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, 2007
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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
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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
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Smaller reporting
company o
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(Do not check if 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, 2007, the aggregate market value of voting
and non-voting common stock held by non-affiliates of the
registrant was approximately $528.4 million, based on the
closing price of the common stock as reported on the NASDAQ
Global Market for that date.
There were 28,232,689 shares of the registrants
Common Stock issued and outstanding on February 29, 2008.
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 2008 Annual
Meeting of Stockholders to be held on May 21, 2008.
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 we believe to be driving
demand for Oncotype DX and our ability to sustain such demand;
our expectation that our research and development expense levels
will remain high as we seek to increase the clinical utility of
Oncotype DX and develop new tests; our expectation that our
general and administrative and sales and marketing expenses will
increase and our anticipated uses of those funds; our
expectations regarding capital expenditures; the factors that
may impact our financial results; the extent and duration of our
net losses; our ability to comply with the requirements of being
a public company; our ability to attract and retain experienced
personnel; the impact changes in healthcare policy or regulation
could have on our business; the adequacy of our product
liability insurance; our ability to recognize revenues other
than on a cash basis and when we expect we will recognize a
majority of revenues upon providing tests; the level of
investment in our sales force; the capacity of our commercial
laboratory to process tests and our expectations regarding
expanded capacity; our dependence on collaborative relationships
and the success of those relationships; whether any tests will
result from our collaborations; our business strategy and our
ability to achieve our strategic goals; our belief that
multi-gene analysis provides better analytical information; our
belief regarding the timing of a potential test for colon
cancer; our expectations regarding clinical development
processes future tests may follow; the applicability of clinical
results to actual outcomes; our estimates and assumptions with
respect to disease incidence; the ability of our test to impact
treatment decisions; our plans to provide a report specific to
N+ patients in 2008; our beliefs regarding the benefits of
individual gene reporting; 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 economic benefits of our test to the healthcare system; our
compliance with federal, state and foreign regulatory
requirements; our expectation that product revenues will
increase; how we intend to spend our existing cash and cash
equivalents and how long we expect our existing cash to last;
our expected future sources of cash; our plans to borrow
additional amounts under existing or new financing arrangements;
the potential impact resulting from the regulation of Oncotype
DX by the U.S. Food and Drug Administration, or FDA, and
our belief that Oncotype DX is properly regulated under the
Clinical Laboratory Improvement Amendments of 1988, or CLIA; the
impact of new or changing regulation or legislation on our
business; our plans to pursue reimbursement on a
case-by-case
basis; our ability, and expectations as to the amount of time it
will take, to achieve successful reimbursement from third-party
payors and government insurance programs; our intent to enter
into additional foreign distribution arrangements; the benefits
of our technology platform; our beliefs regarding our
competitive benefits; the factors that we believe will drive the
establishment of coverage policies; the impact of changing
interest rates; the amount of future revenues that we may derive
from Medicare patients or categories of patients; our success in
increasing patient and physician demand as a result of our
direct sales approach; plans for enhancements of Oncotype DX to
address different patient populations of breast cancer or to
report single gene results; plans for, and the timeframe for the
development or commercial launch of, future tests addressing
different patient populations or other cancers; the occurrence,
timing, outcome or success of clinical trials; our intellectual
property and our strategies regarding filing additional patent
applications to strengthen our intellectual property rights; the
impact of accounting pronouncements and our critical accounting
policies, estimates, models and assumptions on our financial
results; our anticipated cash needs and our estimates regarding
our capital requirements and our needs for additional financing;
and anticipated trends and challenges in our business and the
markets in which we operate.
Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those expected. These risks and uncertainties
include, but are not limited to, those risks discussed in
Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays
in research and development efforts; the risk that we may not
obtain reimbursement for our existing test and any future tests
we may develop; the risks and uncertainties associated with the
regulation of our test by FDA; our ability to compete against
third parties; our ability to obtain capital when needed; and
our history of operating losses. These forward-looking
statements speak only as of the date hereof. We expressly
disclaim any obligation or
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undertaking to update any forward-looking statements
contained herein to reflect any change in our expectations with
regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
In 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 that allow physicians and patients
to make individualized treatment decisions. In January 2004, we
launched our first test under the brand name Oncotype DX
for early stage breast cancer patients. Oncotype DX is
the first multi-gene expression test commercially available that
has clinical evidence validating its ability to predict the
likelihood of breast cancer recurrence and the likelihood of
chemotherapy benefit. 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 laboratory 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
February 2008, the Oncotype DX report began including
measurements of quantitative gene expression for estrogen
receptor, or ER, and progesterone receptor, or PR, which are
used in the calculation of the Recurrence Score result.
Oncotype DX has been extensively evaluated in multiple
independent studies involving more than 3,300 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 Oncology. As of December 31,
2007, more than 46,500 tests had been delivered for use in
treatment planning by more than 7,000 physicians. As of February
2008, more than 70% of all U.S. insured lives were covered
by health plans that provide reimbursement for Oncotype
DX through contracts, agreements and policy decisions. In
late 2007, The American Society of Clinical Oncologists, or
ASCO, and the National Comprehensive Cancer Network, or NCCN,
issued updated clinical practice guidelines that include the use
of Oncotype DX to predict the likelihood of disease
recurrence and the likelihood of chemotherapy benefit for a
large portion of early stage breast cancer patients. Oncotype
DX is commercially available at a list price of $3,650
through our 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.
Our
Strategy
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. Key elements of our strategy include:
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Deliver high-value genomic-based
diagnostics. We believe that many treatment
decisions are currently being made with little understanding of
the molecular profile of a patients tumor and that
economic inefficiencies result in the healthcare system when
crucial and expensive treatment decisions are made based on
inadequate and often subjective information. Our strategy is to
identify treatment decisions that can benefit from, and be
guided by, the patients individual genomic information. We
are focused on developing high-value tests that address these
treatment decisions, with the goal of making our genomic-based
tests a standard of care. We believe our value lies in our
ability to deliver individualized information during the crucial
period of time after diagnosis but prior to the decision to
undergo a specific cancer treatment.
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Achieve broad-based adoption and
reimbursement. We intend to continue to build a
strong 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 can effectively serve the oncology community and provide
us with a competitive advantage. We believe our direct sales
approach, coupled with our plans to continue to conduct
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multiple clinical studies with results published in
peer-reviewed journals, will continue to increase patient and
physician demand and the number of favorable reimbursement
coverage decisions by payors.
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Enhance existing products and
technologies. Our goal is to enhance our marketed
products by validating additional individualized patient
information to improve treatment planning. We also intend to
deliver added value by expanding the clinical categories of
patients we can address within a cancer population. For example,
we plan to expand our breast cancer product to address late
stage breast cancer patients as well as questions about the
responsiveness of an individual tumor to therapeutic agents such
as aromatase inhibitors and taxanes. We believe that continuous
innovation can sustain a competitive advantage by delivering
more information to physicians in comparison with new
competitive products entering the market.
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Apply our clinical development platform to other
cancers. We are applying our clinical development
platform to address multiple cancers for which quantitative
molecular pathology could improve the assessment of the risk of
disease progression and the prediction of response to therapy.
Our test for colon cancer is in development and we are
conducting research and early development studies in renal cell,
prostate and lung cancers and melanoma. We designed our clinical
development platform to enable us to conduct studies with
clinical study groups and opinion leaders using archived biopsy
specimens with years of associated patient data to correlate
genomic information to clinical outcomes.
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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 2007, approximately 1.5 million
people in the United States 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 to treatments, 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 existing tests are
also evaluated and considered.
Physicians currently rely primarily on 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,
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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.
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 genomic-based diagnostic approach correlates gene expression
information to clinical outcomes and provides information
designed to improve treatment decisions for cancer patients. 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 with known clinical outcomes. Once we have
established and validated a test, we can then analyze a
patients tumor and correlate the result to known clinical
outcomes. As a result, each tumors gene expression can be
quantified and correlated with responsiveness to therapy or the
likelihood of cancer recurrence or progression. Oncotype
DX, our first clinically validated product, uses this
quantitative molecular pathology approach to provide an
individualized analysis of each patients tumor.
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
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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 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
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 $3,650. 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 uses quantitative molecular pathology to
improve cancer treatment decisions. We offer Oncotype DX
as a clinical laboratory test, where we analyze tumor tissue
samples in our 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.
Our technology provides quantitative gene expression information
for each patients tumor, which we refer to as an oncotype.
When an oncotype is correlated with known clinical outcomes, it
can be useful in predicting the likelihood of an individual
patients tumor behavior. This allows the physician and
patient to address key issues such as risk of disease recurrence
or progression and potential benefit from chemotherapy or other
treatments. 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, and we are undertaking further studies to
support this finding.
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Oncotype
DX for Breast Cancer
Approximately 255,000 new cases of breast cancer, including
ductal carcinoma in situ, or DCIS, were diagnosed in the United
States in 2007. 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 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
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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
Development and Validation of Oncotype DX
Clinical
Development of the Oncotype DX Recurrence Score
We developed Oncotype DX using a multi-step approach,
conducting clinical studies on thousands of tumor specimens.
