e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended:
December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number:
000-51541
GENOMIC HEALTH, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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77-0552594
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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301 Penobscot Drive
Redwood City, California
(Address of principal
executive offices)
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94063
(Zip Code)
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(650) 556-9300
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered:
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Common Stock, par value $0.0001 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act and Title of Class:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2008, the aggregate market value of voting
and non-voting common stock held by non-affiliates of the
registrant was approximately $260.5 million, based on the
closing price of the common stock as reported on the NASDAQ
Global Market for that date.
There were 28,507,540 shares of the registrants
Common Stock issued and outstanding on February 28, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial
Ownership Reporting Compliance), 11, 12, 13 and 14 of
Part III incorporate by reference information from the
registrants proxy statement to be filed with the
Securities and Exchange Commission in connection with the
solicitation of proxies for the registrants 2009 Annual
Meeting of Stockholders to be held on June 8, 2009.
PART I
This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
When used in this Report, the words expects,
anticipates, intends,
estimates, plans, believes,
and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods
and include statements about our expectation that, for the
foreseeable future, substantially all of our revenues will be
derived from Oncotype DX; the factors that may impact our
financial results; the extent and duration of our net losses or
where we may achieve profitability; our ability to recognize
revenues other than on a cash basis and when we expect we will
recognize a majority of revenues upon providing tests; our
business strategy and our ability to achieve our strategic
goals; our expectation that product revenues will increase; the
amount of future revenues that we may derive from Medicare
patients or categories of patients; our plans to pursue
reimbursement on a
case-by-case
basis; our ability and expectations as to the amount of time it
will take, to achieve successful reimbursement from third-party
payors and government insurance programs for new tests or
markets, including for Oncotype DX for N+ patients or outside of
the U.S.; our expectations regarding our international expansion
and opportunities, and when we may generate revenues from
international sales; our intent to enter into additional foreign
distribution arrangements; the factors we believe to be driving
demand for Oncotype DX and our ability to sustain or increase
such demand; our success in increasing patient and physician
demand as a result of our direct sales approach; plans for
enhancements of Oncotype DX to address different patient
populations of breast cancer or to report single gene results;
plans for, and the timeframe for the development or commercial
launch of, future tests addressing different patient populations
or other cancers; the factors that we believe will drive the
establishment of coverage policies; the capacity of our clinical
reference laboratory to process tests and our expectations
regarding capacity; our dependence on collaborative
relationships and the success of those relationships; whether
any tests will result from our collaborations; the applicability
of clinical results to actual outcomes; our estimates and
assumptions with respect to disease incidence; our belief
regarding the timing of a potential test for colon cancer; our
plans with respect to potential tests for ductal carcinoma in
situ, or other cancers or for patients treated with aromatase
inhibitors or other treatments; the occurrence, timing, outcome
or success of clinical trials or studies; our intention to plan
additional development or clinical studies; the benefits of our
technology platform; the economic benefits of our test to the
healthcare system; the ability of our test to impact treatment
decisions; our beliefs regarding our competitive benefits; our
belief that multi-gene analysis provides better analytical
information; our expectations regarding clinical development
processes future tests may follow; our beliefs regarding the
benefits of individual gene reporting; the level of investment
in our sales force; our expectation that our general and
administrative and sales and marketing expenses will increase
and our anticipated uses of those funds; our expectations
regarding capital expenditures; our expectation that our
research and development expense levels will remain high as we
seek to increase the clinical utility of Oncotype DX and develop
new tests; our ability to comply with the requirements of being
a public company; our ability to attract and retain experienced
personnel; the adequacy of our product liability insurance; how
we intend to spend our existing cash and cash equivalents and
how long we expect our existing cash to last; our anticipated
cash needs and our estimates regarding our capital requirements
and our needs for additional financing; our expected future
sources of cash; our plans to borrow additional amounts under
existing or new financing arrangements; our expectations
regarding our needs to use equipment financing as a funding
source; our belief that we are in material compliance with
financial covenants; our expectations regarding repayment of
debt or incurrence of additional debt; our compliance with
federal, state and foreign regulatory requirements; the
potential impact resulting from the regulation of Oncotype DX by
the U.S. Food and Drug Administration, or FDA, and our
belief that Oncotype DX is properly regulated under the Clinical
Laboratory Improvement Amendments of 1988, or CLIA; the impact
of new or changing policies, regulation or legislation on our
business; our belief that we have taken reasonable steps to
protect our intellectual property; our strategies regarding
filing additional patent applications to strengthen our
intellectual property rights; the impact of changing interest
rates; our beliefs regarding our unrecognized tax benefits; the
impact of accounting pronouncements and our critical accounting
policies, judgments, estimates, models and assumptions on our
financial results; the impact of the economy on our business,
patients and payors; our expectations regarding the impact of
the economic environment on our liquidity and our investments;
and anticipated trends and challenges in our business and the
markets in which we operate.
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Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those expected. These risks and uncertainties
include, but are not limited to, those risks discussed in
Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays
in research and development efforts; the risk that we may not
obtain reimbursement for our existing test and any future tests
we may develop; the risks and uncertainties associated with the
regulation of our test by FDA; our ability to compete against
third parties; our ability to obtain capital when needed; the
economic environment; and our history of operating losses. These
forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation or undertaking to update any
forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement
is based.
This report contains statistical data that we obtained from
reports generated by the American Cancer Society and by DaVInci
Oncology Specialists, a division of the Mattson Jackson Group,
Inc., or that we derived from information contained in these
reports. These reports generally indicate that they have
obtained their information from sources believed to be reliable
but do not guarantee the accuracy and completeness of their
information. Although we believe that the reports are reliable,
we have not independently verified their data.
In this report, all references to Genomic Health,
we, us, or our mean Genomic
Health, Inc.
Genomic Health, the Genomic Health logo, Oncotype, Oncotype
DX and Recurrence Score are trademarks or registered trademarks
of Genomic Health, Inc. We also refer to trademarks of other
corporations and organizations in this report.
Company
Overview
Genomic Health is a life science company focused on the
development and commercialization of genomic-based clinical
diagnostic tests for cancer. Our goal is to improve the quality
of treatment decisions for cancer patients by providing
individualized information to patients and their physicians
through the genomic analysis of tumor biopsies. In January 2004,
we launched our first test under the brand name Oncotype
DX. Oncotype DX has clinical evidence validating its
ability to predict the likelihood of breast cancer recurrence
and the likelihood of chemotherapy benefit for early stage
breast cancer patients. Oncotype DX utilizes quantitative
genomic analysis in standard tumor pathology specimens to
provide tumor-specific information, or the oncotype
of a tumor, in order to improve cancer treatment decisions. We
offer Oncotype DX as a clinical service, where we analyze
the expression levels of 21 genes in tumor tissue samples in our
laboratory and provide physicians with a quantitative gene
expression profile expressed as a single quantitative score,
which we call a Recurrence Score. In 2008, we began including in
the Oncotype DX report measurements of quantitative gene
expression for estrogen receptor, or ER, progesterone receptor,
or PR, and human epidermal growth factor receptor 2, or HER2,
genes, which are used in the calculation of the Recurrence Score
result, in order to provide additional clinical information.
Oncotype DX has been extensively evaluated in twelve
independent studies involving more than 4,000 breast cancer
patients, including a large validation study published in The
New England Journal of Medicine and a chemotherapy benefit
study published in the Journal of Clinical Oncology. As
of December 31, 2008, more than 85,000 tests had been
delivered for use in treatment planning. As of February 2009,
more than 90% of all U.S. insured lives were covered by
health plans that provide reimbursement for Oncotype DX
through contracts, agreements or policy decisions. Reimbursement
on behalf of patients covered by Medicare comprised 22%, 23% and
47% of product revenues for the years ended December 31,
2008, 2007 and 2006. Reimbursement on behalf of patients covered
by UnitedHealthcare Insurance Company comprised 9%, 13% and 5%
of product revenues for the years ended December 31, 2008,
2007 and 2006, respectively. The American Society of Clinical
Oncologists, or ASCO, and the National Comprehensive Cancer
Network, or NCCN, issued updated clinical practice guidelines in
late 2007 that include the use of Oncotype DX to predict
the likelihood of disease recurrence and the likelihood of
chemotherapy benefit for a large portion of early stage breast
cancer patients. Oncotype DX is commercially available at
a list price of $3,820 through our clinical reference laboratory
located in Redwood City, California, which is accredited under
the Clinical Laboratory Improvement Amendments of 1988, or CLIA,
and by the College of American Pathologists, or CAP.
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Scientific
Background
Limits
of Existing Approaches for Determining Cancer
Treatments
Cancer is a group of complex molecular diseases characterized by
the uncontrolled growth and spread of abnormal cells resulting
from genetic mutations or damage that can severely disrupt
normal body functions. In 2008, approximately 1.4 million
people in the United States and 12 million people worldwide
were expected to be diagnosed with cancer. Common types of
cancer include breast, prostate, lung and colon. Cancers are
difficult to treat because each type responds differently,
depending upon the individual and the type and location of the
cancer.
To treat cancer effectively, physicians diagnose and gauge the
stage of a patients disease to determine the best course
of therapy. The most common practice used to diagnose cancer is
through pathologic evaluation of tumors under a microscope. For
solid tumors, tumor tissue is typically removed through surgery
or needle biopsy, fixed in a chemical preservative and embedded
in paraffin wax. A pathologist places thin sections of this
fixed paraffin embedded, or FPE, tissue onto glass slides so it
can be studied under a microscope. In many cases, pathologists
also use molecular staining techniques, including
protein-specific staining, to improve the quality of their
diagnosis. After visually examining the sample, the pathologist
judges whether the biopsy contains normal or cancerous cells.
The pathologist may also grade the tumor based on how aggressive
the cancer cells appear under the microscope.
Once a pathologist diagnoses cancer, the patients
physician determines the stage of the cancer based on further
analysis of the patients condition using a variety of
clinical measures, including the tumor pathology grade, size of
the tumor, how deeply the tumor has invaded tissues at the site
of origin and the extent of any invasion into surrounding
organs, lymph nodes or distant sites. Patient history, physical
signs, symptoms and information obtained from other tests are
also evaluated and considered.
Physicians use tumor pathology grade and stage when predicting
whether a cancer will recur, which is the key determinant in
treatment decisions. Because tumor pathology and staging are
heavily dependent on visual assessment and human interpretation,
physicians and patients make treatment decisions often using
subjective and qualitative information that may not reflect the
molecular nature of the patients cancer. As a result, many
patients are misclassified as high risk when they are low risk
for recurrence or low risk when they are high risk for
recurrence, resulting in over-treatment for some and
under-treatment for others.
For many cancer patients, chemotherapy is commonly used as a
treatment. Chemotherapy involves the use of highly toxic drugs
to kill cancer cells. It is often given after surgery to kill
remaining cancer cells that could not be physically removed in
order to reduce the risk of disease recurrence. Chemotherapy can
take months to complete and can dramatically impact a
patients quality of life. Patients usually experience a
wide range of acute toxicities, including infection, pain in the
mouth and throat, weight loss, fatigue, hair loss, rashes and
injection site reactions. In addition, long-term effects of
chemotherapy can include cognitive impairment, cardiac tissue
damage, infertility, disease of the central nervous system,
chronic fatigue, secondary malignancies and personality changes.
Overall benefits of chemotherapy vary significantly across
cancer populations, and the benefit of treatment may not always
justify the cost of the therapy or the physical and mental
burden patients endure.
Use of
Genomics to Understand Cancer
Genomics is the study of complex sets of genes, their expression
and their function in a particular organism. A gene is a set of
instructions or information that is embedded in the DNA of a
cell. For a gene to be turned on or expressed by a
cell, the cell must first transcribe a copy of its DNA sequence
into messenger RNA, which is then translated by the cell into
protein. Proteins are large molecules that control most
biological processes and make up molecular pathways, which cells
use to carry out their specific functions.
Genomics can also be used to understand diseases at the
molecular level. Diseases can occur when mutated or defective
genes inappropriately activate or block molecular pathways that
are important for normal biological function. Disease can result
from inheriting mutated genes or from developing mutations in
otherwise normal cells. Such mutations can be the cause of
cancer. The ability to detect a mutation or its functional
results and to understand the process by which the mutation
contributes to disease is crucial to understanding the molecular
mechanisms of a disease.
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A common form of genomic analysis is the measurement of gene
expression, or the presence and amount of one or more RNA
sequences in a particular cell or tissue. Mutations may change
the gene expression pattern of a cell as the cell responds to an
altered genetic code. Quantifying the differences in gene
expression has become a common way to study the behavior of an
altered cell. This method allows for the measurement of the
expression of single or multiple genes. These expression levels
can be correlated with disease and clinical outcomes.
Advances in genomic technology have accelerated the rate and
lowered the cost of gene expression analysis, thus providing
unprecedented opportunity for clinical utility. We believe gene
expression technology has the potential to improve the quality
of diagnosis and treatment of disease by arming patients and
physicians with an understanding of disease at a molecular level
that is specific to each patient.
Cancer results from alterations in cells caused by the molecular
changes of mutated genes. The behavior of cancer is dependent on
many different genes and how they interact. Cancer is
complicated and it may not be possible to identify a single gene
that adequately signals a more aggressive or less aggressive
type of cancer. The ability to analyze multiple genes expressed
by the tumor provides more valuable information, which enables
individualized cancer assessment and treatment.
The key to utilizing genomics in cancer is identifying specific
sets of genes and gene interactions that are important for
diagnosing different subsets of cancers. Studies can be
performed which link response to therapy or the likelihood of
recurrence to the pattern of gene expression in tumors. These
results can then be used to develop tests that quantify gene
expression of an individuals tumor, allowing physicians to
better understand what treatments are most likely to work for an
individual patient or how likely a cancer is to recur.
Our
Solution
Our diagnostic approach correlates gene expression to clinical
outcomes and provides an individualized analysis of each
patients tumor. We have optimized technology for
quantitative gene expression on FPE tissue by developing methods
and processes for screening hundreds of genes at a time using
minimal amounts of tissue. This technology allows us to analyze
archived samples of tissue, retained by hospitals for most
cancer patients, to correlate gene expression analysis with
known clinical outcomes, such as responsiveness to therapy or
the likelihood of cancer recurrence or progression. Once we have
established and validated a test, we can then analyze a
patients tumor and correlate the result to these clinical
outcomes.
We believe that our multi-gene analysis, as opposed to
single-gene analysis, provides a more powerful approach to
distinguish tumors as being more or less likely to recur or
progress. Furthermore, as shown in breast cancer, our approach
can be used to determine whether a patient is more or less
likely to benefit from therapy. This information ultimately
allows the physician and patient to choose a course of treatment
that is individualized for each patient.
Our solution fits within current clinical practice and
therapeutic protocols, facilitating product adoption. We analyze
tissues as they are currently handled, processed and stored by
clinical pathology laboratories. Once a patient is diagnosed
with breast cancer and a physician orders Oncotype DX,
the pathology lab provides us with the tumor block or thin
sections from the biopsy specimen utilized for the diagnosis.
Because the specimens are chemically preserved and embedded in
paraffin wax, they require no special handling and can be sent
by overnight mail to our clinical reference laboratory in
California. We believe this provides an advantage over tests
using fresh or frozen tissue that require special handling, such
as shipping frozen tissue on dry ice. We typically analyze the
tissue and deliver our results to the treating physician within
10 to 14 days of receipt of the tissue sample. This is
within the crucial decision window after the tumor has been
surgically removed and before the patient and the treating
physician discuss additional treatment options.
We believe our solution provides information that has the
following benefits:
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Improved Quality of Treatment Decisions. We
believe our approach to genomic-based cancer analysis improves
the quality of cancer treatment decisions by providing an
individualized analysis of each patients tumor that is
correlated to clinical outcome. Our approach represents a
substantial departure from existing approaches to treatment,
which often use subjective, anatomic and qualitative factors to
determine treatments. Oncotype DX has been shown in
clinical studies to classify many patients into recurrence risk
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categories different from classifications based primarily on
tumor pathology grade and stage. Thus, our solution enables
patients and physicians to make more informed decisions about
treatment risk-benefit considerations and, consequently, design
an individualized treatment plan.
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Improved Economics of Cancer Care. We believe
that improving the quality of treatment decisions can result in
significant economic benefits. In early stage breast cancer, our
data shows that many patients are misclassified as high or low
risk under existing treatment guidelines. Many low risk patients
misclassified as high risk receive toxic and expensive
chemotherapy treatment regimens. Chemotherapy and related costs
may exceed $20,000, as compared to Oncotype DXs
list price of $3,820. On the other hand, some high risk patients
misclassified as low risk are not provided chemotherapy
treatment, possibly necessitating future treatment costing up to
$50,000 or more if the cancer recurs.
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Oncotype
DX
Oncotype DX, our first clinically validated product, uses
our quantitative molecular pathology approach to improve cancer
treatment decisions. We offer Oncotype DX as a clinical
laboratory test, where we analyze tumor tissue samples in our
clinical reference laboratory and provide physicians with
genomic information specific to the patients tumor. Early
stage breast cancer is the first patient population where we
have commercialized a genomic test that has been shown
clinically to predict the likelihood of cancer recurrence and
the likelihood of chemotherapy benefit.
In breast cancer, we developed our gene panel by narrowing the
field of approximately 25,000 human genes down to 250
cancer-related genes through review of existing research
literature and computer analysis of genomic databases. We
evaluated the 250 genes in three independent clinical studies to
identify a 21-gene panel whose composite gene expression profile
can be represented by a single quantitative score, which we call
a Recurrence Score. The higher the Recurrence Score, the more
aggressive the tumor and the more likely it is to recur. The
lower the Recurrence Score, the less aggressive the tumor and
the less likely it is to recur. Moreover, we have demonstrated
that the Recurrence Score also correlates with the likelihood of
chemotherapy benefit.
Oncotype
DX for Breast Cancer
In 2008, approximately 205,000 people in the United States
and 1.3 million people worldwide were diagnosed with breast
cancer, including ductal carcinoma in situ, or DCIS. Following
diagnosis, a physician determines the stage of the breast cancer
by examining the following:
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the pathology of the tumor,
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the size of the tumor,
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node status, referred to as node positive, or N+, where the
tumor has spread to the lymph nodes, and node negative, or N-,
where the tumor has not spread to the lymph nodes, and
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the extent to which the cancer has spread to other parts of the
body.
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Breast cancer tumors are classified as stage
0, I, II, III or IV. Stage 0, or DCIS, generally
refers to a pre-invasive tumor with reduced risk of recurrence.
DCIS is typically not treated with chemotherapy but may be
treated with lumpectomy or mastectomy, followed by radiation
therapy and hormonal therapy. Stage I and II are generally
referred to as early stage breast cancer, and stage III
and IV are generally referred to as late stage breast
cancer. Standard treatment guidelines weigh the stage of the
cancer and additional factors to predict cancer recurrence and
determine treatment protocol such as:
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the presence or absence of estrogen receptors, referred to as
estrogen receptor positive, or ER+, where estrogen receptors are
present, and estrogen receptor negative, or ER-, where estrogen
receptors are not present,
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the abundance of human epidermal growth factor receptor-type 2,
or HER2, genes or protein in the tumor,
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the age of the patient, and
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the histological type and grading of the tumor as reported by
the pathologist.
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Because these diagnostic factors have limited capability to
predict future recurrence and chemotherapy benefit, and some are
subjective, a large percentage of early stage breast cancer
patients are classified as high risk. As a consequence, the use
of chemotherapy has become standard practice in Stage I
and II patients even though the benefit to this patient
group as a whole is small. Most early stage breast cancer
patients have N-, ER+ tumors. These patients have been
demonstrated to respond well to hormonal therapy, such as
tamoxifen. Identifying which of these patients will further
benefit from chemotherapy is a difficult decision under these
guidelines. A National Surgical Adjuvant Breast and Bowel
Project, or NSABP, study published in 2004 showed that after
12 years of
follow-up,
overall survival in N-, ER+ breast cancer patients using
tamoxifen hormonal therapy alone was approximately 83% and the
overall survival using tamoxifen hormonal therapy and
chemotherapy was 87%. Therefore, the incremental survival
benefit of chemotherapy in this study was only 4%. Our test is
designed to help identify those patients with aggressive tumors
who are most likely to benefit from chemotherapy and to identify
those patients with less aggressive tumors who may receive
minimal clinical benefit from chemotherapy.
When the treating physician places an order for Oncotype
DX, the local pathology laboratory sends the tumor sample to
our clinical reference laboratory. Once we receive the tumor
sample, it is logged in and processed by our pathology
department. Suitable samples then undergo a process by which RNA
is extracted and purified. We then analyze the resulting
material and produce a report, typically within 10 to
14 days of the receipt of the sample, that shows a
Recurrence Score on a continuum between 0-100. The Recurrence
Score, along with other data and tests that physicians obtain,
forms the basis for the treatment decision.
The Recurrence Score has been clinically validated to correlate
with an individuals likelihood of breast cancer recurrence
within 10 years of diagnosis. The lower the Recurrence
Score the less likely the tumor is to recur and the higher the
Recurrence Score the more likely the tumor is to recur. A
Recurrence Score range from 0 to 100 correlates to an actual
recurrence range from about 3% recurrence to over 30% recurrence
for patients in our validation study. The study involved
668 patients who were enrolled in the NSABP Study B-14
between 1982 and 1988. The continuous range of scores
differentiates Oncotype DX from other tests that predict
only high or low risk by providing an individualized level of
risk. To evaluate our clinical validation studies and compare
Oncotype DX to other methods of classifying risk, we
defined Recurrence Score ranges for low, intermediate and high
risk groups. A Recurrence Score below 18 correlates with a low
likelihood of recurrence; a Recurrence Score equal to or greater
than 18 but less than 31 correlates with an intermediate
likelihood of recurrence; and a Recurrence Score equal to or
greater than 31 correlates with a high likelihood of recurrence.
Within each risk category, Oncotype DX further quantifies
the risk for any given patient. For example, a low risk patient
may have as low as a 3% likelihood of recurrence of breast
cancer within 10 years or as high as an 11% likelihood of
recurrence, depending on the individual Recurrence Score. We
believe this represents a substantial improvement upon existing
methods for classifying patient risk.
Clinical
Utility and Health Economic Benefits of Oncotype
DX
The following table describes our current breast cancer product:
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Breast Cancer Product
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Product Stage
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Oncotype DX
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N-, ER+
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Commercial
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Single gene reporting (ER, PR, HER2)
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Commercial
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N+
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Commercial
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Aromatase inhibitors
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Commercial
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Node
Negative, Estrogen Receptor Positive (N-, ER+)
In December 2007, eight studies were presented at the
San Antonio Breast Cancer Symposium, or SABCS, reinforcing
the clinical utility of Oncotype DX. Three of the studies
assessing the impact of Oncotype DX on treatment
decisions concluded that use of the test resulted in less
recommendation for and use of chemotherapy, demonstrating the
actionable nature of Oncotype DX in its ability to help
reduce unnecessary use of chemotherapy.
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In September 2008, the Journal of Clinical Oncology
published clinical results suggesting that the Oncotype
DX Recurrence Score result provides additional prognostic
information in patients with early-stage breast cancer beyond
that derived from Adjuvant! Online, an online tool that
evaluates clinical variables to help physicians and patients
assess the risks and benefits of getting additional therapy
after surgery. In October 2008, The American Journal of
Surgery published clinical results from a study N-, ER+
patients indicating that Oncotype DX significantly
changed treatment recommendations versus standard measures alone.
Single
Gene Reporting (ER, PR, HER2)
We introduced quantitative gene expression reporting for ER and
PR genes with the Oncotype DX Recurrence Score report in
February 2008 and for HER2 in September 2008. We believe that
reporting individual gene scores in addition to the Recurrence
Score result may have additional utility in predicting outcomes
for specific therapies or disease subtypes. For example, a
quantitative ER score may be a clinically useful predictor of
tamoxifen benefit based on our clinical studies of the NSABP
Study B-14 population. In June 2008, the Journal of Clinical
Oncology published results of a study demonstrating the
utility of Oncotype DX in measuring gene expression for
ER and PR status, indicating that quantitative reverse
transcription polymerase chain reaction, or RT-PCR, a
well-established technology that we license, is a reliable
method for determining hormone receptor status in breast cancer.
At the September 2008 ASCO Breast Cancer Symposium, we presented
results from two studies supporting the use of Oncotype
DX in assessing HER2 gene expression.
Node
Positive (N+)
Many patients diagnosed with N+ breast cancer may not benefit
from chemotherapy or may have other health issues that increase
the risk of chemotherapy treatment. Results from studies of
Oncotype DX in N+ patients utilizing tumor samples from
chemotherapy treated patients (anthracycline plus cytoxin or
anthracycline plus taxotere), completed in collaboration with
the Eastern Cooperative Oncology Group and Aventis, Inc., a
member of the sanofi-aventis group, or Aventis, were presented
at the June 2007 ASCO annual meeting. The results of these
studies suggest that Oncotype DX Recurrence Score results
provide accurate recurrence risk information for patients with
ER+ breast cancer, regardless of whether they are N- or N+. At
SABCS in December 2007, we presented results from a second study
conducted in conjunction with the Southwest Oncology Group
suggesting that Oncotype DX may be useful in predicting
survival without disease recurrence and the benefit of
chemotherapy for N+ patients, in addition to N-, ER+ patients.
As a result, we have experienced an increase in usage of
Oncotype DX for N+ patients. However, substantially all
of our existing reimbursement coverage is limited to women with
early-stage N-, ER+ breast cancer. We may not be able to obtain
reimbursement coverage for Oncotype DX for breast cancer
patients with N+, ER+ disease.
Aromatase
Inhibitors
We conducted studies of Oncotype DX with clinical samples
from postmenopausal women with breast cancer who were treated
with aromatase inhibitors. Aromatase inhibitors and tamoxifen
are both used as standard treatment for early stage ER+ breast
cancer patients. In December 2008 at SABCS, we presented results
from a European study using Oncotype DX to analyze tumor
samples from over 1,200 patients in the ATAC
(Arimedix®,
Tamozifin, Alone or in Combination) trial, which established the
wide use of aromatase inhibitors for adjuvant treatment of
post-menopausal women with hormone-receptor positive breast
cancer. The study demonstrated that, along with other standard
measures such as tumor size, Oncotype DX contributes
independently to provide a more complete picture of prognosis
for N- and N+ patients treated with aromatase inhibitors.
Health
Economic Benefits
We sponsor third-party studies conducted by researchers
affiliated with academic institutions to examine the health
economic implications of Oncotype DX. Two such studies,
one of which was published in The American Journal of Managed
Care in May 2005, analyzed data from patients in the NSABP
Study B-14 multi-center clinical trial to compare risk
classification based on guideline criteria from NCCN to risk
classification by Oncotype DX. Of the 668 patients
in the NSABP study population, NCCN guidelines classified 615,
or 92%, as high risk and 53, or 8%, as low risk. Of the
615 patients classified as high risk by NCCN, Oncotype
DX classified 49% as low risk, 22%
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as intermediate risk and 29% as high risk. Of the
53 patients that NCCN classified as low risk, Oncotype
DX classified 6% as high risk, 22% as intermediate risk and
72% as low risk. In each case, Oncotype DX provided a
more accurate classification of risk than the NCCN guidelines as
measured by 10 year distant recurrence-free survival.
Based on these results, a model was designed to forecast
quality-adjusted survival and expected costs, or the net present
value of all costs of treatment until death, if Oncotype
DX was used in patients classified as low risk or high risk
by NCCN guidelines. The model, when applied to a hypothetical
population of 100 patients with the demographic and disease
characteristics of the patients entered in the NSABP Study B-14,
demonstrated an increase to quality-adjusted survival in this
population of 8.6 years and a reduction in projected
aggregate costs of approximately $200,000. Furthermore, the
model showed that as the expected costs and anticipated toxicity
of chemotherapy regimens increase, the use of the Recurrence
Score to identify which patients would benefit from chemotherapy
should lead to larger reductions in projected overall costs.
According to this study, if all early stage breast cancer
patients and their physicians used Oncotype DX and acted
on the information provided by the Recurrence Score, there would
be significant economic benefit to the healthcare system.
Product
Development
We developed Oncotype DX using the following multi-phased
clinical development program that we are also using to develop
future products for breast, colon and other cancers:
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Research phase. Prior to development, we may
conduct exploratory studies to identify genes, pathways or new
disease opportunities of potential scientific interest.
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Early development phase. In this phase, we
establish a product definition and development plan and select
from the approximately 25,000 genes in the human genome to
identify candidate genes. To date, we have compiled a library of
over 1,300 individual cancer gene tests. Typically, we secure
access to archival tumor biopsy samples correlated with clinical
data in order to identify genes that correlate with a specific
clinical outcome.
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Development phase. If early development
studies successfully identify genes, we conduct additional
clinical studies to refine the gene set in the specific patient
population of interest. We select the final gene panel through
statistical modeling of the gene correlation data. With a gene
panel established, we then finalize the remaining assay
parameters.
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Validation phase. Once the gene panel, assay
chemistry, automation and analysis specifications are finalized,
tested and verified, we begin clinical validation. In this
phase, we conduct one or more validation studies with
prospectively designed endpoints to test our candidate gene
panel and the corresponding quantitative expression score. We
are often able to conduct large validation studies using
archived samples with years of clinical outcomes, thus saving
clinical development time.
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Commercialization and product expansion
phase. Once a test is commercialized, we may
perform additional studies designed to support the tests
clinical utility and potentially to broaden its use in
additional patient populations or for additional indications.
These studies may include prospective studies to verify that our
test is changing physician behavior as well as tests of a
commercial product in new populations.
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Product
Development Opportunities in Breast Cancer
Ductal
Carcinoma in Situ (DCIS)
We are investigating the utility of Oncotype DX in
patients with DCIS, which affects approximately 60,000 women per
year in the United States. We plan to evaluate the use of the
Oncotype DX 21-gene panel and are also in the early
development stage of identifying other existing or new genes and
gene combinations that may be used for treatment planning in
DCIS. In December 2008, at SABCS, we presented study results
demonstrating that quantitative RT-PCR analysis is possible in
DCIS that is adjacent to invasive ductal carcinoma of the breast.
