a result of litigation or other proceedings relating to patent or other intellectual property rights.

Third parties may assert infringement or other intellectual property claims against our licensors, our licensees, our suppliers, our strategic partners or us. We pursue a patent strategy that we believe provides us with a competitive advantage in the non-invasive early detection of colorectal cancer and pre-cancer and is designed to maximize our patent protection against third parties. We have filed patent applications that we believe cover the methods we have designed and use in our Cologuard test to detect colorectal cancer and pre-cancer. In order to protect or enforce our patent and other intellectual property rights, we may have to initiate actions against third parties. Any actions regarding patents could be costly and time-consuming and divert the attention of our management and key personnel from our business. Additionally, such actions could result in challenges to the validity or applicability of our patents. Because the U.S. Patent & Trademark Office maintains patent applications in secrecy until a patent application publishes or the patent is issued, we have no way of knowing if others may have filed patent applications covering technologies used by us or our partners. Additionally, there may be third-party patents, patent applications and other intellectual property relevant to our technologies that may block or compete with our technologies. From time to time we have received correspondence from third parties alleging to hold intellectual property rights that could block our development or commercialization of products. While none of these inquiries to date have had any material effect on us, we may receive inquiries in the future that could have a material effect on our business. Even if third-party claims are without merit, defending a lawsuit may result in substantial expense to us and may divert the attention of management and key personnel. In addition, we cannot provide assurance that we would prevail in any such suits to the extent necessary to conduct our business according to our strategic plan or that the damages or other remedies, if any, awarded against us would not be substantial. Claims of intellectual property infringement may require that we, or our strategic partners, enter into royalty or license agreements with third parties that may only be available on unacceptable terms, if at all. These claims may also result in injunctions against the further development and commercial sale of services or products containing our technologies, which would have a material adverse effect on our business, financial condition and results of operations.

Also, patents and patent applications owned by us may become the subject of interference proceedings in the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial cost to us as well as a possible adverse decision as to the priority of invention of the patent or patent application involved. An adverse decision in an interference proceeding may result in the loss of rights under a patent or patent application subject to such a proceeding.

If we are unable to protect our intellectual property effectively, we may be unable to prevent third parties from using our intellectual property, which would impair any competitive advantage we may otherwise have.

We rely on patent protection as well as a combination of trademark, copyright and trade secret protection and other contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property, which may not be entirely successful, if at all. Additionally, certain of our patents begin to expire in 2017.  This loss of patent protection may permit third parties to use certain intellectual property assets previously exclusively reserved for our use.

We cannot assure you that any of our currently pending or future patent applications will result in issued patents, and we cannot predict how long it will take for any such patents to be issued. Further, we cannot assure you that other parties will not challenge any patents issued to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We have been in the past, and may be in the future, the subject of opposition proceedings relating to our patents. We cannot guarantee you that we will be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in co-ownership of such patents with the third party or the unenforceability or invalidity of such patents. Furthermore, in the life sciences field, courts frequently

26


 

render opinions that may affect the patentability of certain inventions or discoveries, including opinions that may affect the patentability of isolated DNA and/or methods for analyzing or comparing DNA. Such decisions may adversely impact our ability to obtain new patents and facilitate third-party challenges to our existing patents.

Even where we have valid patents, third parties may be able to successfully design their products and services around those patents, such that their products and services do not infringe our patents.  To the extent third parties are able to develop or commercialize competing products and services that do not infringe our patents, our business will be adversely impacted.

Our business is subject to various complex laws and regulations. We could be subject to significant fines and penalties if we or our partners fail to comply with these laws and regulations.

As a provider of clinical diagnostic products and services, we and our partners are subject to extensive and frequently changing federal, state and local laws and regulations governing various aspects of our business. In particular, the clinical laboratory industry is subject to significant governmental certification and licensing regulations, as well as federal and state laws regarding:

·

test ordering and billing practices; 

·

marketing, sales and pricing practices; 

·

health information privacy and security, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and comparable state laws; 

·

insurance; 

·

anti-markup legislation; and 

·

consumer protection.

We are also required to comply with FDA regulations, including with respect to our labeling and promotion activities. In addition, advertising of our tests is subject to regulation by the Federal Trade Commission, or FTC. Violation of any FDA requirement could result in enforcement actions, such as seizures, injunctions, civil penalties and criminal prosecutions, and violation of any FTC requirement could result in injunctions and other associated remedies, all of which could have a material adverse effect on our business. Most states also have similar regulatory and enforcement authority for devices. Additionally, most foreign countries have authorities comparable to the FDA and processes for obtaining marketing approvals. Obtaining and maintaining these approvals, and complying with all laws and regulations, may subject us to similar risks and delays as those we could experience under FDA and FTC regulation. We incur various costs in complying and overseeing compliance with these laws and regulations.

Healthcare policy has been a subject of extensive discussion in the executive and legislative branches of the federal and many state governments and healthcare laws and regulations are subject to change. Following the 2016 elections, such change may be swift and significant.  Development of the existing commercialization strategy for our Cologuard test and planned development of products in our pipeline has been based on existing healthcare policies. We cannot predict what additional 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.

If we or our partners, including independent sales representatives, fail to comply with these laws and regulations, we could incur significant fines and penalties and our reputation and prospects could suffer.  Additionally, our partners could be forced to cease offering our products and services in certain jurisdictions, which could materially disrupt our business.

Some of our activities may subject us to risks under federal and state laws prohibiting ‘kickbacks’ and false or fraudulent claims.

In addition to FDA marketing restrictions, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the healthcare product and service industry and to regulate billing practices and financial relationships with physicians, hospitals and other healthcare providers. These laws include a federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, which prohibit payments intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. While the federal law applies only to

27


 

referrals, products or services for which payment may be made by a federal healthcare program, state laws often apply regardless of whether federal funds may be involved. These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices and providers of laboratory services by limiting the kinds of financial arrangements, including sales programs, that may be used with hospitals, physicians, laboratories and other potential purchasers or prescribers of medical devices and laboratory services. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, or are for items or services that were not provided as claimed. Additionally, to avoid liability under federal false claims laws, we must carefully and accurately code claims for reimbursement, proactively monitor the accuracy and appropriateness of Medicare claims and payments received, diligently investigate any credible information indicating that we may have received an overpayment, and promptly return any overpayments. Currently, a significant percentage of our revenues are generated by payments from Medicare. The federal anti-kickback statute and certain false claims laws prescribe civil and criminal penalties (including fines) for noncompliance that can be substantial. While we continually strive to comply with these complex requirements, interpretations of the applicability of these laws to marketing and billing practices are constantly evolving and even an unsuccessful challenge could cause adverse publicity and be costly to respond to, and thus could harm our business and prospects. Our failure to comply with applicable laws could result in various adverse consequences that could have a material adverse effect upon our business, including the exclusion of our products and services from government programs and the imposition of civil or criminal sanctions.

Compliance with the HIPAA security, privacy and breach notification regulations may increase our costs.