First, we developed methods using reverse transcription
polymerase chain reaction, or RT-PCR, to quantify the expression
of hundreds of genes in RNA isolated from fixed paraffin
embedded tumor tissue. We then selected 250 cancer-related genes
using computer analysis of genomic databases and our knowledge
of cancer pathways. Third, we performed three independent breast
cancer clinical studies in a total of 447 patients with
known clinical outcomes to test the relationship between the
expression of the 250 cancer-related genes and recurrence. Two
of these studies were conducted using samples from patients with
N− and N+ tumors who received tamoxifen, chemotherapy or
both. A third study was conducted in our specific target
population of N−, ER+ patients treated with tamoxifen.
From these studies we selected a panel of 21 genes, comprised of
16 cancer-related genes and five reference genes, with which we
developed the Recurrence Score utilizing a number of statistical
approaches. The Recurrence Score is obtained by first
normalizing the expression of the cancer-related genes against
the reference genes and then applying the Recurrence Score
formula to calculate a single score scaled between 0 and 100.
Clinical
Validation of Prediction of Recurrence and Survival in N−,
ER+ Patients Treated with Tamoxifen
Our initial validation study was performed in 2003 in
collaboration with NSABP to determine whether Oncotype DX
predicts the likelihood of breast cancer recurrence. This study,
which was published in The New England Journal of Medicine
in December 2004, used the NSABP Study B-14 population to
evaluate the ability of Oncotype DX to quantify the
likelihood of breast cancer recurrence over 10 years. The
Recurrence Score was used to prospectively define the following
three risk groups based on our clinical development studies
described above:
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a low risk group, with a Recurrence Score of less than 18,
classified 51% of patients with an average recurrence rate of
6.8%;
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an intermediate risk group, with a Recurrence Score equal to or
greater than 18 but less than 31, classified 22% of the patients
with an average recurrence rate of 14.3%; and
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a high risk group, with a Recurrence Score greater than 31,
which included 27% of the patients with an average recurrence
rate of 30.5%.
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The Recurrence Score was able to assign patients into high and
low risk groups (p<0.001) and, when the Recurrence Score
was examined together with age and tumor size in a multivariate
analysis, only the Recurrence Score remained a significant
predictor of patient outcome (p<0.001). A p-value indicates
the probability that the result obtained in a statistical test
is due to chance rather than a true relationship between
measures. A small
p-value,
generally less than 0.05, or p<0.05, indicates that it is
very unlikely that the results were due to chance. In this study
we also demonstrated that the likelihood of distant recurrence
at 10 years increased continuously as the Recurrence Score
increased, with a range from about 3% recurrence for a
Recurrence Score of zero to greater than 30% recurrence for
patients in the high Recurrence Score category. In addition, in
subgroup analysis of various ages, tumor sizes and pathology
grade, the Recurrence Score remained a consistent predictor of
distant recurrence.
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In collaboration with Northern California Kaiser Permanente, we
conducted a large, case-control, epidemiological study of breast
cancer patients diagnosed from 1985 to 1994 at 14 Northern
California Kaiser hospitals. This study was published in the
Journal of Clinical Oncology in May 2006. This study,
conducted in a community hospital setting, demonstrates that the
Recurrence Score is independently associated with risk of breast
cancer death and is able to identify subgroups of patients
according to low, intermediate and high risk of death at
10 years.
Additional studies were conducted to investigate three clinical
and scientific questions:
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How do patients in the different Recurrence Score risk groups
respond to tamoxifen plus chemotherapy versus tamoxifen alone?
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Does the Recurrence Score predict the likelihood of recurrence,
the benefit from tamoxifen or both?
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Does the Recurrence Score apply to untreated
ER− patients and untreated ER+ patients?
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We conducted a study in 2004 with NSABP to determine whether
Oncotype DX is predictive of the likelihood of
chemotherapy benefit. This study included 651 patients from
the NSABP Study B-20 with N−, ER+ breast cancer enrolled
from 1988 to 1993. The results of this study demonstrated that
low risk patients, as defined by the Recurrence Score, had a 96%
recurrence-free survival rate at 10 years without
chemotherapy compared with a 95% survival rate with
chemotherapy, and intermediate risk patients as defined by the
Recurrence Score had a 90% survival rate without chemotherapy
compared with an 89% rate with chemotherapy. High risk patients
as defined by the Recurrence Score had a 60% survival rate
without chemotherapy compared with an 88% rate with chemotherapy
(p<0.001). These results demonstrate that Oncotype
DX not only quantifies recurrence and survival risk but also
correlates with the likelihood of chemotherapy benefit in early
stage N−, ER+ breast cancer patients.
In 2004, we conducted an expanded study with the NSABP Study
B-14 population to determine whether Oncotype DX captures
information regarding likelihood of distant recurrence,
tamoxifen benefit, or both. This studys conclusions were
published in the Journal of Clinical Oncology in May
2006. The study included 645 patients with N−, ER+
breast cancer enrolled from 1982 to 1988. The results of this
study demonstrated that Oncotype DX predicts the
likelihood of distant disease recurrence in tamoxifen-treated
patients with N−, ER+ breast cancer because it captures
both prognosis and tamoxifen benefit. Furthermore, this study of
Oncotype DX demonstrates that low and intermediate risk
patients as defined by the Recurrence Score had the largest
benefit of tamoxifen and high risk patients as defined by the
Recurrence Score had minimal benefit of tamoxifen. The
quantitative levels of ER, as defined by Oncotype DX,
varied by over two-hundred fold within the ER+ population and
increasing levels of quantitative ER gene expression correlated
with increasing tamoxifen benefit. Finally, Oncotype DX
was able to discriminate between high and low risk patients in a
subset of patients not treated with tamoxifen.
In 2003, we conducted a trial with the M.D. Anderson Cancer
Center to test the predictive power of Oncotype DX in
untreated breast cancer patients who were either ER− or
ER+. This study was published in Clinical Cancer Research
in May 2005. Out of a pool of over 4,000 N− patient
tissue samples, only 149 patients were untreated and had a
sufficient tissue sample and RNA available to make them eligible
for the study. The study population differed significantly from
the NSABP Study B-14 treatment arm used for our initial
validation study in that none of the patients were treated with
tamoxifen, and the population included ER− and ER+
patients. This study did not demonstrate a significant
predictive power for Oncotype DX in untreated N-patients.
Importantly, it also did not demonstrate the expected predictive
power for other known predictive factors. For example, tumor
grade inversely correlated with expected outcomes. Subsequent
evaluations of Oncotype DX in the NSABP Study B-14
placebo arm using samples from untreated ER+ patients and in the
Kaiser Permanente population-based study using samples from
untreated ER+ and ER− patients demonstrated a correlation
between the Recurrence Score and recurrence and survival.
Health
Economic Benefits and Clinical Utility of Oncotype
DX
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
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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% 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.
In December 2007, eight studies were presented at the
San Antonio Breast Cancer Symposium, or SABCS, reinforcing
the clinical utility of Oncotype DX. The SABCS
presentations included a study presented by the Southwest
Oncology Group, or SWOG, suggesting that Oncotype DX may
be useful in predicting survival without disease recurrence and
the benefit of chemotherapy for N+ patients, in addition to
those with N−, ER+ breast cancer. Additionally, 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. The Agency for
Healthcare Research and Quality, the lead Federal agency charged
with improving the quality, safety, efficiency, and
effectiveness of health care, released an online report in
December 2007 reviewing the field of genomic classifiers in
breast cancer including Oncotype DX and other tests. This
report, sponsored by the Centers for Disease Control and
prepared by the Johns Hopkins Evidence-based Practice Center,
indicates that there is strong evidence that Oncotype DX
provides meaningful information beyond standard measures to
predict recurrence and chemotherapy benefit, with demonstrated
clinical utility.
New
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
The following table describes our current breast cancer product
and our other breast cancer product opportunities:
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Breast Cancer
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Breast Cancer
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Anticipated
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Products
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Population
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Product Attributes
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Product Stage
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Oncotype DX
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N−, ER+
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Recurrence
Chemotherapy benefit
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Commercial
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Quantitative ER/PR reporting
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Hormonal therapy benefit
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Commercial
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N+, hormone receptor+
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Recurrence
Chemotherapy benefit
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Product Expansion
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DCIS
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Recurrence
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Product Expansion
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Radiation therapy or other
therapeutic regimens benefit
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Oncotype DX
Second
Generation
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N−, N+ and
DCIS
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Enhanced recurrence
Enhanced chemotherapy benefit
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Research/Early
Development
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New Product Opportunities
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N−, ER+
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Taxane benefit
Recurrence
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Early Development
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N−, ER−
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Taxane benefit
Chemotherapy benefit
Recurrence
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Early Development
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DCIS
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Recurrence
Radiation therapy or other therapeutic regimens benefit
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Early Development
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Oncotype
DX
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 were N− or
N+. At SABCS, 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. Based upon the
results from these studies, we currently provide Oncotype
DX for N+ patients through a medical consultation.
In February 2008, we introduced quantitative gene expression
reporting for ER and PR genes with the Oncotype DX
Recurrence Score report to provide better information for
improved decision making. 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.