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Taxane
benefit test
We are in the development phase for a product to predict the
likelihood of taxane benefit in breast cancer patients. Taxanes
are a class of chemotherapy drugs that are used in addition to
traditional chemotherapy regimens in some patients but have
additional side effects and are most often used in patients with
aggressive or later stage tumors.
Product
Development Opportunities in Other Cancers
The following table describes our products in various stages of
development for cancers other than breast cancer:
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2008 Estimated
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2008 Estimated
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Incidence
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Incidence
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Product Opportunity
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Product Stage
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United States
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Worldwide
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Colon Cancer
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120,000
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1,200,000
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Stage II
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Validation
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Stage III
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Early Development
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Prostate Cancer
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Early Development
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270,000
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780,000
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Renal Cancer
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Early Development
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40,000
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210,000
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Non-small Cell Lung Cancer
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Early Development
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160,000
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1,200,000
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Melanoma
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Early Development
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70,000
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160,000
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Colon
Cancer
Stage II colon cancer affects approximately 30,000 to
40,000 people each year in the United States and the
current treatment paradigm is unclear. About a third of patients
receive adjuvant chemotherapy; however, research indicates that
only 2% to 4% of patients benefit from this treatment, which has
significant associated toxicity. While there are existing
clinical markers associated generally with higher risk in colon
cancer patients, there is no clinically validated genomic test
available that predicts the likelihood of recurrence or
magnitude of chemotherapy benefit for individual patients.
We have conducted studies of selected genes from four clinical
studies across over 1,800 patient samples in order to
identify clinically useful markers for colon cancer recurrence
and response to chemotherapy. We selected a final set of genes
that have been observed to be statistically significantly
correlated to clinical outcome in stage II colon cancer. We
are conducting an independent clinical validation study in
stage II colon cancer for our 18-gene colon cancer assay,
utilizing more than 1,200 patient samples from the
international, multi-center QUASAR trial, which examined the
benefit associated with 5-fluorouracil/leucovorin adjuvant
chemotherapy. Unlike the Oncotype DX breast cancer assay
that captures both recurrence and treatment benefit in one
Recurrence Score, the prognostic and predictive genes in the
colon assay do not overlap. As such, our colon cancer assay was
designed to generate both a prognostic Recurrence Score and a
predictive Treatment Score. The clinical validation study will
evaluate the association of the Recurrence Score with recurrence
in stage II colon cancer patients treated with surgery
alone and the association of the Treatment Score with the
magnitude of chemotherapy benefit in patients treated with
adjuvant chemotherapy. We anticipate reporting results of this
study in the second half of 2009. If results of this study are
positive, we plan to commercialize a test for colon cancer in
2010.
Other
Cancers
We began gene discovery work under our collaboration agreement
with Pfizer for the development of a genomic test to estimate
the risk of recurrence following surgery for patients with Stage
I-III renal carcinoma, clear cell type, that has not spread to
other parts of the body. The clear cell type of renal carcinoma
is the most common type of kidney cancer in adults. As part of
the collaboration, we plan to apply the same molecular
technology and clinical strategy used to develop the Oncotype
DX breast cancer test. We also established collaborations
and identified sources of clinical samples in connection with
our prostate and lung cancer programs.
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Product
Development Opportunities for Targeted Cancer
Therapeutics
Anti-cancer drugs recently approved by the U.S. Food and
Drug Administration, or FDA, and new anti-cancer drugs in
clinical development are designed to provide more targeted
treatment, which should improve efficacy and reduce side
effects. A need exists to identify those patients who, based on
the genomic profile of their tumors, are most likely to benefit
from these therapies. We believe genomic analysis has the
potential to improve patient selection for these therapies. We
have had a number of discussions with pharmaceutical companies
regarding the use of Oncotype DX or our clinical
development platform to identify subsets of patients more likely
to respond to a particular therapy.
EGFR
inhibitor response test
We are in the development phase for tests to predict the
likelihood of response to the epidermal growth factor receptor,
or EGFR, inhibitor class of drugs. For example, we entered into
a collaborative agreement with Bristol-Myers Squibb Company and
ImClone Systems Incorporated to develop a genomic test to
predict the likelihood of response to Erbitux in colorectal
cancer. Erbitux is a targeted therapy currently approved for the
treatment of metastatic colorectal cancer. The agreement
provides for research funding support and milestone payments and
provides us commercial rights to diagnostic tests that result
from the collaboration. We completed early studies with
Bristol-Myers Squibb and ImClone and identified a small number
of genes that could predict response to Erbitux. We are planning
further studies for the development of an EGFR inhibitor
response test.
Targeted
therapies in breast cancer
We entered into collaborative agreements with Aventis and the
Eastern Cooperative Oncology Group to investigate the ability of
gene expression in FPE tissues to predict the likelihood of
response to adjuvant chemotherapy, including the taxane
Taxotere, in patients with early breast cancer and zero to three
involved lymph nodes. The agreements provide us with commercial
rights to diagnostic tests that may result from the
collaboration. Initial study results indicated that in patients
with hormone receptor positive disease who had a Recurrence
Score indicating intermediate risk of recurrence or above, a
number of candidate genes strongly predicted benefit from
treatment with Taxotere. A genomic classifier predicting
differential benefit was identified and, if validated through
additional studies, could lead to the development of a test to
predict the likelihood of benefit from Taxotere.
Technology
We utilize existing technologies such as reverse transcription
polymerase chain reaction, or RT-PCR, and information
technologies and optimize and integrate them into new processes.
We expect to continue to extend the capabilities of the various
components of our process to develop effective products. Our
technology allows us to:
Extract
RNA from FPE-tumor Biopsies
Our product development requires that we be able to quantify the
relative amounts of RNA in patients FPE tissue specimens.
We have developed proprietary technology, intellectual property
and know-how for optimized and automated methods for extraction
and analysis of RNA from FPE tissue.
Amplify
and Detect Diminished Amounts of RNA Consistently
We use RT-PCR as the basis for our quantitative molecular
pathology assays. This technology uses polymerase chain
reaction, or PCR along with fluorescent detection methods to
quantify the relative amount of RNA in a biological specimen. We
believe our technology platform has the following advantages:
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Sensitivity. We have developed protocols for
extracting and quantifying RNA utilizing RT-PCR. Our method for
amplifying small fragmented RNA is designed to allow us in the
future to conduct studies with hundreds to thousands of genes
from 10 micron sections of FPE tissue. The ability to amplify
RNA allows us to maintain a repository of RNA from limited
tissue samples that can be used for later studies.
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Specificity. Our RT-PCR platform is highly
specific because it works only when three different test
reagents, called DNA probes and primers, independently match
each target RNA sequence to be measured. In addition, we have
designed and implemented proprietary software for selecting
optimal probe and primer sequences in an automated,
high-throughput process. The ability to utilize these sequences
allows us to design highly specific assays for closely related
sequences.
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Precision and Reproducibility. The reagents,
materials, instruments and controls in our processes are used by
trained personnel following validated standard operating
procedures. Validation studies have shown that these standard
operating procedures precisely quantify tested RNA with minimal
variability in the assay system across days, instruments and
operators. This enables our clinical reference laboratory to
produce consistently precise and accurate gene expression
results. Our quality control methods for our reagents and
processes, along with our software for automation, sample
tracking, data quality control and statistical analysis, add to
the reproducibility and precision of our test.
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Dynamic Range. Because our RT-PCR platform can
amplify small amounts of RNA in proportion to the amount present
in the sample, we are able to measure RNA levels across as much
as a hundred thousand fold range of differing RNA expression.
Having a broad range of high resolution testing capability
increases the quality of our correlations with clinical outcomes
and therefore the predictive power of our tests.
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Analyze
Hundreds of Genes
The methods and know-how we have developed allow us to expand
RT-PCR technology to a scale that enables screening of hundreds
of genes at a time while using minimal amounts of tissue. During
our initial years of operation, we typically screened 48 to 96
genes from a standard FPE tissue sample using RNA from three 10
micron sections of tissue. By 2003, we routinely screened 192
genes from each sample and, by 2004, we screened 384 genes per
sample. Today, we have the capability to screen up to 768
different genes per sample without sacrificing the sensitivity,
specificity and reproducibility of RT-PCR. With continued
investment in miniaturization and automation, we believe that
our technology will be capable of continued increases in
throughput.
Employ
Advanced Information Technology
We have developed computer programs to automate our RT-PCR assay
process. We have also developed a laboratory information
management system to track our gene-specific reagents,
instruments, assay processes and the data generated. Similarly,
we have automated data analysis, storage and process quality
control. We use statistical methods to optimize and monitor
assay performance and to analyze data from our early development
and development studies.
Competition
We believe that we compete primarily on the basis of:
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the value of the quantitative information Oncotype DX
provides;
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the clinical validation of Oncotype DXs ability to
predict recurrence and survival, and the demonstration of
Oncotype DXs ability to predict the likelihood of
chemotherapy benefit;
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our ability to perform clinical studies using archival tissue as
it is currently processed, handled and stored;
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our ability to screen hundreds of genes at a time;
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our ability to commercialize products through our clinical
development platform;
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our clinical collaborations with clinical study groups;
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the quality of our clinical reference laboratory, which enables
consistent, reproducible results;
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the level of customer service we provide, both to patients and
health care professionals;
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the level of reimbursement coverage for Oncotype DX;
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our ability to obtain appropriate regulatory approvals in a
timely fashion; and
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the inclusion of Oncotype DX in clinical practice
guidelines.
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We believe that we compete favorably with respect to these
factors, although we cannot assure you that we will be able to
continue to do so in the future or that new products that
perform better than Oncotype DX will not be introduced.
We believe that our continued success depends on our ability to:
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continue to innovate and maintain scientifically advanced
technology;
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enhance Oncotype DX to provide information in response to
additional indications;
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continue to validate our products, especially with respect to
chemotherapy benefit;
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continue to obtain positive reimbursement decisions from payors;
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expand Oncotype DX for use in other forms of cancer;
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expand outside of the United States;
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attract and retain skilled scientific and sales personnel;
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obtain patents or other protection for our products and
technology;
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obtain and maintain our clinical reference laboratory
accreditations and licenses; and
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successfully market and sell Oncotype DX.
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Our principal competition comes from existing diagnostic methods
used by pathologists and oncologists. These methods have been
used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment
and kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like Oncotype DX that are performed
outside the pathology laboratory. In addition, few diagnostic
methods are as expensive as Oncotype DX.
We also face competition from many public and private companies
that offer products or have conducted research to profile genes,
gene expression or protein expression in breast cancer, such as
Celera Corporation, Clarient Diagnostic Services, Agendia B.V.,
Applied Genomics, bioTheranostics Incorporated, Exagen and
University Genomics. Commercial laboratories with strong
distribution networks for diagnostic tests, such as Genzyme
Corporation, Laboratory Corporation of America Holdings and
Quest Diagnostics Incorporated, may become competitors. Other
potential competitors include companies that develop diagnostic
tests such as Bayer Diagnostics, a division of Siemens AG, Roche
Diagnostics, a division of F. Hoffmann-La Roche Ltd, and
Veridex LLC, a Johnson & Johnson company. Our
competitors may invent and commercialize technology platforms
that compete with ours. In addition, in December 2005, the
federal government allocated a significant amount of funding to
The Cancer Genome Atlas, a project aimed at developing a
comprehensive catalog of the genetic mutations and other genomic
changes that occur in cancers and maintaining the information in
a free public database. As more information regarding cancer
genomics becomes available to the public, we anticipate that
more products aimed at identifying targeted treatment options
will be developed and these products may compete with ours. In
addition, competitors may develop their own versions of our test
in countries where we did not apply for patents or where our
patents have not issued and compete with us in those countries,
including encouraging the use of their test by physicians or
patients in other countries.
Our test is considered relatively expensive for a diagnostic
test. We increased the price of our test from $3,650 to $3,820
effective July 1, 2008, and we may raise prices in the
future. This could impact reimbursement of and demand for
Oncotype DX. Many of our present and potential
competitors have widespread brand recognition and substantially
greater financial and technical resources and development,
production and marketing capabilities than we do. Others may
develop lower-priced, less complex tests that could be viewed by
physicians and payors as functionally equivalent to our test,
which could force us to lower the list price of our test and
impact our operating margins and our ability to achieve
profitability. Some competitors have developed tests cleared for
marketing by FDA. There may be a marketing differentiation or
perception that an FDA-cleared test is more desirable than
Oncotype DX, and that could discourage adoption and
reimbursement of our test. If we are unable to compete
successfully against current or future competitors, we may be
unable to increase market acceptance for and sales of
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our test, which could prevent us from increasing or sustaining
our revenues or achieving or sustaining profitability and could
cause the market price of our common stock to decline.
Commercial
Operations
We believe our future success will depend in part on our ability
to continue to build a strong domestic sales, marketing and
reimbursement effort by interacting directly with medical and
surgical oncologists, pathologists and payors. Because oncology
is a concentrated specialty, we believe that a focused marketing
organization and specialized sales force is necessary in order
to effectively serve the oncology community. We believe our
direct sales approach, targeting oncologists and breast cancer
surgeons, coupled with our plans to continue to conduct multiple
clinical studies with the objective of having results published
in peer-reviewed journals, is the best approach to increase
patient and physician demand and the number of favorable
reimbursement coverage decisions by payors. In January 2009, we
hired an additional 20 U.S. sales representatives,
increasing our domestic sales force by 33% to a total of 80
sales representatives. All Oncotype DX assays are
processed in our clinical reference laboratory facility in
Redwood City, California. For the year ended December 31,
2008, we delivered more than 39,600 test reports for use in
treatment planning. As of December 2008, our clinical reference
laboratory had the capacity to process up to 15,000 tests per
calendar quarter. In December 2008, we launched an online
physician portal with enhanced real-time delivery of patient
results to physicians and the capability for placing Oncotype
DX orders online.
We believe our future success will also depend in part on our
ability to continue to expand internationally. As of February
2009, we had received test samples from 40 countries and
established exclusive distribution agreements for
Oncotype DX with partners in Israel, Greece, Turkey, the
United Kingdom, Australia, Japan, Taiwan and Hong Kong. We have
completed or initiated multiple international studies, including
the ATAC study of breast cancer patients treated with aromatase
inhibitors conducted by the Royal Marsden Hospital in London and
the ongoing clinical validation study of our colon cancer assay
using samples from the QUASAR trial, of which the majority of
samples are from the United Kingdom. In September 2008, the
Dutch Institute for Healthcare issued updated clinical practice
guidelines that included the use of Oncotype DX for
breast cancer patients. In order to support our international
efforts, we established a subsidiary in Geneva, Switzerland in
February 2009 and have appointed lead executives in Europe and
in Asia. We do not expect international product revenues to
become a significant portion of our total revenues for at least
the next three years.
Reimbursement
Revenues for clinical laboratory tests may come from several
sources, including commercial third-party payors, such as
insurance companies and health maintenance organizations,
government payors, such as Medicare and Medicaid, patients and,
in some cases, from hospitals or referring laboratories who, in
turn, bill third-party payors for testing. Reimbursement of
Oncotype DX by third-party payors is essential to our
commercial success. In addition to the inclusion of Oncotype
DX in ASCO and NCCN breast cancer treatment guidelines, we
believe the key factors that will drive broader adoption of
Oncotype DX will be acceptance by healthcare providers of
its clinical benefits, demonstration of the cost-effectiveness
of using our test, expanded reimbursement by third-party payors,
and targeted increases in marketing and sales efforts.
Several large national commercial third-party payors, a number
of regional payors, including many regional Blue Cross and Blue
Shield plans, and Palmetto Government Benefits Administrators,
or Palmetto GBA, the local Medicare carrier for California with
jurisdiction for claims submitted by us for Medicare patients,
have issued positive coverage determinations for Oncotype
DX for patients with N-, ER+ disease. In January 2008,
Medi-Cal became the first Medicaid agency to establish a policy
covering our test. As of February 2009, more than 90% of all
U.S. insured lives were covered by health plans that
provide reimbursement for the use of Oncotype DX for N-,
ER+ patients through contracts, agreements or policy decisions.
Where policies, contracts or agreements are not in place, we
pursue
case-by-case
reimbursement. We believe that it may take several years to
achieve successful reimbursement with nearly all payors.
However, we cannot predict whether, or under what circumstances,
payors will reimburse for our tests. Payment amounts can also
vary across individual policies and coverage and payment
policies, when adopted, are generally applied prospectively
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rather than retroactively. Denial of coverage by payors, or
payment at inadequate levels, would have a material adverse
impact on market acceptance of our tests.
Commercial Third-party Payors and Patient
Pay. Where there is a payor policy, contract or
agreement in place, we bill the payor, the hospital or referring
laboratory as well as the patient (for deductibles and
coinsurance or copayments, where applicable) in accordance with
the established policy. Where there is no payor policy in place,
we pursue reimbursement on behalf of each patient on a
case-by-case
basis. We request that physicians have a billing conversation
with patients prior to a test being submitted to discuss the
patients responsibility should their policy not cover the
test. We also request that the physician inform the patient that
we will take on the primary responsibility for obtaining
third-party reimbursement on behalf of patients, including
appeals for initial denials, prior to billing a patient. With
this practice established, we believe that most patients
receiving the Oncotype DX test have agreed to the test
knowing that they may be responsible for all or some portion of
the cost of the test should their medical insurer deny or limit
coverage. Our efforts on behalf of patients take a substantial
amount of time, and bills may not be paid for many months, if at
all. Furthermore, if a third-party payor denies coverage after
final appeal, it may take a substantial amount of time to
collect from the patient, and we may not be successful.
Medicare and Medicaid. In determining whether
or not Medicare will pay for a test, the Centers for Medicare
and Medicaid Services, or CMS, which oversees Medicare, can
permit the contractors who process and pay Medicare claims to
make that determination or it can make a national coverage
determination, which will bind all Medicare contractors. To
date, CMS has not issued a national coverage determination on
Oncotype DX. As a result, whether or not Medicare will
cover the test when billed by us is the decision of the local
Medicare carrier for California with jurisdiction to process
claims submitted by us. In January 2006, National Heritage
Insurance Company, or NHIC, the California Medicare contractor
with responsibility for processing and paying claims submitted
by us prior to September 2008, released a local coverage
determination providing coverage for Oncotype DX when
used in accordance with the terms of the determination. In
September 2008, responsibility for processing Medicare claims
submitted by us was transitioned from NHIC to Palmetto GBA. In
June 2008, Palmetto GBA adopted a local coverage determination
for California that includes Oncotype DX. This coverage
decision follows identical criteria as those previously set
forth by NHIC.
Under current Medicare billing rules, claims for Oncotype
DX tests performed on Medicare beneficiaries who were
hospital inpatients at the time the tumor tissue samples were
obtained and whose tests were ordered less than 14 days
from discharge must be incorporated in the payment that the
hospital receives for the inpatient services provided. Medicare
billing rules also require hospitals to bill for the test when
ordered for hospital outpatients less than 14 days
following the date of the hospital procedure where the tumor
tissue samples were obtained. Accordingly, we are required to
bill individual hospitals for tests performed on Medicare
beneficiaries during these time frames. Because we generally do
not have a written agreement in place with these hospitals, we
may not be paid for our tests or may have to pursue payment from
the hospital on a
case-by-case
basis. We believe patients coming under this rule represent
approximately 3% of our total testing population. We believe
these billing rules may lead to confusion regarding whether
Medicare provides adequate reimbursement for our test, and could
discourage Medicare patients from using our test. Although we
are working with Medicare and other diagnostic laboratories to
revise or reverse these billing rules, we have no assurance that
Medicare will do so, and we also cannot ensure that hospitals
will agree to arrangements to pay us for tests performed on
patients falling under these rules.
In addition, each state Medicaid program, which pays for
services furnished to the eligible medically indigent, will
usually make its own decision whether or not to cover
Oncotype DX. In January 2008, Medi-Cal became the first
Medicaid payor to establish a policy covering Oncotype
DX. We have also received a limited number of approvals from
other state Medicaid programs.
We have conducted clinical studies to support the use of
Oncotype DX in patients with N+, ER+ breast cancer and
have experienced an increase in usage for N+ patients. While
some payors provide coverage for the use of Oncotype DX
in patients with lymph node micrometastasis (greater than 0.2mm,
but not greater than 2.0 mm in size), our existing reimbursement
coverage is generally limited to women with early-stage N-, ER+
breast cancer. We may not be able to obtain reimbursement
coverage for Oncotype DX for breast cancer patients who
are N+, ER+ that is similar to the coverage we have obtained for
early-stage N-, ER+ patients.
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The majority of our current international revenues come from two
sources, patient self pay from various countries and payor
reimbursement in Israel through our distribution partner. We
expect international sales of Oncotype DX to be heavily
dependent on reimbursement in the future. In many countries,
governments are primarily responsible for reimbursing diagnostic
tests. Governments often have significant discretion in
determining whether a test will be reimbursed at all, and if so,
how much will be paid. Although we have agreements with
distribution partners in several countries in addition to
Israel, we have no direct existing contracts, agreements or
policy decisions with international payors for reimbursement
coverage of Oncotype DX. We expect that it will take
several years to establish coverage and reimbursement for
Oncotype DX in countries outside of the U.S.
Payment
Clinical laboratory testing services, when covered by
third-party payors, are paid under various methodologies,
including prospective payment systems and fee schedules. Under
Medicare, payment is generally made under the Clinical
Laboratory Fee Schedule with amounts assigned to specific
procedure billing codes. Each Medicare carrier jurisdiction has
a fee schedule that establishes the price for each specific
laboratory billing code. The Social Security Act establishes
that these fee schedule amounts are to be increased annually,
subject to certain limitations, by the percentage increase in
the consumer price index, or CPI, for the prior year. Congress
has frequently legislated that the CPI increase not be
implemented. In the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, or MMA, Congress eliminated the CPI
update through 2008. In addition, the National Limitation
Amount, or NLA, which acts as a ceiling on Medicare
reimbursement, is set at a percentage of the median of all the
carrier fee schedule amounts for each test code. In the past,
Congress has frequently lowered the percentage of the median
used to calculate the NLA in order to achieve budget savings.
Currently, the NLA ceiling is set at 74% of the medians for
established tests and 100% of the median for diagnostic tests
for which no limitation amount was established prior to 2001.
Thus, no Medicare carrier can pay more than the NLA amount for
any specific code.
There is no specific Current Procedural Terminology, or CPT,
procedure code or group of codes to report Oncotype DX.
Therefore, the test generally must be reported under a
non-specific, unlisted procedure code, which is subject to
manual review of each claim. We were informed by NHIC that,
under the local coverage determination, claims are to be paid
consistent with the average allowed reimbursement rate for
Oncotype DX claims that were billed and processed to
completion as of September 30, 2005. This rate remains in
effect at the date of this report.
A Healthcare Common Procedure Coding System, or HCPCS code has
been issued effective January 1, 2006 that some private
third-party payors may accept on claims for the Oncotype
DX test. Medicare will not accept this HCPCS code, however.
In the future, we may move forward with plans to obtain specific
CPT procedure coding. If we do move forward with plans to obtain
specific CPT coding, there is no assurance that specific coding
will be adopted. Whether or not we obtain a specific CPT code
for the test, there can be no assurance that an adequate payment
rate will continue to be assigned to the test.
On several occasions, including in 2003 during the negotiations
over the MMA, Congress has considered imposing a 20%
co-insurance amount on clinical laboratory services, which would
require beneficiaries to pay a portion of the cost of their
clinical laboratory testing. Although that requirement has not
been enacted at this time, Congress could decide to impose such
an obligation at some point in the future. If so, it could make
it more difficult for us to collect co-insurance payments for
Oncotype DX.
Regulation
Clinical
Laboratory Improvement Amendments of 1988
As a clinical reference laboratory, we are required to hold
certain federal, state and local licenses, certifications and
permits to conduct our business. Under CLIA, we are required to
hold a certificate applicable to the type of work we perform and
to comply with standards covering personnel, facilities
administration, quality systems and proficiency testing.
We have a certificate of accreditation under CLIA to perform
testing and are accredited by CAP. To renew our CLIA
certificate, we are subject to survey and inspection every two
years to assess compliance with program standards. The standards
applicable to the testing which we perform may change over time.
We cannot assure you
17
that we will be able to operate profitably should regulatory
compliance requirements become substantially more costly in the
future.
If our clinical reference laboratory is out of compliance with
CLIA requirements, we may be subject to sanctions such as
suspension, limitation or revocation of our CLIA certificate, as
well as directed plan of correction, state
on-site
monitoring, civil money penalties, civil injunctive suit or
criminal penalties. We must maintain CLIA compliance and
certification to be eligible to bill for services provided to
Medicare beneficiaries. If we were to be found out of compliance
with CLIA program requirements and subjected to sanction, our
business could be harmed.
U.S.
Food and Drug Administration
FDA regulates the sale or distribution through interstate
commerce of medical devices, including in vitro diagnostic
test kits. Devices subject to FDA regulation must undergo
pre-market review prior to commercialization unless the device
is of a type exempted from such review. In addition,
manufacturers of medical devices must comply with various
regulatory requirements under the Federal Food, Drug and
Cosmetic Act and regulations promulgated under that Act,
including quality system review regulations, unless exempted
from those requirements for particular types of devices.
Entities that fail to comply with FDA requirements can be liable
for criminal or civil penalties, such as recalls, detentions,
orders to cease manufacturing and restrictions on labeling and
promotion.
Clinical laboratory tests like Oncotype DX are regulated
under CLIA, as administered by CMS, as well as by applicable
state laws. Diagnostic kits that are sold and distributed
through interstate commerce are regulated as medical devices by
FDA. Clinical laboratory tests that are developed and validated
by a laboratory for its own use are called laboratory developed
tests, or LDTs. Most LDTs currently are not subject to FDA
regulation, although reagents or software provided by third
parties and used to perform LDTs may be subject to regulation.
We believe that Oncotype DX is not a diagnostic kit and
also believe that it is an LDT. As a result, we believe
Oncotype DX should not be subject to regulation under
established FDA policies. The container we provide for
collection and transport of tumor samples from a pathology
laboratory to our clinical reference laboratory may be
considered a medical device subject to FDA regulation but is
currently exempt from pre-market review by FDA.
In January 2006, we received a letter from FDA regarding
Oncotype DX inviting us to meet with FDA to discuss the
nature and appropriate regulatory status of and the least
burdensome ways that we may fulfill any FDA pre-market review
requirements that may apply. In September 2006, FDA issued draft
guidance on a new class of tests called In Vitro
Diagnostic Multivariate Index Assays, or IVDMIAs. Under
this draft guidance, Oncotype DX could be classified as
either a Class II or a Class III medical device, which
may require varying levels of FDA pre- market review depending
upon intended use and on the level of control necessary to
assure the safety and effectiveness of the test. In July 2007,
FDA posted revised draft guidance that addressed some of the
comments submitted in response to the September 2006 draft
guidance. The revised draft guidance includes an 18 month
transition period of FDA enforcement discretion following
release of final guidance for currently available tests if the
laboratory submits a pre-market review submission within
12 months of the publication of final guidance. The comment
period for this revised guidance expired in October 2007.
In May 2007, FDA issued a guidance document Class II
Special Controls Guidance Document: Gene Expression Profiling
Test System for Breast Cancer Prognosis. This guidance
document was developed to support the classification of gene
expression profiling test systems for breast cancer prognosis
into Class II. In addition, in June 2007, FDA issued a
guidance document Pharmacogenetic Tests and Genetic Tests
for Heritable Markers which provides recommendations to
sponsors and FDA reviewers in preparing and reviewing pre-market
approval applications, or PMA, and pre-market notification, or
510(k), submissions for pharmacogenetic and other human genetic
tests, whether testing is for single markers or for multiple
markers simultaneously (multiplex tests).
In addition, the Secretary of the Department of Health and Human
Services, or HHS, requested that its Advisory Committee on
Genetics, Health and Society make recommendations about the
oversight of genetic testing. A final report was published in
April 2008. If the reports recommendations for increased
oversight of genetic testing were to result in further
regulatory burdens it could have a negative impact on our
business and could delay the commercialization of tests in
development.
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We are continuing our ongoing dialogue with FDA and HHS
regarding the Oncotype DX breast cancer assay. We cannot
provide any assurance that FDA regulation, including pre-market
review, will not be required in the future for Oncotype
DX, either through new enforcement policies adopted by FDA
or new legislation enacted by Congress. It is possible that
legislation will be enacted into law and may result in increased
regulatory burdens for us to continue to offer the Oncotype
DX assay.
If pre-market review is required, our business could be
negatively impacted until such review is completed and clearance
to market or approval is obtained, and FDA could require that we
stop selling our test pending pre-market clearance or approval.
If our test is allowed to remain on the market but there is
uncertainty about our test, if it is labeled investigational by
FDA, or if labeling claims FDA allows us to make are limited,
orders or reimbursement may decline. The regulatory approval
process may involve, among other things, successfully completing
additional clinical trials and submitting a pre-market clearance
notice or filing a PMA application with FDA. If pre-market
review is required by FDA, there can be no assurance that our
test will be cleared or approved on a timely basis, if at all.
Ongoing compliance with FDA regulations would increase the cost
of conducting our business, and subject us to inspection by FDA
and to the requirements of FDA and penalties for failure to
comply with these requirements. We may also decide voluntarily
to pursue FDA pre-market review of Oncotype DX if we
determine that doing so would be appropriate.
Should any of the reagents obtained by us from vendors and used
in conducting our test be affected by future regulatory actions,
our business could be adversely affected by those actions,
including increasing the cost of testing or delaying, limiting
or prohibiting the purchase of reagents necessary to perform
testing.
Health
Insurance Portability and Accountability Act
Under the federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, HHS has issued regulations
to protect the privacy and security of protected health
information used or disclosed by health care providers, such as
us. HIPAA also regulates standardization of data content, codes
and formats used in health care transactions and standardization
of identifiers for health plans and providers. Penalties for
violations of HIPAA regulations include civil and criminal
penalties.
We developed policies and procedures to comply with these
regulations by the respective compliance enforcement dates. The
requirements under these regulations may change periodically and
could have an effect on our business operations if compliance
becomes substantially more costly than under current
requirements.
In addition to federal privacy regulations, there are a number
of state laws governing confidentiality of health information
that are applicable to our operations. New laws governing
privacy may be adopted in the future as well. We have taken
steps to comply with health information privacy requirements to
which we are aware that we are subject. However, we can provide
no assurance that we are or will remain in compliance with
diverse privacy requirements in all of the jurisdictions in
which we do business. Failure to comply with privacy
requirements could result in civil or criminal penalties, which
could have a materially adverse impact on our business.