The HIPAA privacy, security and breach notification regulations, including the expanded requirements under HITECH, establish comprehensive federal standards with respect to the uses and disclosures of protected health information (“PHI”) by health plans, healthcare providers and healthcare clearinghouses, in addition to setting standards to protect the confidentiality, integrity and security of PHI. The regulations establish a complex regulatory framework on a variety of subjects, including:

·

the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain payments for our services, and our healthcare operations activities;

·

a patient’s rights to access, amend and receive an accounting of certain disclosures of PHI;

·

requirements to notify individuals if there is a breach of their PHI;

·

the contents of notices of privacy practices for PHI;

·

administrative, technical and physical safeguards required of entities that use or receive PHI; and

·

the protection of computing systems maintaining electronic PHI.

 

We have implemented practices to meet the requirements of the HIPAA privacy, security and breach notification regulations, as required by law. We are required to comply with federal privacy, security and breach notification regulations as well as varying state privacy, security and breach notification laws and regulations, which may be more stringent than federal HIPAA requirements. In addition, for healthcare data transfers from other countries relating to citizens of those countries, we must comply with the laws of those countries. The federal privacy regulations restrict our ability to use or disclose patient identifiable data, without patient authorization, for purposes other than payment, treatment, healthcare operations and certain other specified disclosures such as public health and governmental oversight of the healthcare industry.

HIPAA provides for significant fines and other penalties for wrongful use or disclosure of PHI, including potential civil and criminal fines and penalties. Computer networks are always vulnerable to breach and unauthorized persons may in the future be able to exploit weaknesses in the security systems of our computer networks and gain access to PHI. Additionally, we share PHI with third-party contractors who are contractually obligated to safeguard and maintain the confidentiality of PHI. Unauthorized persons may be able to gain access to PHI stored in such third-party contractors’ computer networks. Any wrongful use or disclosure of PHI by us or our third-party contractors, including disclosure due to data theft or unauthorized access to our or our third-party contractors’ computer networks, could subject us to fines or penalties that could adversely affect our business and results of operations. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we could also incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information.

28


 

The success of our business is substantially dependent upon the efforts of our senior management team.

Our success depends largely on the skills, experience and performance of key members of our senior management team including Kevin Conroy, our Chairman, President and Chief Executive Officer, Maneesh Arora, our Senior Vice President and Chief Operating Officer, Dr. Graham Lidgard, our Senior Vice President and Chief Science Officer, and Jeff Elliott, our Chief Financial Officer. These executives are critical to directing and managing our growth and development in the future. Our success is substantially dependent upon our senior management’s ability to lead our company, implement successful corporate strategies and initiatives, develop key relationships, including relationships with collaborators and business partners, and successfully commercialize products and services. While our management team has significant experience in securing FDA approvals for diagnostic products, we have considerably less experience in commercializing products or services. The efforts of our management team will be critical to us as we develop our technologies and seek to commercialize our Cologuard test and other products and services.

Our success depends on our ability to retain our managerial personnel and to attract additional personnel.

Our success depends in large part on our ability to attract and retain managerial personnel. If we were to lose any of our senior management team, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategies. Competition for desirable personnel is intense, and there can be no assurance that we will be able to attract and retain the necessary staff. The failure to maintain management or to attract sales personnel as we commercialize our Cologuard test could materially adversely affect our business, financial condition and results of operations.

Our management has broad discretion over the use of our available cash and marketable securities and might not spend available cash and marketable securities in ways that increase the value of your investment.

As of December 31, 2016, we had $311.1 million in combined cash and marketable securities. Our management currently expects to deploy these resources primarily to expand our Cologuard commercialization activities, to fund our product development efforts and for general corporate and working capital purposes. However, our management has broad discretion to pursue other objectives and we may use these funds for other purposes. Our management might not effectively deploy our cash and marketable securities which could have an adverse effect on our business.

Our business and reputation will suffer if we are unable to establish and comply with, stringent quality standards to assure that the highest level of quality is observed in the performance our Cologuard test.

Inherent risks are involved in providing and marketing cancer diagnostic tests, such as our Cologuard test, and related services. Patients and healthcare providers rely on us to provide accurate clinical and diagnostic information that may be used to make critical healthcare decisions.  As such, users of our Cologuard test may have a greater sensitivity to errors than users of some other types of products and services.

We must maintain top service standards and FDA-mandated and other quality controls. Performance defects, incomplete or improper process controls, excessively slow turnaround times, unanticipated uses of Cologuard or mishandling of stool samples or Cologuard test results (whether by us, patients, healthcare providers, courier delivery services or others) can lead to adverse outcomes for patients and interruptions to our services.  These events could lead to voluntary or legally mandated safety alerts relating to Cologuard or our laboratory facility and could result in the removal of Cologuard from the market or the suspension of our laboratory’s operations.  Insufficient quality controls and any resulting negative outcomes, could result in significant costs and litigation, as well as negative publicity that could reduce demand for Cologuard and payors’ willingness to cover our Cologuard test.  Even if we maintain adequate controls and procedures, damaging and costly errors may occur.

Product and professional liability suits against us could result in expensive and time-consuming litigation, payment of substantial damages and increases in our insurance rates.

The sale and use of our Cologuard test could lead to product or professional liability claims based on, among other things, allegations that it contained a design or manufacturing defect or our laboratory was negligent in processing test results, which resulted in the failure to detect the condition for which it was designed or an unnecessary procedure which caused harm. A product or professional liability claim could result in substantial damages, be costly and time consuming to defend, and cause material harm to our business, reputation or financial condition. We cannot assure you that our

29


 

liability insurance would protect our assets from the financial impact of defending a product or professional liability claim. Any claim brought against us, with or without merit, could increase our liability insurance rates or prevent us from securing insurance coverage in the future.

We expect to rely on third parties to conduct any future studies of our technologies that may be required by the FDA or other US or foreign regulatory bodies, and those third parties may not perform satisfactorily.

We do not have the ability to independently conduct the clinical or other studies that will be required to obtain FDA or other regulatory approvals for future products we may develop or the approval of foreign regulatory bodies that may be required for such future products or for our Cologuard test to the extent we seek to market products internationally. Accordingly, we expect to rely on third parties such as contract research organizations, medical institutions and clinical investigators to conduct any such studies, including the post-approval study required by the FDA for our Cologuard test. Our reliance on these third parties for clinical development activities will reduce our control over these activities. These third-party contractors may not complete activities on schedule or conduct studies in accordance with regulatory requirements or our study design. Our reliance on third parties that we do not control will not relieve us of our requirement to prepare, and ensure our compliance with, various procedures required under good clinical practices, even though third-party contract research organizations may prepare and comply with their own, comparable procedures. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our studies may be extended, delayed, suspended or terminated, and we may not be able to obtain a required regulatory approval.

Our inability to manage growth could harm our business.