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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 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 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.
Second
generation Oncotype DX
We are investigating additional genes and gene combinations that
may add to the predictive power of Oncotype DX. A second
generation product, if successful, could further refine and
improve the classification of patients and result in better
information for treatment decisions. We have identified multiple
genes through research and development studies that, in varying
combinations, may provide improved prediction of recurrence risk
and likelihood of chemotherapy benefit in breast cancer patients.
Taxane
benefit test
We are in the early 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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Anticipated Product
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Product Opportunity
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Attributes
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Product Stage
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Colon Cancer
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Recurrence
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Development
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Prediction of drug response
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Renal Cell Cancer
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Recurrence
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Early Development
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Prostate Cancer
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Progression
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Early Development
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Recurrence
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Non-small Cell Lung Cancer
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Prediction of drug response
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Early Development
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Melanoma
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Recurrence
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Early Development
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Prediction of drug response
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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. As a result, we have now
identified multiple genes that have been observed to be
statistically significantly correlated to clinical outcome. We
expect to conduct analytical validation work with the final gene
set and algorithm and a clinical validation study in 2008.
In late 2007, we executed a collaboration agreement with Pfizer
Inc. for the development of a genomic test to estimate the risk
of recurrence following surgery for patients with Stage I-III
renal carcinoma, clear cell type, that has not spread to other
parts of the body. The clear cell type of renal carcinoma is the
most common type of kidney cancer in adults. 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.
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 our individualized genomic
analysis has the potential to
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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 early development phase to develop 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 are currently conducting
studies in collaboration with Bristol-Myers Squibb and ImClone,
the results of which will determine the next steps in developing
a test to predict Erbitux benefit.
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 studies are underway and the results will
guide us in determining the next steps in an effort to develop a
test to predict the likelihood of benefit from Taxotere.
Technology
We utilize existing technologies such as RT-PCR and information
technologies and optimize and integrate them into new processes.
We expect to continue to extend the capabilities of the various
components of our process to develop effective products. Our
technology allows us to:
Extract
RNA from FPE-tumor Biopsies
Our product development 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 a well-established technology that we license from Roche
Molecular Systems Inc., or Roche, called 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
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system across days, instruments and operators. This enables our
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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the speed with which our clinical development platform can
commercialize products;
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our clinical collaborations with clinical study groups;
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the level of customer service we provide, both to patients and
health care professionals;
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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 for breast cancer 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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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 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 companies that offer products
or have conducted research to profile genes, gene expression or
protein expression in breast cancer, including Celera Genomics,
a business segment of Applera Corporation, and Clarient
Diagnostic Services as well as Agendia B.V. and other private
companies. 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 price of our test from $3,460 to $3,650
effective June 1, 2007, and we may raise prices in the
future. This could impact reimbursement of and demand for
Oncotype DX. Many of our present and potential
competitors have widespread brand recognition and substantially
greater financial and technical resources and development,
production and marketing capabilities than we do. Others may
develop lower-priced, less complex tests that could be viewed by
physicians and payors as functionally equivalent to our test,
which could force us to lower the list price of our test and
impact our operating margins and our ability to achieve
profitability. Some competitors have developed tests cleared for
marketing by FDA. There may be a marketing differentiation or
perception that an FDA-cleared test is more desirable than
Oncotype DX, and that 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 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.
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 December 2007, the NCCN included Oncotype DX in its
updated 2008 breast cancer treatment guidelines as an option for
guiding adjuvant chemotherapy treatment decisions in patients
with hormone receptor positive,
HER-2
negative tumors with specified features. In October 2007, ASCO
issued updated clinical practice guidelines
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that include the use of Oncotype DX to predict the
likelihood of disease recurrence and the likelihood of
chemotherapy benefit for newly diagnosed, early stage N−,
ER+ breast cancer patients. In July 2007, the Blue Cross and
Blue Shield Association Technology Evaluation Center concluded
that the use of Oncotype DX to inform decision making
about adjuvant chemotherapy meets its criteria for women with
N−, ER+ tumors who have been treated with tamoxifen. In
addition to the inclusion of Oncotype DX in these
clinical treatment guidelines, we believe the key factors that
will drive broader adoption of Oncotype DX will be
acceptance by healthcare providers of its clinical benefits,
demonstration of the cost-effectiveness of using our test,
expanded reimbursement by third-party payors, and appropriate
increases in marketing and sales efforts.
Cigna HealthCare, Humana, Inc., Health Net, Inc., United
HealthCare Insurance Company, Aetna, Inc., Kaiser Foundation
Health Plan, Inc., National Heritage Insurance Company, or NHIC,
the local Medicare carrier for California with jurisdiction for
claims submitted by us for Medicare patients, and Medi-Cal, the
Medicaid program for the state of California, have issued
positive coverage determinations for Oncotype DX.
WellPoint, Inc., a leading health benefits company, adopted a
policy covering Oncotype DX with certain restrictions. In
addition, a number of regional payors, including many regional
Blue Cross and Blue Shield providers, have issued policies
supporting reimbursement for our test. As of February 2008, more
than 70% of all U.S. insured lives were covered by health
plans that provide reimbursement for Oncotype DX through
contracts, agreements and 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
rather than retroactively. Denial of coverage by payors, or
payment at inadequate levels, would have a material adverse
impact on market acceptance of our products.
Commercial Third-party Payors and Patient
Pay. Where there is a payor policy 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, NHIC, the California
Medicare contractor with responsibility for processing and
paying claims submitted by us, released a local coverage
determination providing coverage for Oncotype DX when
used in accordance with the terms of the determination. As a
result, we are permitted to submit claims to Medicare for the
Oncotype DX tests performed on Medicare beneficiaries who
were hospital inpatients or outpatients at the time the tumor
tissue samples were obtained, but only if the test was ordered
at least 14 days following the date of the patients
discharge from the hospital and where other specified conditions
are met. The local coverage determination is effective for
Oncotype DX tests provided on or after February 27,
2006. Under 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 or when the test is ordered less than 14 days from
discharge must be incorporated in the payment that the hospital
receives for their inpatient services provided related to the
patients breast cancer. Medicare billing rules also
require hospitals to bill for the test when performed or ordered
for hospital outpatients less than 14 days following the
date of the hospital
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outpatient procedure where the tumor tissue samples were
obtained. We are in the process of making arrangements with
hospitals for payment of the test when performed for the portion
of Medicare beneficiaries, representing approximately 2-3% of
our total testing population, who are hospital inpatients or
outpatients at the time specimens are collected and who do not
meet criteria under the Medicare billing rules for billing by
us. We are also working with Medicare to revise or reverse these
billing rules to allow us to bill for tests performed after
discharge from the hospital. However, we have no assurance that
Medicare will revise or reverse these billing rules, and we also
cannot ensure that hospitals will agree to arrangements to pay
us for tests performed on patients falling under these billing
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 December 2007, 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.
In late 2007, CMS announced that Palmetto Government Benefits
Administrators, or Palmetto, will be replacing NHIC as the
Medicare administrative contractor with jurisdiction over claims
submitted by us to Medicare. Medicare claims processing
responsibility will transition from NHIC to Palmetto over the
next several months with Palmetto expected to assume full
responsibility by the summer of 2008. It is possible that
Palmetto will adopt different coverage or payment policies from
those of NHIC, and its policies may not include reimbursement
for Oncotype DX or may provide for reimbursement on
different terms than are presently in effect.
We recently conducted clinical studies to support the use of
Oncotype DX in post-menopausal women with N+, ER+ breast
cancer. Most of our existing reimbursement coverage is
specifically for women with early stage N−, ER+ breast
cancer. When we begin to offer Oncotype DX for
post-menopausal female breast cancer patients who are N+, ER+
patients, we may not be able to obtain reimbursement coverage
for these patients that is similar to the coverage we have
obtained for early state N−, ER+ patients.
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 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.
At the present time, 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 have been informed by
NHIC that, under the local coverage determination, we may expect
claims 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.
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 or that adequate payment will be assigned if and
when a specific procedure code is adopted.
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In the MMA, Congress authorized the Medicare program to conduct
a demonstration project on applying competitive bidding to
certain clinical laboratory tests. It is not clear whether
competitive bidding will be applied more broadly to clinical
laboratory services under Medicare at some point in the future
and, if so, whether this would impact payment for Oncotype
DX, which is provided solely by us. In addition, 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 payment for Oncotype DX.
Regulation
Clinical
Laboratory Improvement Amendments of 1988
As a clinical 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 that we will be able to operate profitably
should regulatory compliance requirements become substantially
more costly in the future.
If our 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 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-
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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, has requested that its Advisory Committee on
Genetics, Health and Society make recommendations about the
oversight of genetic testing. Draft recommendations were
published in November 2007 and were open for public comment
through late December 2007, and a final report is expected in
the spring of 2008.
We are continuing our ongoing dialogue with FDA and HHS
regarding the Oncotype DX breast cancer assay, but FDA
may finalize its policy on IVDMIAs at any time. We cannot
provide any assurance that FDA regulation, including pre-market
review, will not be required in the future for Oncotype
DX, either through new enforcement policies adopted by FDA
or new legislation enacted by Congress. It is possible that
legislation will be enacted into law and may result in increased
regulatory burdens for us to continue to offer the
Oncotype DX assay.