Federal
and State Physician Self-referral Prohibitions
We are subject to the federal physician self-referral
prohibitions commonly known as the Stark Law, and to similar
restrictions under Californias Physician Ownership and
Referral Act, commonly known as PORA. Together these
restrictions generally prohibit us from billing a patient or any
governmental or private payor for any test when the physician
ordering the test, or any member of such physicians
immediate family, has an investment interest in or compensation
arrangement with us, unless the arrangement meets an exception
to the prohibition.
Both the Stark Law and PORA contain an exception for referrals
made by physicians who hold investment interests in a publicly
traded company that has stockholders equity exceeding
$75 million at the end of its most recent fiscal year or on
average during the previous three fiscal years, and which
satisfies certain other requirements. In addition, both the
Stark Law and PORA contain an exception for compensation paid to
a physician for personal services rendered by the physician. We
have compensation arrangements with a number of physicians for
personal services, such as speaking engagements and specimen
tissue preparation. We have structured these arrangements with
terms intended to comply with the requirements of the personal
services exception to Stark and PORA.
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However, we can not be certain that regulators would find these
arrangements to be in compliance with Stark, PORA or similar
state laws. We would be required to refund any payments we
receive pursuant to a referral prohibited by these laws to the
patient, the payor or the Medicare program, as applicable.
Sanctions for a violation of the Stark Law include the following:
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denial of payment for the services provided in violation of the
prohibition;
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refunds of amounts collected by an entity in violation of the
Stark Law;
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a civil penalty of up to $15,000 for each service arising out of
the prohibited referral;
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possible exclusion from federal healthcare programs, including
Medicare and Medicaid; and
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a civil penalty of up to $100,000 against parties that enter
into a scheme to circumvent the Stark Laws prohibition.
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These prohibitions apply regardless of the reasons for the
financial relationship and the referral. No finding of intent to
violate the Stark Law is required for a violation. In addition,
under an emerging legal theory, knowing violations of the Stark
Law may also serve as the basis for liability under the Federal
False Claims Act.
Further, a violation of PORA is a misdemeanor and could result
in civil penalties and criminal fines. Finally, other states
have self-referral restrictions with which we have to comply
that differ from those imposed by federal and California law.
While we have attempted to comply with the Stark Law, PORA and
similar laws of other states, it is possible that some of our
financial arrangements with physicians could be subject to
regulatory scrutiny at some point in the future, and we cannot
provide an assurance that we will be found to be in compliance
with these laws following any such regulatory review.
Federal
and State Anti-kickback Laws
The Federal Anti-kickback Law makes it a felony for a provider
or supplier, including a laboratory, to knowingly and willfully
offer, pay, solicit or receive remuneration, directly or
indirectly, in order to induce business that is reimbursable
under any federal health care program. A violation of the
Anti-kickback Law may result in imprisonment for up to five
years and fines of up to $250,000 in the case of individuals and
$500,000 in the case of organizations. Convictions under the
Anti-kickback Law result in mandatory exclusion from federal
health care programs for a minimum of five years. In addition,
HHS has the authority to impose civil assessments and fines and
to exclude health care providers and others engaged in
prohibited activities from Medicare, Medicaid and other federal
health care programs.
Actions which violate the Anti-kickback Law or similar laws may
also involve liability under the Federal False Claims Act, which
prohibits the knowing presentation of a false, fictitious or
fraudulent claim for payment to the U.S. Government.
Actions under the Federal False Claims Act may be brought by the
Department of Justice or by a private individual in the name of
the government.
Although the Anti-kickback Law applies only to federal health
care programs, a number of states, including California, have
passed statutes substantially similar to the Anti-kickback Law
pursuant to which similar types of prohibitions are made
applicable to all other health plans and third-party payors.
Both Californias fee-splitting statute, Business and
Professions Section 650, and its Medi-Cal anti-kickback
statute, Welfare and Institutions Code Section 14107.2,
have been interpreted by the California Attorney General and
California courts in substantially the same way as HHS and the
courts have interpreted the Anti-kickback Law. A violation of
Section 650 is punishable by imprisonment and fines of up
to $50,000. A violation of Section 14107.2 is punishable by
imprisonment and fines of up to $10,000.
Federal and state law enforcement authorities scrutinize
arrangements between health care providers and potential
referral sources to ensure that the arrangements are not
designed as a mechanism to induce patient care referrals and
opportunities. The law enforcement authorities, the courts and
Congress have also demonstrated a willingness to look behind the
formalities of a transaction to determine the underlying purpose
of payments between health care providers and actual or
potential referral sources. Generally, courts have taken a broad
interpretation of
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the scope of the Anti-kickback Law, holding that the statute may
be violated if merely one purpose of a payment arrangement is to
induce future referrals.
In addition to statutory exceptions to the Anti-kickback Law,
regulations provide for a number of safe harbors. If an
arrangement meets the provisions of a safe harbor, it is deemed
not to violate the Anti-kickback Law. An arrangement must fully
comply with each element of an applicable safe harbor in order
to qualify for protection. There are no regulatory safe harbors
to Californias Section 650.
Among the safe harbors that may be relevant to us is the
discount safe harbor. The discount safe harbor potentially
applies to discounts provided by providers and suppliers,
including laboratories, to physicians or institutions where the
physician or institution bills the payor for the test, not when
the laboratory bills the payor directly. If the terms of the
discount safe harbor are met, the discounts will not be
considered prohibited remuneration under the Anti-kickback Law.
This safe harbor may therefore be potentially applicable to our
agreements to sell tests to hospitals where the hospital submits
a claim to the payor.
California does not have a discount safe harbor. However, as
noted above, Section 650 has generally been interpreted
consistent with the Anti-kickback Law.
The personal services safe harbor to the Anti-kickback Law
provides that remuneration paid to a referral source for
personal services will not violate the Anti-kickback Law
provided all of the elements of that safe harbor are met. One
element is that, if the agreement is intended to provide for the
services of the physician on a periodic, sporadic or part-time
basis, rather than on a full-time basis for the term of the
agreement, the agreement specifies exactly the schedule of such
intervals, their precise length, and the exact charge for such
intervals. Our personal services arrangements with some
physicians did not meet the specific requirement of this safe
harbor that the agreement specify exactly the schedule of the
intervals of time to be spent on the services because the nature
of the services, such as speaking engagements, does not lend
itself to exact scheduling and therefore meeting this element of
the personal services safe harbor is impractical. Failure to
meet the terms of the safe harbor does not render an arrangement
illegal. Rather, such arrangements must be evaluated under the
language of the statute, taking into account all facts and
circumstances.
While we believe that we are in compliance with the
Anti-kickback Law and Section 650, there can be no
assurance that our relationships with physicians, hospitals and
other customers will not be subject to investigation or a
successful challenge under such laws. If imposed for any reason,
sanctions under the Anti-kickback Law and Section 650 could
have a negative effect on our business.
Other
Federal and State Fraud and Abuse Laws
In addition to the requirements that are discussed above, there
are several other health care fraud and abuse laws that could
have an impact on our business. For example, provisions of the
Social Security Act permit Medicare and Medicaid to exclude an
entity that charges the federal health care programs
substantially in excess of its usual charges for its services.
The terms usual charge and substantially in
excess are ambiguous and subject to varying
interpretations.
Further, the Federal False Claims Act prohibits a person from
knowingly submitting a claim or making a false record or
statement in order to secure payment by the federal government.
In addition to actions initiated by the government itself, the
statute authorizes actions to be brought on behalf of the
federal government by a private party having knowledge of the
alleged fraud. Because the complaint is initially filed under
seal, the action may be pending for some time before the
defendant is even aware of the action. If the government is
ultimately successful in obtaining redress in the matter or if
the plaintiff succeeds in obtaining redress without the
governments involvement, then the plaintiff will receive a
percentage of the recovery. Finally, the Social Security Act
includes its own provisions that prohibit the filing of false
claims or submitting false statements in order to obtain
payment. Violation of these provisions may result in fines,
imprisonment or both, and possible exclusion from Medicare or
Medicaid programs. California has an analogous state false
claims act applicable to all payors, as do many other states.
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California
Laboratory Licensing
In addition to federal certification requirements of
laboratories under CLIA, licensure is required and maintained
for our clinical reference laboratory under California law. Such
laws establish standards for the day-to-day operation of a
clinical laboratory, including the training and skills required
of personnel and quality control. In addition, California laws
mandate proficiency testing, which involves testing of specimens
that have been specifically prepared for the laboratory.
If our clinical reference laboratory is out of compliance with
California standards, the California Department of Health
Services, or DHS, may suspend, restrict or revoke our license to
operate our clinical reference laboratory, assess substantial
civil money penalties, or impose specific corrective action
plans. Any such actions could materially affect our business. We
maintain a current license in good standing with DHS. However,
we cannot provide assurance that DHS will at all times in the
future find us to be in compliance with all such laws.
New
York Laboratory Licensing
Because we receive specimens from New York State, our clinical
reference laboratory is required to be licensed by New York. We
maintain such licensure for our clinical reference laboratory
under New York state laws and regulations, which establish
standards for:
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day-to-day operation of a clinical laboratory, including
training and skill levels required of laboratory personnel;
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physical requirements of a facility;
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equipment; and
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quality control.
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New York law also mandates proficiency testing for laboratories
licensed under New York state law, regardless of whether or not
such laboratories are located in New York. If a laboratory is
out of compliance with New York statutory or regulatory
standards, the New York State Department of Health, or DOH, may
suspend, limit, revoke or annul the laboratorys New York
license, censure us as the holder of the license or assess civil
money penalties. Statutory or regulatory noncompliance may
result in a laboratorys being found guilty of a
misdemeanor under New York law. Should we be found out of
compliance with New York laboratory requirements, we could be
subject to such sanctions, which could harm our business. We
maintain a current license in good standing with DOH. However,
we cannot provide assurance that DOH will at all times find us
to be in compliance with all such laws.
Other
States Laboratory Testing
Florida, Maryland, Pennsylvania and Rhode Island require
out-of-state laboratories which accept specimens from those
states to be licensed. We have obtained licenses in those four
states and believe we are in compliance with applicable
licensing laws.
From time to time, we may become aware of other states that
require out-of-state laboratories to obtain licensure in order
to accept specimens from the state, and it is possible that
other states do have such requirements or will have such
requirements in the future. If we identify any other state with
such requirements or if we are contacted by any other state
advising us of such requirements, we intend to follow
instructions from the state regulators as to how we should
comply with such requirements.
Environmental
Laws
We are subject to regulation under federal, state and local laws
and regulations governing environmental protection and the use,
storage, handling and disposal of hazardous substances. The cost
of complying with these laws and regulations may be significant.
Our activities currently require the controlled use of
potentially harmful biological materials, hazardous materials
and chemicals. We cannot eliminate the risk of accidental
contamination or injury to employees or third parties from the
use, storage, handling or disposal of these materials. In the
event of
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contamination or injury, we could be held liable for any
resulting damages, and any liability could exceed our resources
or any applicable insurance coverage we may have.
Regulation Outside
of the United States
For marketing outside the United States, we are subject to
foreign regulatory requirements governing human clinical testing
and marketing approval for our products. These requirements vary
by jurisdiction, differ from those in the United States and may
require us to perform additional pre-clinical or clinical
testing. In many countries outside of the United States,
coverage, pricing and reimbursement approvals are also required.
Patents
and Proprietary Technology
In order to remain competitive, we must develop and maintain
protection on the proprietary aspects of our technologies. To
that end, we rely on a combination of patents, patent
applications, copyrights and trademarks, as well as contracts,
such as confidentiality, material data transfer, license and
invention assignment agreements. We also rely upon trade secret
laws to protect some improvements, know-how and continuing
technological .innovation. In addition, we have what we consider
to be reasonable security measures in place to maintain
confidentiality. Our intellectual property strategy is intended
to develop and maintain our competitive position.
As of December 31, 2008, we had two issued patents in the
U.S., one of which was issued jointly to us and to NSABP, and a
number of pending U.S. patent applications, including
provisional and non-provisional filings. Our issued patents
expire in 2023 and 2024, respectively. Some of these
U.S. patent applications also have corresponding pending or
granted applications under the Patent Cooperation Treaty in
Canada, Europe, Japan, Australia and other jurisdictions. In
these patent applications, we have either sole or joint
ownership positions. In those cases where joint ownership
positions were created, we have negotiated contractual
provisions providing us with the opportunity to acquire
exclusive rights under the patent applications. Under three
patent applications, we have elected to allow exclusive options
to lapse without exercising the option. The joint ownership
agreements generally are in the form of material data transfer
agreements that were executed at the onset of our collaborations
with third parties.
Our patent applications relate to two main areas: gene
expression technology methods, and gene markers for cancer
recurrence and drug response in certain forms of cancer. We
intend to file additional patent applications in the United
States and abroad to strengthen our intellectual property
rights. Our patent applications may not result in issued
patents, and we cannot assure you that any patents that might
issue will protect our technology. Any patents issued to us in
the future may be challenged by third parties as being invalid
or unenforceable, or third parties may independently develop
similar or competing technology that is not covered by our
patents. We cannot be certain that the steps we have taken will
prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
We have received notices of claims of infringement,
misappropriation or misuse of other parties proprietary
rights in the past and may from time to time receive additional
notices. Some of these claims may lead to litigation. We cannot
assure you that we will prevail in these actions, or that other
actions alleging misappropriation or misuse by us of third-party
trade secrets, infringement by us of third-party patents and
trademarks or the validity of patents issued to us in the
future, will not be asserted or prosecuted against us, or that
any assertions of misappropriation, infringement or misuse or
prosecutions seeking to establish the validity of our patents
will not materially or adversely affect our business, financial
condition and results of operations.
An adverse determination in litigation or interference
proceedings to which we may become a party relating to any
patents issued to us in the future or any patents owned by third
parties could subject us to significant liabilities to third
parties or require us to seek licenses from third parties.
Furthermore, if we are found to willfully infringe these
patents, we could, in addition to other penalties, be required
to pay treble damages. Although patent and intellectual property
disputes in this area have often been settled through licensing
or similar arrangements, costs associated with such arrangements
may be substantial and could include ongoing royalties. We may
be unable to obtain necessary licenses on satisfactory or
commercially feasible terms, if at all. If we do not obtain
necessary licenses, we may not be able to redesign
Oncotype DX or other of our tests to avoid infringement,
or such redesign may take considerable time, and force us to
reassess our business plans. Adverse determinations in a
judicial or administrative
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proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling Oncotype DX or other of
our tests, which would have a significant adverse impact on our
business.
All employees and technical consultants working for us are
required to execute confidentiality agreements in connection
with their employment and consulting relationships with us.
Confidentiality agreements provide that all confidential
information developed or made known to others during the course
of the employment, consulting or business relationship shall be
kept confidential except in specified circumstances. In
addition, agreements with employees provide that all inventions
conceived by the individual while employed by us are our
exclusive property. We cannot provide any assurance that
employees and consultants will abide by the confidentiality or
assignment terms of these agreements. Despite measures taken to
protect our intellectual property, unauthorized parties might
copy aspects of our technology or obtain and use information
that we regard as proprietary.
Roche
License Agreement
We license from Roche Molecular Systems, Inc., on a
non-exclusive basis, a number of U.S. patents claiming
nucleic acid amplification processes known as polymerase chain
reaction, or PCR, homogeneous polymerase chain reaction, and
RT-PCR. We use these processes in our research and development
and in the processing of our tests. The Roche license is limited
to the performance of clinical laboratory services within the
United States and Puerto Rico, and does not include the right to
make or sell products using the patented processes. The license
continues as long as the underlying patent rights are in effect,
but is subject to early termination by Roche under the following
circumstances:
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a change in our ownership;
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a declaration of bankruptcy or insolvency, the making of an
assignment for the benefit of our creditors, having a receiver
appointed, or losing the federal or state licenses necessary for
our operation;
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a change in our status to a non-profit entity or government
institution; or
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our breach of or default under a material term of the license.
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If the Roche license is terminated, we will be unable to use the
licensed processes to conduct research and development or to
perform our tests. As payment for the licenses granted to us, we
make royalty payments to Roche consisting of a specified
percentage of our net revenues.
Research
and Development Expenses
Research and development expenses were $28.6 million,
$22.1 million and $12.8 million for the years ended
December 31, 2008, 2007 and 2006, respectively. During
2008, we continued to conduct research and development studies
in breast cancer, colon cancer and other cancers. We began gene
discovery work under our collaboration agreement for the
development of a genomic test to estimate the risk of recurrence
following surgery for patients with Stage I-III renal carcinoma,
clear cell type. We also established collaborations and
identified sources of clinical samples in connection with our
prostate and lung cancer programs.
Employees
As of December 31, 2008, we had 387 employees,
including 72 in clinical reference laboratory operations, 109 in
research and development, 117 in sales and marketing, 49 in
information technology, including bioinformatics, and 40 in
general and administrative functions, including finance, human
resources and facilities. None of our employees are covered by
collective bargaining arrangements, and our management considers
its relationships with employees to be good.
Available
Information
We were incorporated in Delaware in August 2000, and our website
is located at www.genomichealth.com. We make available
free of charge on our website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the Securities and Exchange Commission. Our website
and the
24
information contained therein or connected thereto are not
intended to be incorporated into this Annual Report on
Form 10-K.
We are
an early stage company with a history of net losses, and we
expect to incur net losses for the foreseeable
future.
We have incurred substantial net losses since our inception. For
the year ended December 31, 2008, we incurred net losses of
$16.1 million. From our inception in August 2000 through
December 31, 2008, we had an accumulated deficit of
$168.5 million. To date, we have not, and we may never,
achieve revenues sufficient to offset expenses. We expect to
devote substantially all of our resources to continue to invest
in our product pipeline, including Oncotype DX and future
products, and our commercial and laboratory infrastructure.
We expect to incur additional losses in the future and we may
never achieve profitability.
We
expect to continue to incur significant research and development
expenses, which may make it difficult for us to achieve
profitability.
In recent years, we have incurred significant costs in
connection with the development of Oncotype DX. Our
research and development expenses were $28.6 million for
the year ended December 31, 2008. We expect our research
and development expense levels to remain high and to continue to
increase for the foreseeable future as we seek to expand the
clinical utility of our existing test and develop new tests. As
a result, we will need to generate significant revenues in order
to achieve profitability. Our failure to achieve profitability
in the future could cause the market price of our common stock
to decline.
Declining
general economic or business conditions may have a negative
impact on our business.
Concerns over inflation, deflation, energy costs, geopolitical
issues, the availability and cost of credit, the Federal
stimulus package, Federal budget proposals, the
U.S. mortgage market and a declining real estate market in
the U.S. have contributed to increased volatility and
diminished expectations for the global economy and expectations
of slower global economic growth going forward. These factors,
combined with volatile oil prices, declining business and
consumer confidence, a declining stock market and increased
unemployment, have precipitated an economic slowdown and
recession. If the economic climate in the U.S. does not
improve or continues to deteriorate, our business, including our
patient population, our suppliers and our third-party payors,
could be negatively affected, resulting in a negative impact on
our product revenues.
If
third-party payors, including managed care organizations and
Medicare, do not provide reimbursement or rescind their
favorable reimbursement policies for Oncotype DX, its commercial
success could be compromised.
Physicians and patients may decide not to order Oncotype
DX unless third-party payors, such as managed care
organizations as well as government payors such as Medicare and
Medicaid, pay a substantial portion of the test price.
Reimbursement by a third-party payor may depend on a number of
factors, including a payors determination that tests using
our technologies are:
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not experimental or investigational,
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medically necessary,
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appropriate for the specific patient,
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cost-effective,
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supported by peer-reviewed publications, and
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included in clinical practice guidelines.
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There is uncertainty concerning third-party payor reimbursement
of any test, including Oncotype DX. Several entities
conduct technology assessments of medical tests and devices and
provide the results of their assessments for informational
purposes to other parties. These assessments may be used by
third-party payors and health care providers as grounds to deny
coverage for a test or procedure. Although there are a number of
favorable assessments of Oncotype DX, the test has
received negative assessments in the past and may receive
additional negative assessments in the future.
Since each payor makes its own decision as to whether to
establish a policy to reimburse our test, seeking these
approvals is a time-consuming and costly process. To date, we
have secured policy-level reimbursement approval from a number
of third-party payors. We cannot be certain that coverage for
Oncotype DX will be provided in the future by additional
third-party payors or that existing reimbursement policies will
remain in place.
Under current Medicare billing rules, claims for Oncotype
DX tests performed on Medicare beneficiaries who were
hospital inpatients at the time the tumor tissue samples were
obtained and whose tests were ordered less than 14 days
from discharge must be incorporated in the payment that the
hospital receives for the inpatient services provided. Medicare
billing rules also require hospitals to bill for the test when
ordered for hospital outpatients less than 14 days
following the date of the hospital procedure where the tumor
tissue samples were obtained. Accordingly, we are required to
bill individual hospitals for tests performed on Medicare
beneficiaries during these time frames. Because we generally do
not have a written agreement in place with these hospitals, we
may not be paid for our tests or may have to pursue payment from
the hospital on a
case-by-case
basis. We believe patients coming under this rule represent
approximately 3% of our total testing population. We believe
these billing rules may lead to confusion regarding whether
Medicare provides adequate reimbursement for our test, and could
discourage Medicare patients from using our test. Although we
are working with Medicare and other diagnostic laboratories to
revise or reverse these billing rules, we have no assurance that
Medicare will do so, and we also cannot ensure that hospitals
will agree to arrangements to pay us for tests performed on
patients falling under these rules.
Insurers, including managed care organizations as well as
government payors such as Medicare and Medicaid, have increased
their efforts to control the cost, utilization and delivery of
health care services. From time to time, Congress has considered
and implemented changes in the Medicare fee schedules in
conjunction with budgetary legislation. Further reductions of
reimbursement for Medicare services may be implemented from time
to time. Reductions in the reimbursement rates of other
third-party payors have occurred and may occur in the future.
These measures have resulted in reduced payment rates and
decreased test utilization for the clinical laboratory industry.
Following reporting of clinical studies to support the use of
Oncotype DX in patients with N+, ER+ breast cancer, we
experienced an increase in usage for N+ patients. While some
payors provide coverage for the use of Oncotype DX in
patients with lymph node micrometastasis (less than 2mm in
size), our existing reimbursement coverage is generally limited
to women with early-stage N-, ER+ breast cancer. We may not be
able to obtain reimbursement coverage for Oncotype DX for
breast cancer patients who are N+, ER+ that is similar to the
coverage we have obtained for early-stage N-, ER+ patients. In
addition, we may not be able to obtain reimbursement coverage
for any other new test or test enhancement we may develop in the
future.
If we are unable to obtain reimbursement approval from private
payors and Medicare and Medicaid programs for Oncotype
DX, or if the amount reimbursed is inadequate, our ability
to generate revenues from Oncotype DX could be limited.
Even if we are being reimbursed, insurers may withdraw their
coverage policies or cancel their contracts with us at any time,
stop paying for our test or reduce the payment rate for our
test, which would reduce our revenue.
We
depend on a limited number of payors for a significant portion
of our product revenues and if these or other payors stop
providing reimbursement or decrease the amount of reimbursement
for our test, our revenues could decline.
For the years ended December 31, 2008 and 2007, one payor,
Medicare, as administered by NHIC and Palmetto GBA, accounted
for 22% and 23% of our product revenues, respectively. Another
payor, United HealthCare Insurance Company, accounted for 9% and
13% of our product revenues for the years ended
December 31, 2008 and 2007, respectively. NHIC was the
local Medicare carrier for California with jurisdiction
26
for claims submitted by us for Medicare patients in the United
States prior to September 2008, when responsibility for
processing Medicare claims submitted by us was transitioned from
NHIC to Palmetto GBA. In the future, it is possible that
Palmetto GBA or other third-party payors that provide
reimbursement for our test may suspend, revoke or discontinue
coverage at any time, or may reduce the reimbursement rates
payable to us. Any such actions could have a negative impact on
our revenues.
If FDA
were to begin regulating our test, we could be forced to stop
sales of Oncotype DX, we could incur substantial costs and time
delays associated with meeting requirements for pre-market
clearance or approval or we could experience decreased demand
for or reimbursement of our test.
Clinical laboratory tests like Oncotype DX are regulated
under CLIA, as administered through CMS, as well as by
applicable state laws. Diagnostic kits that are sold and
distributed through interstate commerce are regulated as medical
devices by FDA. Clinical laboratory tests that are developed and
validated by a laboratory for its own use are called laboratory
developed tests, or LDTs. Most LDTs are not currently subject to
FDA regulation, although reagents or software provided by third
parties and used to perform LDTs may be subject to regulation.
We believe that Oncotype DX is not a diagnostic kit and
also believe that it is an LDT. As a result, we believe
Oncotype DX should not be subject to regulation under
established FDA policies. The container we provide for
collection and transport of tumor samples from a pathology
laboratory to our clinical reference laboratory may be a medical
device subject to FDA regulation but is currently exempt from
pre-market review by FDA.
In January 2006, we received a letter from FDA regarding
Oncotype DX inviting us to meet with FDA to discuss the
nature and appropriate regulatory status of and the least
burdensome ways that we may fulfill any FDA pre-market review
requirements that may apply. In September 2006, FDA issued draft
guidance on a new class of tests called In Vitro
Diagnostic Multivariate Index Assays, or IVDMIAs. Under
this draft guidance, Oncotype DX could be classified as
either a Class II or a Class III medical device, which
may require varying levels of FDA pre-market review depending
upon intended use and on the level of control necessary to
assure the safety and effectiveness of the test. In July 2007,
FDA posted revised draft guidance that addressed some of the
comments submitted in response to the September 2006 draft
guidance. The revised draft guidance includes an 18 month
transition period of FDA enforcement discretion following
release of final guidance for currently marketed tests if the
laboratory submits a pre-market review submission within
12 months of the publication of final guidance. The comment
period for this revised guidance expired in October 2007.
In May 2007, FDA issued a guidance document Class II
Special Controls Guidance Document: Gene Expression Profiling
Test System for Breast Cancer Prognosis. This guidance
document was developed to support the classification of gene
expression profiling test systems for breast cancer prognosis
into Class II. In addition, in June 2007, FDA issued a
guidance document Pharmacogenetic Tests and Genetic Tests
for Heritable Markers which provides recommendations to
sponsors and FDA reviewers in preparing and reviewing pre-market
approval applications, or PMA, and pre-market notification, or
510(k), submissions for pharmacogenetic and other human genetic
tests, whether testing is for single markers or for multiple
markers simultaneously (multiplex tests).
In addition, the Secretary of the Department of Health and Human
Services, or HHS, requested that its Advisory Committee on
Genetics, Health and Society make recommendations about the
oversight of genetic testing. A final report was published in
April 2008. If the reports recommendations for increased
oversight of genetic testing were to result in further
regulatory burdens it could have a negative impact on our
business and could delay the commercialization of tests in
development.
We are continuing our ongoing dialogue with FDA and HHS
regarding the Oncotype DX breast cancer assay. We cannot
provide any assurance that FDA regulation, including pre-market
review, will not be required in the future for Oncotype
DX, either through new enforcement policies adopted by FDA
or new legislation enacted by Congress. It is possible that
legislation will be enacted into law and may result in increased
regulatory burdens for us to continue to offer the Oncotype
DX assay.
If pre-market review is required, our business could be
negatively impacted until such review is completed and clearance
to market or approval is obtained, and FDA could require that we
stop selling our test pending pre-market clearance or approval.
If our test is allowed to remain on the market but there is
uncertainty about our test, if it is labeled investigational by
FDA, or if labeling claims FDA allows us to make are very
limited, orders or
27
reimbursement may decline. The regulatory approval process may
involve, among other things, successfully completing additional
clinical trials and submitting a pre-market clearance notice or
filing a PMA application with FDA. If pre-market review is
required by FDA, there can be no assurance that our test will be
cleared or approved on a timely basis, if at all. Ongoing
compliance with FDA regulations would increase the cost of
conducting our business, and subject us to inspection by FDA and
to the requirements of FDA and penalties for failure to comply
with these requirements. We may also decide voluntarily to
pursue FDA pre-market review of Oncotype DX if we
determine that doing so would be appropriate.
Should any of the reagents obtained by us from vendors and used
in conducting our test be affected by future regulatory actions,
our business could be adversely affected by those actions,
including increasing the cost of testing or delaying, limiting
or prohibiting the purchase of reagents necessary to perform
testing.
If we
were required to conduct additional clinical trials prior to
continuing to sell Oncotype DX or marketing any new test, those
trials could lead to delays or failure to obtain necessary
regulatory approval, which could cause significant delays in
commercializing any future products and harm our ability to
become profitable.
If FDA decides to regulate our tests, it may require additional
pre-market clinical testing prior to submitting a regulatory
application for commercial sales. If we are required to conduct
pre-market clinical trials, whether using prospectively acquired
samples or archival samples, delays in the commencement or
completion of clinical testing could significantly increase our
test development costs and delay commercialization. Many of the
factors that may cause or lead to a delay in the commencement or
completion of clinical trials may also ultimately lead to delay
or denial of regulatory clearance or approval. The commencement
of clinical trials may be delayed due to insufficient patient
enrollment, which is a function of many factors, including the
size of the patient population, the nature of the protocol, the
proximity of patients to clinical sites and the eligibility
criteria for the clinical trial. We may find it necessary to
engage contract research organizations to perform data
collection and analysis and other aspects of our clinical
trials, which might increase the cost and complexity of our
trials. We may also depend on clinical investigators, medical
institutions and contract research organizations to perform the
trials properly. If these parties do not successfully carry out
their contractual duties or obligations or meet expected
deadlines, or if the quality, completeness or accuracy of the
clinical data they obtain is compromised due to the failure to
adhere to our clinical protocols or for other reasons, our
clinical trials may have to be extended, delayed or terminated.
Many of these factors would be beyond our control. We may not be
able to enter into replacement arrangements without undue delays
or considerable expenditures. If there are delays in testing or
approvals as a result of the failure to perform by third
parties, our research and development costs would increase, and
we may not be able to obtain regulatory clearance or approval
for our test. In addition, we may not be able to establish or
maintain relationships with these parties on favorable terms, if
at all. Each of these outcomes would harm our ability to market
our test, or to become profitable.