In connection with the commercialization of our Cologuard test, we have added, and expect to continue to add, additional personnel in the areas of sales and marketing, laboratory operations, billing and collections, quality assurance and compliance. Our number of full time employees has increased from 236, as of December 31, 2014, to 736, as of December 31, 2016. Further, as we build our commercialization efforts and expand research and development activities for new products and services, the scope and complexity of our operations is increasing significantly. As a result of our growth, our operating expenses and capital requirements have also increased, and we expect that they will continue to increase, significantly. Our ability to manage our growth effectively requires us to forecast expenses accurately, and to properly forecast and expand operational and testing facilities, if necessary, to expend funds to improve our operational, financial and management controls, reporting systems and procedures. As we move forward in commercializing our Cologuard test, we will also need to effectively manage our growing manufacturing, laboratory operations and sales and marketing needs. If we are unable to manage our anticipated growth effectively, our business could be harmed.

International operations could subject us to risks and expenses that could adversely impact the business and results of operations.

To date, we have not undertaken substantial commercial activities outside the United States.  We have evaluated the commercialization of Cologuard in several European and Asian countries, but we do not have present plans to expand Cologuard internationally.  If we seek to expand Cologuard internationally, or launch other products or services internationally, in the future, those efforts would expose us to risks from the failure to comply with foreign laws and regulations that differ from those under which we operate in the U.S., as well as U.S. rules and regulations that govern foreign activities such as the U.S. Foreign Corrupt Practices Act. In addition, we could be adversely affected by other risks associated with operating in foreign countries. Economic uncertainty in some of the geographic regions in which we might operate, including developing regions, could result in the disruption of commerce and negatively impact cash flows from our operations in those areas.

These and other factors may have a material adverse effect on any international operations we may seek to undertake and, consequently, on our financial condition and results of operations.

30


 

Delaware law, our charter documents and rights agreement could impede or discourage a takeover or change of control that stockholders may consider favorable.

As a Delaware corporation, we are subject to certain anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Accordingly, our board of directors could rely on Delaware law to prevent or delay an acquisition of our company. In addition, certain provisions of our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

·

Our board of directors is divided into three classes serving staggered three-year terms. 

·

Only our board of directors can fill vacancies on the board. 

·

Our stockholders may not act by written consent. 

·

There are various limitations on persons authorized to call a special meeting of stockholders and advance notice requirements for stockholders to make nominations of candidates for election as directors or to bring matters before an annual meeting of stockholders. 

·

Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock.

These types of provisions could make it more difficult for a third party to acquire control of us, even if the acquisition would be beneficial to our stockholders.

In addition, we have adopted a rights agreement that provides that in the event of (i) an acquisition of 15% or more of our outstanding common stock or (ii) an announcement of an intention to make a tender offer or exchange offer for 15% or more of our outstanding common stock, our stockholders, other than the potential acquiror, shall be granted rights enabling them to purchase additional shares of our common stock at a substantial discount to the then prevailing market price. The rights agreement could significantly dilute such acquiror’s ownership position in our shares, thereby making a takeover prohibitively expensive and encouraging such acquiror to negotiate with our board of directors. Therefore, the rights agreement could make it more difficult for a third party to acquire control of us without the approval of our board of directors.

We may engage in acquisitions that could disrupt our business, cause dilution to our stockholders and reduce our financial resources.

In the future, we may enter into transactions to acquire other businesses, products, services or technologies. Because we have not made any acquisitions to date, our ability to do so successfully is unproven. If we do identify suitable candidates, we may not be able to make such acquisitions on favorable terms or at all. Any acquisitions we make may not strengthen our competitive position, and these transactions may be viewed negatively by investors, healthcare providers, patients and others. We may decide to incur debt in connection with an acquisition or issue our common stock or other securities to the stockholders of the acquired company, which would reduce the percentage ownership of our existing stockholders. We could incur losses resulting from undiscovered liabilities of the acquired business that are not covered by any indemnification we may obtain from the seller. In addition, we may not be able to successfully integrate the acquired personnel, technologies and operations into our existing business in an effective, timely and non-disruptive manner. Acquisitions may also divert management from day-to-day responsibilities, increase our expenses and reduce our cash available for operations and other uses. We cannot predict the number, timing or size of future acquisitions or the effect that any such transactions might have on our operating results.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2016, we had federal and state net operating loss carryforwards (“NOLs”) of approximately $725.1 million and $291.9 million, respectively. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change is generally defined as a greater than 50% change in equity ownership by value over a specified time period (generally three years). Given the Code’s broad definition, an ownership change could be the unintended consequence of otherwise normal market trading in our stock that is outside our control. An ownership change under Section 382 of the Code could also be triggered by certain strategic transactions. Additionally, tax law limitations may result in our NOLs expiring before we have the ability to use them. For these reasons, even if we attain profitability our ability to utilize our NOLs may be limited, potentially

31


 

significantly so.

Our stock price has fluctuated widely and is likely to continue to be volatile.

The market price for our common stock varied between a high of $22.80 and a low of $4.67 in the twelve-month period ended December 31, 2016.  Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including those listed in this “Item 1A. Risk Factors” section and other, unknown factors.  Our stock price also may be affected by:

·

comments by securities analysts regarding our business or prospects;

·

our issuance of common stock or other securities;

·

our inability to accurately forecast future performance;

·

our inability to meet analysts’ expectations;

·

general fluctuations in the stock market or in the stock prices of companies in the life sciences or healthcare diagnostics industries; and

·

general conditions and publicity regarding the life sciences or healthcare diagnostics industries.

Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Further, sharp drops in the market price of our common stock, such as we experienced in 2015 and at other times in our history, may expose us to securities class-action litigation. Such litigation could result in substantial expenses and diversion of management’s attention and corporate resources, which would seriously harm our business, financial condition, and results of operations.

We have never paid cash dividends and do not intend to do so.

We have never declared or paid cash dividends on our common stock. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations and capital requirements, as well as other factors deemed relevant by our board of directors.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

As of December 31, 2016, we occupied approximately 195,000 square feet of space at our significant facilities in Madison, Wisconsin. See Note 8 in the notes to our consolidated financial statements for further discussion surrounding our leased facilities.

 

As of December 31, 2016, our significant facilities are as follows:

 

 

 

 

 

 

 

 

 

Location

    

Primary Function

    

Total Square Feet (approx.)

    

Leased or Owned

 

Madison, Wisconsin

 

Research and development

 

55,000

 

Owned

 

Madison, Wisconsin

 

Executive offices

 

34,000

 

Leased

 

Madison, Wisconsin

 

Operations

 

56,000

 

Leased

 

Madison, Wisconsin

 

Clinical laboratory

 

50,000

 

Leased

 

 

 

Item 3.  Legal Proceedings

From time to time we are a party to various legal proceedings arising in the ordinary course of our business. We are not currently a party to any pending litigation that we believe is likely to have a material adverse effect on our business operations or financial condition.

Item 4.  Mine Safety Disclosures

Not applicable.

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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is currently listed on the NASDAQ Capital Market under the symbol “EXAS.” The following table provides, for the periods indicated, the high and low sales prices per share as reported on the NASDAQ Capital Market.