If pre-market review is required, our business could be
negatively impacted until such review is completed and clearance
to market or approval is obtained, and FDA could require that we
stop selling our test pending pre-market clearance or approval.
If our test is allowed to remain on the market but there is
uncertainty about our test or if it is labeled investigational
by FDA, orders 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
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requirements in all of the jurisdictions in which we do
business. Failure to comply with privacy requirements could
result in civil or criminal penalties, which could have a
materially adverse impact on our business.
Federal
and State Physician Self-referral Prohibitions
We are subject to the federal physician self-referral
prohibitions commonly known as the Stark Law, and to similar
restrictions under Californias Physician Ownership and
Referral Act, commonly known as PORA. Together these
restrictions generally prohibit us from billing a patient or any
governmental or private payor for any test when the physician
ordering the test, or any member of such physicians
immediate family, has an investment interest in or compensation
arrangement with us, unless the arrangement meets an exception
to the prohibition.
Both the Stark Law and PORA contain an exception for referrals
made by physicians who hold investment interests in a publicly
traded company that has stockholders equity exceeding
$75 million at the end of its most recent fiscal year or on
average during the previous three fiscal years, and which
satisfies certain other requirements. In addition, both the
Stark Law and PORA contain an exception for compensation paid to
a physician for personal services rendered by the physician. We
have compensation arrangements with a number of physicians for
personal services, such as speaking engagements and specimen
tissue preparation. We have structured these arrangements with
terms intended to comply with the requirements of the personal
services exception to Stark and PORA. However, we 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.
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Actions which violate the Anti-kickback Law or similar laws may
also involve liability under the Federal False Claims Act, which
prohibits the knowing presentation of a false, fictitious or
fraudulent claim for payment to the U.S. Government.
Actions under the Federal False Claims Act may be brought by the
Department of Justice or by a private individual in the name of
the government.
Although the Anti-kickback Law applies only to federal health
care programs, a number of states, including California, have
passed statutes substantially similar to the Anti-kickback Law
pursuant to which similar types of prohibitions are made
applicable to all other health plans and third-party payors.
Both Californias fee-splitting statute, Business and
Professions Section 650, and its Medi-Cal anti-kickback
statute, Welfare and Institutions Code Section 14107.2,
have been interpreted by the California Attorney General and
California courts in substantially the same way as HHS and the
courts have interpreted the Anti-kickback Law. A violation of
Section 650 is punishable by imprisonment and fines of up
to $50,000. A violation of Section 14107.2 is punishable by
imprisonment and fines of up to $10,000.
Federal and state law enforcement authorities scrutinize
arrangements between health care providers and potential
referral sources to ensure that the arrangements are not
designed as a mechanism to induce patient care referrals and
opportunities. The law enforcement authorities, the courts and
Congress have also demonstrated a willingness to look behind the
formalities of a transaction to determine the underlying purpose
of payments between health care providers and actual or
potential referral sources. Generally, courts have taken a broad
interpretation of the scope of the Anti-kickback Law, holding
that the statute may be violated if merely one purpose of a
payment arrangement is to induce future referrals.
In addition to statutory exceptions to the Anti-kickback Law,
regulations provide for a number of safe harbors. If an
arrangement meets the provisions of a safe harbor, it is deemed
not to violate the Anti-kickback Law. An arrangement must fully
comply with each element of an applicable safe harbor in order
to qualify for protection. There are no regulatory safe harbors
to Californias Section 650.
Among the safe harbors that may be relevant to us is the
discount safe harbor. The discount safe harbor potentially
applies to discounts provided by providers and suppliers,
including laboratories, to physicians or institutions where the
physician or institution bills the payor for the test, not when
the laboratory bills the payor directly. If the terms of the
discount safe harbor are met, the discounts will not be
considered prohibited remuneration under the Anti-kickback Law.
This safe harbor may therefore be potentially applicable to our
agreements to sell tests to hospitals where the hospital submits
a claim to the payor.
California does not have a discount safe harbor. However, as
noted above, Section 650 has generally been interpreted
consistent with the Anti-kickback Law.
The personal services safe harbor to the Anti-kickback Law
provides that remuneration paid to a referral source for
personal services will not violate the Anti-kickback Law
provided all of the elements of that safe harbor are met. One
element is that, if the agreement is intended to provide for the
services of the physician on a periodic, sporadic or part-time
basis, rather than on a full-time basis for the term of the
agreement, the agreement specifies exactly the schedule of such
intervals, their precise length, and the exact charge for such
intervals. Our personal 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.
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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.
California
Laboratory Licensing
In addition to federal certification requirements of
laboratories under CLIA, licensure is required and maintained
for our 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 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
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
laboratory is required to be licensed by New York. We maintain
such licensure for our 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.
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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.
Patents
and Proprietary Technology
In order to remain competitive, we must develop and maintain
protection on the proprietary aspects of our technologies. We
rely on a combination of patent applications, copyrights,
trademarks, trade secret laws and confidentiality, material data
transfer agreements, licenses and invention assignment
agreements to protect our intellectual property rights. We also
rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and
maintain our competitive position. We generally protect this
information with reasonable security measures.
As of December 31, 2007, we had two issued patents, 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 applications under the Patent
Cooperation Treaty in Canada, Europe, Japan and Australia. 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
24
considerable time, and force us to reassess our business plans.
Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling 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. 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 have obtained from Roche a non-exclusive license under a
number of U.S. patents claiming nucleic acid amplification
processes known as polymerase chain reaction, or PCR,
homogeneous polymerase chain reaction, and reverse transcription
polymerase chain reaction, or 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.
Oxford
Finance Agreements
We have entered into a master security agreement and a number of
promissory notes with Oxford Finance Corporation, or Oxford, to
finance the acquisition of laboratory and office equipment,
computer hardware and software, and leasehold improvements.
Under the master security agreement, we granted a security
interest to Oxford in the assets purchased with the borrowed
amounts. Events that would constitute a default by us under the
master security agreement include, among others, our failure to
pay an obligation when due, an attempt by us to sell, lease,
transfer or encumber the collateral, our failure to maintain
liability insurance as required by the agreement; our
dissolving, becoming insolvent, filing for bankruptcy or having
a receiver appointed, a change in our ownership or a material
adverse change in our financial condition, business or
operations.
The promissory notes provide that amounts borrowed will be
repaid in periodic installments. Principal underlying promissory
notes to finance laboratory and office equipment and computer
hardware and software must be paid in 45 to 48 monthly
installments, and principal underlying promissory notes to
finance leasehold improvements must be paid in 36 monthly
installments. Prepayment of indebtedness under a promissory note
is allowed only after the first anniversary of the note and is
subject to a prepayment penalty. If we default under the master
security agreement, Oxford may declare all of our indebtedness
under the promissory notes to be immediately due and payable. As
of December 31, 2007, the outstanding principal amount
under these promissory notes was $4.7 million.
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Research
and Development Expenses
Research and development expenses were $22.1 million,
$12.8 million and $9.5 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Employees
As of December 31, 2007, we had 288 employees. None of
our employees are covered by collective bargaining arrangements,
and our management considers its relationships with employees to
be good.
Available
Information
We were incorporated in Delaware in August 2000, and our website
is located at www.genomichealth.com. We make available
free of charge on our website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the Securities and Exchange Commission. Our website
and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on
Form 10-K.
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RISKS
RELATED TO OUR COMPANY
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, 2007, we incurred net losses of
$27.3 million. From our inception in August 2000 through
December 31, 2007, we had an accumulated deficit of
$152.4 million. To date, we have not, and we may never,
achieve revenues sufficient to offset expenses. We expect to
devote substantially all of our resources to continue
commercializing and enhancing our existing test, Oncotype
DX, and to develop future tests.
We expect to incur additional losses in the future and we may
never achieve profitability. We do not expect our losses to be
substantially mitigated by revenues from Oncotype DX or
future products, if any, for at least the next year.
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 $22.1 million for
the year ended December 31, 2007. 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.
If
third-party payors, including managed care organizations and
Medicare, do not provide reimbursement or rescind their
reimbursement policies for Oncotype DX, its commercial success
could be compromised.
Oncotype DX has a current list price of $3,650.
Physicians and patients may decide not to order Oncotype
DX unless third-party payors, such as managed care
organizations as well as government payors such as Medicare and
Medicaid, pay a substantial portion of the 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 significant uncertainty concerning third-party
reimbursement of any test incorporating new technology,
including Oncotype DX. Several entities conduct
technology assessments of new medical tests and devices and
provide the results of their assessments for informational
purposes to other parties. These assessments may be used by
third-party payors and health care providers as grounds to deny
coverage for a test or procedure. Oncotype DX has in the
past received negative assessments 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 in the future.
In January 2006, NHIC, the local Medicare carrier for California
with jurisdiction for claims submitted by us for Medicare
patients, released a local coverage determination providing
coverage for Oncotype DX when used in
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accordance with the terms of the determination. As a result, we
are permitted to submit claims to Medicare for the Oncotype
DX tests performed on Medicare beneficiaries who were
hospital inpatients or outpatients at the time the tumor tissue
samples were obtained, but only if the test was ordered at least
14 days following the date of the patients discharge
from the hospital and where other specified conditions are met.