Complying
with numerous regulations pertaining to our business is an
expensive and time-consuming process, and any failure to comply
could result in substantial penalties.
We are subject to CLIA, a federal law that regulates clinical
laboratories that perform testing on specimens derived from
humans for the purpose of providing information for the
diagnosis, prevention or treatment of disease. CLIA is intended
to ensure the quality and reliability of clinical laboratories
in the United States by mandating specific standards in the
areas of personnel qualifications, administration, and
participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. We have a
current certificate of accreditation under CLIA to perform
testing. To renew this certificate, we are subject to survey and
inspection every two years. Moreover, CLIA inspectors may make
random inspections of our clinical reference laboratory.
We are also required to maintain a license to conduct testing in
California. California laws establish standards for day-to-day
operation of our clinical reference laboratory, including the
training and skills required of personnel and quality control.
Moreover, several states require that we hold licenses to test
specimens from patients in those states. Other states may have
similar requirements or may adopt similar requirements in the
future. Finally, we may be subject to regulation in foreign
jurisdictions as we seek to expand international distribution of
our test.
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If we were to lose our CLIA accreditation or California license,
whether as a result of a revocation, suspension or limitation,
we would no longer be able to sell Oncotype DX, which
would limit our revenues and harm our business. If we were to
lose our license in other states where we are required to hold
licenses, we would not be able to test specimens from those
states.
We are subject to other regulation by both the federal
government and the states in which we conduct our business,
including:
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Medicare billing and payment regulations applicable to clinical
laboratories;
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the federal Medicare and Medicaid Anti-kickback Law and state
anti-kickback prohibitions;
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the federal physician self-referral prohibition, commonly known
as the Stark Law, and the state equivalents;
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the federal Health Insurance Portability and Accountability Act
of 1996;
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the Medicare civil money penalty and exclusion
requirements; and
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the federal civil and criminal False Claims Act and state
equivalents.
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We have adopted policies and procedures designed to comply with
these laws, including policies and procedures relating to
financial arrangements between us and physicians who refer
patients to us. In the ordinary course of our business, we
conduct internal reviews of our compliance with these laws. Our
compliance is also subject to governmental review. The growth of
our business and sales organization may increase the potential
of violating these laws or our internal policies and procedures.
The risk of our being found in violation of these laws and
regulations is further increased by the fact that many of them
have not been fully interpreted by the regulatory authorities or
the courts, and their provisions are open to a variety of
interpretations. Any action brought against us for violation of
these laws or regulations, even if we successfully defend
against it, could cause us to incur significant legal expenses
and divert our managements attention from the operation of
our business. If our operations are found to be in violation of
any of these laws and regulations, we may be subject to any
applicable penalty associated with the violation, including
civil and criminal penalties, damages and fines, we could be
required to refund payments received by us, and we could be
required to curtail or cease our operations. Any of the
foregoing consequences could seriously harm our business and our
financial results.
Our
financial results depend on sales of one test, Oncotype DX, and
we will need to generate sufficient revenues from this and other
tests to run our business.
For the foreseeable future, we expect to derive substantially
all of our revenues from sales of one test, Oncotype DX.
We have been selling this test since January 2004. We are in
various stages of research and development for other tests that
we may offer as well as for enhancements to our existing test.
We do not currently expect to commercialize a test for colon
cancer until 2010, and there can be no assurance that we will be
successful in doing so. We are not currently able to estimate
when we may be able to commercialize tests for other cancers or
whether we will be successful in doing so. If we are unable to
increase sales of Oncotype DX or to successfully develop
and commercialize other tests or enhancements, our revenues and
our ability to achieve profitability would be impaired, and the
market price of our common stock could decline.
New
test development involves a lengthy and complex process, and we
may be unable to commercialize any of the tests we are currently
developing.
We have multiple tests in various stages of development and
devote considerable resources to research and development. For
example, we are currently in the validation phase of the
application of our technology to predict recurrence and the
therapeutic benefit of chemotherapy in colon cancer, and we are
conducting research or early development studies in prostate,
renal cell and lung cancers and melanoma. There can be no
assurance that our technologies will be capable of reliably
predicting the recurrence of other types of cancer, such as
colon cancer, with the sensitivity and specificity necessary to
be clinically and commercially useful, or that our colon cancer
assay will
29
succeed in meeting one or more clinical endpoints. In addition,
before we can develop diagnostic tests for new cancers and
commercialize any new products, we will need to:
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conduct substantial research and development;
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conduct validation studies;
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expend significant funds; and
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develop and scale our laboratory processes to accommodate
different tests.
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The product development process involves a high degree of risk
and takes several years. Our product development efforts may
fail for many reasons, including:
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failure of the product at the research or development stage;
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difficulty in accessing archival tissue samples, especially
tissue samples with known clinical results; or
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lack of clinical validation data to support the effectiveness of
the product.
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Few research and development projects result in commercial
products, and success in early clinical trials often is not
replicated in later studies. At any point, we may abandon
development of a product candidate or we may be required to
expend considerable resources repeating clinical trials, which
would adversely impact the timing for generating potential
revenues from those product candidates. In addition, as we
develop products, we will have to make significant investments
in product development, marketing and selling resources. If a
clinical validation study fails to demonstrate the prospectively
defined endpoints of the study, we would likely abandon the
development of the product or product feature that was the
subject of the clinical trial, which could harm our business.
If we
are unable to support demand for our tests, our business may
suffer.
We have added a second shift at our clinical reference
laboratory facility and will need to ramp up our testing
capacity as our test volume grows. We will need to continue to
implement increases in scale and related processing, customer
service, billing and systems process improvements, and to expand
our internal quality assurance program to support testing on a
larger scale. We will also need additional certified laboratory
scientists and other scientific and technical personnel to
process higher volumes of our tests. We cannot assure you that
any increases in scale, related improvements and quality
assurance will be successfully implemented or that appropriate
personnel will be available. As additional products are
commercialized, we will need to bring new equipment on-line,
implement new systems, controls and procedures and hire
personnel with different qualifications. Failure to implement
necessary procedures or to hire the necessary personnel could
result in higher cost of processing or an inability to meet
market demand. There can be no assurance that we will be able to
perform tests on a timely basis at a level consistent with
demand, that our efforts to scale our commercial operations will
not negatively affect the quality of test results, or that we
will be successful in responding to the growing complexity of
our testing operations. If we encounter difficulty meeting
market demand or quality standards for Oncotype DX or
future products, our reputation could be harmed and our future
prospects and our business could suffer.
We may
experience limits on our revenues if physicians decide not to
order our test.
If medical practitioners do not order Oncotype DX or any
future tests developed by us, we will likely not be able to
create demand for our products in sufficient volume for us to
become profitable. To generate demand, we will need to continue
to make oncologists, surgeons and pathologists aware of the
benefits of Oncotype DX and any products we may develop
in the future through published papers, presentations at
scientific conferences and
one-on-one
education by our sales force. In addition, we will need to
demonstrate our ability to obtain adequate reimbursement
coverage from third-party payors.
Prior to the inclusion of Oncotype DX in clinical
guidelines, guidelines and practices regarding the treatment of
breast cancer often recommended that chemotherapy be considered
in most cases, including many cases in which our test might
indicate that, based on our clinical trial results, chemotherapy
would be of little or no benefit. Accordingly, physicians may be
reluctant to order a test that may suggest recommending against
chemotherapy in treating breast cancer. Moreover, our test
provides quantitative information not currently provided by
pathologists
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and it is performed at our facility rather than by the
pathologist in a local laboratory, so pathologists may be
reluctant to support our test. These facts may make it difficult
for us to convince medical practitioners to order Oncotype
DX for their patients, which could limit our ability to
generate revenues and our ability to achieve profitability.
We may
experience limits on our revenues if patients decide not to use
our test.
Some patients may decide not to use our test due to its price,
part or all of which may be payable directly by the patient if
the applicable payor denies reimbursement in full or in part.
Even if medical practitioners recommend that their patients use
our test, patients may still decide not to use Oncotype
DX, either because they do not want to be made aware of the
likelihood of recurrence or they wish to pursue a particular
course of therapy regardless of test results. Additionally, the
current economic slowdown could negatively impact patients,
resulting in loss of healthcare coverage, delayed medical
checkups or inability to pay for a relatively expensive test. If
only a small portion of the patient population decides to use
our test, we will experience limits on our revenues and our
ability to achieve profitability.
If we
are unable to develop products to keep pace with rapid
technological, medical and scientific change, our operating
results and competitive position would be harmed.
In recent years, there have been numerous advances in
technologies relating to the diagnosis and treatment of cancer.
For example, technologies in addition to ours now reportedly
permit measurement of gene expression in fixed paraffin
embedded, or FPE, tissue specimens. New chemotherapeutic or
biologic strategies are being developed that may increase
survival time and reduce toxic side effects. These advances
require us to continuously develop new products and enhance
existing products to keep pace with evolving standards of care.
Our test could become obsolete unless we continually innovate
and expand our product to demonstrate recurrence and treatment
benefit in patients treated with new therapies. New treatment
therapies typically have only a few years of clinical data
associated with them, which limits our ability to perform
clinical studies and correlate sets of genes to a new
treatments effectiveness. If we are unable to demonstrate
the applicability of our test to new treatments, then sales of
our test could decline, which would harm our revenues.
Our
rights to use technologies licensed from third parties are not
within our control, and we may not be able to sell our products
if we lose our existing rights or cannot obtain new rights on
reasonable terms.
We license from third parties technology necessary to develop
our products. For example, we license technology from Roche that
we use to analyze genes for possible inclusion in our tests and
that we use in our clinical reference laboratory to conduct our
test. In return for the use of a third partys technology,
we may agree to pay the licensor royalties based on sales of our
products. Royalties are a component of cost of product revenues
and impact the margin on our test. We may need to license other
technology to commercialize future products. Our business may
suffer if these licenses terminate, if the licensors fail to
abide by the terms of the license or fail to prevent
infringement by third parties, if the licensed patents or other
rights are found to be invalid or if we are unable to enter into
necessary licenses on acceptable terms. Companies that attempt
to replicate our tests could be set up in countries that do not
recognize our intellectual property. Such companies could send
test results into the United States and therefore reduce sales
of our tests.
Our
competitive position depends on maintaining intellectual
property protection.
Our ability to compete and to achieve and maintain profitability
depends on our ability to protect our proprietary discoveries
and technologies. We currently rely on a combination of patents,
patent applications, copyrights, trademarks, and
confidentiality, material data transfer, license and invention
assignment agreements to protect our intellectual property
rights. We also rely upon trade secret laws to protect
unpatented know-how and continuing technological innovation. Our
intellectual property strategy is intended to develop and
maintain our competitive position. Patents may be granted to us
jointly with other organizations, and while we may have a right
of first refusal, we cannot guarantee that a joint owner will
not license rights to another party, and cannot guarantee that a
joint owner will cooperate with us in the enforcement of patent
rights.
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As of December 31, 2008, we had two issued patents in the
U.S. covering genes and methods that are components of the
Oncotype DX assay, one of which was issued jointly to us
and to the National Surgical Adjuvant Breast and Bowel Project,
or NSABP. Our pending patent applications may not result in
issued patents, and we cannot assure you that our issued patent
or any patents that might ultimately be issued by the
U.S. Patent and Trademark Office will protect our
technology. Any patents that may be issued to us might be
challenged by third parties as being invalid or unenforceable,
or third parties may independently develop similar or competing
technology that avoids our patents. We cannot be certain that
the steps we have taken will prevent the misappropriation and
use of our intellectual property, particularly in foreign
countries where the laws may not protect our proprietary rights
as fully as in the United States.
From time to time, the United States Supreme Court, other
federal courts, the U.S. Congress or the U.S. Patent
and Trademark Office may change the standards of patentability
and any such changes could have a negative impact on our
business. In addition, competitors may develop their own
versions of our test in countries where we did not apply for
patents or where our patents have not issued and compete with us
in those countries, including encouraging the use of their test
by physicians or patients in other countries.
We may
face intellectual property infringement claims that could be
time-consuming and costly to defend and could result in our loss
of significant rights and the assessment of treble
damages.
We have received notices of claims of infringement or misuse of
other parties proprietary rights in the past and may from
time to time receive additional notices. Some of these claims
may lead to litigation. We cannot assure you that we will
prevail in such actions, or that other actions alleging
misappropriation or misuse by us of third-party trade secrets,
infringement by us of third-party patents and trademarks or the
validity of our patents, will not be asserted or prosecuted
against us. We may also initiate claims to defend our
intellectual property. Intellectual property litigation,
regardless of outcome, is expensive and time-consuming, could
divert managements attention from our business and have a
material negative effect on our business, operating results or
financial condition. If there is a successful claim of
infringement against us, we may be required to pay substantial
damages (including treble damages if we were to be found to have
willfully infringed a third partys patent) to the party
claiming infringement, develop non-infringing technology, stop
selling our test or using technology that contains the allegedly
infringing intellectual property or enter into royalty or
license agreements that may not be available on acceptable or
commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on
a timely basis could harm our business. In addition, revising
our test to include the non-infringing technologies would
require us to re-validate our test, which would be costly and
time-consuming. Also, we may be unaware of pending patent
applications that relate to our test. Parties making
infringement claims on future issued patents may be able to
obtain an injunction that would prevent us from selling our test
or using technology that contains the allegedly infringing
intellectual property, which could harm our business.
It is possible that a third party or patent office might take
the position that one or more patents or patent applications
constitute prior art in the field of genomic-based diagnostics.
In such a case, we might be required to pay royalties, damages
and costs to firms who own the rights to these patents, or we
might be restricted from using any of the inventions claimed in
those patents.
If we
are unable to compete successfully, we may be unable to increase
or sustain our revenues or achieve profitability.
Our principal competition comes from existing diagnostic methods
used by pathologists and oncologists. These methods have been
used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment
and kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like Oncotype DX that are performed
outside the pathology laboratory. In addition, few diagnostic
methods are as expensive as Oncotype DX.
We also face competition from many public and private companies
that offer products or have conducted research to profile genes,
gene expression or protein expression in breast cancer, such as
Celera Corporation, Clarient Diagnostic Services, Agendia B.V.,
Applied Genomics, bioTheranostics Incorporated, Exagen and
32
University Genomics. Commercial laboratories with strong
distribution networks for diagnostic tests, such as Genzyme
Corporation, Laboratory Corporation of America Holdings and
Quest Diagnostics Incorporated, may become competitors. Other
potential competitors include companies that develop diagnostic
tests such as Bayer Diagnostics, a division of Siemens AG, Roche
Diagnostics, a division of F. Hoffmann-La Roche Ltd, and
Veridex LLC, a Johnson & Johnson company, as well as
other companies and academic and research institutions. Our
competitors may invent and commercialize technology platforms
that compete with ours. In addition, in December 2005, the
federal government allocated a significant amount of funding to
The Cancer Genome Atlas, a project aimed at developing a
comprehensive catalog of the genetic mutations and other genomic
changes that occur in cancers and maintaining the information in
a free public database. As more information regarding cancer
genomics becomes available to the public, we anticipate that
more products aimed at identifying targeted treatment options
will be developed and these products may compete with ours. In
addition, competitors may develop their own versions of our test
in countries where we did not apply for patents or where our
patents have not issued and compete with us in those countries,
including encouraging the use of their test by physicians or
patients in other countries.
Our test is considered relatively expensive for a diagnostic
test. We increased the list price of our test from $3,650 to
$3,820 effective July 1, 2008, and we may raise prices in
the future. This could impact reimbursement of and demand for
Oncotype DX. Many of our present and potential
competitors have widespread brand recognition and substantially
greater financial and technical resources and development,
production and marketing capabilities than we do. Others may
develop lower-priced, less complex tests that could be viewed by
physicians and payors as functionally equivalent to our test,
which could force us to lower the list price of our test and
impact our operating margins and our ability to achieve
profitability. Some competitors have developed tests cleared for
marketing by FDA. There may be a marketing differentiation or
perception that an FDA-cleared test is more desirable than
Oncotype DX, and that may discourage adoption and
reimbursement of our test. If we are unable to compete
successfully against current or future competitors, we may be
unable to increase market acceptance for and sales of our test,
which could prevent us from increasing or sustaining our
revenues or achieving or sustaining profitability and could
cause the market price of our common stock to decline.
Our
research and development efforts will be hindered if we are not
able to contract with third parties for access to archival
tissue samples.
Under standard clinical practice in the United States, tumor
biopsies removed from patients are chemically preserved and
embedded in paraffin wax and stored. Our clinical development
relies on our ability to secure access to these archived tumor
biopsy samples, as well as information pertaining to their
associated clinical outcomes. Others have demonstrated their
ability to study archival samples and often compete with us for
access. Additionally, the process of negotiating access to
archived samples is lengthy since it typically involves numerous
parties and approval levels to resolve complex issues such as
usage rights, institutional review board approval, privacy
rights, publication rights, intellectual property ownership and
research parameters. If we are not able to negotiate access to
archival tumor tissue samples with hospitals and collaborators,
or if other laboratories or our competitors secure access to
these samples before us, our ability to research, develop and
commercialize future products will be limited or delayed.
If we
cannot maintain our current clinical collaborations and enter
into new collaborations, our product development could be
delayed.
We rely on and expect to continue to rely on clinical
collaborators to perform a substantial portion of our clinical
trial functions. If any of our collaborators were to breach or
terminate its agreement with us or otherwise fail to conduct its
collaborative activities successfully and in a timely manner,
the research, development or commercialization of the products
contemplated by the collaboration could be delayed or
terminated. If any of our collaboration agreements are
terminated, or if we are unable to renew those collaborations on
acceptable terms, we would be required to seek alternative
collaborations. We may not be able to negotiate additional
collaborations on acceptable terms, if at all, and these
collaborations may not be successful.
In the past, we have entered into clinical trial collaborations
with highly regarded organizations in the cancer field
including, for example, NSABP. Our success in the future depends
in part on our ability to enter into agreements with other
leading cancer organizations. This can be difficult due to
internal and external constraints
33
placed on these organizations. Some organizations may limit the
number of collaborations they have with any one company so as to
not be perceived as biased or conflicted. Organizations may also
have insufficient administrative and related infrastructure to
enable collaborations with many companies at once, which can
extend the time it takes to develop, negotiate and implement a
collaboration. Additionally, organizations often insist on
retaining the rights to publish the clinical data resulting from
the collaboration. The publication of clinical data in
peer-reviewed journals is a crucial step in commercializing and
obtaining reimbursement for a test such as ours, and our
inability to control when, if ever, results are published may
delay or limit our ability to derive sufficient revenues from
any product that may result from a collaboration.
From time to time we expect to engage in discussions with
potential clinical collaborators which may or may not lead to
collaborations. However, we cannot guarantee that any
discussions will result in clinical collaborations or that any
clinical studies which may result will be enrolled or completed
in a reasonable time frame or with successful outcomes. Once
news of discussions regarding possible collaborations are known
in the medical community, regardless of whether the news is
accurate, failure to announce a collaborative agreement or the
entitys announcement of a collaboration with an entity
other than us may result in adverse speculation about us, our
product or our technology, resulting in harm to our reputation
and our business.
The
loss of key members of our senior management team or our
inability to retain highly skilled scientists, clinicians and
salespeople could adversely affect our business.
Our success depends largely on the skills, experience and
performance of key members of our executive management team and
others in key management positions. The efforts of each of these
persons together will be critical to us as we continue to
develop our technologies and testing processes and as we attempt
to transition to a company with more than one commercialized
product. If we were to lose one or more of these key employees,
we may experience difficulties in competing effectively,
developing our technologies and implementing our business
strategies.
Our research and development programs and commercial laboratory
operations depend on our ability to attract and retain highly
skilled scientists and technicians, including geneticists,
licensed laboratory technicians, chemists, biostatisticians and
engineers. We may not be able to attract or retain qualified
scientists and technicians in the future due to the intense
competition for qualified personnel among life science
businesses, particularly in the San Francisco Bay Area. We
also face competition from universities and public and private
research institutions in recruiting and retaining highly
qualified scientific personnel. In addition, our success depends
on our ability to attract and retain salespeople with extensive
experience in oncology and close relationships with medical
oncologists, surgeons, pathologists and other hospital
personnel. We may have difficulties locating, recruiting or
retaining qualified salespeople, which could cause a delay or
decline in the rate of adoption of our products. If we are not
able to attract and retain the necessary personnel to accomplish
our business objectives, we may experience constraints that will
adversely affect our ability to support our discovery,
development and sales programs. All of our employees are at-will
employees, which means that either we or the employee may
terminate their employment at any time.
If our
sole laboratory facility becomes inoperable, we will be unable
to perform our test and our business will be
harmed.
We do not have redundant clinical reference laboratory
facilities outside of Redwood City, California. Redwood City is
situated near earthquake fault lines. Our facility and the
equipment we use to perform our tests would be costly to replace
and could require substantial lead time to repair or replace.
The facility may be harmed or rendered inoperable by natural or
man-made disasters, including earthquakes, flooding and power
outages, which may render it difficult or impossible for us to
perform our tests for some period of time. The inability to
perform our tests or the backlog of tests that could develop if
our facility is inoperable for even a short period of time may
result in the loss of customers or harm our reputation, and we
may be unable to regain those customers in the future. Although
we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient
to cover all of our potential losses and may not continue to be
available to us on acceptable terms, or at all.
34
In order to rely on a third party to perform our tests, we could
only use another facility with established state licensure and
CLIA accreditation under the scope of which Oncotype DX
could be performed following validation and other required
procedures. We cannot assure you that we would be able to find
another CLIA-certified facility willing to adopt Oncotype
DX and comply with the required procedures, that this
laboratory would be willing to perform the tests for us on
commercially reasonable terms, or that it would be able to meet
our quality standards. In order to establish a redundant
clinical reference laboratory facility, we would have to spend
considerable time and money securing adequate space,
constructing the facility, recruiting and training employees,
and establishing the additional operational and administrative
infrastructure necessary to support a second facility. We may
not be able, or it may take time, to replicate our testing
processes or results in a new facility. Additionally, any new
clinical reference laboratory facility opened by us would be
subject to certification under CLIA and licensed by several
states, including California and New York, which can take a
significant amount of time and result in delays in our ability
to begin operations.
We are
dependent on our information technology and telecommunications
systems, and any failure of these systems could harm our
business.
We depend on information technology, or IT, and
telecommunications systems for significant aspects of our
operations. In addition, our third-party billing and collections
provider is dependent upon telecommunications and data systems
provided by outside vendors and information it receives from us
on a regular basis. These IT and telecommunications systems
support a variety of functions, including test processing,
sample tracking, quality control, customer service and support,
billing and reimbursement, research and development activities,
and our general and administrative activities. Failures or
significant downtime of our IT or telecommunications systems or
those used by our third-party service providers could prevent us
from processing tests, providing test results to physicians,
billing payors, processing reimbursement appeals, handling
patient or physician inquiries, conducting research and
development activities, and managing the administrative aspects
of our business. Any disruption or loss of IT or
telecommunications systems on which critical aspects of our
operations depend could have an adverse effect on our business
and our product revenues.
Changes
in healthcare policy could subject us to additional regulatory
requirements that may interrupt sales of Oncotype DX and
increase our costs.
Healthcare policy has been a subject of extensive discussion in
the executive and legislative branches of the federal and many
state governments. We developed our commercialization strategy
for Oncotype DX based on existing healthcare policies.
Changes in healthcare policy, such as changes in the FDA
regulatory policy for LDTs, the creation of broad limits for
diagnostic products in general or requirements that Medicare
patients pay for portions of clinical laboratory tests or
services received, could substantially interrupt the sales of
Oncotype DX, increase costs and divert managements
attention. For example, in 1989, the U.S. Congress passed
federal self-referral prohibitions commonly known as the Stark
Law, significantly restricting, regulating and changing
laboratories relationships with physicians. In addition,
selling our tests outside of the United States makes us subject
to applicable foreign regulatory requirements, which may also
change over time. We cannot predict what changes, if any, will
be proposed or adopted or the effect that such proposals or
adoption may have on our business, financial condition and
results of operations.
We
rely on a limited number of suppliers or, in some cases, a sole
supplier, for some of our laboratory instruments and materials
and may not be able to find replacements in the event our
suppliers no longer supply that equipment or those
materials.
We rely solely on Applied Biosystems, a division of Life
Technologies Corporation, to supply some of the laboratory
equipment on which we perform our tests. We periodically
forecast our needs for laboratory equipment and enter into
standard purchase orders with Applied Biosystems based on these
forecasts. We believe that there are relatively few equipment
manufacturers other than Applied Biosystems that are currently
capable of supplying the equipment necessary for Oncotype
DX. Even if we were to identify other suppliers, there can
be no assurance that we will be able to enter into agreements
with such suppliers on a timely basis on acceptable terms, if at
all. If we should encounter delays or difficulties in securing
from Applied Biosystems the quality and quantity of equipment
35
we require for Oncotype DX, we may need to reconfigure
our test process, which would result in delays in
commercialization or an interruption in sales. If any of these
events occur, our business and operating results could be
harmed. Additionally, if Applied Biosystems deems us to have
become uncreditworthy, it has the right to require alternative
payment terms from us, including payment in advance. We are also
required to indemnify Applied Biosystems against any damages
caused by any legal action or proceeding brought by a third
party against Applied Biosystems for damages caused by our
failure to obtain required approval with any regulatory agency.
We also rely on several sole suppliers for certain laboratory
materials which we use to perform our tests. While we have
developed alternate sourcing strategies for these materials, we
cannot be certain that these strategies will be effective. If we
should encounter delays or difficulties in securing these
laboratory materials, delays in commercialization or an
interruption in sales could occur.
We may
be unable to manage our future growth effectively, which would
make it difficult to execute our business
strategy.
Future growth will impose significant added responsibilities on
management, including the need to identify, recruit, train and
integrate additional employees. In addition, rapid and
significant growth will place strain on our administrative and
operational infrastructure, including customer service and our
clinical reference laboratory. Our ability to manage our
operations and growth will require us to continue to improve our
operational, financial and management controls, reporting
systems and procedures. If we are unable to manage our growth
effectively, it may be difficult for us to execute our business
strategy.
If we
were sued for product liability or professional liability, we
could face substantial liabilities that exceed our
resources.
The marketing, sale and use of our test could lead to the filing
of product liability claims if someone were to allege that our
test failed to perform as it was designed. We may also be
subject to liability for errors in the test results we provide
to physicians or for a misunderstanding of, or inappropriate
reliance upon, the information we provide. For example,
physicians sometimes order Oncotype DX for patients who
do not have the same specific clinical attributes indicated on
the Oncotype DX report form as those for which the test
provides clinical experience information from validation
studies. It is our practice to offer medical consultation to
physicians ordering Oncotype DX for such patients,
including ER- patients and male breast cancer patients. A
product liability or professional liability claim could result
in substantial damages and be costly and time consuming for us
to defend. Although we believe that our existing product and
professional liability insurance is adequate, we cannot assure
you that our insurance would fully protect us from the financial
impact of defending against product liability or professional
liability claims. Any product liability or professional
liability claim brought against us, with or without merit, could
increase our insurance rates or prevent us from securing
insurance coverage in the future. Additionally, any product
liability lawsuit could cause injury to our reputation, result
in the recall of our products, or cause current collaborators to
terminate existing agreements and potential collaborators to
seek other partners, any of which could impact our results of
operations.
If we
use biological and hazardous materials in a manner that causes
injury, we could be liable for damages.
Our activities currently require the controlled use of
potentially harmful biological materials, hazardous materials
and chemicals and may in the future require the use of
radioactive compounds. We cannot eliminate the risk of
accidental contamination or injury to employees or third parties
from the use, storage, handling or disposal of these materials.
In the event of contamination or injury, we could be held liable
for any resulting damages, and any liability could exceed our
resources or any applicable insurance coverage we may have.
Additionally, we are subject on an ongoing basis to federal,
state and local laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste
products. The cost of compliance with these laws and regulations
may be significant and could negatively affect our operating
results.
36
International
expansion of our business may expose us to business, regulatory,
political, operational, financial and economic risks associated
with doing business outside of the United States.
Our business strategy contemplates international expansion,
including establishing direct sales and physician outreach and
education capabilities outside of the United States and
expanding our relationship with distributors. In February 2009,
we established a subsidiary in Geneva, Switzerland and we may
establish operations in other countries in the future. Doing
business internationally involves a number of risks, including:
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multiple, conflicting and changing laws and regulations such as
tax laws, export and import restrictions, employment laws,
regulatory requirements and other governmental approvals,
permits and licenses;
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failure by us or our distributors to obtain regulatory approvals
for the use of our test in various countries;
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difficulties in staffing and managing foreign operations;
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complexities associated with managing multiple payor
reimbursement regimes or self-pay systems;
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logistics and regulations associated with shipping tissue
samples, including infrastructure conditions and transportation
delays;
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financial risks, such as longer payment cycles, difficulty
collecting accounts receivable and exposure to foreign currency
exchange rate fluctuations;
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political and economic instability, including wars, terrorism,
and political unrest, outbreak of disease, boycotts, curtailment
of trade and other business restrictions; and
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regulatory and compliance risks that relate to maintaining
accurate information and control over sales and
distributors activities that may fall within the purview
of the Foreign Corrupt Practice Act, its books and records
provisions or its anti-bribery provisions.
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Any of these factors could significantly harm our future
international expansion and operations and, consequently, our
revenues and results of operations.
Our
dependence on distributors for sales of Oncotype DX outside of
the U.S. could limit or prevent us from selling our test in
other markets and from realizing long-term international revenue
growth.
We do not have sales personnel outside of the U.S. but
instead rely on distributors. As of February 2009, we had
exclusive distribution agreements for Oncotype DX in
several countries outside of the U.S., and we may enter into
other similar arrangements in other countries in the future. We
intend to grow our business internationally, and to do so we may
need to attract additional distributors to expand the
territories in which we sell Oncotype DX. Distributors
may not commit the necessary resources to market and sell
Oncotype DX to the level of our expectations. If current
or future distributors do not perform adequately, or we are
unable to locate distributors in particular geographic areas, we
may not realize long-term international revenue growth.
Regulatory requirements, costs of doing business outside of the
United States and the reimbursement process in foreign markets
may also impact our revenues from international sales or impact
our ability to increase international sales in the future.