 

 

 

 

 

 

 

 

 

 

    

High

    

Low

 

2016

 

 

 

 

 

 

 

First quarter

 

$

9.22

 

$

4.67

 

Second quarter

 

 

13.20

 

 

5.36

 

Third quarter

 

 

22.80

 

 

11.48

 

Fourth quarter

 

 

20.40

 

 

13.22

 

2015

 

 

 

 

 

 

 

First quarter

 

$

29.60

 

$

20.35

 

Second quarter

 

 

32.85

 

 

20.12

 

Third quarter

 

 

30.00

 

 

17.58

 

Fourth quarter

 

 

18.74

 

 

6.79

 

 

As of February 20, 2017, there were 110,603,808 shares of our common stock outstanding held by approximately 87 holders of record.

We have never paid any cash dividends on our capital stock and do not plan to pay any cash dividends in the foreseeable future.

On February 26, 2016, we issued Restricted Stock Unit awards to seventy new non-executive employees as inducement grants to enter into employment with the Company.  These awards cover a total of 151,350 shares of the Company’s common stock.  These awards vest in four equal annual installments beginning on the first anniversary of the date of grant.  These new hire inducement awards were granted pursuant to NASDAQ Listing Rule 5635(c)(4) and Section 4(a)(2) of the Securities Act of 1933.  On May 3, 2016, the Company filed a registration statement on Form S-8 (File No. 333-211099) under which the shares of common stock underlying these awards were registered, prior to the time at which they vest.

 

 

33


 

Item 6.  Selected Financial Data

The selected historical financial data for the five years ended December 31, 2016 is derived from our audited consolidated financial statements. The selected historical financial data should be read in conjunction with, and is qualified by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes thereto.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2016

 

2015

 

2014

 

2013

 

2012

 

 

 

(Amounts in thousands, except per share data)

 

Statements of Operations Data:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laboratory service revenue

 

$

99,376

 

$

39,437

 

$

1,504

 

$

 

$

 

License fees

 

 

 —

 

 

 —

 

 

294

 

 

4,144

 

 

4,144

 

 

 

 

99,376

 

 

39,437

 

 

1,798

 

 

4,144

 

 

4,144

 

Cost of sales(1)

 

 

45,195

 

 

24,501

 

 

4,325

 

 

 

 

 —

 

Gross profit

 

 

54,181

 

 

14,936

 

 

(2,527)

 

 

4,144

 

 

4,144

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

33,473

 

 

33,914

 

 

28,669

 

 

27,678

 

 

42,131

 

General and administrative(1)

 

 

76,898

 

 

57,950

 

 

30,435

 

 

13,649

 

 

9,900

 

Sales and marketing(1)

 

 

112,826

 

 

82,140

 

 

38,908

 

 

9,578

 

 

4,755

 

 

 

 

223,197

 

 

174,004

 

 

98,012

 

 

50,905

 

 

56,786

 

Loss from operations

 

 

(169,016)

 

 

(159,068)

 

 

(100,539)

 

 

(46,761)

 

 

(52,642)

 

Investment income

 

 

2,018

 

 

1,271

 

 

542

 

 

316

 

 

262

 

Interest expense

 

 

(213)

 

 

(6)

 

 

(51)

 

 

(69)

 

 

(41)

 

Net loss

 

$

(167,211)

 

$

(157,803)

 

$

(100,048)

 

$

(46,514)

 

$

(52,421)

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(1.63)

 

$

(1.71)

 

$

(1.25)

 

$

(0.69)

 

$

(0.88)

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

102,335

 

 

92,135

 

 

80,232

 

 

67,493

 

 

59,481

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,921

 

$

41,135

 

$

58,131

 

$

12,851

 

$

13,345

 

Marketable securities

 

 

262,179

 

 

265,744

 

 

224,625

 

 

120,408

 

 

94,776

 

Total assets

 

 

377,040

 

 

364,030

 

 

312,824

 

 

146,627

 

 

112,119

 

Long term debt

 

 

4,633

 

 

4,789

 

 

1,000

 

 

1,000

 

 

1,000

 

Other long term liabilities

 

 

5,734

 

 

4,601

 

 

3,599

 

 

 —

 

 

 —

 

Total liabilities

 

 

41,745

 

 

37,174

 

 

23,840

 

 

11,311

 

 

13,524

 

Stockholders’ equity

 

 

335,295

 

 

326,856

 

 

288,984

 

 

135,316

 

 

98,595

 

 


(1)

Non‑cash stock‑based compensation expense included in these amounts are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2016

    

2015

    

2014

    

2013

    

2012

 

Cost of sales

 

$

1,064

 

$

876

 

$

279

 

$

 —

 

$

 —

 

Research and development

 

 

4,014

 

 

3,744

 

 

4,149

 

 

2,817

 

 

2,396

 

General and administrative

 

 

14,597

 

 

9,358

 

 

5,575

 

 

3,054

 

 

2,579

 

Sales and marketing

 

 

4,057

 

 

4,072

 

 

1,517

 

 

1,873

 

 

518

 

 

 

 

 

 

34


 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

Overview

Exact Sciences Corporation (together with its subsidiaries, “Exact,” “we,” “us,” “our” or the “Company”) is a molecular diagnostics company currently focused on the early detection and prevention of some of the deadliest forms of cancer. We have developed an accurate, non-invasive, patient friendly screening test called Cologuard® for the early detection of colorectal cancer and pre-cancer, and we are currently working on the development of additional tests for other types of cancer, with the goal of becoming a leader in cancer diagnostics.

Our Cologuard Test

Colorectal cancer is the second leading cause of cancer deaths in the United States and the leading cause of cancer deaths in the U.S. among non-smokers. Each year in the U.S. there are approximately:

 

·

135,000 new cases of colorectal cancer

·

50,000 deaths from colorectal cancer

 

Colorectal cancer treatment represents a significant, growing healthcare cost. As of 2010, $14 billion was spent annually in the U.S. on colorectal cancer treatment, and the projected annual treatment costs are expected to be $20 billion in 2020. The incidence of colorectal cancer in Medicare patients is expected to rise from 106,000 cases in 2010 to more than 180,000 cases in 2030.

 

It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers. Colorectal cancer can take up to 10-15 years to progress from a pre-cancerous lesion to metastatic cancer and death. Patients who are diagnosed early in the progression of the disease—with pre-cancerous lesions or polyps or early-stage cancer—are more likely to have a complete recovery and to be treated less expensively. Accordingly, the American Cancer Society (“ACS”) recommends that all people age 50 and older undergo regular colorectal cancer screening. Of the more than 80 million people in the U.S. for whom routine colorectal cancer screening is recommended, 42 percent have not been screened according to current guidelines. Poor compliance with screening guidelines has meant that nearly two-thirds of colorectal cancer diagnoses are made in the disease’s late stages. The five-year survival rates for stages 3 and 4 are 67 percent and 12 percent, respectively. We believe the large underserved population of unscreened and inadequately screened patients represents a significant opportunity for a patient-friendly screening test.