The local coverage determination is effective for Oncotype
DX tests provided on or after February 27, 2006. Under
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 or when the
test is ordered less than 14 days from discharge must be
incorporated in the payment that the hospital receives for the
inpatient services provided related to the patients breast
cancer. Medicare billing rules also require hospitals to bill
for the test when performed or ordered for hospital outpatients
less than 14 days following the date of the hospital
outpatient procedure where the tumor tissue samples were
obtained. We are in the process of making arrangements with
hospitals for payment of the test when performed for the portion
of Medicare beneficiaries, representing approximately
2-3% of our
total testing population, who are hospital inpatients or
outpatients at the time specimens are collected and who do not
meet criteria under the Medicare billing rules for billing by
us. We are also working with Medicare to revise or reverse these
billing rules to allow us to bill for tests performed after
discharge from the hospital. However, we have no assurance that
Medicare will revise or reverse these billing rules, and we also
cannot ensure that hospitals will agree to arrangements to pay
us for tests performed on patients falling under these billing
rules.
Insurers, including managed care organizations as well as
government payors such as Medicare, have increased their efforts
to control the cost, utilization and delivery of health care
services. From time to time, Congress has considered and
implemented changes in the Medicare fee schedules in conjunction
with budgetary legislation. Further reductions of reimbursement
for Medicare services may be implemented from time to time.
Reductions in the reimbursement rates of other third-party
payors have occurred and may occur in the future. These measures
have resulted in reduced prices and decreased test utilization
for the clinical laboratory industry.
We recently conducted clinical studies to support the use of
Oncotype DX in post-menopausal women with N+, ER+ breast
cancer. Most of our existing reimbursement coverage is
specifically for women with early stage N−, ER+ breast
cancer. We may not be able to obtain reimbursement coverage for
Oncotype DX for post-menopausal female breast cancer
patients who are N+, ER+ patients that is similar to the
coverage we have obtained for early stage N−, ER+ patients.
If we are unable to obtain reimbursement approval from private
payors and Medicare and Medicaid programs for Oncotype
DX, or if the amount reimbursed is inadequate, our ability
to generate revenues from Oncotype DX could be limited.
Even if we are being reimbursed, insurers may withdraw their
coverage policies or cancel their contracts with us at any time
or stop paying for our test, which would reduce our revenue.
We
depend on a limited number of payors for a significant portion
of our product revenues and if these payors stop providing
reimbursement or decrease the amount of reimbursement for our
test, our revenues could decline.
For the years ended December 31, 2007 and 2006, one payor,
Medicare, as administered by NHIC, accounted for 23% and 47%,
respectively, of our product revenues. Another payor, United
HealthCare Insurance Company, accounted for 13% of our product
revenues for the year ended December 31, 2007. NHIC is the
local Medicare carrier for California with jurisdiction for
claims submitted by us for Medicare patients in the United
States. The responsibility for processing Medicare claims
submitted by us is being transitioned from NHIC to another
entity, Palmetto, which is expected to take over full
responsibility for processing such claims by us by summer 2008.
We cannot assure you that this new Medicare administrative
contractor will adopt the same coverage or payment policies as
those adopted by NHIC. In addition, payors that currently
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 changes could have a
negative impact on our revenues.
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If FDA
were to begin regulating our test, we could be forced to stop
sales of Oncotype DX, we could experience significant delays in
commercializing any future products, we could incur substantial
costs and time delays associated with meeting requirements for
pre-market clearance or approval or we could experience
decreased demand for or reimbursement of our test.
Clinical laboratory tests like Oncotype DX are regulated
under CLIA, as administered through CMS, as well as by
applicable state laws. Diagnostic kits that are sold and
distributed through interstate commerce are regulated as medical
devices by FDA. Clinical laboratory tests that are developed and
validated by a laboratory for its own use are called laboratory
developed tests, or LDTs. Most LDTs currently are not subject to
FDA regulation, although reagents or software provided by third
parties and used to perform LDTs may be subject to regulation.
We believe that Oncotype DX is not a diagnostic kit and
also believe that it is an LDT. As a result, we believe
Oncotype DX should not be subject to regulation under
established FDA policies. The container we provide for
collection and transport of tumor samples from a pathology
laboratory to our laboratory 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 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, has requested that its Advisory Committee on
Genetics, Health and Society make recommendations about the
oversight of genetic testing. Draft recommendations were
published in November 2007 and were open for public comment
through late December 2007, and a final report is expected in
the spring of 2008.
We are continuing our ongoing dialogue with FDA and HHS
regarding the Oncotype DX breast cancer assay. We cannot
provide any assurance that FDA regulation, including pre-market
review, will not be required in the future for Oncotype
DX, either through new enforcement policies adopted by FDA
or new legislation enacted by Congress. It is possible that
legislation will be enacted into law and may result in increased
regulatory burdens for us to continue to offer the Oncotype
DX assay.
If pre-market review is required, our business could be
negatively impacted until such review is completed and clearance
to market or approval is obtained, and FDA could require that we
stop selling our test pending pre-market clearance or approval.
If our test is allowed to remain on the market but there is
uncertainty about our test or if it is labeled investigational
by FDA, orders 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
29
requirements of FDA and penalties for failure to comply with
these requirements. We may also decide voluntarily to pursue FDA
pre-market review of Oncotype DX if we determine that
doing so would be appropriate.
Should any of the reagents obtained by us from vendors and used
in conducting our test be affected by future regulatory actions,
our business could be adversely affected by those actions,
including increasing the cost of testing or delaying, limiting
or prohibiting the purchase of reagents necessary to perform
testing.
If we
were required to conduct additional clinical trials prior to
continuing to sell Oncotype DX or marketing any new test, those
trials could lead to delays or failure to obtain necessary
regulatory approvals and harm our ability to become
profitable.
If FDA decides to regulate our tests, it may require extensive
pre-market clinical testing prior to submitting a regulatory
application for commercial sales. If we are required to conduct
pre-market clinical trials, whether using prospectively acquired
samples or archival samples, delays in the commencement or
completion of clinical testing could significantly increase our
test development costs and delay commercialization. Many of the
factors that may cause or lead to a delay in the commencement or
completion of clinical trials may also ultimately lead to delay
or denial of regulatory clearance or approval. The commencement
of clinical trials may be delayed due to insufficient patient
enrollment, which is a function of many factors, including the
size of the patient population, the nature of the protocol, the
proximity of patients to clinical sites and the eligibility
criteria for the clinical trial. We may find it necessary to
engage contract research organizations to perform data
collection and analysis and other aspects of our clinical
trials, which might increase the cost and complexity of our
trials. We may also depend on clinical investigators, medical
institutions and contract research organizations to perform the
trials properly. If these parties do not successfully carry out
their contractual duties or obligations or meet expected
deadlines, or if the quality, completeness or accuracy of the
clinical data they obtain is compromised due to the failure to
adhere to our clinical protocols or for other reasons, our
clinical trials may have to be extended, delayed or terminated.
Many of these factors would be beyond our control. We may not be
able to enter into replacement arrangements without undue delays
or considerable expenditures. If there are delays in testing or
approvals as a result of the failure to perform by third
parties, our research and development costs would increase, and
we may not be able to obtain regulatory clearance or approval
for our test. In addition, we may not be able to establish or
maintain relationships with these parties on favorable terms, if
at all. Each of these outcomes would harm our ability to market
our test, or to become profitable.
Complying
with numerous regulations pertaining to our business is an
expensive and time-consuming process, and any failure to comply
could result in substantial penalties.
We are subject to CLIA, a federal law that regulates clinical
laboratories that perform testing on specimens derived from
humans for the purpose of providing information for the
diagnosis, prevention or treatment of disease. CLIA is intended
to ensure the quality and reliability of clinical laboratories
in the United States by mandating specific standards in the
areas of personnel qualifications, administration, and
participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. We have a
current certificate of accreditation under CLIA to perform
testing. To renew this certificate, we are subject to survey and
inspection every two years. Moreover, CLIA inspectors may make
random inspections of our laboratory.
We are also required to maintain a license to conduct testing in
California. California laws establish standards for day-to-day
operation of our clinical laboratory, including the training and
skills required of personnel and quality control. Moreover,
several states require that we hold licenses to test specimens
from patients residing in those states. Other states 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.
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.
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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.
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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 tests for colon
cancer until at least 2009, and we are not currently able to
estimate when we may be able to commercialize tests for other
cancers or whether we will be successful in doing so. If we are
unable to increase sales of Oncotype DX or to
successfully develop and commercialize other tests or
enhancements, our revenues and our ability to achieve
profitability would be impaired, and the market price of our
common stock could decline.
New
test development involves a lengthy and complex process, and we
may be unable to commercialize any of the tests we are currently
developing.