We may
acquire other businesses or form joint ventures that could harm
our operating results, dilute our stockholders ownership,
increase our debt or cause us to incur significant
expense.
As part of our business strategy, we may pursue acquisitions of
complementary businesses and assets, as well as technology
licensing arrangements. We also may pursue strategic alliances
that leverage our core technology and industry experience to
expand our product offerings or distribution. We have no
experience with respect to acquiring other companies and limited
experience with respect to the formation of collaborations,
strategic alliances and joint ventures. If we make any
acquisitions, we may not be able to integrate these acquisitions
successfully into our existing business, and we could assume
unknown or contingent liabilities. Any future acquisitions by us
also could result in significant write-offs or the incurrence of
debt and contingent liabilities, any of which could harm our
operating results. Integration of an acquired company also may
require management resources that otherwise would be available
for ongoing development of our existing business. We may not
identify or complete these transactions
37
in a timely manner, on a cost-effective basis, or at all, and we
may not realize the anticipated benefits of any acquisition,
technology license, strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of
our common stock as consideration, which would dilute the
ownership of our stockholders. If the price of our common stock
is low or volatile, we may not be able to acquire other
companies for stock. The market price of our common stock has
been particularly volatile during the recent period of upheaval
in the capital markets and world economy, and this excessive
volatility may continue for an extended period of time.
Alternatively, it may be necessary for us to raise additional
funds for acquisitions through public or private financings.
Additional funds may not be available on terms that are
favorable to us, or at all.
Our
marketable securities are subject to risks that could adversely
affect our overall financial position.
We invest our cash in accordance with an established internal
policy in instruments which historically have been highly liquid
and carried relatively low risk. However, with recent credit
market conditions, similar types of investments have experienced
losses in value or liquidity issues which differ from their
historical pattern. Should a portion of our marketable
securities lose value or have their liquidity impaired, it could
adversely affect our overall financial position by imperiling
our ability to fund our operations and forcing us to seek
additional financing sooner than we would otherwise. Such
financing, if available, may not be available on commercially
attractive terms.
Our
inability to raise additional capital on acceptable terms in the
future may limit our ability to develop and commercialize new
tests and technologies.
We expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure,
commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other
things:
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sustain commercialization of our initial test, enhancements to
that test or any future tests we may develop;
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increase our selling and marketing efforts to drive market
adoption and address competitive developments;
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further expand our clinical reference laboratory operations;
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expand our technologies into other areas of cancer;
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fund our clinical validation study activities;
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expand our research and development activities;
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acquire or license technologies; and
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finance capital expenditures and our general and administrative
expenses.
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Our present and future funding requirements will depend on many
factors, including:
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the level of research and development investment required to
maintain and improve our technology position;
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costs of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
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our need or decision to acquire or license complementary
technologies or acquire complementary businesses;
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changes in product development plans needed to address any
difficulties in commercialization;
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changes in the regulatory environment, including any decision by
FDA to regulate our activities;
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competing technological and market developments;
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the rate of progress in establishing reimbursement arrangements
with third-party payors; and
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changes in regulatory policies or laws that affect our
operations.
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38
If we raise funds by issuing equity securities, dilution to our
stockholders could result. Any equity securities issued also may
provide for rights, preferences or privileges senior to those of
holders of our common stock. If we raise funds by issuing debt
securities, these debt securities would have rights, preferences
and privileges senior to those of holders of our common stock,
and the terms of the debt securities issued could impose
significant restrictions on our operations. If we raise funds
through collaborations and licensing arrangements, we might be
required to relinquish significant rights to our technologies or
products, or grant licenses on terms that are not favorable to
us. The credit markets and the financial services industry have
been experiencing a period of unprecedented turmoil and upheaval
characterized by the bankruptcy, failure, collapse or sale of
various financial institutions and an unprecedented level of
intervention from the United States federal government. These
events have generally made equity and debt financing more
difficult to obtain. Accordingly, additional equity or debt
financing might not be available on reasonable terms, if at all.
If adequate funds are not available, we may have to scale back
our operations or limit our research and development activities.
We
must implement additional finance and accounting systems,
procedures and controls as we grow our business and organization
and to satisfy public company reporting requirements, which will
increase our costs and require additional management
resources.
As a public reporting company, we are required to comply with
the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the Securities and Exchange Commission.
Compliance with Section 404 of the Sarbanes-Oxley Act and
other requirements has increased our costs and required
additional management resources. We will need to continue to
implement additional finance and accounting systems, procedures
and controls as we grow our business and organization and to
satisfy existing reporting requirements. If we fail to maintain
or implement adequate controls, if we are unable to complete the
required Section 404 assessment as to the adequacy of our
internal control over financial reporting in future
Form 10-K
filings, or if our independent registered public accounting firm
is unable to provide us with an unqualified report as to the
effectiveness of our internal control over financial reporting
in future
Form 10-K
filings, our ability to obtain additional financing could be
impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and
in the accuracy of our periodic reports filed under the Exchange
Act. A lack of investor confidence in the reliability and
accuracy of our public reporting could cause our stock price to
decline.
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ITEM 1B.
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Unresolved
Staff
Comments.
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None.
At December 31, 2008, we occupied approximately
96,000 square feet of laboratory and office space in
Redwood City, California under operating leases that expire in
February 2012. We believe that these facilities are adequate to
meet our business requirements for the near-term and that
additional space, when needed, will be available on commercially
reasonable terms.
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ITEM 3.
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Legal
Proceedings.
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We were not a party to any legal proceedings, other than
immaterial proceedings in the ordinary course of our business,
at December 31, 2008, or at the date of this report.
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ITEM 4.
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Submission
of Matters to a Vote of Security
Holders.
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No matters were submitted to a vote of security holders during
the fourth quarter of 2008.
39
Executive
Officers of the Registrant
The names of our executive officers and their ages as of
March 1, 2009, are as follows:
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Name
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Age
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Position
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Randal W. Scott, Ph.D.
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Executive Chairman of the Board
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Kimberly J. Popovits
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President and Chief Executive Officer and Director
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G. Bradley Cole
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53
|
|
|
Chief Operating Officer and Chief Financial Officer; Secretary
|
Steven Shak, M.D.
|
|
|
58
|
|
|
Chief Medical Officer
|
Joffre B. Baker, Ph.D.
|
|
|
61
|
|
|
Chief Scientific Officer
|
Randal W. Scott, Ph.D., has served as our Executive
Chairman of the Board since January 2009, Chairman of the Board
and Chief Executive Officer since our inception in August 2000
until December 2008, President from August 2000 until February
2002, Chief Financial Officer from December 2000 until April
2004, and Secretary from August 2000 until December 2000 and
from May 2003 until February 2005. Dr. Scott was a founder
of Incyte Corporation, a genomic information company, and served
Incyte in various roles, including Chairman of the Board from
August 2000 to December 2001, President from January 1997 to
August 2000, and Chief Scientific Officer from March 1995 to
August 2000. Dr. Scott holds a B.S. in Chemistry from
Emporia State University and a Ph.D. in Biochemistry from the
University of Kansas.
Kimberly J. Popovits has served as our President and
Chief Executive Officer since January 2009, President and Chief
Operating Officer since February 2002 and as a director since
March 2002. From November 1987 to February 2002,
Ms. Popovits served in various roles at Genentech, Inc., a
biotechnology company, most recently serving as Senior Vice
President, Marketing and Sales from February 2001 to February
2002, and as Vice President, Sales from October 1994 to February
2001. Prior to joining Genentech, she served as
Division Manager, Southeast Region, for American Critical
Care, a division of American Hospital Supply, a supplier of
health care products to hospitals. Ms. Popovits holds a
B.A. in Business from Michigan State University.
G. Bradley Cole has served as our Chief Operating
Officer and Chief Financial Officer since January 2009,
Executive Vice President, Operations from January 2008 until
December 2008, Executive Vice President and Chief Financial
Officer from July 2004 until December 2008 and Secretary since
February 2005. From December 1997 to May 2004, he served in
various positions at Guidant Corporation, a medical device
company, most recently serving as Vice President, Finance and
Business Development for the Endovascular Solutions Group from
January 2001 until May 2004. From July 1994 to December 1997,
Mr. Cole was Vice President, Finance and Chief Financial
Officer of Endovascular Technologies, Inc., a medical device
company that was acquired by Guidant Corporation. From December
1988 to February 1994, he served as Vice President, Finance and
Chief Financial Officer of Applied Biosystems Incorporated, a
life sciences systems company. Mr. Cole holds a B.S. in
Business from Biola University and an M.B.A. from San Jose
State University.
Steven Shak, M.D., has served as our Chief Medical
Officer since December 2000. From July 1996 to October 2000,
Dr. Shak served in various roles in Medical Affairs at
Genentech, most recently as Senior Director and Staff Clinical
Scientist. From November 1989 to July 1996, Dr. Shak served
as a Director of Discovery Research at Genentech, where he was
responsible for Pulmonary Research, Immunology, and Pathology.
Prior to joining Genentech, Dr. Shak was an Assistant
Professor of Medicine and Pharmacology at the New York
University School of Medicine. Dr. Shak holds a B.A. in
Chemistry from Amherst College and an M.D. from the New York
University School of Medicine, and completed his post-doctoral
training at the University of California, San Francisco.
Joffre B. Baker, Ph.D., has served as our Chief
Scientific Officer since December 2000. From March 1997 to
October 2000, Dr. Baker served as the Vice President for
Research Discovery at Genentech. From March 1993 to October
2000, Dr. Baker oversaw Research Discovery at Genentech,
which included the departments of Cardiovascular Research,
Oncology, Immunology, Endocrinology, and Pathology. From July
1991 to October 1993, he served as Genentechs Director of
Cardiovascular Research. Prior to joining Genentech,
Dr. Baker was a member of the faculty of the Department of
Biochemistry at the University of Kansas. He holds a B.S. in
Biology and Chemistry from the University of California,
San Diego and a Ph.D. in Biochemistry from the University
of Hawaii.
40
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity
Securities.
|
Our common stock, par value $0.0001, is traded on the NASDAQ
Global Market under the symbol GHDX. The following
table sets forth the range of high and low sales prices for our
common stock for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Stock price high
|
|
$
|
27.02
|
|
|
$
|
22.42
|
|
|
$
|
25.50
|
|
|
$
|
22.91
|
|
Stock price low
|
|
$
|
16.45
|
|
|
$
|
16.58
|
|
|
$
|
18.86
|
|
|
$
|
16.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Stock price high
|
|
$
|
24.68
|
|
|
$
|
19.70
|
|
|
$
|
22.25
|
|
|
$
|
26.17
|
|
Stock price low
|
|
$
|
16.47
|
|
|
$
|
14.80
|
|
|
$
|
18.25
|
|
|
$
|
19.12
|
|
According to the records of our transfer agent, we had 115
stockholders of record as of February 28, 2009.
Dividends
We have never declared or paid any cash dividends on our capital
stock, and we do not currently intend to pay any cash dividends
on our common stock in the foreseeable future. We expect to
retain future earnings, if any, to fund the development and
growth of our business. Our board of directors will determine
future cash dividends, if any. There are currently no
contractual restrictions on our ability to pay dividends.
41
Stock
Performance Graph
The following information is not deemed to be soliciting
material or to be filed with the Securities
and Exchange Commission or subject to Regulation 14A or 14C
under the Securities Exchange Act of 1934 or to the liabilities
of Section 18 of the Securities Exchange Act of 1934, and
will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent we specifically
incorporate it by reference into such a filing.
Set forth below is a line graph showing the cumulative total
stockholder return (change in stock price plus reinvested
dividends) assuming the investment of $100 on September 29,
2005 (the day of our initial public offering) in each of our
common stock, the NASDAQ Market Index and the NASDAQ
Biotechnology Index for the period commencing on
September 29, 2005 and ending on December 31, 2008.
The comparisons in the table are required by the Securities and
Exchange Commission and are not intended to forecast or be
indicative of future performance of our common stock.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG GENOMIC HEALTH INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
Genomic Health, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
77.53
|
|
|
|
$
|
158.30
|
|
|
|
$
|
192.68
|
|
|
|
$
|
165.79
|
|
NASDAQ Market Index
|
|
|
$
|
100.00
|
|
|
|
$
|
102.82
|
|
|
|
$
|
113.47
|
|
|
|
$
|
124.76
|
|
|
|
$
|
74.00
|
|
NASDAQ Biotechnology Index
|
|
|
$
|
100.00
|
|
|
|
$
|
104.49
|
|
|
|
$
|
104.49
|
|
|
|
$
|
104.76
|
|
|
|
$
|
98.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
ITEM 6.
|
Selected
Financial
Data.
|
The following selected consolidated financial data should be
read together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this report. The selected consolidated
balance sheets data at December 31, 2008 and 2007 and the
selected consolidated statements of operations data for each
year ended December 31, 2008, 2007 and 2006 have been
derived from our audited consolidated financial statements that
are included elsewhere in this report. The selected consolidated
balance sheets data at December 31, 2006, 2005 and 2004 and
the selected consolidated statements of operations data for each
year ended December 31, 2005 and 2004 have been derived
from our audited consolidated financial statements not included
in this report. Historical results are not necessarily
indicative of the results to be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
108,658
|
|
|
$
|
62,745
|
|
|
$
|
27,006
|
|
|
$
|
4,823
|
|
|
$
|
227
|
|
Contract revenues
|
|
|
1,921
|
|
|
|
1,282
|
|
|
|
2,168
|
|
|
|
379
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
110,579
|
|
|
|
64,027
|
|
|
|
29,174
|
|
|
|
5,202
|
|
|
|
327
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
27,185
|
|
|
|
17,331
|
|
|
|
9,908
|
|
|
|
6,249
|
|
|
|
1,828
|
|
Research and development
|
|
|
28,624
|
|
|
|
22,053
|
|
|
|
12,841
|
|
|
|
9,465
|
|
|
|
10,040
|
|
Selling and marketing
|
|
|
46,668
|
|
|
|
36,456
|
|
|
|
24,625
|
|
|
|
15,348
|
|
|
|
9,856
|
|
General and administrative
|
|
|
25,617
|
|
|
|
17,849
|
|
|
|
12,765
|
|
|
|
6,485
|
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
128,094
|
|
|
|
93,689
|
|
|
|
60,139
|
|
|
|
37,547
|
|
|
|
25,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,515
|
)
|
|
|
(29,662
|
)
|
|
|
(30,965
|
)
|
|
|
(32,345
|
)
|
|
|
(25,266
|
)
|
Interest and other income, net
|
|
|
1,365
|
|
|
|
2,370
|
|
|
|
2,045
|
|
|
|
984
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit
|
|
|
(16,150
|
)
|
|
|
(27,292
|
)
|
|
|
(28,920
|
)
|
|
|
(31,361
|
)
|
|
|
(24,995
|
)
|
Income tax benefit
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.57
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
$
|
(13.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic and diluted net
loss per share
|
|
|
28,297,705
|
|
|
|
26,759,798
|
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
1,808,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes non-cash charges for employee stock-based compensation
expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
491
|
|
|
$
|
375
|
|
|
$
|
167
|
|
|
$
|
53
|
|
|
$
|
5
|
|
Research and development
|
|
|
2,913
|
|
|
|
1,882
|
|
|
|
821
|
|
|
|
323
|
|
|
|
42
|
|
Selling and marketing
|
|
|
2,622
|
|
|
|
1,876
|
|
|
|
779
|
|
|
|
274
|
|
|
|
38
|
|
General and administrative
|
|
|
3,112
|
|
|
|
2,152
|
|
|
|
1,137
|
|
|
|
426
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,138
|
|
|
$
|
6,285
|
|
|
$
|
2,904
|
|
|
$
|
1,076
|
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
On January 1, 2006, we adopted Statement of Financial
Accounting Standard No. 123R, Share-based Payment,
using the modified prospective method. Prior to 2006,
stock-based compensation was recognized in accordance with
Accounting Principles Board Opinion No. 25.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
56,669
|
|
|
$
|
68,360
|
|
|
$
|
44,215
|
|
|
$
|
69,527
|
|
|
$
|
38,275
|
|
Working capital
|
|
|
52,692
|
|
|
|
63,948
|
|
|
|
37,516
|
|
|
|
65,801
|
|
|
|
36,771
|
|
Total assets
|
|
|
86,689
|
|
|
|
87,929
|
|
|
|
58,024
|
|
|
|
75,799
|
|
|
|
41,538
|
|
Notes payable, current portion
|
|
|
1,814
|
|
|
|
2,687
|
|
|
|
2,547
|
|
|
|
1,052
|
|
|
|
|
|
Notes payable, long-term portion
|
|
|
225
|
|
|
|
2,039
|
|
|
|
4,726
|
|
|
|
2,621
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,212
|
|
Accumulated deficit
|
|
|
(168,484
|
)
|
|
|
(152,395
|
)
|
|
|
(125,103
|
)
|
|
|
(96,183
|
)
|
|
|
(64,822
|
)
|
Total stockholders equity (deficit)
|
|
|
66,175
|
|
|
|
71,166
|
|
|
|
41,829
|
|
|
|
67,517
|
|
|
|
(64,154
|
)
|
|
|
ITEM 7.
|
Managements Discussion and Analysis of Financial Condition
and Results of
Operations.
|
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the related notes included
in Item 8 of this report. Historical results are not
necessarily indicative of future results.
Business
Overview
We are a life science company focused on the development and
commercialization of genomic-based clinical diagnostic tests for
cancer that allow physicians and patients to make individualized
treatment decisions. Our diagnostic test, Oncotype DX, is
used for breast cancer patients to predict the likelihood of
cancer recurrence and the likelihood of chemotherapy benefit and
is conducted at our clinical reference laboratory in Redwood
City, California. Effective July 1, 2008, we increased the
list price of our test from $3,650 to $3,820. Substantially all
of our historical revenues have been derived from the sale of
Oncotype DX ordered by physicians in the United States.
Adoption
and Reimbursement
For the year ended December 31, 2008, more than 39,600 test
reports were delivered for use in treatment planning, compared
to more than 24,450 and more than 14,500 test reports delivered
for the years ended December 31, 2007 and 2006,
respectively. As of December 31, 2008, more than 85,000
tests had been delivered for use in treatment planning by more
than 7,500 physicians. We believe increased demand resulted from
the inclusion of Oncotype DX in the clinical practice
guidelines of the American Society of Clinical Oncologists, or
ASCO, and the National Comprehensive Cancer Network, or NCCN,
publication of peer-reviewed articles on studies we sponsored,
conducted or collaborated on that support the use and
reimbursement of Oncotype DX, clinical presentations at
major symposia, and our ongoing commercial efforts. However,
this increased demand is not necessarily indicative of future
demand, and we cannot assure you that this level of increased
demand can be sustained or that publication of articles, future
appearances or presentations at medical conferences or increased
commercial efforts will have a similar impact on demand for
Oncotype DX. We believe that each year we may experience
slower demand for our test in the second and third calendar
quarters, which may be attributed to physicians, surgeons and
patients scheduling vacations during this time.
We depend upon third-party payors to provide reimbursement for
our test. Accordingly, we have focused substantial resources on
obtaining reimbursement coverage from third-party payors. As of
February 2009, more than 90% of all U.S. insured lives were
covered by health plans that provide reimbursement for
Oncotype DX for patients with N-, ER+ disease through
contracts, agreements or policy decisions.
44
In order to enhance the clinical utility of Oncotype DX,
we introduced quantitative gene expression reporting for
estrogen receptor, or ER, and progesterone receptor, or PR,
genes with the Oncotype DX report in February 2008 and
for the human epidermal growth factor receptor 2, or HER2, gene
in September 2008. In the second half of 2008, we experienced an
increase in usage of Oncotype DX for N+ patients. While
some payors provide coverage for the use of Oncotype DX
in patients with lymph node micrometastasis (greater than 0.2mm,
but not greater than 2.0 mm in size), substantially all of our
existing reimbursement coverage is limited to women with
early-stage N-, ER+ breast cancer. We may not be able to obtain
reimbursement coverage for Oncotype DX for breast cancer
patients with N+, ER+ disease.
Our domestic sales, marketing and reimbursement efforts are
focused on direct interaction with medical and surgical
oncologists, pathologists and payors. In January 2009, we hired
an additional 20 U.S. sales representatives, increasing our
domestic sales force to a total of 80 sales representatives. We
have also continued to expand internationally. As of February
2009, we had received test samples from 40 countries, completed
or initiated multiple international studies and established
exclusive distribution agreements for Oncotype DX with
partners in eight countries outside of the U.S. We
established a subsidiary in Geneva, Switzerland in February 2009
and have appointed lead executives in Europe and in Asia to
support our international efforts. We do not expect
international product revenues to comprise a significant portion
of our total revenues for at least the next three years.
Product
Pipeline
We are investigating the utility of Oncotype DX in
patients with ductal carcinoma in situ, or DCIS, which generally
refers to a pre-invasive tumor with reduced risk of recurrence.
We plan to evaluate the use of the Oncotype DX gene panel
and also seek to identify other genes that may be used for
treatment planning in DCIS. We are also conducting studies of
Oncotype DX with clinical samples from breast cancer
patients who were treated with aromatase inhibitors.
Outside of breast cancer, we are conducting an independent
clinical validation study in stage II colon cancer for our
18-gene colon cancer assay, utilizing more than
1,200 patient samples from an international trial which
examined the benefit associated with 5-fluorouracil/leucovorin
chemotherapy. We anticipate reporting results of this validation
study in the second half of 2009. We do not currently expect to
commercialize a test for colon cancer until 2010.
Economic
Environment
Continuing concerns over inflation, deflation, energy costs,
geopolitical issues, the availability and cost of credit, the
Federal stimulus plan, Federal budget proposals, the
U.S. mortgage market and a declining real estate market in
the U.S. have contributed to increased volatility and
diminished expectations for the global economy and expectations
of slower global economic growth going forward. These factors,
combined with volatile oil prices, declining business and
consumer confidence, a declining stock market and increased
unemployment, have precipitated an economic slowdown and
recession. We evaluated the impact of this environment on our
cash management, cash collection activities and volume of tests
delivered.
As of the date of this report, we have not experienced a loss of
principal on any of our investments, and we expect that we will
continue to be able to access or liquidate these investments as
needed to support our business activities. From time to time, we
monitor the financial position of our significant third-party
payors, which include Medicare and managed care companies. As of
the date of this report, we do not expect the current economic
environment to have a material negative impact on our ability to
collect payments from our third-party payors in the foreseeable
future. The economic slowdown could negatively impact the volume
of tests we deliver if patients lose healthcare coverage, delay
medical checkups or are unable to pay for our test.
We intend to continue to assess the impact of the economic
environment on our business activities. If the economic climate
in the U.S. does not improve or continues to deteriorate,
our cash position, cash collection activities and volume of
tests delivered could be negatively impacted and we could
experience lower revenues.
45
Critical
Accounting Policies and Significant Judgments and
Estimates
This discussion and analysis of our financial condition and
results of operations is based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses and the
disclosure of contingent assets and liabilities at the date of
the financial statements, as well as revenues and expenses
during the reporting periods. We evaluate our estimates and
judgments on an ongoing basis. We base our estimates on
historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other
sources. Actual results could therefore differ materially from
those estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect
our more significant estimates and assumptions used in the
preparation of our financial statements.
Revenue
Recognition
We exercise judgment in determining whether revenue is
recognized on an accrual basis when test results are delivered
or on a cash basis when cash is received from the payor. Our
revenues for tests performed are recognized when the following
criteria are met: (1) persuasive evidence that an
arrangement exists; (2) delivery has occurred or services
rendered; (3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. We assess whether
the fee is fixed or determinable based on the nature of the fee
charged for the products or services delivered and existing
contractual agreements. When evaluating collectibility, we
consider whether we have sufficient history to reliably estimate
a payors individual payment patterns. Based upon at least
several months of payment history, we review the number of tests
paid against the number of tests billed and the payors
outstanding balance for unpaid tests to determine whether
payments are being made at a consistently high percentage of
tests billed and at appropriate amounts given the contracted
payment amount. To the extent all criteria set forth above are
not met, including where there is no evidence of payment history
at the time test results are delivered, product revenues are
recognized on a cash basis when cash is received from the payor.
Contract revenues are generally derived from studies conducted
with biopharmaceutical and pharmaceutical companies and are
recognized on a contract-specific basis. Under certain
contracts, revenues are recognized as costs are incurred or
assays are processed. We may exercise judgment when estimating
full-time equivalent level of effort, costs incurred and time to
project completion. For certain contracts, we utilize the
performance-based method of revenue recognition, which requires
that we estimate the total amount of costs to be expended for a
project then recognize revenue equal to the portion of costs
expended to date. The estimated total costs to be expended are
necessarily subject to revision from time-to-time as the
underlying facts and circumstances change.
Allowance
for Doubtful Accounts
We accrue an allowance for doubtful accounts against our
accounts receivable based on estimates consistent with
historical payment experience. Our allowance for doubtful
accounts is evaluated quarterly and adjusted when trends or
significant events indicate that a change in estimate is
appropriate. As of December 31, 2008 and 2007, our
allowance for doubtful accounts was $881,000 and $133,000,
respectively. The year over year increase in our allowance for
doubtful accounts reflected the impact of moving several
third-party payors from a cash basis to an accrual basis.
Research
and Development Expenses
Research and development expenses are comprised of the following
types of costs incurred in performing research and development
activities: salaries and benefits, allocated overhead and
facility occupancy costs, contract services and other outside
costs, and costs to acquire in-process research and development
projects and technologies that have no alternative future use.
Research and development expenses also include costs related to
activities performed under contracts with biopharmaceutical and
pharmaceutical companies. Research and development costs are
expensed as incurred.
46
Prior to January 1, 2008, we recognized non-refundable
advance payments for goods and services to be used for future
research and development activities as an expense when payments
were made. Beginning January 1, 2008, these payments are
deferred and capitalized and recognized as an expense as the
goods are delivered or the related services are performed in
accordance with Emerging Issues Task Force Issue
No. 07-3,
Accounting for Non-Refundable Payments for Goods or Services
Received for Use in Future Research and Development
Activities, or
EITF 07-3.
As a result of our adoption of
EITF 07-3,
our research and development collaboration expenses and net loss
decreased by $258,000 for the year ended December 31, 2008.
Our net loss per share decreased by $0.01 for the year ended
December 31, 2008. We expect to recognize these deferred
and capitalized amounts as expense in future periods as the
related services are delivered.
We enter into collaboration and clinical trial agreements with
clinical collaborators and record these costs as research and
development expenses. We record accruals for estimated study
costs comprised of work performed by our collaborators under
contract terms.
All potential future product programs outside of breast and
colon cancer are in the research or early development phase. The
expected time frame in which a test for one of these other
cancers can be brought to market is uncertain given the
technical challenges and clinical variables that exist between
different types of cancers. In 2008, we began maintaining
information regarding costs incurred for activities performed
under certain contracts with biopharmaceutical and
pharmaceutical companies. However, we do not generally record or
maintain information regarding costs incurred in research and
development on a program-specific basis. Our research and
development staff and associated infrastructure resources are
deployed across several programs. Many of our costs are thus not
attributable to individual programs. As a result, we are unable
to determine the duration and completion costs of our research
and development programs or when, if ever, and to what extent we
will receive cash inflows from the commercialization and sale of
a product.
Stock-based
Compensation Expense
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based
Payment, or SFAS 123R, which addresses the accounting
for stock-based payment transactions whereby an entity receives
employee services in exchange for equity instruments, including
stock options. Under the provisions of SFAS 123R, our
employee stock-based compensation is estimated at the date of
grant based on the fair value of the award using the
Black-Scholes option-pricing model and is recognized as expense
ratably over the requisite service period. The application of
SFAS 123R requires significant judgment and the use of
estimates, particularly surrounding assumptions used in
determining fair value. The Black-Scholes valuation method
requires the use of estimates such as stock price volatility and
expected option lives, as well as expected option forfeiture
rates, to value stock-based compensation. As of January 2008,
our assumptions regarding expected volatility are based on the
historical volatility of our common stock. Prior to January
2008, our assumptions regarding expected volatility were based
primarily on comparable peer data because our common stock had
been publicly traded for less than two years. The expected life
of options is estimated based on historical option exercise data
and assumptions related to unsettled options. Expected option
forfeiture rates are based on historical data, and compensation
expense is adjusted for actual results.
As required under SFAS 123R, we review our valuation
assumptions on an ongoing basis, and, as a result, our valuation
assumptions used to value employee stock-based awards granted in
future periods may change. See Note 10, Stock-Based
Compensation, in the Notes to Consolidated Financial
Statements in Part II, Item 8 of this Annual Report on
Form 10-K
for more information.
Results
of Operations
Comparison
of Years Ended December 31, 2008, 2007 and
2006
We recorded net loss for the years ended December 31, 2008,
2007 and 2006 of $16.1 million, $27.3 million and
$28.9 million, respectively. On a basic and diluted per
share basis, net loss was $0.57, $1.02 and $1.18 for the years
ended December 31, 2008, 2007 and 2006, respectively.
47
Revenues
We derive our revenues primarily from product sales and, to a
lesser extent, from contract research arrangements. We operate
in one industry segment. Our product revenues are derived solely
from the sale of our Oncotype DX test. Payors are billed
upon generation and delivery of a Recurrence Score report to the
physician. Product revenues are recorded on a cash basis unless
a contract or policy is in place with the payor at the time of
billing and collectibility is reasonably assured. Contract
revenues are derived from studies conducted with
biopharmaceutical and pharmaceutical companies and are recorded
as contractual obligations are completed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Product revenues
|
|
$
|
108,658
|
|
|
$
|
62,745
|
|
|
$
|
27,006
|
|
Contract revenues
|
|
|
1,921
|
|
|
|
1,282
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
110,579
|
|
|
$
|
64,027
|
|
|
$
|
29,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase in product revenues
|
|
$
|
45,913
|
|
|
$
|
35,739
|
|
|
|
|
|
Year over year percentage increase in product revenues
|
|
|
73
|
%
|
|
|
132
|
%
|
|
|
|
|
The year over year increases in product revenues resulted from
increased adoption, as evidenced by a 62% increase in test
volume for 2008 compared to 2007 and a 61% increase in test
volume for 2007 compared to 2006, expanded reimbursement
coverage, resulting in increases in the amount paid per test,
and increases in revenues recorded on an accrual basis.