 

Our Cologuard test is a non-invasive stool-based DNA (“sDNA”) screening test which utilizes a multi-target approach to detect DNA and hemoglobin biomarkers associated with colorectal cancer and pre-cancer. Ten biomarkers are targeted that have been shown to be strongly associated with colorectal cancer and pre-cancer. Methylation, mutation, and hemoglobin results are combined in the laboratory analysis through a proprietary algorithm to provide a single positive or negative reportable result.

 

On August 11, 2014 the U.S. Food and Drug Administration (“FDA”) approved Cologuard for use as the first and only sDNA non-invasive colorectal cancer screening test. Our submission to the FDA for Cologuard included the results of our pivotal DeeP-C clinical trial that had over 10,000 patients enrolled at 90 sites in the U.S. and Canada. The results of our DeeP-C clinical trial for Cologuard were published in the New England Journal of Medicine in April 2014. The peer-reviewed study, “Multi-target Stool DNA Testing for Colorectal-Cancer Screening,” highlighted the performance of Cologuard in the trial population:

 

·

Cancer Sensitivity: 92%

·

Stage I and II Cancer Sensitivity: 94%

·

High-Grade Dysplasia Sensitivity: 69%

·

Specificity: 87%

 

The competitive advantages of sDNA screening may provide a significant market opportunity. If the test were used by 30-percent of the eligible screening population at a three-year screening interval rate, we estimate the potential

35


 

U.S. market for sDNA screening would be more than $4 billion, annually.

 

Our Cologuard Commercialization Strategy

 

Our commercialization strategy includes three main elements focusing on physicians, patients, and payors.

 

Physicians and Patients 

 

Our sales team actively engages with physicians and their staffs to emphasize the need for colorectal cancer screening, educate them on the value of Cologuard, and enroll them in our physician ordering system to enable them to prescribe the test. We focus on specific physicians based on Cologuard order history and on physician groups and larger regional and national health systems.

 

Securing inclusion in guidelines and quality measures is a key part of our physician engagement strategy since many physicians rely on such guidelines and quality measures when making screening recommendations. In June 2016, the US Preventive Services Task Force (“USPSTF”) issued an updated recommendation statement for colorectal cancer screening and gave an "A" grade to colorectal cancer screening starting at age 50 and continuing until age 75. The statement specifies seven screening methods, including FIT-DNA (which is Cologuard).

 

Professional colorectal cancer screening guidelines in the U.S., including those of the ACS, the American College of Gastroenterology (“ACG”), the American Gastroenterological Association (“AGA”) and the National Comprehensive Cancer Network (“NCCN”), recommend regular screening by a variety of methods. Since 2008, joint colorectal cancer screening guidelines endorsed by the ACS and the U.S. Multi-Society Task Force on Colorectal Cancer (“CRC Task Force”) have included sDNA screening technology as a screening option for the detection of colorectal cancer in average risk, asymptomatic individuals age 50 and older. The CRC Task Force is a consortium of several organizations that includes representatives of the ACG, AGA, the American Society for Gastrointestinal Endoscopy, and the American College of Physicians/Society of Internal Medicine. In October 2014, the ACS updated its colorectal cancer screening guidelines to specifically include Cologuard as a recommended sDNA screening test. In June 2016, the NCCN updated its Colorectal Cancer Screening Guidelines to add sDNA screening, at a once-every-three-years interval, to its list of recommended screening tests.

In October 2016, the National Committee for Quality Assurance (“NCQA”) included Cologuard testing on a three-year interval in the final 2017 Healthcare Effectiveness Data and Information set (“HEDIS”) measures. More than 90 percent of America’s health plans measure quality based on HEDIS. In February 2017, the Centers for Medicare & Medicaid Services (“CMS”) proposed including Cologuard in the 2018 Star Ratings program, which uses HEDIS as a primary data source. The Star Ratings program is designed to measure quality in Medicare Advantage plans, help beneficiaries find a plan, and determine potential quality bonus payments. The proposal to include Cologuard in the Star Ratings program, as set forth in the Medicare Advantage Advance Notice and Draft Call letter dated February 1, 2017, is subject to a public comment period.

 

A critical part of the value proposition of Cologuard is our compliance program, which involves active engagement with patients and physicians. This activity is focused on enabling patients to complete Cologuard tests that have been ordered for them by their physicians and supporting physicians in their efforts to have their patients screened.

 

After the launch of Cologuard, we initiated a significant public relations effort to engage patients in the United States. We have conducted targeted direct-to-patient advertising campaigns through social media, print and other channels. In 2016 we began a national television advertising campaign. To date, we have focused our efforts on cable television most commonly viewed by our target patient demographic, and we have begun testing advertising campaigns on network television. In 2017, we plan to continue our targeted direct-to-patient advertising initiatives and launch new content for our television advertising campaign.

Payors

 

The cornerstone of our payor-engagement strategy was securing Medicare coverage from CMS. Medicare covers 47% of patients in the screening population for Cologuard. On October 9, 2014, CMS issued a final National Coverage Determination (“NCD”) for Cologuard following a parallel review process with FDA.  Cologuard was the first screening

36


 

test approved by FDA and covered by CMS through that process. As outlined in the NCD, Medicare Part B covers Cologuard once every three years for beneficiaries who meet all of the following criteria:

 

·

age 50 to 85 years,

·

asymptomatic (no signs or symptoms of colorectal disease including but not limited to lower gastrointestinal pain, blood in stool, positive guaiac fecal occult blood test or fecal immunochemical test), and

·

at average risk for developing colorectal cancer (e.g., no personal history of adenomatous polyps, colorectal cancer, or inflammatory bowel disease, including Crohn’s Disease and ulcerative colitis; no family history of colorectal cancers or adenomatous polyps, familial adenomatous polyposis, or hereditary non-polyposis colorectal cancer).

 

In the 2017 Clinical Laboratory Fee Schedule, CMS set reimbursement for Cologuard at $512.43. Payments from CMS are subject to sequestration. Under the Protecting Access to Medicare Act of 2014 (“PAMA”), effective January 1, 2018, the CMS reimbursement rate for Cologuard will be calculated based on the volume-weighted median of private payor rates for Cologuard. The initial data collection period for that purpose was the period between January 1, 2016 and June 30, 2016. The CMS reimbursement rate will subsequently be reset every three years, or every year if the Company applies for, and is granted, Advanced Diagnostic Laboratory Test status for Cologuard, based on the volume-weighted median of private payor rates experienced in the applicable six-month data collection period. The data for the initial collection period must be submitted to CMS by March 31, 2017 and will be subject to review by CMS prior to the finalization of the new reimbursement rate.

 

In addition to Medicare reimbursement, we believe it is necessary to secure favorable coverage and reimbursement from commercial payors for Cologuard to achieve its full commercial potential. Some commercial payors have issued positive coverage decisions for Cologuard and others have agreed to cover Cologuard as an in-network service. We believe that commercial payors’ reimbursement of Cologuard will depend on a number of factors, including payors’ determination that it is: sensitive and specific for colorectal cancer; not experimental or investigational; approved or recommended by major organizations’ guidelines; subject to applicable federal and state coverage mandates; reliable, safe and effective; medically necessary; appropriate for the specific patient; and cost-effective. Also, some payors may require that they give prior authorization for a Cologuard test before they are willing to pay for it.  Prior authorization requirements may include requirements that we, patients, or physicians provide the payor with extensive medical records and other information.