We have multiple tests in various stages of development and
devote considerable resources to research and development. For
example, we are currently in the development stage of the
application of our technology to predict recurrence and the
therapeutic benefit of chemotherapy in colon cancer, and we are
conducting early development studies in prostate, renal cell and
lung cancers and melanoma. There can be no assurance that our
technologies will be capable of reliably predicting the
recurrence of other types of cancer or other cancers, such as
colon, with the sensitivity and specificity necessary to be
clinically and commercially useful for the treatment of other
cancers, or that we can develop those technologies at all. In
addition, before we can develop diagnostic tests for new cancers
and commercialize any new products, we will need to:
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conduct substantial research and development;
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conduct validation studies;
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expend significant funds; and
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develop and scale our laboratory processes to accommodate
different tests.
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This process involves a high degree of risk and takes several
years. Our product development efforts may fail for many
reasons, including:
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failure of the product at the research or development stage;
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difficulty in accessing archival tissue samples, especially
tissue samples with known clinical results; or
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lack of clinical validation data to support the effectiveness of
the product.
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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 recently added a second shift at our clinical laboratory
facility and will need to ramp up our testing capacity as our
test volume grows. We 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 or that we will be successful in
responding to the growing complexity of our testing operations.
If we encounter difficulty meeting market demand 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.
Until recently, guidelines and practices regarding the treatment
of breast cancer often recommended that chemotherapy be
considered in most cases, including many cases in which our test
might indicate that, based on our clinical trial results,
chemotherapy would be of little or no benefit. Accordingly,
physicians may be reluctant to order a test that may suggest
recommending against chemotherapy in treating breast cancer.
Moreover, our test provides quantitative information not
currently provided by pathologists and it is performed at our
facility rather than by the pathologist in a local laboratory,
so pathologists may be reluctant to support our test. These
facts may make it difficult for us to convince medical
practitioners to order Oncotype DX for their patients,
which could limit our ability to generate revenues and our
ability to achieve profitability.
We may
experience limits on our revenues if patients decide not to use
our test.
Some patients may decide not to order our test due to its price,
part or all of which may be payable directly by the patient if
the applicable payor denies reimbursement in full or in part.
Even if medical practitioners recommend
32
that their patients use our test, patients may still decide not
to use Oncotype DX, either because they do not want to be
made aware of the likelihood of recurrence or they wish to
pursue a particular course of therapy regardless of test
results. If only a small portion of the patient population
decides to use our test, we will experience limits on our
revenues and our ability to achieve profitability.
If we
are unable to develop products to keep pace with rapid
technological, medical and scientific change, our operating
results and competitive position would be harmed.
In recent years, there have been numerous advances in
technologies relating to the diagnosis and treatment of cancer.
For example, technologies in addition to ours now reportedly
permit measurement of gene expression in FPE tissue specimens.
Also, new hormonal therapies such as aromatase inhibitors are
viewed by physicians as promising therapies for breast cancer
with more tolerable side effects than those associated with
tamoxifen, the hormonal therapy commonly used today in
treatment. For advanced cancer, new chemotherapeutic strategies
are being developed that may increase survival time and reduce
toxic side effects. These advances require us to continuously
develop new products and enhance existing products to keep pace
with evolving standards of care. Our test could become obsolete
unless we continually innovate and expand our product to
demonstrate recurrence and treatment benefit in patients treated
with new therapies. New treatment therapies typically have only
a few years of clinical data associated with them, which limits
our ability to perform clinical studies and correlate sets of
genes to a new treatments effectiveness. If we are unable
to demonstrate the applicability of our test to new treatments,
then sales of our test could decline, which would harm our
revenues.
Our
rights to use technologies licensed from third parties are not
within our control, and we may not be able to sell our products
if we lose our existing rights or cannot obtain new rights on
reasonable terms.
We license from third parties technology necessary to develop
our products. For example, we license technology from Roche that
we use to analyze genes for possible inclusion in our tests and
that we use in our 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.
Our
competitive position depends on maintaining intellectual
property protection.
Our ability to compete and to achieve and maintain profitability
depends on our ability to protect our proprietary discoveries
and technologies. We currently rely on a combination of patent
applications, copyrights, trademarks, trade secret laws and
confidentiality agreements, material data transfer agreements,
license agreements and invention assignment agreements to
protect our intellectual property rights. We also rely upon
unpatented know-how and continuing technological innovation to
develop and maintain our competitive position. Patents may be
granted to us jointly with other organizations, and while we may
have a right of first refusal, we cannot guarantee that a joint
owner will not license rights to another party, and cannot
guarantee that a joint owner will cooperate with us in the
enforcement of patent rights.
As of December 31, 2007, we had two issued patents, one of
which was issued jointly to us and to NSABP. Our pending patent
applications may not result in issued patents, and we cannot
assure you that our issued patent or any patents that might
ultimately be issued by the U.S. Patent and Trademark
Office will protect our technology. Any patents that may be
issued to us might be challenged by third parties as being
invalid or unenforceable, or third parties may independently
develop similar or competing technology that avoids our patents.
We cannot be certain that the steps we have taken will prevent
the misappropriation and use of our intellectual property,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
From time to time, the United States Supreme Court, other
federal courts, the U.S. Congress or the U.S. Patent
and Trademark Office may change the standards of patentability
and any such changes could have a negative impact on our
business. In addition, competitors may develop their own
versions of our test in countries where we did not
33
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,
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 such actions, or that other
actions alleging misappropriation or misuse by us of third-party
trade secrets, infringement by us of third-party patents and
trademarks or the validity of our patents, will not be asserted
or prosecuted against us. We may also initiate claims to defend
our intellectual property. Intellectual property litigation,
regardless of outcome, is expensive and time-consuming, could
divert managements attention from our business and have a
material negative effect on our business, operating results or
financial condition. If there is a successful claim of
infringement against us, we may be required to pay substantial
damages (including treble damages if we were to be found to have
willfully infringed a third partys patent) to the party
claiming infringement, develop non-infringing technology, stop
selling our test or using technology that contains the allegedly
infringing intellectual property or enter into royalty or
license agreements that may not be available on acceptable or
commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on
a timely basis could harm our business. In addition, revising
our test to include the non-infringing technologies would
require us to re-validate our test, which would be costly and
time-consuming. Also, we may be unaware of pending patent
applications that relate to our test. Parties making
infringement claims on future issued patents may be able to
obtain an injunction that would prevent us from selling our test
or using technology that contains the allegedly infringing
intellectual property, which could harm our business.
There are a number of patents and patent applications that may
constitute prior art in the field of genomic-based diagnostics.
We may be required to pay royalties, damages and costs to firms
who own the rights to these patents, or we might be restricted
from using any of the inventions claimed in those patents.
If we
are unable to compete successfully, we may be unable to increase
or sustain our revenues or achieve profitability.
Our principal competition comes from existing diagnostic methods
used by pathologists and oncologists. These methods have been
used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment
and kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like Oncotype DX that are performed
outside the pathology laboratory. In addition, few diagnostic
methods are as expensive as Oncotype DX.
We also face competition from many companies that offer products
or have conducted research to profile genes, gene expression or
protein expression in breast cancer, including Celera Genomics,
a business segment of Applera Corporation, and Clarient
Diagnostic Services as well as Agendia B.V. and other private
companies. 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.
34
Our test is considered relatively expensive for a diagnostic
test. We increased the price of our test from $3,460 to $3,650
effective June 1, 2007, and we may raise prices in the
future. This could impact reimbursement of and demand for
Oncotype DX. Many of our present and potential
competitors have widespread brand recognition and substantially
greater financial and technical resources and development,
production and marketing capabilities than we do. Others may
develop lower-priced, less complex tests that could be viewed by
physicians and payors as functionally equivalent to our test,
which could force us to lower the list price of our test and
impact our operating margins and our ability to achieve
profitability. Some competitors have developed tests cleared for
marketing by FDA. There may be a marketing differentiation or
perception that an FDA-cleared test is more desirable than
Oncotype DX, and that may discourage adoption and
reimbursement of our test. If we are unable to compete
successfully against current or future competitors, we may be
unable to increase market acceptance for and sales of our test,
which could prevent us from increasing or sustaining our
revenues or achieving or sustaining profitability and could
cause the market price of our common stock to decline.
Our
research and development efforts will be hindered if we are not
able to contract with third parties for access to archival
tissue samples.
Under standard clinical practice in the United States, tumor
biopsies removed from patients are chemically preserved and
embedded in paraffin wax and stored. Our clinical development
relies on our ability to secure access to these archived tumor
biopsy samples, as well as information pertaining to their
associated clinical outcomes. Others have demonstrated their
ability to study archival samples and often compete with us for
access. Additionally, the process of negotiating access to
archived samples is lengthy since it typically involves numerous
parties and approval levels to resolve complex issues such as
usage rights, institutional review board approval, privacy
rights, publication rights, intellectual property ownership and
research parameters. If we are not able to negotiate access to
archival tumor tissue samples with hospitals and collaborators,
or if other laboratories or our competitors secure access to
these samples before us, our ability to research, develop and
commercialize future products will be limited or delayed.
If we
cannot maintain our current clinical collaborations and enter
into new collaborations, our product development could be
delayed.