Approximately $55.1 million, or 51%, of product revenues
for the year ended December 31, 2008 were recorded on an
accrual basis and recognized at the time the test results were
delivered, compared to $23.0 million, or 37%, and
$10.8 million, or 40%, of product revenues for the years
ended December 31, 2007 and 2006, respectively. Of the
tests delivered, 42% were on an accrual basis for the year ended
December 31, 2008, compared to 26% and 21% of tests
delivered for the years ended December 31, 2007 and 2006,
respectively. For all periods, the balance of product revenues
was recognized upon cash collection as payments were received.
Product revenues from Medicare payments for the year ended
December 31, 2008 were $23.7 million, or 22% of
product revenues, compared to $14.3 million, or 23%, and
$12.7 million, or 47%, for the years ended
December 31, 2007 and 2006, respectively. Medicare revenue
for the year ended December 31, 2006 included
$4.7 million of payments for services provided to Medicare
patients prior to Medicares February 27, 2006
effective coverage date for Oncotype DX. Product revenues
from United HealthCare Insurance Company payments were
$9.8 million, or 9% of product revenues, for the year ended
December 31, 2008 compared to $8.2 million, or 13% of
product revenues, for the year ended December 31, 2007.
There were no product revenues from United HealthCare Insurance
Company payments for the year ended December 31, 2006.
Contract revenues were $1.9 million, $1.3 million and
$2.2 million for the years ended December 31, 2008,
2007 and 2006, respectively. Contract revenues represented
studies assessing our gene expression technology or
collaborative work in gene selection and protocol design with
our pharmaceutical partners. The increase in contract revenues
for 2008 compared to 2007 included the recognition of
$1.4 million in 2008 related to the completion of a
contract. The decrease in contract revenues for 2007 compared to
2006 was due to project timing for ongoing research and
development collaboration activities. We expect that our
contract revenues will continue to fluctuate based on the number
and timing of studies being conducted.
48
Cost of
Product Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Tissue sample processing costs
|
|
$
|
18,998
|
|
|
$
|
12,071
|
|
|
$
|
7,568
|
|
Employee stock-based compensation
|
|
|
491
|
|
|
|
375
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tissue sample processing costs
|
|
|
19,489
|
|
|
|
12,446
|
|
|
|
7,735
|
|
License fees
|
|
|
7,696
|
|
|
|
4,885
|
|
|
|
2,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product revenues
|
|
$
|
27,185
|
|
|
$
|
17,331
|
|
|
$
|
9,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
9,854
|
|
|
$
|
7,423
|
|
|
|
|
|
Year over year percentage increase
|
|
|
57
|
%
|
|
|
75
|
%
|
|
|
|
|
Cost of product revenues represents the cost of materials,
direct labor, equipment and infrastructure expenses associated
with processing tissue samples (including histopathology,
anatomical pathology, paraffin extraction, reverse transcription
polymerase chain reaction, or RT-PCR, quality control analyses
and shipping charges to transport tissue samples) and license
fees. Infrastructure expenses include allocated facility
occupancy and information technology costs. Costs associated
with performing our test are recorded as tests are processed.
Costs recorded for tissue sample processing represent the cost
of all the tests processed during the period regardless of
whether revenue was recognized with respect to that test.
Royalties for licensed technology calculated as a percentage of
product revenues and fixed annual payments relating to the
launch and commercialization of Oncotype DX are recorded
as license fees in cost of product revenues at the time product
revenues are recognized or in accordance with other contractual
obligations. License fees represent a significant component of
our cost of product revenues and are expected to remain so for
the foreseeable future.
Test volume increased 62% from 2007 to 2008 and 61% from 2006 to
2007, driving the $6.9 million, or 57%, and
$4.5 million, or 60%, year over year increases in tissue
sample processing costs. The $2.8 million, or 57%, and
$2.7 million, or 125%, year over year increases in license
fees included higher royalties primarily driven by year over
year increases in product revenues of 73% and 132%,
respectively. We expect the cost of product revenues to increase
to the extent we process more tests.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
16,534
|
|
|
$
|
11,487
|
|
|
$
|
6,211
|
|
Employee stock-based compensation
|
|
|
2,913
|
|
|
|
1,882
|
|
|
|
821
|
|
Collaboration expenses
|
|
|
1,433
|
|
|
|
1,320
|
|
|
|
1,486
|
|
Reagents and laboratory supplies
|
|
|
1,972
|
|
|
|
1,709
|
|
|
|
773
|
|
Infrastructure and all other costs
|
|
|
5,772
|
|
|
|
5,655
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
28,624
|
|
|
$
|
22,053
|
|
|
$
|
12,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
6,571
|
|
|
$
|
9,212
|
|
|
|
|
|
Year over year percentage increase
|
|
|
30
|
%
|
|
|
72
|
%
|
|
|
|
|
Research and development expenses represent costs incurred to
develop our technology and carry out clinical studies and
include personnel-related expenses, reagents and supplies used
in research and development laboratory work, infrastructure
expenses, including allocated overhead and facility occupancy
costs, contract services and other outside costs. Research and
development expenses also include costs related to activities
performed under contracts with biopharmaceutical and
pharmaceutical companies.
The $6.6 million increase in research and development
expenses for 2008 compared to 2007 included a $5.0 million
increase in personnel-related expenses due primarily to an
increase in headcount year over year, a
49
$1.0 million increase in stock-based compensation and a
$263,000 increase in costs incurred for reagents and laboratory
supplies. The $9.2 million increase in research and
development expenses for 2007 compared to 2006 included a
$5.3 million increase in personnel-related expenses due
primarily to an increase in headcount year over year, a
$2.1 million increase in infrastructure expenses, including
allocations for laboratory facilities expansion and
improvements, a $1.1 million increase in employee
stock-based compensation and a $936,000 increase in costs
incurred for reagents and lab supplies. We expect that our
research and development expenses will continue to increase as
we increase investment in our product pipeline for a variety of
cancers, including cancers other than breast and colon.
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
21,208
|
|
|
$
|
17,225
|
|
|
$
|
11,371
|
|
Employee stock-based compensation
|
|
|
2,622
|
|
|
|
1,876
|
|
|
|
779
|
|
Promotional and marketing materials
|
|
|
10,961
|
|
|
|
8,972
|
|
|
|
7,437
|
|
Travel, meetings and seminars
|
|
|
6,086
|
|
|
|
5,294
|
|
|
|
2,910
|
|
Infrastructure and all other costs
|
|
|
5,791
|
|
|
|
3,089
|
|
|
|
2,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling and marketing expenses
|
|
$
|
46,668
|
|
|
$
|
36,456
|
|
|
$
|
24,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
10,212
|
|
|
$
|
11,831
|
|
|
|
|
|
Year over year percentage increase
|
|
|
28
|
%
|
|
|
48
|
%
|
|
|
|
|
Our selling and marketing expenses consist primarily of
personnel-related expenses, education and promotional expenses
associated with Oncotype DX and infrastructure expenses,
including allocated facility occupancy and information
technology costs. These expenses include the costs of educating
physicians, laboratory personnel and other healthcare
professionals regarding our genomic technologies, how our
Oncotype DX test was developed and validated and the
value of the quantitative information that Oncotype DX
provides. Selling and marketing expenses also include the costs
of sponsoring continuing medical education, medical meeting
participation and dissemination of our scientific and economic
publications related to Oncotype DX.
The $10.2 million increase in selling and marketing
expenses for 2008 compared to 2007 was primarily due to a
$4.0 million increase in personnel-related expenses,
reflecting our investment in our field sales and support
organization, a $2.7 million increase in infrastructure and
other expenses, including allocations for facilities expansion
and improvements and medical affairs support for breast cancer
product enhancements, a $2.0 million increase in
promotional field and marketing expense, a $792,000 increase in
travel-related expenses, primarily associated with field sales
personnel, and a $746,000 increase in stock-based compensation.
Of the $4.0 million increase in personnel-related expenses,
$3.5 million was attributable to increases in salaries and
related expenses and $528,000 was attributable to higher
commissions and bonus payments related to increased product
revenues.
The $11.8 million increase in selling and marketing
expenses in 2007 compared to 2006 was due to a $5.9 million
increase in personnel-related expenses, largely due to the
expansion of our domestic field sales and support organization
in the second half of 2006, $2.4 million in higher
travel-related expenses primarily associated with field sales
personnel, a $1.5 million increase in promotional field and
marketing expense, a $1.1 million increase in stock-based
compensation expense, and a $1.0 million increase in
infrastructure expenses, including facilities expansion and
improvements. Of the $5.9 million increase in
personnel-related expenses, $4.7 million was attributable
to increases in salaries and related expenses, including the
expansion of our domestic field sales force in July 2006,
and, $1.2 million was attributable to higher commissions
and bonus payments related to increased product revenues.
We expect that selling and marketing expenses will continue to
increase in future periods as we continue to invest in our
domestic field sales force and support organization and expand
our commercial efforts in international
50
markets. In January 2009, we hired an additional 20
U.S. sales representatives, increasing our domestic sales
force by 33% to a total of 80 sales representatives.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
9,184
|
|
|
$
|
6,053
|
|
|
$
|
4,530
|
|
Employee stock-based compensation
|
|
|
3,112
|
|
|
|
2,152
|
|
|
|
1,137
|
|
Professional fees and all other costs
|
|
|
13,321
|
|
|
|
9,644
|
|
|
|
7,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
25,617
|
|
|
$
|
17,849
|
|
|
$
|
12,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
7,768
|
|
|
$
|
5,084
|
|
|
|
|
|
Year over year percentage increase
|
|
|
44
|
%
|
|
|
40
|
%
|
|
|
|
|
Our general and administrative expenses consist primarily of
personnel-related expenses and professional fees and other
costs, including legal fees, advisory and auditing expenses,
billing and collection costs, bad debt expense and other
professional and administrative costs and related infrastructure
expenses, including allocated facility occupancy and information
technology costs.
The $7.8 million increase in general and administrative
expenses for 2008 compared to 2007 included a $3.1 million
increase in personnel-related expenses due primarily to an
increase in headcount year over year, a $1.4 million
increase in bad debt expense related to growth in our aged
accounts receivable balances, a $1.1 million increase in
billing and collections expense related to an increase in the
number of tests processed and cash collected, a $960,000
increase in stock-based compensation expense and a $768,000
increase in professional fees, due primarily to legal fees
related to regulatory and other matters, and a $406,000 increase
in infrastructure and related costs.
The $5.1 million increase in general and administrative
expenses for 2007 compared to 2006 included a $1.5 million
increase in personnel-related expense due primarily to an
increase in headcount year over year, a $1.0 million
increase in stock-based compensation and $966,000 in higher
billing and collection fees paid to third-party billing and
collection vendors. These increases were partially offset by a
decrease in bad debt expense due to changes in our estimate of
allowance for doubtful accounts, which resulted in a $115,000
credit to bad debt expense for the year ended December 31,
2007.
We expect general and administrative expenses to increase as we
hire additional staff and incur other expenses to support the
growth of our business and to the extent we spend more on fees
for billing and collections as we process more tests.
Interest
and Other Income
Interest and other income was $1.8 million for the year
ended December 31, 2008 compared to $3.0 million and
$2.5 million for the years ended December 31, 2007 and
2006, respectively. The decrease in interest and other income
for 2008 compared to 2007 reflected decreased interest income
due to lower average cash and short-term investment balances
compared to the prior year, which reflected the investment of a
portion of the proceeds from our May 2007 common stock offering,
and lower market yields on our investments in 2008. The increase
in interest and other income for 2007 compared to 2006 was due
to increased interest income from higher average short-term
investment balances, resulting from our investment of a portion
of the cash proceeds from our May 2007 public offering of common
stock, and higher market yields on our investments in 2007.
We expect our interest and other income may continue to decrease
if the overall decline in the interest rate environment related
to the current economic crisis continues.
Interest
Expense
Interest expense was $386,000 for the year ended
December 31, 2008 compared to $678,000 and $446,000 for the
years ended December 31, 2007 and 2006, respectively. We
incur interest expense on our equipment financing established in
March 2005. The $292,000 decrease in interest expense in 2008
compared to 2007 was due to lower
51
average balances on these borrowings as we paid them down. The
$232,000 increase in interest expense in 2007 compared to 2006
was due to higher average balances on these borrowings
reflecting draws made on our equipment financing line in January
2007.
We expect our interest expense to decline as we continue to make
payments on our equipment financing. We do not anticipate using
additional equipment financing as a funding source in the next
twelve months.
Liquidity
and Capital Resources
As of December 31, 2008, we had an accumulated deficit of
$168.5 million. We have not yet achieved profitability and
anticipate that we will likely incur net losses for at least the
next year. However, we cannot provide assurance as to when, if
ever, we will achieve profitability. We expect that our research
and development, selling and marketing and general and
administrative expenses will continue to increase and, as a
result, we will need to generate significant product revenues to
achieve profitability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
56,669
|
|
|
$
|
68,360
|
|
|
$
|
44,215
|
|
Working capital
|
|
|
52,692
|
|
|
|
63,948
|
|
|
|
37,516
|
|
For the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(818
|
)
|
|
|
(18,706
|
)
|
|
|
(20,733
|
)
|
Investing activities
|
|
|
(26,167
|
)
|
|
|
(4,744
|
)
|
|
|
13,041
|
|
Financing activities
|
|
|
(1,008
|
)
|
|
|
47,688
|
|
|
|
3,779
|
|
Capital expenditures (included in investing activities above)
|
|
|
(10,057
|
)
|
|
|
(4,881
|
)
|
|
|
(8,424
|
)
|
Sources
of Liquidity
At December 31, 2008, we had cash, cash equivalents and
short-term investments of $56.7 million compared to
$68.4 million at December 31, 2007. In accordance with
our investment policy, available cash is invested in short-term,
low-risk, investment-grade debt instruments. Our cash and
short-term investments are held in a variety of interest-bearing
instruments including money market accounts, obligations of
U.S. government-sponsored entities, high-grade corporate
bonds and commercial paper. At December 31, 2008, our
holdings of obligations of U.S. government-sponsored
entities consisted entirely of debt securities issued by the
Federal Home Loan Bank, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation.
Historically we have financed our operations primarily through
sales of our equity securities and cash received in payment for
our tests. In May 2007, we completed a public offering of our
common stock, resulting in net proceeds of $49.7 million.
At December 31, 2008, we had approximately
$46.5 million of securities available for issuance under a
shelf registration statement. Purchases of equipment and
leasehold improvements have been partially financed through
capital equipment financing arrangements. At December 31,
2008 and December 31, 2007, we had notes payable under
these equipment financing arrangements of $2.0 million and
$4.7 million, respectively. Our existing notes payable
under these arrangements are scheduled to be fully paid by
November 2010.
Cash
Flows
Net cash used in operating activities was $818,000,
$18.7 million and $20.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Net cash
used in operating activities includes net loss adjusted for
certain non-cash items and changes in assets and liabilities.
The $17.9 million decrease in net cash used in operating
activities from 2008 to 2007 was primarily due to a
$15.1 million decrease in net loss excluding depreciation
and stock-based compensation expense, a $2.6 million
decrease in net cash used related to increases in deferred
revenues, a $489,000 decrease in net cash used related to
accounts payable and a $1.3 million increase in accrued
expenses and other liabilities, partially offset by a
$491,000 million increase in net cash used related to
increases in accounts receivable and a $1.3 million
increase in net cash used related to decreases in accrued
compensation. The $2.0 million decrease in net cash used in
operating activities from 2007 to 2006 was primarily due to a
$6.4 million
52
decrease in net loss excluding depreciation and stock-based
compensation expense and a $489,000 decrease in net cash used
related to increases in accrued expenses and other liabilities,
partially offset by a $3.1 million increase in net cash
used related to increases in accounts receivable, prepaid
expenses and other assets and a $1.7 million increase in
cash used due to a decrease in accounts payable.
Net cash used in investing activities was $26.2 million for
the year ended December 31, 2008, compared to net cash used
in investing activities of $4.7 million for the year ended
December 31, 2007 and net cash provided by investing
activities of $13.0 million for the year ended
December 31, 2006. Our investing activities have consisted
predominately of purchases and maturities of marketable
securities and capital expenditures. The $21.5 million
increase in net cash used in investing activities from 2007 to
2008 was due to a $16.3 million increase in net purchases
of short-term investments as we invested a portion of the cash
proceeds from our May 2007 public offering of common stock as
well as a $5.2 million increase in capital expenditures for
facility expansion and improvements. The $17.7 million
increase in net cash used in investing activities from 2006 to
2007 was due to a $21.3 million increase in net purchases
of short-term investments as we invested a portion of the cash
proceeds from our May 2007 public offering of common stock,
partially offset by a $3.5 million decrease in capital
expenditures for facility expansion and improvements.
Net cash used in financing activities was $1.0 million for
the year ended December 31, 2008, compared to net cash
provided by financing activities of $47.7 million and
$3.8 million for the years ended December 31, 2007 and
2006, respectively. Our financing activities include sales of
our equity securities and capital equipment financing
arrangements. The $48.7 million decrease in net cash
provided by financing activities from 2007 to 2008 was primarily
due to a decrease in proceeds from issuance of common stock. The
$43.9 million increase in net cash provided by financing
activities from 2006 to 2007 included net proceeds of
$49.7 million from our May 2007 public offering of common
stock, partially offset by a $6.1 million decrease in cash
provided by capital equipment financing.
Contractual
Obligations
The following table summarizes our significant contractual
obligations as of December 31, 2008 and the effect those
obligations are expected to have on our liquidity and cash flows
in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Notes payable obligations
|
|
$
|
2,172
|
|
|
$
|
1,934
|
|
|
$
|
238
|
|
|
$
|
|
|
|
$
|
|
|
Non-cancelable operating lease obligations
|
|
|
5,167
|
|
|
|
1,520
|
|
|
|
3,357
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,339
|
|
|
$
|
3,454
|
|
|
$
|
3,595
|
|
|
$
|
290
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our notes payable obligations are for principal and interest
payments on capital equipment financing. In March 2005, we
entered into an arrangement to finance the acquisition of
laboratory equipment, computer hardware and software, leasehold
improvements and office equipment. In connection with this
arrangement, we granted the lender a security interest in the
assets purchased with these borrowings. Beginning in April 2006,
we could prepay all, but not part, of any amounts owing under
the arrangement so long as we also paid a 6% premium on the
remaining outstanding principal balance. This premium was
reduced to 5% in April 2007 and was further reduced to 4% in
April 2008. As of December 31, 2008, the outstanding
principal balance under this arrangement was $2.2 million
at annual interest rates ranging from 10.23% to 11.30%,
depending upon the applicable note.
Our non-cancelable operating lease obligations are for
laboratory and office space. In September 2005, we entered into
a non-cancelable lease for 48,000 square feet of laboratory
and office space in Redwood City, California. In January 2007,
we entered into a non-cancelable lease for an additional
48,000 square feet of laboratory and office space in a
nearby location. Both leases expire in February 2012.
We are required to make a series of fixed annual payments under
one of our collaboration agreements beginning on the date that
we commercially launched Oncotype DX. We made payments of
$300,000, $300,000 and $475,000 in January 2006, 2007 and 2008,
respectively. We are required to make additional payments of
$475,000
53
in each of 2009 through 2011. However, because either party may
terminate the agreement upon 30 days prior written
notice, these payments are not included in the table above.
We have also committed to make potential future payments to
third parties as part of our collaboration agreements. Payments
under these agreements generally become due and payable only
upon achievement of specific project milestones. Because the
achievement of these milestones is generally neither probable
nor reasonably estimable, such commitments have not been
included in the table above.
Off-Balance
Sheet Activities
As of December 31, 2008, we had no material off-balance
sheet arrangements other than the lease obligations and
collaboration payments discussed above.
Operating
Capital and Capital Expenditure Requirements
We expect to continue to incur operating losses for the next
12 months and to make capital expenditures to keep pace
with the expansion of our research and development programs and
to scale our commercial operations. However, we cannot provide
assurance as to when, if ever, we will achieve profitability. We
expect to spend approximately $5.0 million over the next
12 months for planned laboratory equipment and other
capital expenditures in order to support the growth of our
business. It may take years to move any one of a number of
product candidates in research through development and
validation to commercialization. We expect that our cash and
cash equivalents will be used to fund working capital and for
capital expenditures and other general corporate purposes, such
as licensing technology rights, partnering arrangements for our
tests outside the U.S., establishing direct sales capabilities
outside of the U.S. or reduction of debt obligations. We
may also use cash to acquire or invest in complementary
businesses, technologies, services or products. We have no
current plans, agreements or commitments with respect to any
such acquisition or investment, and we are not currently engaged
in any negotiations with respect to any such transaction.
The amount and timing of actual expenditures may vary
significantly depending upon a number of factors, such as the
progress of our product development, regulatory requirements,
commercialization efforts, the amount of cash used by
operations, progress in reimbursement and the pace of
international expansion.
We currently anticipate that our cash, cash equivalents and
short-term investments, together with collections from
Oncotype DX, will be sufficient to fund our operations
and facilities expansion plans for at least the next
12 months. We cannot be certain that our development of
future products will be successful or that we will be able to
raise sufficient additional funds to see these programs through
to a successful commercial product.
Our future funding requirements will depend on many factors,
including the following:
|
|
|
|
|
the rate of progress in establishing reimbursement arrangements
with third-party payors;
|
|
|
|
the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts;
|
|
|
|
the rate of progress and cost of research and development
activities associated with expansion of Oncotype DX for
breast cancer;
|
|
|
|
the rate of progress and cost of research and development
activities associated with products in the early development and
validation phase focused on cancers other than breast cancer;
|
|
|
|
the cost of acquiring or achieving access to tissue samples and
technologies;
|
|
|
|
the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
|
|
|
|
the effect of competing technological and market developments;
|
|
|
|
costs related to international expansion;
|
|
|
|
the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our products or
operations; and
|
54
|
|
|
|
|
the economic and other terms and timing of any collaborations,
licensing or other arrangements into which we may enter.
|
Until we can generate a sufficient amount of product revenues to
finance our cash requirements, which we may never do, we expect
to finance future cash needs primarily through public or private
equity offerings, debt financings, borrowings or strategic
collaborations. The issuance of equity securities may result in
dilution to stockholders, or may provide for rights, preferences
or privileges senior to those of our holders of common stock. If
we raise funds by issuing debt securities, these debt securities
would have rights, preferences and privileges senior to those of
holders of our common stock. The terms of debt securities or
borrowings could impose significant restrictions on our
operations. We do not know whether additional funding will be
available on acceptable terms, if at all. Recently, the credit
markets and the financial services industry have been
experiencing a period of unprecedented turmoil and upheaval
characterized by the bankruptcy, failure, collapse or sale of
various financial institutions and an unprecedented level of
intervention from the U.S. federal government. These events
have generally made equity and debt financing difficult to
obtain. If we are not able to secure additional funding when
needed, we may have to delay, reduce the scope of or eliminate
one or more research and development programs or selling and
marketing initiatives. In addition, we may have to work with a
partner on one or more of our product or market development
programs, which would lower the economic value of those programs
to our company.
Recent
Accounting Pronouncements
In February 2008, Financial Accounting Standards Board, or FASB
issued FASB Staff Position
157-2,
Effective Date of FASB Statement
No. 157(SFAS 157), or
FSP 157-2.
FSP 157-2
delays the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until
fiscal years beginning after November 15, 2008. We have
elected a partial deferral of SFAS 157 under the provisions
of
FSP 157-2.
We do not expect the application of SFAS 157 to our
non-financial assets and non-financial liabilities to have a
material impact on our financial condition or results of
operations.
In November 2007, FASB ratified Emerging Issues Task Force Issue
No. 07-1,
Accounting for Collaborative Arrangements, or
EITF 07-1,
which defines collaborative arrangements and establishes
reporting requirements for transactions between participants in
a collaborative arrangement and between participants in a
collaborative arrangement and third parties.
EITF 07-1
is effective for fiscal years beginning after December 15,
2008, and is to be applied retrospectively to all prior periods
presented for all collaborative arrangements existing as of the
effective date. We do not expect the adoption of
EITF 07-01
to have a material impact on our financial condition or results
of operations.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Our exposure to market risk is confined to our cash equivalents
and marketable securities. The primary objective of our
investment activities is to preserve our capital to fund
operations. We also seek to maximize income from our investments
without assuming significant risk. Our investment policy
provides for investments in short-term, low-risk,
investment-grade debt instruments. Our investments in marketable
securities, which are comprised primarily of money market funds,
obligations of U.S. Government agencies and
government-sponsored entities, high-grade corporate bonds and
commercial paper, are subject to default, changes in credit
rating and changes in market value. Due to recent financial and
economic conditions, similar investments have experienced losses
in value and liquidity constraints which differ from historical
patterns. These investments are also subject to interest rate
risk and will decrease in value if market rate interest rates
increase.
Our cash, cash equivalents and marketable securities, totaling
$56.7 million at December 31, 2008, did not include
any auction preferred stock, auction rate securities or
mortgage-backed investments. We currently do not hedge interest
rate exposure, and we do not have any foreign currency or other
derivative financial instruments. The securities in our
investment portfolio are classified as available for sale and
are, due to their short-term nature, subject to minimal interest
rate risk. To date, we have not experienced a loss of principal
on any of our investments. Although we currently expect that our
ability to access or liquidate these investments as needed to
support our business activities will continue, we cannot ensure
that this will not change. We believe that, if market interest
rates were to change immediately and uniformly by 10% from
levels at December 31, 2008, the impact on the fair value
of these securities or our cash flows or income would not be
material.
55
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data.
|
Genomic
Health, Inc.
Index to
consolidated financial statements
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Genomic Health, Inc.
We have audited the accompanying consolidated balance sheets of
Genomic Health, Inc. as of December 31, 2008 and 2007, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule included under
Item 15(a)(2). These consolidated financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Genomic Health, Inc. at
December 31, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Genomic Health, Inc.s internal control
over financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 12, 2009
expressed an unqualified opinion thereon.
Palo Alto, California
March 12, 2009
57
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,171
|
|
|
$
|
39,164
|
|
Short-term investments
|
|
|
45,499
|
|
|
|
29,196
|
|
Accounts receivable (net of allowance for doubtful accounts;
2008 $881, 2007 $133)
|
|
|
8,807
|
|
|
|
5,089
|
|
Prepaid expenses and other current assets
|
|
|
4,781
|
|
|
|
3,105
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
70,258
|
|
|
|
76,554
|
|
Property and equipment, net
|
|
|
15,562
|
|
|
|
10,412
|
|
Restricted cash
|
|
|
500
|
|
|
|
500
|
|
Other assets
|
|
|
369
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
86,689
|
|
|
$
|
87,929
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,898
|
|
|
$
|
1,966
|
|
Accrued compensation
|
|
|
4,157
|
|
|
|
3,672
|
|
Accrued license fees
|
|
|
2,553
|
|
|
|
1,798
|
|
Accrued expenses and other current liabilities
|
|
|
4,398
|
|
|
|
1,948
|
|
Notes payable current portion
|
|
|
1,814
|
|
|
|
2,687
|
|
Deferred revenues current portion
|
|
|
2,381
|
|
|
|
337
|
|
Lease incentive obligations current portion
|
|
|
364
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,565
|
|
|
|
12,606
|
|
Notes payable long-term portion
|
|
|
225
|
|
|
|
2,039
|
|
Deferred revenues long-term portion
|
|
|
1,417
|
|
|
|
671
|
|
Lease incentive obligations long-term portion
|
|
|
789
|
|
|
|
629
|
|
Other liabilities
|
|
|
518
|
|
|
|
818
|
|
|
|
|
|
|
|
|
|
|
Commitments (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, none issued and outstanding at December 31,
2008 and 2007
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 28,461,327 and 28,181,859 shares issued and
outstanding at December 31, 2008 and 2007 respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
234,412
|
|
|
|
223,507
|
|
Accumulated other comprehensive income
|
|
|
245
|
|
|
|
52
|
|
Accumulated deficit
|
|
|
(168,484
|
)
|
|
|
(152,395
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
66,175
|
|
|
|
71,166
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
86,689
|
|
|
$
|
87,929
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
58
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
108,658
|
|
|
$
|
62,745
|
|
|
$
|
27,006
|
|
Contract revenues
|
|
|
1,921
|
|
|
|
1,282
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
110,579
|
|
|
|
64,027
|
|
|
|
29,174
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
27,185
|
|
|
|
17,331
|
|
|
|
9,908
|
|
Research and development
|
|
|
28,624
|
|
|
|
22,053
|
|
|
|
12,841
|
|
Selling and marketing
|
|
|
46,668
|
|
|
|
36,456
|
|
|
|
24,625
|
|
General and administrative
|
|
|
25,617
|
|
|
|
17,849
|
|
|
|
12,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
128,094
|
|
|
|
93,689
|
|
|
|
60,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,515
|
)
|
|
|
(29,662
|
)
|
|
|
(30,965
|
)
|
Interest and other income
|
|
|
1,751
|
|
|
|
3,048
|
|
|
|
2,491
|
|
Interest expense
|
|
|
(386
|
)
|
|
|
(678
|
)
|
|
|
(446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit
|
|
|
(16,150
|
)
|
|
|
(27,292
|
)
|
|
|
(28,920
|
)
|
Income tax benefit
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.57
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
28,297,705
|
|
|
|
26,759,798
|
|
|
|
24,508,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
59
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Balance at December 31, 2005
|
|
|
24,470,981
|
|
|
$
|
2
|
|
|
$
|
167,053
|
|
|
$
|
(3,297
|
)
|
|
$
|
(58
|
)
|
|
$
|
(96,183
|
)
|
|
$
|
67,517
|
|
Deferred stock-based compensation reclassified upon adoption of
SFAS 123R on January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
(3,297
|
)
|
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to employees upon exercise of stock
options for cash
|
|
|
74,826
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
Issuance of common stock to consultants upon exercise of stock
options for cash
|
|
|
2,253
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
2,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,904
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,920
|
)
|
|
|
(28,920
|
)
|
Change in unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
24,548,060
|
|
|
|
2
|
|
|
|
166,922
|
|
|
|
|
|
|
|
8
|
|
|
|
(125,103
|
)
|
|
|
41,829
|
|
Issuance of common stock for cash, net of issuance costs
|
|
|
3,450,000
|
|
|
|
|
|
|
|
49,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,668
|
|
Issuance of common stock to employees upon exercise of stock
options for cash
|
|
|
174,287
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552
|
|
Issuance of common stock to consultants upon exercise of stock
options for cash
|
|
|
9,512
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
6,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,285
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,292
|
)
|
|
|
(27,292
|
)
|
Change in unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
28,181,859
|
|
|
|
2
|
|
|
|
223,507
|
|
|
|
|
|
|
|
52
|
|
|
|
(152,395
|
)
|
|
|
71,166
|
|
Issuance of common stock to employees upon exercise of stock
options for cash
|
|
|
245,035
|
|
|
|
|
|
|
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,425
|
|
Issuance of common stock to consultants upon exercise of stock
options for cash
|
|
|
34,433
|
|
|
|
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
9,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,138
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,089
|
)
|
|
|
(16,089
|
)
|
Change in unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
28,461,327
|
|
|
$
|
2
|
|
|
$
|
234,412
|
|
|
$
|
|
|
|
$
|
245
|
|
|
$
|
(168,484
|
)
|
|
$
|
66,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
60
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,012
|
|
|
|
3,995
|
|
|
|
2,629
|
|
Employee stock-based compensation
|
|
|
9,138
|
|
|
|
6,285
|
|
|
|
2,904
|
|
Non-employee stock-based compensation
|
|
|
88
|
|
|
|
65
|
|
|
|
83
|
|
Gain on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,718
|
)
|
|
|
(3,227
|
)
|
|
|
(1,548
|
)
|
Employee note receivable
|
|
|
|
|
|
|
|
|
|
|
37
|
|
Prepaid expenses and other assets
|
|
|
(1,687
|
)
|
|
|
(1,647
|
)
|
|
|
(228
|
)
|
Accounts payable
|
|
|
(68
|
)
|
|
|
(557
|
)
|
|
|
1,130
|
|
Accrued expenses and other liabilities
|
|
|
2,905
|
|
|
|
1,608
|
|
|
|
933
|
|
Accrued compensation
|
|
|
485
|
|
|
|
1,804
|
|
|
|
913
|
|
Deferred revenues
|
|
|
2,790
|
|
|
|
161
|
|
|
|
609
|
|
Lease incentive obligations
|
|
|
326
|
|
|
|
99
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(818
|
)
|
|
|
(18,706
|
)
|
|
|
(20,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(10,057
|
)
|
|
|
(4,881
|
)
|
|
|
(8,424
|
)
|
Purchase of short-term investments
|
|
|
(112,109
|
)
|
|
|
(66,021
|
)
|
|
|
(40,002
|
)
|
Maturities of short-term investments
|
|
|
95,999
|
|
|
|
66,158
|
|
|
|
61,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(26,167
|
)
|
|
|
(4,744
|
)
|
|
|
13,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
|
|
|
|
|
|
|
|
4,912
|
|
Principal payments of notes payable
|
|
|
(2,687
|
)
|
|
|
(2,547
|
)
|
|
|
(1,312
|
)
|
Proceeds from issuance of common stock upon exercise of stock
options
|
|
|
1,679
|
|
|
|
565
|
|
|
|
179
|
|
Net proceeds from issuance of common stock in public offering
|
|
|
|
|
|
|
49,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,008
|
)
|
|
|
47,688
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(27,993
|
)
|
|
|
24,238
|
|
|
|
(3,913
|
)
|
Cash and cash equivalents at the beginning of period
|
|
|
39,164
|
|
|
|
14,926
|
|
|
|
18,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
11,171
|
|
|
$
|
39,164
|
|
|
$
|
14,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
386
|
|
|
$
|
678
|
|
|
$
|
446
|
|
See accompanying notes.