 

Coverage of Cologuard may also depend, in whole or in part, on whether payors determine, or courts and/or governmental agencies determine, coverage is required under applicable federal or state laws mandating coverage of certain colorectal cancer screening services. For example, Section 2713 of the Patient Protection and Affordable Care Act (“ACA”) mandates that certain health insurers cover evidence-based items or services that have in effect a rating of “A” or “B” in the current recommendations of USPSTF without imposing any patient cost-sharing (“ACA Mandate”). Similarly, federal regulations require that Medicare Advantage plans cover “A” or “B” graded preventive services without patient cost-sharing. Following the updated USPSTF recommendation statement, the CMS issued an updated Evidence of Coverage notice for Medicare Advantage plans that affirms such plans must include coverage of Cologuard every three years without patient cost-sharing. While we believe the ACA Mandate will require certain health insurers to cover Cologuard without patient cost-sharing (following an initial phase-in period between one and two years from when the USPSTF recommendation statement was issued), it is possible that certain health insurers will disagree, in which case courts and/or governmental agencies may need to resolve this matter.  It is also possible that the ACA Mandate will be repealed or significantly modified in the future. 

 

Similarly, we believe the laws of several states currently mandate coverage of Cologuard by certain health insurance companies. While some of those insurance companies have agreed with our interpretation, in certain states, others have disagreed. In some cases, we have filed lawsuits in an effort to enforce state laws we believe require coverage of Cologuard, and we may file additional suits in the future.  We may or may not be successful in any such lawsuit.

 

We are pursuing a variety of strategies to increase commercial payor coverage for Cologuard, including providing cost effectiveness data to payors to make the case for Cologuard reimbursement.  We are focusing our efforts on large national and regional insurers, insurers in states with coverage mandates for colorectal cancer screening, and health plans that have affiliated health systems.

37


 

 

We believe quality metrics will help shape payors’ coverage decisions, as well as physicians’ cancer screening procedures. Some government and private payors are adopting pay-for-performance programs that differentiate payments for healthcare services based on the achievement of documented quality metrics, cost efficiencies or patient outcomes. Payors may look to quality measures such as the HEDIS and CMS Star Ratings measures to assess quality of care.  We believe inclusion in the HEDIS measures and the Star Ratings measures (if the Star Ratings are revised to include Cologuard, as proposed by CMS in February 2017) will have a positive impact on payors’ willingness to reimburse Cologuard, as well as on physicians’ willingness to prescribe the test. 

Our Clinical Lab Facility

As part of our commercialization strategy, we established a state-of-the-art, highly automated lab facility that is certified pursuant to federal Clinical Laboratory Improvement Amendments (“CLIA”) requirements to process Cologuard tests and provide patient results. Our commercial lab operation is housed in a 50,000 square foot facility in Madison, Wisconsin. At our lab, we currently have the capacity to process approximately one million tests per year, and we have capacity to expand, if needed. 

 

Product Pipeline

We also are developing a pipeline of potential future products and services. We are continuing to collaborate with MAYO Foundation for Medical Education and Research (“MAYO”) on developing new tests, with the goal of becoming a leader in cancer diagnostics. We believe Cologuard’s technological platform provides a strong foundation for the development of additional cancer diagnostic tests. Through our collaboration with MAYO, we have identified proprietary methylation markers for several major cancers. We have successfully performed validation studies on tissue samples for seven major cancers, including lung cancer, and on blood samples for four major cancers.  

 

The ACS estimates that lung cancer will be diagnosed in 223,000 Americans and cause 156,000 deaths in the United States in 2017. Currently, more than half of lung cancer cases are diagnosed at an advanced stage, after symptoms appear, when the five-year survival rate is in the low single digits. If lung cancer is detected at an early stage, its five-year survival rate can be as high as 80%. We are currently developing a blood-based biomarker test to aid in the early detection of lung cancer in individuals with lung nodules discovered through a computerized tomography (“CT”) or other scan. Such a test may help reduce the number of unnecessary biopsies and other follow-up procedures, and thereby reduce costs and improve health outcomes. We recently completed a 400 patient lung cancer study which has been submitted for publication in the spring of 2017.

 

We also plan to continue to explore opportunities for improving Cologuard, including improvements that could lower our cost of sales. 

 

2017 Priorities

Our top priorities for 2017 are to (1) grow revenue for Cologuard, which includes leveraging Cologuard’s growth towards becoming a standard of care, (2) improve the customer experience and continue to deliver world class service to patients and providers, and (3) expand our product portfolio by developing additional cancer diagnostic tests as further outlined in the pipeline section above.  

Results of Operations

Our top priorities for 2016 included (1) growing revenue for Cologuard, (2) enhancing our infrastructure to support the growth of Cologuard and future products and (3) improving Cologuard, including reducing its cost. 

During 2016, we completed approximately 244,000 Cologuard tests, which generated $99.4 million of revenue compared to 2015 when we completed 104,000 tests and generated $39.4 million of revenue. The increase in revenues and tests completed from the prior year was primarily driven by sales force execution, our patient advertising campaign, and the increase in commercial coverage for Cologuard. As of December 31, 2016, more than 163 million people are in health plans that cover Cologuard.

38


 

We made investments in our technical systems, manufacturing capabilities, customer care center, and our sales force in order to enhance our infrastructure and position our operations and processes for continued growth. Additionally, we continued to focus on cost containment throughout the business which, along with the increase in test volume, helped drive improvements in our gross margin from 38% for 2015 to 55% for 2016.

 

In 2016 we continued to invest in research and development and focused on the development of additional cancer diagnostic tests as outlined in the “Product Pipeline” section above.  

 

In order to support the commercialization of Cologuard and to achieve our goals for 2016, our selling, general, and administrative costs increased by $49.6 million during the year. In addition, our efforts in 2016 to develop our pipeline products and improvements to Cologuard remained consistent with the prior year which led to a slight decrease in research and development costs of $0.4 million. We ensured that we were well capitalized to meet our future goals by raising $144.2 million, net of issuance costs, through an underwritten public offering of common stock completed in August 2016 and finished the year with $311.1 million in cash, cash equivalents, and marketable securities.

Comparison of the years ended December 31, 2016 and 2015

Laboratory service revenue. Our laboratory service revenue is generated by performing diagnostic services using our Cologuard test. For the years ended December 31, 2016 and 2015, the Company completed approximately 244,000 and 104,000 Cologuard tests, respectively, and generated laboratory service revenue of $99.4 million and $39.4 million, respectively. The increase in revenue was primarily due to an increase in completed Cologuard tests during the period.

Our cost structure. Our selling, general, and administrative expenses consist primarily of non-research personnel salaries, office expenses, professional fees, sales and marketing expenses incurred in support of our commercialization efforts and non-cash stock-based compensation.