We rely on and expect to continue to rely on clinical
collaborators to perform a substantial portion of our clinical
trial functions. If any of our collaborators were to breach or
terminate its agreement with us or otherwise fail to conduct its
collaborative activities successfully and in a timely manner,
the research, development or commercialization of the products
contemplated by the collaboration could be delayed or
terminated. If any of our collaboration agreements 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 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
35
announcement of a collaboration with an entity other than us may
result in adverse speculation about us, our product or our
technology, resulting in harm to our reputation and our business.
The
loss of key members of our senior management team or our
inability to retain highly skilled scientists, clinicians and
salespeople could adversely affect our business.
Our success depends largely on the skills, experience and
performance of key members of our executive management team and
others in key management positions. The efforts of each of these
persons together will be critical to us as we continue to
develop our technologies and testing processes and as we attempt
to transition to a company with more than one commercialized
product. If we were to lose one or more of these key employees,
we may experience difficulties in competing effectively,
developing our technologies and implementing our business
strategies.
Our research and development programs and commercial laboratory
operations depend on our ability to attract and retain highly
skilled scientists and technicians, including geneticists,
licensed laboratory technicians, chemists, biostatisticians and
engineers. We may not be able to attract or retain qualified
scientists and technicians in the future due to the intense
competition for qualified personnel among life science
businesses, particularly in the San Francisco Bay Area. We
also face competition from universities and public and private
research institutions in recruiting and retaining highly
qualified scientific personnel. In addition, our success depends
on our ability to attract and retain salespeople with extensive
experience in oncology and close relationships with medical
oncologists, surgeons, pathologists and other hospital
personnel. We may have difficulties locating, recruiting or
retaining qualified salespeople, which could cause a delay or
decline in the rate of adoption of our products. If we are not
able to attract and retain the necessary personnel to accomplish
our business objectives, we may experience constraints that will
adversely affect our ability to support our discovery,
development and sales programs. All of our employees are at-will
employees, which means that either we or the employee may
terminate their employment at any time.
If our
sole laboratory facility becomes inoperable, we will be unable
to perform our test and our business will be
harmed.
We do not have redundant laboratory facilities. We perform all
of our diagnostic testing in our laboratory located in Redwood
City, California. Redwood City is situated on or near earthquake
fault lines. Our facility and the equipment we use to perform
our tests would be costly to replace and could require
substantial lead time to repair or replace. The facility may be
harmed or rendered inoperable by natural or man-made disasters,
including earthquakes, flooding and power outages, which may
render it difficult or impossible for us to perform our tests
for some period of time. The inability to perform our tests 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.
In order to rely on a third party to perform our tests, we could
only use another facility with established state licensure and
CLIA accreditation under the scope of which Oncotype DX
could be performed following validation and other required
procedures. We cannot assure you that we would be able to find
another CLIA-certified facility willing to adopt Oncotype
DX and comply with the required procedures, or that this
laboratory would be willing to perform the tests for us on
commercially reasonable terms. In order to establish a redundant
laboratory facility, we would have to spend considerable time
and money securing adequate space, constructing the facility,
recruiting and training employees, and establishing the
additional operational and administrative infrastructure
necessary to support a second facility. Additionally, any new
clinical laboratory facility opened by us would be subject to
certification under CLIA and licensed by several states,
including California and New York, which can take a significant
amount of time and result in delays in our ability to begin
operations.
36
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. We cannot
predict what changes, if any, will be proposed or adopted or the
effect that such proposals or adoption may have on our business,
financial condition and results of operations.
We
rely on a limited number of suppliers or, in some cases, a sole
supplier, for some of our laboratory instruments and materials
and may not be able to find replacements in the event our
suppliers no longer supply that equipment or those
materials.
We rely solely on Applied Biosystems, a division of Applera
Corporation, to supply some of the laboratory equipment on which
we perform our tests. We periodically forecast our needs for
laboratory equipment and enter into standard purchase orders
with Applied Biosystems based on these forecasts. We believe
that there are relatively few equipment manufacturers other than
Applied Biosystems that are currently capable of supplying the
equipment necessary for Oncotype DX. Even if we were to
identify other suppliers, there can be no assurance that we will
be able to enter into agreements with such suppliers on a timely
basis on acceptable terms, if at all. If we should encounter
delays or difficulties in securing from Applied Biosystems the
quality and quantity of equipment we require for Oncotype
DX, we may need to reconfigure our test process, which would
result in delays in commercialization or an interruption in
sales. If any of these events occur, our business and operating
results could be harmed. Additionally, if Applied Biosystems
deems us to have become uncreditworthy, it has the right to
require alternative payment terms from us, including payment in
advance. We are also required to indemnify Applied Biosystems
against any damages caused by any legal action or proceeding
brought by a third party against Applied Biosystems for damages
caused by our failure to obtain required approval with any
regulatory agency.
We also rely on several sole suppliers for certain laboratory
materials which we use to perform our tests. While we have
developed alternate sourcing strategies for these materials, we
cannot be certain that these strategies will be effective. If we
should encounter delays or difficulties in securing these
laboratory materials, delays in commercialization or an
interruption in sales could occur.
We may
be unable to manage our future growth effectively, which would
make it difficult to execute our business
strategy.
Future growth will impose significant added responsibilities on
management, including the need to identify, recruit, train and
integrate additional employees. In addition, rapid and
significant growth will place strain on our administrative and
operational infrastructure, including customer service and our
clinical laboratory. Our ability to manage our operations and
growth will require us to continue to improve our operational,
financial and management controls, reporting systems and
procedures. If we are unable to manage our growth effectively,
it may be difficult for us to execute our business strategy.
If we
were sued for product liability 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 information we provide to
customers 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
37
DX for such patients, including N+ patients, ER- patients, or
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.
Our
dependence on distributors for foreign sales of Oncotype DX
could limit or prevent us from selling our test in foreign
markets and from realizing long-term international revenue
growth.
International sales as a percentage of net revenues are expected
to remain modest in the near term as we focus our efforts on the
sale of Oncotype DX in the United States. We have
established exclusive distribution networks for Oncotype
DX in Israel, Japan and the United Kingdom, and may enter
into other similar arrangements in other countries in the
future. Over the long term, we intend to grow our business
internationally, and to do so we will need to attract additional
distributors to expand the territories in which we sell
Oncotype DX. Distributors may not commit the necessary
resources to market and sell Oncotype DX to the level of
our expectations. If current or future distributors do not
perform adequately, or we are unable to locate distributors in
particular geographic areas, we may not realize long-term
international revenue growth. Regulatory requirements in foreign
markets may also impact our ability to realize long-term
international revenue growth.
We may
acquire other businesses or form joint ventures that could harm
our operating results, dilute our stockholders ownership,
increase our debt or cause us to incur significant
expense.
As part of our business strategy, we may pursue acquisitions of
complementary businesses and assets, as well as technology
licensing arrangements. We also may pursue strategic alliances
that leverage our core technology and industry experience to
expand our product offerings or distribution. We have no
experience with respect to acquiring other companies and limited
experience with respect to the formation of collaborations,
strategic alliances and joint ventures. If we make any
acquisitions, we may not be able to integrate these acquisitions
successfully into our existing business, and we could assume
unknown or contingent liabilities. Any future acquisitions by us
also could result in significant write-offs or the incurrence of
debt and contingent liabilities, any of which could harm our
operating results. Integration of an acquired company also may
require management resources that otherwise would be available
for ongoing development of our existing business. We may not
identify or complete these transactions in a timely manner, on a
cost-effective basis, or at all, and we may not realize the
anticipated benefits of any acquisition, technology license,
strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of
our common stock as consideration, which would dilute the
ownership of our stockholders. If the price of our common stock
is low or volatile, we may not be able to acquire other
companies for stock. Alternatively, it may be necessary for us
to raise additional funds for acquisitions through public or
private financings. Additional funds may not be available on
terms that are favorable to us, or at all.
38
Our
inability to raise additional capital on acceptable terms in the
future may limit our ability to develop and commercialize new
tests and technologies.
We expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure,
commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other
things:
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sustain commercialization of our initial test or enhancements to
that test;
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increase our selling and marketing efforts to drive market
adoption and address competitive developments;
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further expand our clinical laboratory operations;
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expand our technologies into other areas of cancer;
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fund our clinical validation study activities;
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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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If we raise funds by issuing equity securities, dilution to our
stockholders could result. Any equity securities issued also may
provide for rights, preferences or privileges senior to those of
holders of our common stock. If we raise funds by issuing debt
securities, these debt securities would have rights, preferences
and privileges senior to those of holders of our common stock,
and the terms of the debt securities issued could impose
significant restrictions on our operations. If we raise funds
through collaborations and licensing arrangements, we might be
required to relinquish significant rights to our technologies or
products, or grant licenses on terms that are not favorable to
us. If adequate funds are not available, we may have to scale
back our operations or limit our research and development
activities.
We
must implement additional and expensive finance and accounting
systems, procedures and controls as we grow our business and
organization and to satisfy public company reporting
requirements, which will increase our costs and require
additional management resources.
As a public reporting company, we are required to comply with
the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the Securities and Exchange Commission.