61
GENOMIC
HEALTH, INC.
December 31, 2008
|
|
Note 1.
|
Organization
and Summary of Significant Accounting Policies
|
The
Company
Genomic Health, Inc. (the Company) is a life science
company focused on the development and commercialization of
genomic-based clinical diagnostic tests for cancer that allow
physicians and patients to make individualized treatment
decisions. The Company was incorporated in Delaware in August
2000. The Companys first test, Oncotype DX, was
launched in 2004 and is used for early-stage breast cancer
patients to predict the likelihood of breast cancer recurrence
and the likelihood of chemotherapy benefit. The Company has
incurred significant losses and expects to incur additional
losses for at least the next year as commercial and development
efforts continue. However, the Company cannot provide assurance
as to when, if ever, it will achieve profitability.
Principles
of Consolidation
The consolidated financial statements include all the accounts
of the Company and its wholly-owned subsidiary. The Company has
one wholly-owned subsidiary, Oncotype Laboratories, Inc.,
which was established in 2003 and is inactive.
Basis
of Presentation and Use of Estimates
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
judgments, assumptions and estimates that affect the amounts
reported in the Companys consolidated financial statements
and accompanying notes. Actual results could differ materially
from those estimates.
Certain reclassifications of prior period amounts have been made
to the Companys consolidated financial statements to
conform to the current period presentation.
Cash
Equivalents and Short-term Investments
The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash
equivalents.
The Company invests in marketable securities, primarily money
market securities, obligations of U.S. Government agencies
and government-sponsored entities, corporate bonds and
commercial paper. The Company considers all investments with a
maturity date less than one year as of the balance sheet date to
be short-term investments. These securities are carried at
estimated fair value with unrealized gains and losses included
in stockholders equity. Those investments with a maturity
date greater than one year as of the balance sheet date are
considered to be long-term investments. As of December 31,
2008, all investments were classified as available for sale.
Realized gains and losses and declines in value, if any, judged
to be other than temporary on available-for-sale securities are
reported in other income or expense. When securities are sold,
any associated unrealized gain or loss recorded as a separate
component of stockholders equity is reclassified out of
stockholders equity on a specific-identification basis and
recorded in earnings for the period.
Fair
Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, short-term
investments, trade receivables and accounts payable, approximate
fair value due to their short maturities. Based on borrowing
rates currently available to the Company for loans and capital
lease obligations with similar terms, the carrying value of the
Companys debt obligations approximates fair value.
62
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS 157
applies whenever standards require (or permit) assets or
liabilities to be measured at fair value, and does not expand
the use of fair value in any new circumstances.
The Company adopted SFAS 157 as of January 1, 2008 for
financial assets and liabilities measured at fair value. There
was no financial statement impact as a result of adoption. The
Company will adopt SFAS 157 for non-financial assets and
liabilities as of January 1, 2009. See Note 3 for more
information.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 expands the use
of fair value accounting but does not affect existing standards
that require assets or liabilities to be carried at fair value.
Under SFAS 159, a company may elect to use fair value to
measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts
payable, issued debt and other financial assets and liabilities.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007.
The Company adopted SFAS 159 effective January 1, 2008
and did not elect fair value as an alternative measurement for
any financial instruments not previously carried at fair value.
In October 2008, FASB issued Staff Position
No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(FSP 157-3)
which clarifies the application of SFAS 157 in an inactive
market and illustrates how an entity would determine fair value
when the market for a financial asset is not active. The Company
adopted
FSP 157-3
as of September 30, 2008. There was no financial impact as
a result of adoption.
Concentration
of Risk
Cash equivalents, short-term investments and accounts receivable
are financial instruments which potentially subject the Company
to concentrations of credit risk. The Company invests in money
market securities through a major U.S. bank and is exposed
to credit risk in the event of default by the financial
institution to the extent of amounts recorded on the
consolidated balance sheets. The Company invests in short-term,
investment-grade debt instruments and by policy limits the
amount in any one type of investment, except for securities
issued or guaranteed by the U.S. Government. Through
December 31, 2008, no material losses had been incurred.
As of December 31, 2008, all of the Companys product
revenues have been derived from sales of one product, the
Oncotype DX test. Substantially all of the Companys
tests to date have been delivered to physicians in the United
States. All Oncotype DX assays are processed in the
Companys clinical reference laboratory facility in Redwood
City, California. One third-party payor accounted for
approximately 22%, 23% and 47% of the Companys product
revenues for the years ended December 31, 2008, 2007 and
2006, respectively. This payor represented 42% and 55% of the
Companys net accounts receivable balance as of
December 31, 2008 and 2007, respectively. Another
third-party payor accounted for approximately 9%, 13% and 5% of
the Companys product revenues in 2008, 2007 and 2006,
respectively. This payor represented 14% and 10% of the
Companys accounts receivable balance as of
December 31, 2008 and 2007, respectively.
Allowance
for Doubtful Accounts
The Company accrues an allowance for doubtful accounts against
its accounts receivable consistent with historical payment
experience. Bad debt expense is included in general and
administrative expense on the Companys consolidated
statements of operations. Accounts receivable are written off
against the allowance when the appeals process is exhausted,
when an unfavorable coverage decision is received or when there
is other substantive evidence that the account will not be paid.
As of December 31, 2008 and 2007, the Companys
allowance for doubtful accounts was $881,000 and $133,000,
respectively. Write-offs for doubtful accounts of $595,000 and
$261,000 were recorded against the allowance during the years
ended December 31, 2008 and 2007,
63
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. Bad debt expense was $1.3 million, ($115,000)
and $510,000 for the years ended December 31, 2008, 2007
and 2006, respectively. Changes in the Companys estimate
of allowance for doubtful accounts resulted in the reduction of
bad debt expense for the year ended December 31, 2007.
Property
and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to five
years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the
assets or the remaining term of the lease, whichever is shorter.
Internal-Use
Software
The Company accounts for software developed or obtained for
internal use in accordance with Statement of Position
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. The statement requires
capitalization of certain costs incurred in the development of
internal-use software, including external direct material and
service costs and employee payroll and payroll-related costs.
Capitalized internal-use software costs, which are included in
property and equipment, are generally depreciated over three
years.
Leases
The Company enters into lease agreements for its laboratory and
office facilities. These leases are classified as operating
leases. Rent expense is recognized on a straight-line basis over
the term of the lease. Incentives granted under the
Companys facilities leases, including allowances to fund
leasehold improvements and rent holidays, are capitalized and
are recognized as reductions to rental expense on a
straight-line basis over the term of the lease.
Intangible
Assets
Intangible assets with finite useful lives are recorded at cost,
less accumulated amortization. Amortization is recognized over
the estimated useful lives of the assets.
Impairment
of Long-lived Assets
The Company reviews long-lived assets, which include property
and equipment and intangible assets, for impairment whenever
events or changes in business circumstances indicate that the
carrying amounts of the assets may not be fully recoverable. An
impairment loss would be recognized when estimated discounted
future cash flows expected to result from the use of the asset
and its eventual disposition are less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows.
There were no impairment losses for the years ended
December 31, 2008, 2007 and 2006.
Guarantees
and Indemnifications
The Company, as permitted under Delaware law and in accordance
with its bylaws, indemnifies its officers and directors for
certain events or occurrences, subject to certain limits, while
the officer or director is or was serving at the Companys
request in such capacity. The term of the indemnification period
is for the officers or directors lifetime. The
maximum amount of potential future indemnification is unlimited;
however, the Company has a director and officer insurance policy
that limits its exposure and may enable it to recover a portion
of any future amounts paid. The Company believes the fair value
of these indemnification agreements is minimal. Accordingly, the
Company has not recorded any liabilities for these agreements as
of December 31, 2008 and 2007.
Income
Taxes
The Company uses the liability method for income taxes, whereby
deferred income taxes are provided on items recognized for
financial reporting purposes over different periods than for
income tax purposes. Valuation allowances are provided when the
expected realization of tax assets does not meet a
more-likely-than-not criterion.
64
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes (FIN 48), as of
January 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing the recognition
threshold a tax position is required to meet before being
recognized in the financial statements. It also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. FASB Staff Position
FIN 48-1
(FSP
FIN 48-1),
which provides guidance on determining whether a tax position is
effectively settled for purposes of recognizing previously
unrecognized tax benefits, was issued in May 2007 and is
effective upon the Companys initial adoption of
FIN 48. The adoption of FIN 48 and FSP
FIN 48-1
had no impact on the Companys financial condition, results
of operations or cash flows. See Note 12, Income
Taxes, for additional FIN 48 disclosures.
Comprehensive
Gain or Loss
The Company displays comprehensive gain or loss and its
components within its consolidated statements of
stockholders equity. Other comprehensive gain or loss
consists entirely of unrealized gains and losses on
available-for-sale investments.
Revenue
Recognition
The Company derives its revenues from product sales and contract
research arrangements. The Company operates in one industry
segment. Product revenues are derived solely from the sale of
the Oncotype DX test for breast cancer. The Company
generally bills third-party payors for Oncotype DX upon
generation and delivery of a Recurrence Score report to the
physician. As such, the Company takes assignment of benefits and
the risk of collection with the third-party payor. The Company
usually bills the patient directly for amounts owed after
multiple requests for payment have been denied or only partially
paid by the insurance carrier. As a relatively new test,
Oncotype DX may be considered investigational by some
payors and therefore not covered under their reimbursement
policies. Consequently, the Company pursues
case-by-case
reimbursement where policies are not in place or payment history
has not been established.
The Companys product revenues for tests performed are
recognized when the following revenue recognition criteria are
met: (1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Criterion
(1) is satisfied when the Company has an agreement or
contract with the payor in place, or when the payor has issued a
policy addressing reimbursement for the Oncotype DX test.
Criterion (2) is satisfied when the Company performs the
test and generates and delivers a Recurrence Score report to the
physician. Determination of criteria (3) and (4) is
based on managements judgments regarding whether the fee
charged for products or services delivered is fixed or
determinable, contractual agreements entered into, and the
collectibility of those fees under any contract or agreement.
When evaluating collectibility, the Company considers whether it
has sufficient history to reliably estimate a payors
individual payment patterns. Based upon at least several months
of payment history, the Company reviews the number of tests paid
against the number of tests billed and the payors
outstanding balance for unpaid tests to determine whether
payments are being made at a consistently high percentage of
tests billed and at appropriate amounts given the contracted
payment amount. To the extent all criteria set forth above are
not met when test results are delivered, product revenues are
recognized when cash is received from the payor.
Prior to 2008, product revenues had largely been recognized on a
cash basis because the Company had a limited number of contracts
or agreements with third-party payors and limited collections
experience. The Company recognizes a portion of its product
revenue from third-party payors, including some private payors
and Medicare, on an accrual basis prospectively when the
criteria described in the preceding paragraph are satisfied. For
the year ended December 31, 2008, approximately half of
total product revenue recognized was recorded on an accrual
basis.
Contract revenues are generally derived from studies conducted
with biopharmaceutical and pharmaceutical companies. The
specific methodology for revenue recognition is determined on a
case-by-case
basis according to
65
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the facts and circumstances applicable to a given contract.
Under certain contracts, the Companys input, measured in
terms of full-time equivalent level of effort or running a set
of assays through its clinical reference laboratory under a
contractual protocol, triggers payment obligations, and revenues
are recognized as costs are incurred or assays are processed.
Certain contracts have payments that are triggered as milestones
are completed, such as completion of a successful set of
experiments. Milestones are assessed on an individual basis and
revenue is recognized when these milestones are achieved, as
evidenced by acknowledgment from collaborators, provided that
(1) the milestone event is substantive and its
achievability was not reasonably assured at the inception of the
agreement and (2) the milestone payment is non-refundable.
Where separate milestones do not meet these criteria, the
Company typically defaults to a performance-based model, such as
revenue recognition following delivery of effort as compared to
an estimate of total expected effort.
Advance payments received in excess of revenues recognized are
classified as deferred revenue until such time as the revenue
recognition criteria have been met.
Stock-based
Compensation
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment (SFAS 123R).
SFAS 123R addresses the accounting for stock-based payment
transactions whereby an entity receives employee services in
exchange for equity instruments, including stock options.
SFAS 123R eliminates the ability to account for stock-based
payment transactions using the intrinsic value method under
Accounting Principles Board Opinion No. 25 (APB
25), and instead requires that such transactions be
accounted for using a fair-value based method. The application
of SFAS 123R requires significant judgment and the use of
estimates, particularly surrounding assumptions used in
determining fair value. The Company uses the Black-Scholes
valuation method, which requires the use of estimates such as
stock price volatility and expected option lives, as well as
expected option forfeiture rates, to value stock-based
compensation, and recognizes stock-based compensation expense on
a straight-line basis.
The Company elected the modified prospective transition method
as permitted under SFAS 123R, which requires that
stock-based compensation expense be recorded for all new and
unvested stock options that are ultimately expected to vest as
the requisite service is rendered beginning on January 1,
2006. Stock-based compensation expense resulting from the
adoption of SFAS 123R represents expense related to stock
options granted on or after January 1, 2006, as well as
stock options granted prior to, but not yet vested as of,
January 1, 2006. As of December 31, 2008, total
unrecognized compensation expense related to unvested stock
options, net of estimated forfeitures, was $18.2 million.
The Company expects to recognize this expense over a
weighted-average period of 46 months.
Equity instruments granted to non-employees are valued using the
Black-Scholes method and accounted for as prescribed by
SFAS 123R and Emerging Issues Task Force (EITF)
Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
(EITF 96-18),
and will be subject to periodic revaluation over their vesting
terms.
On November 10, 2005, the FASB issued FASB Staff Position
No. FAS 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards
(FSP 123R-3). The Company elected to adopt
the alternative transition method provided in FSP 123R-3
for calculating the tax effects (if any) of stock-based
compensation expense pursuant to SFAS 123R. The alternative
transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool, or
APIC pool, related to the tax effects of employee stock-based
compensation (if any), and to determine the subsequent impact to
the APIC pool and the consolidated statements of operations and
cash flows of the tax effects (if any) of employee stock-based
compensation awards that are outstanding upon adoption of
SFAS 123R.
66
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
401(k)
Plan
Substantially all of the Companys employees are covered by
its defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code. On
January 1, 2007, the Company began dollar for dollar
matching of employee contributions up to a maximum of $1,000 for
each employee per year. The match is funded concurrently with a
participants semi-monthly contributions to the 401(k)
Plan. The Company recorded expense of $320,000 and $246,000 for
the years ended December 31, 2008 and 2007 for its
contributions under the Plan. There were no employer match
contributions to the 401(k) Plan for the year ended
December 31, 2006.
Cost
of Product Revenues
Cost of product revenues includes the cost of materials, direct
labor, equipment and infrastructure expenses associated with
processing tissue samples (including histopathology, anatomical
pathology, paraffin extraction, RT-PCR and quality control
analyses), shipping charges to transport tissue samples and
license fees. Infrastructure expenses include allocated facility
occupancy and information technology costs. Costs associated
with performing the Companys tests are recorded as tests
are processed. Costs recorded for tissue sample processing and
shipping charges represent the cost of all the tests processed
during the period regardless of whether revenue was recognized
with respect to that test. License fees for royalties due on
product revenues and contractual obligations are recorded in
cost of product revenues at the time product revenues are
recognized or in accordance with other contractual obligations.
Research
and Development
Research and development expenses are comprised of the following
types of costs incurred in performing research and development
activities: salaries and benefits, allocated overhead and
facility occupancy costs, contract services, reagents and
laboratory supplies, and costs to acquire in-process research
and development projects and technologies that have no
alternative future use. Research and development expenses also
include costs related to activities performed under contracts
with biopharmaceutical and pharmaceutical companies. Research
and development costs are expensed as incurred.
The Company enters into collaboration and clinical trial
agreements with clinical collaborators and records these costs
as research and development expenses. The Company records
accruals for estimated study costs comprised of work performed
by its collaborators under contract terms.
In June 2007, FASB ratified EITF Issue
No. 07-3,
Accounting for Non-Refundable Payments for Goods or Services
Received for Use in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
requires that non-refundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed.
The Company adopted
EITF 07-03
effective January 1, 2008 for arrangements that were
entered into after that date. Prior to January 1, 2008, the
Company recognized non-refundable advance payments for goods and
services to be used for future research and development
activities as an expense when payments were made. As a result of
the adoption of
EITF 07-3,
the Companys research and development expenses decreased
by $258,000 and its net loss per share decreased by $0.01 for
the year ended December 31, 2008. The Company expects to
recognize these deferred and capitalized amounts as expense in
future periods as the related services are delivered.
Recently
Issued Accounting Pronouncements
In February 2008, FASB issued FASB Staff Position
157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-2
delays the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until
fiscal years beginning after November 15, 2008. The Company
has elected a partial
67
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deferral of SFAS 157 under the provisions of
FSP 157-2.
The Company does not expect the application of SFAS 157 to
its non-financial assets and non-financial liabilities to have a
material impact on its financial condition or results of
operations when the standard is applied
In November 2007, FASB ratified EITF
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in a
collaborative arrangement and third parties.
EITF 07-1
is effective for fiscal years beginning after December 15,
2008, and is to be applied retrospectively to all prior periods
presented for all collaborative arrangements existing as of the
effective date. The Company does not expect the adoption of
EITF 07-01
to have a material impact on its financial condition or results
of operations.
|
|
Note 2.
|
Net Loss
Per Share
|
Basic net loss per share is calculated by dividing net loss for
the period by the weighted-average number of common shares
outstanding for the period without consideration for potential
common shares. Diluted net loss per share is computed by
dividing net loss by the weighted-average number of common
shares outstanding for the period and dilutive potential common
shares for the period determined using the treasury-stock
method. For the purposes of this calculation, options to
purchase common stock are considered to be potential common
shares and are not included in the calculation of diluted net
loss per share because their effect is anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net loss
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average net common shares outstanding for basic and
diluted loss per common share
|
|
|
28,297,705
|
|
|
|
26,759,798
|
|
|
|
24,508,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.57
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding dilutive securities not included in diluted net loss
per share calculation (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
4,665,037
|
|
|
|
3,919,720
|
|
|
|
2,940,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Fair
Value Measurements
|
On January 1, 2008, the Company adopted the provisions of
SFAS 157 for its financial assets and liabilities. As
permitted by
FSP 157-2,
the Company elected to defer the adoption of SFAS 157 for
all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in its
financial statements on a recurring basis (at least annually),
until January 1, 2009. SFAS 157 provides a framework
for measuring fair value under GAAP and requires expanded
disclosures regarding fair value measurements. SFAS 157
defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability, or an exit price,
in the principal or most advantageous market for that asset or
liability in an orderly transaction between market participants
on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of
observable inputs, where available, and minimize the use of
unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure
fair value:
Level 1: Quoted prices in active
markets for identical assets or liabilities.
Level 2: Observable inputs other
than Level 1 prices, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities.
68
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Level 3: Unobservable inputs that
are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
The following table sets forth the Companys financial
instruments that were measured at fair value on a recurring
basis at December 31, 2008 by level within the fair value
hierarchy. The Company did not have any non-financial assets or
liabilities that were measured or disclosed at fair value on a
recurring basis at December 31, 2008. As required by
SFAS 157, assets and liabilities measured at fair value are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. The
Companys assessment of the significance of a particular
input to the fair value measurement in its entirety requires
management to make judgments and considers factors specific to
the asset or liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits
|
|
$
|
5,926
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,926
|
|
U.S. Treasury securities
|
|
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
Debt securities of U.S. government-sponsored agencies
|
|
|
|
|
|
|
37,350
|
|
|
|
|
|
|
|
37,350
|
|
Commercial paper
|
|
|
|
|
|
|
8,146
|
|
|
|
|
|
|
|
8,146
|
|
Corporate bonds
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
Note 4.
|
Commercial
Technology Licensing Agreements
|
The Company is a party to various agreements under which it
licenses technology on a nonexclusive basis in the field of
human diagnostics. Access to these licenses enables the Company
to process its laboratory tests for Oncotype DX. While
certain agreements contain provisions for fixed annual payments,
license fees are generally calculated as a percentage of product
revenues, with rates that vary by agreement and may be tiered,
and payments that may be capped at annual minimum or maximum
amounts. The Company recognized costs recorded under these
agreements for the years ended December 31, 2008, 2007 and
2006 of $7.7 million, $4.9 million and
$2.2 million, respectively, which were included in cost of
product revenues.
|
|
Note 5.
|
Short-term
Investments
|
The following tables illustrate the Companys
available-for-sale securities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of U.S. government-sponsored entities
|
|
$
|
37,144
|
|
|
$
|
209
|
|
|
$
|
(3
|
)
|
|
$
|
37,350
|
|
Corporate debt securities
|
|
|
8,110
|
|
|
|
42
|
|
|
|
(3
|
)
|
|
|
8,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,254
|
|
|
$
|
251
|
|
|
$
|
(6
|
)
|
|
$
|
45,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of U.S. government-sponsored entities
|
|
$
|
2,848
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
2,849
|
|
Corporate debt securities
|
|
|
26,296
|
|
|
|
53
|
|
|
|
(2
|
)
|
|
|
26,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,144
|
|
|
$
|
54
|
|
|
$
|
(2
|
)
|
|
$
|
29,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no realized gains or losses on its
available-for-sale securities for the years ended
December 31, 2008, 2007 and 2006, respectively.
The amortized cost and estimated fair value of
available-for-sale securities by contractual maturity at
December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
Market Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
45,254
|
|
|
$
|
45,499
|
|
|
|
Note 6.
|
Property
and Equipment
|
The following table summarizes the Companys property and
equipment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Laboratory equipment
|
|
$
|
12,236
|
|
|
$
|
9,881
|
|
Computer equipment and internal-use software
|
|
|
2,931
|
|
|
|
1,520
|
|
Furniture and fixtures
|
|
|
2,357
|
|
|
|
1,736
|
|
Leasehold improvements
|
|
|
12,489
|
|
|
|
7,297
|
|
Construction in progress
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,013
|
|
|
|
20,710
|
|
Less accumulated depreciation and amortization
|
|
|
(14,451
|
)
|
|
|
(10,298
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,562
|
|
|
$
|
10,412
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2008, 2007 and 2006, the
Company recorded depreciation and amortization expense of
$4.9 million, $3.9 million and $2.6 million,
respectively.
|
|
Note 7.
|
Accrued
Expenses and Other Liabilities
|
The following table summarizes the Companys accrued
expenses and other current liabilities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accrued expenses
|
|
$
|
2,022
|
|
|
$
|
1,105
|
|
Accrued refunds
|
|
|
1,359
|
|
|
|
60
|
|
Accrued professional and other service fees
|
|
|
916
|
|
|
|
698
|
|
Other current liabilities
|
|
|
101
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,398
|
|
|
$
|
1,948
|
|
|
|
|
|
|
|
|
|
|
70
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued refunds includes overpayments due to third-party payors.
Accrued professional and other service fees includes third-party
billing and collections costs, legal expenses, accounting and
audit fees and investor relations expenses.
Notes
Payable
In March 2005, the Company entered into an arrangement to
finance the acquisition of laboratory and office equipment,
computer hardware and software and leasehold improvements. In
connection with this arrangement, the Company granted the lender
a security interest in the assets purchased with the borrowed
amounts. Beginning in April 2006, the Company could prepay all,
but not part of, the amounts outstanding under the arrangement
so long as the Company also paid a 6% premium on the outstanding
principal balance. This premium was reduced to 5% in April 2007
and further reduced to 4% in April 2008. As of December 31,
2008, the outstanding notes payable principal balance under this
arrangement was $2.0 million at annual interest rates
ranging from 10.23% to 11.30%, depending on the applicable note.
According to the terms of the arrangement, the Company is
required to notify the lender if there is a material adverse
change in its financial condition, business or operations. The
Company believes it has complied with all the material covenants
of the financing arrangement during the years ended
December 31, 2008, 2007 and 2006.
As of December 31, 2008, the Companys aggregate
commitments under its financing arrangement were as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
|
(In thousands)
|
|
|
Years Ending December 31,
|
|
|
|
|
2009
|
|
$
|
1,934
|
|
2010
|
|
|
238
|
|
|
|
|
|
|
Total minimum payments
|
|
|
2,172
|
|
Less: interest portion
|
|
|
(133
|
)
|
|
|
|
|
|
Present value of net minimum payments
|
|
|
2,039
|
|
Less: current portion of obligations
|
|
|
(1,814
|
)
|
|
|
|
|
|
Long-term obligations
|
|
$
|
225
|
|
|
|
|
|
|
Lease
Obligations
In September 2005, the Company entered into a non-cancelable
lease directly with the facility owner for 48,000 square
feet of laboratory and office space that the Company currently
occupies in Redwood City, California. The lease expires in
February 2012 and includes lease incentive obligations of
$834,000 that are being amortized on a straight-line basis over
the life of the lease. In connection with this lease, the
Company was required to secure a $500,000 letter of credit,
which is classified as restricted cash on the consolidated
balance sheets.
In January 2007, the Company entered into a non-cancelable lease
for an additional 48,000 square feet of laboratory and
office space in a nearby location. The lease expires in February
2012 and includes lease incentive obligations totaling $283,000
that are being amortized on a straight-line basis over the life
of the lease. In connection with this lease, the Company paid a
$151,000 cash security deposit, which is included in other
assets on the consolidated balance sheets.
71
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rent expense under all operating leases amounted to
$1.1 million, $1.2 million and $810,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Future non-cancelable commitments under these operating leases
at December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
|
(In thousands)
|
|
|
Years Ending December 31,
|
|
|
|
|
2009
|
|
$
|
1,520
|
|
2010
|
|
|
1,634
|
|
2011
|
|
|
1,723
|
|
2012
|
|
|
290
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
5,167
|
|
|
|
|
|
|
Clinical
Collaborator Costs
The Company has entered into a variety of collaboration and
specimen transfer agreements relating to its development
efforts. The Company recorded collaboration expenses of
$1.4 million, $1.3 million and $1.5 million for
the years ended December 31, 2008, 2007 and 2006,
respectively, relating to services provided in connection with
these agreements. In addition to these expenses, certain
agreements contain provisions for royalties from inventions
resulting from these collaborations. The Company has certain
options and rights relating to joint inventions arising out of
the collaborations.
At December 31, 2008, future fixed annual payments,
exclusive of royalty payments, relating to the launch and
commercialization of Oncotype DX totaled
$1.4 million and are payable as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payments
|
|
|
|
(In thousands)
|
|
|
Payment Due:
|
|
|
|
|
January 2009
|
|
$
|
475
|
|
January 2010
|
|
|
475
|
|
January 2011
|
|
|
475
|
|
|
|
|
|
|
Total payments
|
|
$
|
1,425
|
|
|
|
|
|
|
These payments are recorded in cost of product revenues as
license fees. Expense is recorded ratably over the year before
the relevant payment is made. If at any time the Company
discontinues the sale of commercial products or services
resulting from the collaboration, no future annual payments will
be payable and the Company will have no further obligation under
the agreement. If the Companys cash balance is less than
$5.0 million on the due date of any of the annual payments,
the Company may be able to defer any current annual payment due
for a period of up to 12 months.