Cost of sales includes costs related to inventory production and usage, shipment of test collection kits, royalties and the cost of laboratory services to process tests and provide results to physicians. Gross margin as a percentage of laboratory service revenue is also affected by our current revenue recognition policy, which may result in costs being incurred in one period that relate to revenues recognized in a later period.

We expect that gross margin for our laboratory services will continue to fluctuate and be affected by Cologuard test volume, our revenue recognition policy, patient compliance rates, payor mix, the levels of reimbursement, and payment patterns of payors and patients.

Cost of sales. Cost of sales increased to $45.2 million for the year ended December 31, 2016 from $24.5 million for the year ended December 31, 2015. The increase in cost of sales is primarily due to the increases in completed Cologuard tests. The Company completed approximately 244,000 and 104,000 Cologuard tests for the years ended December 31, 2016 and 2015, respectively.

 

 

 

 

 

 

 

 

 

 

 

Amounts in millions

    

2016

    

2015

    

Change

 

Production costs

 

$

29.7

 

$

13.7

 

$

16.0

 

Facility and support services

 

 

7.0

 

 

4.2

 

 

2.8

 

Personnel expenses

 

 

7.3

 

 

5.6

 

 

1.7

 

Stock-based compensation

 

 

1.1

 

 

0.9

 

 

0.2

 

Other cost of sales expenses

 

 

0.1

 

 

0.1

 

 

 —

 

Total cost of sales expense

 

$

45.2

 

$

24.5

 

$

20.7

 

 

39


 

Research and development expenses. Research and development expenses decreased to $33.5 million for the year ended December 31, 2016 compared to $33.9 million for the year ended December 31, 2015. During 2016 we continued to work on Cologuard improvements and the development of pipeline products at similar levels to the prior year, which led to a comparable level of spending in research and development in 2016. 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in millions

    

2016

    

2015

    

Change

 

Personnel expenses

 

$

11.6

 

$

9.6

 

$

2.0

 

Direct research and development expenses

 

 

13.9

 

 

13.3

 

 

0.5

 

Legal and professional fees

 

 

1.9

 

 

4.4

 

 

(2.5)

 

Stock-based compensation

 

 

4.0

 

 

3.7

 

 

0.3

 

Other research and development expenses

 

 

2.1

 

 

2.9

 

 

(0.8)

 

Total research and development expenses

 

$

33.5

 

$

33.9

 

$

(0.5)

 

 

 

General and administrative expenses. General and administrative expenses increased to $76.9 million for the year ended December 31, 2016 compared to $58.0 million for the year ended December 31, 2015. The increase in general and administrative expenses was primarily a result of increased personnel costs and stock-based compensation expense due to increased headcount to support the overall growth of the Company.

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in millions

    

2016

    

2015

    

Change

 

Personnel expenses

 

$

30.4

 

$

18.9

 

$

11.5

 

Professional and legal fees

 

 

11.8

 

 

10.8

 

 

1.0

 

Stock-based compensation

 

 

14.6

 

 

9.4

 

 

5.2

 

Other general and administrative

 

 

4.2

 

 

4.3

 

 

(0.1)

 

Facility and support services

 

 

15.9

 

 

14.6

 

 

1.3

 

Total general and administrative expenses

 

$

76.9

 

$

58.0

 

$

18.9

 

 

Sales and marketing expenses. Sales and marketing expenses increased to $112.8 million for the year ended December 31, 2016 compared to $82.1 million for the year ended December 31, 2015. The increase in sales and marketing expenses was a result of hiring additional sales and marketing personnel and increasing our advertising and patient marketing efforts as part of the ongoing commercialization of our Cologuard test.

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in millions

    

2016

    

2015

    

Change

 

Personnel expenses

 

$

57.4

 

$

48.1

 

$

9.3

 

Direct marketing costs and professional fees

 

 

50.6

 

 

28.7

 

 

21.9

 

Stock-based compensation

 

 

4.1

 

 

4.1

 

 

 —

 

Other sales and marketing expenses

 

 

0.7

 

 

1.2

 

 

(0.5)

 

Total sales and marketing expenses

 

$

112.8

 

$

82.1

 

$

30.7

 

 

Investment income. Investment income increased to $2.0 million for the year ended December 31, 2016 compared to $1.3 million for the year ended December 31, 2015. This increase in investment income was due to a higher return on investments for the year ended December 31, 2016 when compared to the same period in 2015.

40


 

Interest income and expense. Net interest expense increased to $0.2 million for the year ended December 31, 2016 compared to net interest expense of $6,000 for the year ended December 31, 2015. During the year ended December 31, 2015 the Company offset $0.1 million of interest expense due to the forgiveness of accrued interest expense previously recorded on the Wisconsin Department of Commerce loan, which was forgiven during 2015 due to the Company’s meeting certain job creation targets. The increase in interest expense in 2016 was due to no similar offset during 2016.

Comparison of the years ended December 31, 2015 and 2014

Laboratory service revenue. Our laboratory service revenue is generated by performing diagnostic services using our Cologuard test. Our Cologuard test became available to be marketed and sold upon FDA approval on August 11, 2014. Total laboratory service revenue was $39.4 million for the year ended December 31, 2015 and $1.5 million for the year ended December 31, 2014.  

License fee revenue. We generated no license fee revenue for the year ended December 31, 2015. Total license fee revenue was $0.3 million for the year ended December 31, 2014. License fee revenue consists of the amortization of up‑front technology license fee payments associated with our collaboration, license and purchase agreement with Genzyme. The previously unamortized Genzyme up‑front payment and holdback amounts were amortized on a straight‑line basis over the initial Genzyme collaboration period, which ended in January 2014.

Cost of sales.  Cost of sales increased to $24.5 million for the year ended December 31, 2015 from $4.3 million for the year ended December 31, 2014. The increase in cost of sales is related to the production and testing services of our Cologuard test, which obtained FDA approval during the third quarter of 2014.

 

 

 

 

 

 

 

 

 

 

 

Amounts in millions

    

2015

    

2014

    

Change

 

Production costs

 

$

13.7

 

$

1.4

 

$

12.3

 

Personnel expenses

 

 

5.6

 

 

1.7

 

 

3.9

 

Facility and support services

 

 

4.2

 

 

0.8

 

 

3.4

 

Stock-based compensation

 

 

0.9

 

 

0.3

 

 

0.6

 

Other cost of sales expenses

 

 

0.1

 

 

0.1

 

 

 —

 

Total cost of sales expenses

 

$

24.5

 

$

4.3

 

$

20.2

 

 

Research and development expenses. Research and development expenses increased to $33.9 million for the year ended December 31, 2015 from $28.7 million for the year ended December 31, 2014. This increase in overall research and development expenditures was related to additional focus on pipeline product development and improvements to Cologuard.