72
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Common
Stock
As of December 31, 2008, the Company had
28,461,327 shares of common stock outstanding. Shares of
common stock reserved for future issuance as of
December 31, 2008 were as follows:
|
|
|
|
|
Shares to be issued upon exercise of outstanding stock options
|
|
|
4,665,037
|
|
Shares available for future stock option grants
|
|
|
1,055,472
|
|
|
|
|
|
|
Shares of common stock reserved for future issuance
|
|
|
5,720,509
|
|
|
|
|
|
|
Public
Offering of Common Stock
On May 25, 2007, the Company closed an underwritten public
offering of 3,450,000 shares of common stock at a price to
the public of $15.50 per share pursuant to the Companys
shelf registration statement on
Form S-3.
Net proceeds from the offering, after deducting the underwriting
discounts and offering expenses, were $49.7 million.
Entities affiliated with Julian Baker, an outside director and a
principal stockholder of the Company, purchased
1,000,000 shares of the Companys common stock in this
offering. As of December 31, 2008, the Company had
approximately $46.5 million of securities available for
sale under a shelf registration statement. See Note 11 for
further information on related parties.
|
|
Note 10.
|
Stock-based
Compensation
|
2005
Stock Incentive Plan
On September 8, 2005, the Board of Directors approved the
2005 Stock Incentive Plan (the 2005 Plan), which was
later approved by the Companys stockholders. The Company
has reserved 5,000,000 shares of the Companys common
stock for issuance under the 2005 Plan. The 2005 Plan became
effective upon the closing of the Companys initial public
offering on October 4, 2005. Pursuant to the 2005 Plan,
stock options, restricted shares, stock units, and stock
appreciation rights may be granted to employees, consultants,
and outside directors of the Company. Options granted may be
either incentive stock options or nonstatutory stock options.
Stock options are governed by stock option agreements between
the Company and recipients of stock options. Incentive stock
options may be granted under the 2005 Plan at an exercise price
of not less than 100% of the fair market value of the common
stock on the date of grant, determined by the Compensation
Committee of the Board of Directors. Nonstatutory stock options
may be granted under the 2005 Plan at an exercise price of not
less than 80% of the fair market value of the common stock on
the date of grant, determined by the Compensation Committee of
the Board of Directors. Options become exercisable and expire as
determined by the Compensation Committee, provided that the term
of incentive stock options may not exceed 10 years from the
date of grant. Stock option agreements may provide for
accelerated exercisability in the event of an optionees
death, disability, or retirement or other events.
Under the 2005 Plan, each outside director who joins the board
after the effective date of the 2005 Plan will receive an
automatic nonstatutory stock option grant that vests at a rate
of 25% at the end of the first year, with the remaining balance
vesting monthly over the next three years. On the first business
day following the annual meeting of the Companys
stockholders, each outside director who is continuing board
service and who was not initially elected to the board at the
annual meeting will receive an additional nonstatutory stock
option grant, which will vest in full on the first anniversary
of the date of grant or, if earlier, immediately prior to the
next annual meeting of the Companys stockholders.
Nonstatutory stock options granted to outside directors must
have an exercise price equal to 100% of the fair market value of
the common stock on the date of grant. Nonstatutory stock
options terminate on the earlier of the day before the tenth
anniversary of the date of grant or the date twelve months after
termination of the outside directors service as a member
of the board of directors.
73
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted shares, stock appreciation rights, and stock units
granted under the 2005 Plan are governed by restricted stock
agreements, SAR agreements, and stock unit agreements between
the Company and recipients of the awards. Terms of the
agreements are determined by the Compensation Committee.
2001
Stock Incentive Plan
The Companys 2001 Stock Incentive Plan (the 2001
Plan) was terminated upon completion of the Companys
initial public offering on October 4, 2005. No shares of
common stock are available under the 2001 Plan other than to
satisfy exercises of stock options granted under the 2001 Plan
prior to its termination. Under the 2001 Plan, incentive stock
options and nonstatutory stock options were granted to
employees, officers, and directors of, or consultants to, the
Company and its affiliates. Options granted under the 2001 Plan
expire no later than 10 years from the date of grant.
Employee
Stock-Based Compensation Expense
Employee stock-based compensation expense for the years ended
December 31, 2008, 2007 and 2006 was calculated based on
awards ultimately expected to vest and has been reduced for
estimated forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Employee stock-based compensation expense includes
expense related to options granted to outside directors of the
Company. The Company recorded employee stock-based compensation
expense of $9.1 million, $6.3 million and
$2.9 million for the years ended December 31, 2008,
2007 and 2006, respectively. The following table presents the
impact of employee stock-based compensation expense on selected
statements of operations line items for the years ended
December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
491
|
|
|
$
|
375
|
|
|
$
|
167
|
|
Research and development
|
|
|
2,913
|
|
|
|
1,882
|
|
|
|
821
|
|
Selling and marketing
|
|
|
2,622
|
|
|
|
1,876
|
|
|
|
779
|
|
General and administrative
|
|
|
3,112
|
|
|
|
2,152
|
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,138
|
|
|
$
|
6,285
|
|
|
$
|
2,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense resulting from the
adoption of SFAS 123R represents expense related to stock
options granted on or after January 1, 2006, as well as
stock options granted prior to, but not yet vested as of,
January 1, 2006. As of December 31, 2008, total
unrecognized compensation expense related to unvested stock
options, net of estimated forfeitures, was $18.2 million.
The Company expects to recognize this expense over a
weighted-average period of 46 months.
Valuation
Assumptions
The employee stock-based compensation expense recognized under
SFAS 123R was determined using the Black-Scholes option
valuation model. Option valuation models require the input of
highly subjective assumptions that can vary over time. As of
January 2008, the Companys assumptions regarding expected
volatility are based on the historical volatility of the
Companys common stock. Prior to January 2008, the
Companys assumptions regarding expected volatility were
based primarily on comparable peer data because the
Companys common stock had been publicly traded for less
than two years. The expected life of options granted is
estimated based on historical option exercise data and
assumptions related to unsettled options. The risk-free interest
rate is estimated using published rates for U.S. Treasury
securities with a remaining term approximating the expected life
of the options granted. The Company uses a dividend yield of
zero as it has never paid cash dividends and does not
74
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
anticipate paying cash dividends in the foreseeable future. The
weighted-average fair values and assumptions used in calculating
such values during each fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected volatility
|
|
|
58
|
%
|
|
|
61
|
%
|
|
|
68
|
%
|
Risk-free interest rate
|
|
|
1.98
|
%
|
|
|
3.93
|
%
|
|
|
4.76
|
%
|
Expected life of options in years
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.5
|
|
Weighted-average fair value
|
|
$
|
9.79
|
|
|
$
|
12.77
|
|
|
$
|
10.27
|
|
Stock
Options Granted to Non-employees
The Company grants stock options to consultants from time to
time in exchange for services performed for the Company. During
the years ended December 31, 2008, 2007 and 2006, the
Company granted options to purchase 14,400, 9,600 and
2,850 shares, respectively, to consultants. The fair value
of these option grants was determined using the Black-Scholes
option pricing model and accounted for as prescribed by
SFAS 123R and
EITF 96-18.
In general, the options vest over the contractual periods of the
respective consulting arrangement and, therefore, the Company
revalues the options periodically and records additional
compensation expense related to these options over the remaining
vesting periods. During the years ended December 31, 2008,
2007 and 2006, stock-based compensation expense related to these
options was $88,000, $65,000 and $83,000, respectively.
Stock
Option Activity
The following is a summary of option activity for the years
ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Shares Available
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Balance at December 31, 2005
|
|
|
4,290,631
|
|
|
|
2,021,276
|
|
|
$
|
4.75
|
|
Options granted
|
|
|
(1,043,705
|
)
|
|
|
1,043,705
|
|
|
$
|
16.61
|
|
Options exercised
|
|
|
|
|
|
|
(77,079
|
)
|
|
$
|
2.36
|
|
2001 Plan shares expired
|
|
|
(35,589
|
)
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
71,499
|
|
|
|
(71,499
|
)
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
3,282,836
|
|
|
|
2,916,403
|
|
|
$
|
9.04
|
|
Options granted
|
|
|
(1,287,917
|
)
|
|
|
1,287,917
|
|
|
$
|
21.71
|
|
Options exercised
|
|
|
|
|
|
|
(183,799
|
)
|
|
$
|
3.07
|
|
2001 Plan shares expired
|
|
|
(11,259
|
)
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
100,801
|
|
|
|
(100,801
|
)
|
|
$
|
15.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
2,084,461
|
|
|
|
3,919,720
|
|
|
$
|
13.33
|
|
Options granted
|
|
|
(1,191,380
|
)
|
|
|
1,191,380
|
|
|
$
|
17.96
|
|
Options exercised
|
|
|
|
|
|
|
(279,468
|
)
|
|
$
|
6.01
|
|
2001 Plan shares expired
|
|
|
(4,204
|
)
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
166,595
|
|
|
|
(166,595
|
)
|
|
$
|
18.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
1,055,472
|
|
|
|
4,665,037
|
|
|
$
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of stock options exercised during 2008, 2007
and 2006 was $4.1 million, $2.9 million and $948,000,
respectively. The estimated fair value of options vesting in
2008, 2007 and 2006 was $10.1 million, $5.6 million
and $2.7 million, respectively.
75
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information concerning
outstanding and exercisable options under the 2001 and 2005
Plans as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Options Exercisable
|
|
|
|
Number
|
|
|
Years Remaining
|
|
|
Weighted-Average
|
|
|
Number
|
|
|
Weighted-Average
|
|
Exercise Price Range
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$ 0.58 - $ 1.33
|
|
|
387,728
|
|
|
|
4.89
|
|
|
$
|
1.15
|
|
|
|
387,728
|
|
|
$
|
1.15
|
|
$ 2.88 - $ 2.88
|
|
|
426,646
|
|
|
|
5.96
|
|
|
$
|
2.88
|
|
|
|
416,978
|
|
|
$
|
2.88
|
|
$ 9.39 - $ 9.39
|
|
|
537,750
|
|
|
|
6.84
|
|
|
$
|
9.39
|
|
|
|
395,518
|
|
|
$
|
9.39
|
|
$ 9.55 - $17.29
|
|
|
467,997
|
|
|
|
6.91
|
|
|
$
|
12.61
|
|
|
|
296,378
|
|
|
$
|
12.01
|
|
$17.33 - $17.33
|
|
|
915,430
|
|
|
|
9.90
|
|
|
$
|
17.33
|
|
|
|
|
|
|
$
|
|
|
$17.37 - $18.50
|
|
|
195,126
|
|
|
|
8.06
|
|
|
$
|
18.13
|
|
|
|
84,788
|
|
|
$
|
17.94
|
|
$18.54 - $18.89
|
|
|
632,338
|
|
|
|
7.94
|
|
|
$
|
18.88
|
|
|
|
316,188
|
|
|
$
|
18.89
|
|
$18.91 - $23.03
|
|
|
344,372
|
|
|
|
8.69
|
|
|
$
|
20.93
|
|
|
|
90,696
|
|
|
$
|
20.72
|
|
$23.31 - $24.60
|
|
|
757,650
|
|
|
|
8.90
|
|
|
$
|
23.34
|
|
|
|
193,703
|
|
|
$
|
23.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,665,037
|
|
|
|
|
|
|
|
|
|
|
|
2,181,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the aggregate intrinsic value of the
outstanding options was $25.5 million and the aggregate
intrinsic value of the exercisable options was
$20.6 million. The weighted-average remaining contractual
life for exercisable options was 6.68 years.
|
|
Note 11.
|
Related
Party Transactions
|
The Company has two agreements with Incyte Corporation, a former
stockholder, that were entered into in March 2001: a LifeSeq
collaborative agreement and a patent license agreement. Under
these agreements, the Company incurred royalties expense of
$1.1 million, $627,000 and $270,000 in 2008, 2007 and 2006,
respectively.
One of the Companys directors is also a director of Incyte
and holds shares, directly or beneficially, of both companies.
As of December 31, 2006, to the Companys knowledge,
Incyte had divested its holdings in the Companys common
stock.
The Company recorded an income tax benefit of $61,000 for the
year ended December 31, 2008. The Company recorded minimum
state income taxes of $4,000 excluding the impact of a $65,000
discrete item. The discrete item reflects the Companys
estimated refundable credit receivable as a result of the
enactment of the Housing and Economic Recovery Act of 2008,
under which corporations otherwise eligible for bonus first-year
depreciation may instead elect to claim a refund for research
and development tax credits generated prior to 2006. No income
tax expense or benefit was recorded for the years ended
December 31, 2007 or 2006 because the Company has incurred
net operating losses since inception.
As of December 31, 2008 and 2007, the Company had deferred
tax assets of approximately $64.4 million and
$59.6 million, respectively. Realization of the deferred
tax assets is dependent upon future taxable income, if any, the
amount and timing of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation
allowance. The net valuation allowance increased by
approximately $4.9 million, $8.9 million and
$11.3 million during the years ended December 31,
2008, 2007 and 2006, respectively. Deferred tax assets primarily
relate to net operating loss and tax credit carryforwards.
76
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
52,682
|
|
|
$
|
52,508
|
|
Research tax credits
|
|
|
4,785
|
|
|
|
3,396
|
|
Capitalized costs
|
|
|
1,216
|
|
|
|
1,193
|
|
Fixed assets
|
|
|
2,163
|
|
|
|
957
|
|
Other
|
|
|
3,599
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
64,445
|
|
|
|
59,554
|
|
Valuation allowance
|
|
|
(64,445
|
)
|
|
|
(59,554
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Company had federal and state
net operating loss carryforwards of approximately
$132.2 million and $128.9 million, respectively, and
federal and state research and development tax credit
carryforwards of approximately $3.1 million and
$3.3 million, respectively. The federal net operating loss
and tax credit carryforwards will expire at various dates
beginning in 2010 if not utilized. The state tax credits have no
expiration date.
The Company tracks a portion of its deferred tax assets
attributable to stock option benefits in a separate memorandum
account pursuant to SFAS 123R. Therefore, these amounts are
no longer included in the Companys gross or net deferred
tax assets. Pursuant to SFAS 123R, the benefit of these
stock options will not be recorded in equity unless it reduces
taxes payable. As of December 31, 2008, the portion of the
federal and state net operating loss related to stock option
benefits was approximately $1.9 million.
Utilization of the net operating loss and tax credit
carryforwards may be subject to a substantial annual limitation
due to ownership change limitations defined by the Internal
Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net
operating losses and credits before utilization.
The Company adopted FIN 48 as of January 1, 2007.
FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing the recognition threshold a tax position is
required to meet before being recognized in the financial
statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Company did not
recognize any adjustment to its liability for uncertain tax
positions as a result of the implementation of FIN 48, and
therefore did not record any adjustment to the beginning balance
of retained earnings on its 2007 consolidated balance sheet.
The Company had $575,000 and $413,000 of unrecognized tax
benefits as of December 31, 2008 and 2007, respectively.
The following table summarizes the activity related to
unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
413
|
|
|
$
|
|
|
Increases related to prior year tax positions
|
|
|
9
|
|
|
|
413
|
|
Increases related to current year tax positions
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
575
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
77
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest and penalties related to unrecognized tax benefits
would be included as income tax expense in the Companys
consolidated statements of operations. As of December 31,
2008, the Company had not recognized any tax-related penalties
or interest in its consolidated balance sheets or statements of
operations. The Company does not anticipate a material change to
its unrecognized tax benefits over the next twelve months.
Unrecognized tax benefits may change during the next twelve
months for items that arise in the ordinary course of business.
The Company files federal and state income tax returns with
varying statutes of limitations. Due to the Companys net
carryover of unused net operating losses and tax credits, all
tax years from 2000 forward remain subject to future examination
by tax authorities.
|
|
Note 13.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table contains selected unaudited consolidated
statements of operations information for each of the quarters in
2008 and 2007. The Company believes that the following
information reflects all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The operating results for
any quarter are not necessarily indicative of results for any
future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except per share data)
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
23,440
|
|
|
$
|
27,783
|
|
|
$
|
28,121
|
|
|
$
|
31,235
|
|
Product revenues
|
|
|
23,356
|
|
|
|
26,327
|
|
|
|
28,070
|
|
|
$
|
30,905
|
|
Cost of product revenues
|
|
|
5,884
|
|
|
|
6,850
|
|
|
|
7,140
|
|
|
|
7,311
|
|
Net loss
|
|
|
(6,634
|
)
|
|
|
(4,099
|
)
|
|
|
(3,022
|
)
|
|
|
(2,334
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.24
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.08
|
)
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
14,088
|
|
|
$
|
14,690
|
|
|
$
|
15,901
|
|
|
$
|
19,348
|
|
Product revenues
|
|
|
13,146
|
|
|
|
14,555
|
|
|
|
15,781
|
|
|
|
19,264
|
|
Cost of product revenues
|
|
|
3,847
|
|
|
|
4,172
|
|
|
|
4,398
|
|
|
|
4,914
|
|
Net loss
|
|
|
(6,850
|
)
|
|
|
(7,198
|
)
|
|
|
(7,253
|
)
|
|
|
(5,991
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.28
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.21
|
)
|
The quarterly increases in product revenues and cost of product
revenues during 2008 and 2007 were primarily attributable to
increased adoption of Oncotype DX by physicians and
increased reimbursement for Oncotype DX by third-party
payors. The increases in revenues and cost of product revenues
for the fourth quarter of 2007 and the first quarter of 2008
were also attributable to the inclusion of Oncotype DX in
the American Society of Clinical Oncologys clinical
practice guidelines in October 2007 and in the National
Comprehensive Cancer Network s clinical practice
guidelines in December 2007.
Per share amounts for the quarters and full year have been
calculated separately. Accordingly, quarterly amounts may not
add to the annual amount because of differences in the
weighted-average common shares outstanding during each period,
due primarily to the effect of the Companys issuing shares
of its common stock during the year.
Basic and diluted net loss per common share are identical as
common equivalent shares are excluded from the calculation
because their effect is anti-dilutive.
78
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosures.
|
Not applicable.
|
|
ITEM 9A.
|
Controls and
Procedures.
|
(a) Evaluation of disclosure controls and
procedures. We maintain disclosure controls
and procedures, as such term is defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act,
that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Our disclosure controls and procedures have been designed to
meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily
was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions.
Based on their evaluation as of the end of the period covered by
this Annual Report on
Form 10-K,
our Chief Executive Officer and Chief Financial Officer have
concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
(b) Managements Annual Report on Internal Control
over Financial Reporting. Our management is responsible for
establishing and maintaining internal control over our financial
reporting. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of the
effectiveness of internal control to future periods are subject
to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2008. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway
Commission, or COSO, in Internal Control-Integrated
Framework. Based on the assessment using those criteria, our
management concluded that, as of December 31, 2008, our
internal control over financial reporting was effective. Our
independent registered public accounting firm, Ernst &
Young LLP, audited the effectiveness of our internal control
over financial reporting. Their report appears below:
79
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Genomic Health, Inc.
We have audited Genomic Health, Inc.s internal control
over financial reporting as of December 31, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Genomic Health, Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Genomic Health, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Genomic Health, Inc. as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2008 and our report dated March 12, 2009
expressed an unqualified opinion thereon.
Palo Alto, California
March 12, 2009
80
(c) Changes in internal controls. There
was no change in our internal control over financial reporting
(as defined in
Rule 13a-15(f)
under the Exchange Act) identified in connection with the
evaluation described in Item 9A(a) above that occurred
during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
Other
Information.
|
None.
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The information required by this item with respect to directors
is incorporated by reference from the information under the
caption Election of Directors contained in our Proxy
Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for
our 2009 Annual Meeting of Stockholders to be held on
June 8, 2009, or Proxy Statement. Certain information
required by this item concerning executive officers is set forth
in Part I of this Report under the caption Executive
Officers of the Registrant and is incorporated herein by
reference.
Item 405 of
Regulation S-K
calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16(a) of the
Exchange Act. This disclosure is contained in the section
entitled Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement and is incorporated
herein by reference.
We have adopted a Code of Business Conduct that applies to all
of our officers and employees, including our Executive Chairman
of the Board, our President and Chief Executive Officer, our
Chief Operating Officer and Chief Financial Officer and other
employees who perform financial or accounting functions. The
Code of Business Conduct sets forth the basic principles that
guide the business conduct of our employees. We have also
adopted a Senior Financial Officers Code of Ethics that
specifically applies to our Executive Chairman of the Board, our
President and Chief Executive Officer, our Chief Operating
Officer and Chief Financial Officer, and key management
employees. Stockholders may request a free copy of our Code of
Business Conduct and Ethics and our Senior Financial
Officers Code of Ethics by contacting Genomic Health,
Inc., Attention: CFO, 301 Penobscot Drive, Redwood City,
California 94063.
To date, there have been no waivers under our Code of Business
Conduct and Ethics or Senior Financial Officers Code of
Ethics. We intend to disclose future amendments to certain
provisions of our Code of Business Conduct and Ethics or Senior
Financial Officers Code of Ethics or any waivers, if and
when granted, of our Code of Business Conduct and Ethics or
Senior Financial Officers Code of Ethics on our website at
http://www.genomichealth.com
within four business days following the date of such amendment
or waiver.
Our Board of Directors has appointed an Audit Committee,
comprised of Mr. Randall S. Livingston, as Chairman,
Mr. Samuel D. Colella and Dr. Fred E. Cohen. The Board
of Directors has determined that Mr. Livingston qualifies
as an Audit Committee Financial Expert under the definition
outlined by the Securities and Exchange Commission. In addition,
each of the members of the Audit Committee qualifies as an
independent director under the current rules of The
NASDAQ Stock Market and Securities and Exchange Commission rules
and regulations.
|
|
ITEM 11.
|
Executive
Compensation.
|
The information required by this item is incorporated by
reference from the information under the captions Election
of Directors Compensation of Directors and
Executive Compensation contained in the Proxy
Statement.
81
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item is incorporated by
reference from the information under the captions Security
Ownership of Certain Beneficial Owners and Management and
Equity Compensation Plan Information contained in
the Proxy Statement.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is incorporated by
reference from the information under the caption Certain
Relationships and Related Transactions contained in the
Proxy Statement.
|
|
ITEM 14.
|
Principal
Accounting Fees and
Services.
|
The information required by this item is incorporated by
reference from the information under the caption Principal
Accountant Fees and Services contained in the Proxy
Statement.
PART IV
|
|
ITEM 15.
|
Exhibits and Financial Statement Schedules.
|
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial
Statements of Genomic Health under Item 8 of Part II
hereof.
(2) Financial Statement Schedules
The following schedule is filed as part of this
Form 10-K:
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 2008, 2007, and 2006.
All financial statement schedules have been omitted because they
are not applicable or not required or because the information is
included elsewhere in the Consolidated Financial Statements or
the Notes thereto.
(3) Exhibits
See Item 15(b) below. Each management contract or
compensatory plan or arrangement required to be filed has been
identified.
(b) Exhibits
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
3(i)
|
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.3 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
3(ii)
|
|
|
Amended and Restated Bylaws of the Company, as amended and
restated January 8, 2009 (incorporated by reference to
exhibit 3.1 to the Companys Current Report on
Form 8-K
filed on January 9, 2009).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
the exhibit of the same number filed with Registration Statement
on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
4
|
.2
|
|
Amended and Restated Investors Rights Agreement, dated
February 9, 2004 between the Company and certain of its
stockholders (incorporated by reference to the exhibit of the
same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
82
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
10
|
.1#
|
|
Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.2#
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.3#
|
|
2005 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.1
|
|
Sublease Agreement dated June 1, 2001 between the Company
and Corixa Corporation (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.2
|
|
First Amendment to Sublease Agreement dated October 29,
2003 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.3
|
|
Second Amendment to Sublease Agreement dated January 31,
2005 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.5
|
|
PCR Patent License Agreement dated February 21, 2005
between the Company and Roche Molecular Systems, Inc.
(incorporated by reference to exhibit 10.8 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.1
|
|
Master Security Agreement dated March 30, 2005 between the
Company and Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.1 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.2
|
|
Form of Promissory Note (Equipment) issued by the Company in
favor of Oxford Finance Corporation (incorporated by reference
to exhibit 10.9.2 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.3
|
|
Form of Promissory Note (Computers and Software) issued by the
Company in favor of Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.3 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.4
|
|
Schedule of Promissory Notes issued by the Company in favor of
Oxford Finance Corporation (incorporated by reference to
exhibit 10.6.4 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
|
10
|
.7
|
|
Lease dated September 23, 2005 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.10 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.8
|
|
Lease dated January 2, 2007 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.8 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
|
10
|
.9#
|
|
Form of Non U.S. Employee/Consultant Stock Option Agreement
under the Companys 2005 Stock Incentive Plan (incorporated
by reference to exhibit 10.1 filed with the Companys
Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2008).
|
|
12
|
.1*
|
|
Statement Regarding Computation of Ratios.
|
|
21
|
.1
|
|
List of Subsidiaries (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
23
|
.1*
|
|
Consent of independent registered public accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (see page 86 of this
Form 10-K).
|
|
31
|
.1*
|
|
Rule 13a 14(a) Certification of Chief Executive
Officer.
|
|
31
|
.2*
|
|
Rule 13a 14(a) Certification of the Chief
Financial Officer.
|
83
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
32
|
.1**
|
|
Statement of the Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
32
|
.2**
|
|
Statement of the Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release Nos.
33-8238 and
34-47986,
Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing
under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by
reference. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements. |
|
# |
|
Indicates management contract or compensatory plan or
arrangement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.
(c) Financial Statements and Schedules
Reference is made to Item 15(a)(2) above.
84
SCHEDULE II
GENOMIC
HEALTH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
(Credited) to
|
|
|
|
|
|
End of
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
133
|
|
|
$
|
1,343
|
|
|
$
|
595
|
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
510
|
|
|
$
|
(115
|
)(1)
|
|
$
|
262
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
|
|
|
$
|
562
|
|
|
$
|
52
|
|
|
$
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Changes in the Companys estimate of allowance for doubtful
accounts resulted in the reduction of bad debt expense for the
year ended December 31, 2007. |
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GENOMIC HEALTH, INC.
|
|
|
|
By:
|
/s/ Kimberly
J. Popovits
|
Kimberly J. Popovits
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 13, 2009
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Randal W.
Scott, Kimberly J. Popovits and G. Bradley Cole, and each of
them, his true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities,
to sign any amendments to this report on
Form 10-K
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact or their substitute or substitutes may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Kimberly
J. Popovits
Kimberly
J. Popovits
|
|
President and Chief Executive Officer Director
(Principal Executive Officer)
|
|
March 13, 2009
|
|
|
|
|
|
/s/ G.
Bradley Cole
G.
Bradley Cole
|
|
Chief Operating Officer and
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Randal
W. Scott
Randal
W. Scott, Ph.D.
|
|
Executive Chairman of the Board of Directors
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Julian
C. Baker
Julian
C. Baker
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Brook
H. Byers
Brook
H. Byers
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Fred
E. Cohen
Fred
E. Cohen, MD., D. Phil.
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Samuel
D. Colella
Samuel
D. Colella
|
|
Director
|
|
March 13, 2009
|
86
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Ginger
L. Graham
Ginger
L. Graham
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Randall
S. Livingston
Randall
S. Livingston
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Woodrow
A. Myers
Woodrow
A. Myers Jr., MD
|
|
Director
|
|
March 13, 2009
|
87
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
3(i)
|
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.3 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
3(ii)
|
|
|
Amended and Restated Bylaws of the Company, as amended and
restated January 8, 2009 (incorporated by reference to
exhibit 3.1 to the Companys Current Report on
Form 8-K
filed on January 9, 2009).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
the exhibit of the same number filed with Registration Statement
on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
4
|
.2
|
|
Amended and Restated Investors Rights Agreement, dated
February 9, 2004 between the Company and certain of its
stockholders (incorporated by reference to the exhibit of the
same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.1#
|
|
Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.2#
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.3#
|
|
2005 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.1
|
|
Sublease Agreement dated June 1, 2001 between the Company
and Corixa Corporation (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.2
|
|
First Amendment to Sublease Agreement dated October 29,
2003 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.3
|
|
Second Amendment to Sublease Agreement dated January 31,
2005 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.5
|
|
PCR Patent License Agreement dated February 21, 2005
between the Company and Roche Molecular Systems, Inc.
(incorporated by reference to exhibit 10.8 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.1
|
|
Master Security Agreement dated March 30, 2005 between the
Company and Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.1 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.2
|
|
Form of Promissory Note (Equipment) issued by the Company in
favor of Oxford Finance Corporation (incorporated by reference
to exhibit 10.9.2 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.3
|
|
Form of Promissory Note (Computers and Software) issued by the
Company in favor of Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.3 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.4
|
|
Schedule of Promissory Notes issued by the Company in favor of
Oxford Finance Corporation (incorporated by reference to
exhibit 10.6.4 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
|
10
|
.7
|
|
Lease dated September 23, 2005 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.10 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.8
|
|
Lease dated January 2, 2007 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.8 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
10
|
.9#
|
|
Form of Non U.S. Employee/Consultant Stock Option Agreement
under the Companys 2005 Stock Incentive Plan (incorporated
by reference to exhibit 10.1 filed with the Companys
Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2008).
|
|
12
|
.1*
|
|
Statement Regarding Computation of Ratios.
|
|
21
|
.1
|
|
List of Subsidiaries (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
23
|
.1*
|
|
Consent of independent registered public accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (see page 86 of this
Form 10-K).
|
|
31
|
.1*
|
|
Rule 13a 14(a) Certification of Chief Executive
Officer.
|
|
31
|
.2*
|
|
Rule 13a 14(a) Certification of the Chief
Financial Officer.
|
|
32
|
.1**
|
|
Statement of the Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
32
|
.2**
|
|
Statement of the Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release Nos.
33-8238 and
34-47986,
Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing
under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by
reference. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements. |
|
# |
|
Indicates management contract or compensatory plan or
arrangement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.