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in millions

    

2015

    

2014

    

Change

 

Personnel expenses

 

$

9.6

 

$

8.7

 

$

0.9

 

Stock-based compensation

 

 

3.7

 

 

4.2

 

 

(0.5)

 

Direct research and development expenses

 

 

13.3

 

 

10.4

 

 

2.9

 

Legal and professional fees

 

 

4.4

 

 

2.3

 

 

2.1

 

Other research and development expenses

 

 

2.9

 

 

3.1

 

 

(0.2)

 

Total research and development expenses

 

$

33.9

 

$

28.7

 

$

5.2

 

 

General and administrative expenses. General and administrative expenses increased to $58.0 million for the year ended December 31, 2015 from $30.4 million for the year ended December 31, 2014. The increase in general and administrative expenses was primarily related to increased expenditures required to support our overall growth and the first full year of Cologuard commercialization.

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in millions

    

2015

    

2014

    

Change

 

Personnel expenses

 

$

18.9

 

$

7.8

 

$

11.1

 

Professional and legal fees

 

 

10.8

 

 

5.9

 

 

4.9

 

Stock-based compensation

 

 

9.4

 

 

5.6

 

 

3.8

 

Other general and administrative expenses

 

 

4.3

 

 

3.2

 

 

1.1

 

Facility and support services

 

 

14.6

 

 

7.9

 

 

6.7

 

Total general and administrative expenses

 

$

58.0

 

$

30.4

 

$

27.6

 

 

41


 

Sales and marketing expenses. Sales and marketing expenses increased to $82.1 million for the year ended December 31, 2015 from $38.9 million for the year ended December 31, 2014. The increase in sales and marketing expense was a result of hiring additional sales and marketing personnel and increasing our advertising and patient marketing efforts as part of the commercialization of Cologuard.

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in millions

    

2015

    

2014

    

Change

 

Direct marketing costs and professional fees

 

$

28.7

 

$

22.4

 

$

6.3

 

Personnel expenses

 

 

48.1

 

 

14.7

 

 

33.4

 

Stock-based compensation

 

 

4.1

 

 

1.5

 

 

2.6

 

Other sales and marketing expenses

 

 

1.2

 

 

0.3

 

 

0.9

 

Total sales and marketing expenses

 

$

82.1

 

$

38.9

 

$

43.2

 

 

Investment income. Investment income increased to $1.3 million for the year ended December 31, 2015 from $0.5 million for the year ended December 31, 2014. This increase was primarily due to an overall higher cash and marketable securities balance, due to our increased issuance of common stock, during the year ended December 31, 2015 as compared to the same period of 2014.

Interest expense. Interest expense decreased to $6,000 for the year ended December 31, 2015 from $0.1 million for the year ended December 31, 2014. This decrease is primarily due to the reversal of the accrued interest expense previously recorded on the Wisconsin Department of Commerce loan which was forgiven during 2015 due to the Company meeting certain job creation targets. Additionally, there was less interest expense recognized for our capital lease during the year ended December 31, 2015 when compared to the same period in 2014. These decreases were offset with an increase in interest expense due to the new credit agreement entered into during 2015 to finance the purchase of a facility located in Madison, Wisconsin.

Liquidity and Capital Resources

We have financed our operations since inception primarily through private and public offerings of our common stock and through revenue generated by the sale of Cologuard. As of December 31, 2016, we had approximately $48.9 million in unrestricted cash and cash equivalents and approximately $262.2 million in marketable securities.

All of our investments in marketable securities consist of fixed income investments, and all are deemed available‑for‑sale. The objectives of this portfolio are to provide liquidity and safety of principal while striving to achieve the highest rate of return, consistent with these two objectives. Our investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

Net cash used in operating activities was $130.1 million, $134.0 million, and $81.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. The principal use of cash in operating activities for each of the years ended December 31, 2016, 2015 and 2014 was to fund our net loss. The increase in net cash used in operating activities for the years ended December 31, 2016 and December 31, 2015, as compared to the year ended December 31, 2014 was primarily due to increased sales and marketing activities and general and administrative activities, including increases in stock-based compensation, personnel expenses, and direct marketing costs, to support the launch of the Cologuard test. Cash flows from operations can vary significantly due to various factors, including changes in our operations, prepaid expenses, accounts payable, and accrued expenses.

Net cash used in investing activities was $11.5 million, $64.8 million, and $117.3 million for the years ended December 31, 2016, 2015, and 2014, respectively. The decrease in cash used in investing activities for the year ended December 31, 2016 when compared to the same period in 2015 was primarily the result of increased maturities of marketable securities. Excluding the impact of purchases and maturities of marketable securities, net cash used in investing activities was $14.9 million for the year ended December 31, 2016, compared to $22.0 million for the year ended December 31, 2015. The decrease was primarily the result of a decrease in purchases of property and equipment. Excluding the impact of purchases and maturities of marketable securities, net cash used in investing activities for the year ended December 31, 2014 was primarily the result of purchases of property and equipment of $12.0 million. Purchases of property and equipment during 2016 and 2015 included facility improvements, investments in our IT infrastructure, and equipment related to laboratory processing.

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Net cash provided by financing activities was $149.6 million, $181.8 million, and $244.0 million for the years ended December 31, 2016, 2015, and 2014, respectively. The decrease in cash provided by financing activities for the year ended December 31, 2016 when compared to the same period in 2015 was primarily the result of a decrease in proceeds from the sale of common stock from $174.1 million in 2015 to $144.2 million in 2016.  The decrease in cash provided by financing activities for the year ended December 31, 2015 when compared to the same period in 2014 was primarily the result of a decrease in proceeds from the sale of common stock from $238.6 million in 2014 to $174.1 million in 2015.

We expect that cash and cash equivalents and marketable securities on hand at December 31, 2016, will be sufficient to fund our current operations for at least the next twelve months, based on current operating plans. However, we may need to raise additional capital to fully fund our current strategic plan, which includes successfully commercializing Cologuard and developing a pipeline of future products. If we are unable to obtain sufficient additional funds to enable us to fund our operations through the completion of such plan, our results of operations and financial condition would be materially adversely affected, and we may be required to delay the implementation of our plan and otherwise scale back our operations. Even if we successfully raise sufficient funds to complete our plan, we cannot assure that our business will ever generate sufficient cash flow from operations to become profitable.

The following table reflects our estimated fixed obligations and commitments as of December 31, 2016. This table only includes potential milestone payments due upon FDA approval of future products or future sales‑based royalty obligations and milestones when we determine the likelihood of payment is probable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

Less Than

 

 

 

 

 

 

 

More Than

 

Description

 

Total

 

One Year

 

1 - 3 Years

 

3 - 5 Years

 

5 Years

 

 

 

(in thousands)

 

Long-term debt obligations(1)

    

$

4,852

    

$

174

    

$

4,678

    

$

 —

    

$

 —

 

Other long-term liabilities(1)

 

 

1,200

 

 

 —

 

 

1,200

 

 

 —

 

 

 —

 

Obligations under license and collaborative agreements(2)

 

 

3,542

 

 

1,256

 

 

512

 

 

512

 

 

1,262

 

Operating lease obligations

 

 

6,882

 

 

2,226

 

 

2,896

 

 

1,479

 

 

281

 

Total

 

$

16,476

 

$

3,656

 

$

9,286

 

$

1,991