Compliance with Section 404 of the Sarbanes-Oxley Act and
other requirements has increased our costs and required
additional management resources. We will need to continue to
implement additional finance and accounting systems, procedures
and controls as we grow our business and organization and to
satisfy existing reporting requirements. If we fail to maintain
or implement adequate controls, if we are unable to complete the
required Section 404 assessment as to the adequacy of our
internal control over financial reporting in future
Form 10-K
filings, or if our independent registered public accounting firm
is unable to provide us with an unqualified report as to the
effectiveness of our internal control over
39
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, 2007, 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, 2007, 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 2007.
40
Executive
Officers
The names of our executive officers and their ages as of
March 1, 2008, 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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50
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Chief Executive Officer and Chairman of the Board
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Kimberly J. Popovits
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49
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President, Chief Operating Officer and Director
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G. Bradley Cole
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52
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Executive Vice President, Operations and Chief Financial
Officer; Secretary
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Steven Shak, M.D.
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57
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Chief Medical Officer
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Joffre B. Baker, Ph.D.
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60
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Chief Scientific Officer
|
Randal W. Scott, Ph.D., has served as our Chairman
of the Board and Chief Executive Officer since our inception in
August 2000 and served as 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 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 is a
director of Nuvelo, Inc., a biotechnology company.
Ms. Popovits holds a B.A. in Business from Michigan State
University.
G. Bradley Cole has served as our Executive Vice
President, Operations since January 2008, as Executive Vice
President and Chief Financial Officer since July 2004 and as
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.
41
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Stock price high
|
|
$
|
17.73
|
|
|
$
|
11.82
|
|
|
$
|
14.87
|
|
|
$
|
24.30
|
|
Stock price low
|
|
$
|
9.08
|
|
|
$
|
9.60
|
|
|
$
|
10.83
|
|
|
$
|
13.56
|
|
According to the records of our transfer agent, we had 138
stockholders of record as of February 29, 2008.
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.
42
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, 2007.
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 AND NASDAQ BIOTECH INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
September 29, 2005
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Genomic Health, Inc.
|
|
$
|
100.00
|
|
|
$
|
77.53
|
|
|
$
|
158.30
|
|
|
$
|
192.68
|
|
NASDAQ Market Index
|
|
$
|
100.00
|
|
|
$
|
102.82
|
|
|
$
|
113.47
|
|
|
$
|
124.76
|
|
NASDAQ Biotechnology Index
|
|
$
|
100.00
|
|
|
$
|
103.65
|
|
|
$
|
102.75
|
|
|
$
|
103.93
|
|
43
|
|
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, 2007 and 2006 and the
selected consolidated statements of operations data for each
year ended December 31, 2007, 2006 and 2005 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, 2005, 2004 and 2003 and
the selected consolidated statements of operations data for each
year ended December 31, 2004 and 2003 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statements of Operations Data:
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
62,745
|
|
|
$
|
27,006
|
|
|
$
|
4,823
|
|
|
$
|
227
|
|
|
$
|
|
|
Contract revenues
|
|
|
1,282
|
|
|
|
2,168
|
|
|
|
379
|
|
|
|
100
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
64,027
|
|
|
|
29,174
|
|
|
|
5,202
|
|
|
|
327
|
|
|
|
125
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
17,331
|
|
|
|
9,908
|
|
|
|
6,249
|
|
|
|
1,828
|
|
|
|
|
|
Research and development
|
|
|
22,053
|
|
|
|
12,841
|
|
|
|
9,465
|
|
|
|
10,040
|
|
|
|
9,069
|
|
Selling and marketing
|
|
|
36,456
|
|
|
|
24,625
|
|
|
|
15,348
|
|
|
|
9,856
|
|
|
|
2,805
|
|
General and administrative
|
|
|
17,849
|
|
|
|
12,765
|
|
|
|
6,485
|
|
|
|
3,869
|
|
|
|
3,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
93,689
|
|
|
|
60,139
|
|
|
|
37,547
|
|
|
|
25,593
|
|
|
|
15,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(29,662
|
)
|
|
|
(30,965
|
)
|
|
|
(32,345
|
)
|
|
|
(25,266
|
)
|
|
|
(15,435
|
)
|
Interest and other income, net
|
|
|
2,370
|
|
|
|
2,045
|
|
|
|
984
|
|
|
|
271
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
|
$
|
(15,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
$
|
(13.82
|
)
|
|
$
|
(12.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic and diluted net
loss per share
|
|
|
26,759,798
|
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
1,808,022
|
|
|
|
1,226,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes non-cash charges for employee stock-based compensation
expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
375
|
|
|
$
|
167
|
|
|
$
|
53
|
|
|
$
|
5
|
|
|
$
|
|
|
Research and development
|
|
|
1,882
|
|
|
|
821
|
|
|
|
323
|
|
|
|
42
|
|
|
|
|
|
Selling and marketing
|
|
|
1,876
|
|
|
|
779
|
|
|
|
274
|
|
|
|
38
|
|
|
|
|
|
General and administrative
|
|
|
2,152
|
|
|
|
1,137
|
|
|
|
426
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,285
|
|
|
$
|
2,904
|
|
|
$
|
1,076
|
|
|
$
|
191
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
68,360
|
|
|
$
|
44,215
|
|
|
$
|
69,527
|
|
|
$
|
38,275
|
|
|
$
|
11,062
|
|
Working capital
|
|
|
63,948
|
|
|
|
37,516
|
|
|
|
65,801
|
|
|
|
36,771
|
|
|
|
10,046
|
|
Total assets
|
|
|
87,929
|
|
|
|
58,024
|
|
|
|
75,799
|
|
|
|
41,538
|
|
|
|
13,096
|
|
Notes payable, short-term
|
|
|
2,687
|
|
|
|
2,547
|
|
|
|
1,052
|
|
|
|
|
|
|
|
161
|
|
Notes payable, long-term
|
|
|
2,039
|
|
|
|
4,726
|
|
|
|
2,621
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,212
|
|
|
|
51,064
|
|
Accumulated deficit
|
|
|
(152,395
|
)
|
|
|
(125,103
|
)
|
|
|
(96,183
|
)
|
|
|
(64,822
|
)
|
|
|
(39,827
|
)
|
Total stockholders equity (deficit)
|
|
|
71,166
|
|
|
|
41,829
|
|
|
|
67,517
|
|
|
|
(64,154
|
)
|
|
|
(39,547
|
)
|
45
|
|
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 early stage breast cancer patients to predict the
likelihood of cancer recurrence and the likelihood of
chemotherapy benefit. All tumor samples are sent to our
laboratory in Redwood City, California for analysis. Upon
generation and delivery of a Recurrence Score report to the
physician, we generally bill third-party payors for Oncotype
DX. Effective June 1, 2007, we increased the list price
of our test from $3,460 to $3,650.
We have experienced a significant increase in demand for
Oncotype DX since the test was launched in January 2004.
For the year ended December 31, 2007, more than 24,450 test
reports were delivered for use in treatment planning, compared
to more than 14,500 and more than 7,000 tests delivered for the
years ended December 31, 2006 and 2005, respectively. As of
December 31, 2007, more than 46,500 tests had been
delivered for use in treatment planning by more than 7,000
physicians. We believe this increased demand resulted from the
continued 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, inclusion of Oncotype DX in clinical
practice guidelines, and the expansion of our domestic field
sales organization. However, this increased demand is not
necessarily indicative of future growth rates, and we cannot
assure you that this level of increased demand can be sustained
or that future appearances or presentations at medical
conferences, publication of articles or increases in sales
personnel will have similar impact on demand for Oncotype
DX. We believe that each year we may experience slower
growth in 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.
Substantially all of our tests to date have been delivered to
physicians in the United States. One payor, Medicare, as
administered by National Heritage Insurance Company, or NHIC,
accounted for approximately 23% and 47% of our product revenues
for the years ended December 31, 2007 and 2006,
respectively. Another payor, United HealthCare Insurance
Company, accounted for approximately 13% of our product revenues
in 2007. As of December 31, 2007, our laboratory had the
capacity to process up to 11,000 tests per quarter. We believe
that with additional equipment and personnel, the capacity of
our existing facility can be significantly increased in the
future.
Since our inception, we have generated significant net losses.
As of December 31, 2007, we had an accumulated deficit of
$152.4 million. We incurred net losses of
$27.3 million, $28.9 million and $31.4 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. We expect our net losses to continue for at least
the next year. We anticipate that a substantial portion of our
capital resources and efforts over the next several years will
be focused on research and development, both to develop
additional tests for breast cancer and to develop tests for
colon and other cancers, to scale up our commercial
organization, and for other general corporate purposes. Our
financial results will be limited by a number of factors,
including establishment of coverage policies by third-party
insurers and government payors, our ability in the short term to
collect from payors, which often requires that we pursue a
case-by-case
manual appeals process, and our ability to recognize revenues on
an accrual basis as tests are performed and reports are
delivered. Unless a contract or policy is in place with a payor
at the time of billing and collectibility from that payor is
reasonably assured, we recognize revenue when cash is received.
We do not expect to recognize the majority of revenues from our
current customers on an accrual basis until the end of 2008 or
later.
Adoption
and Reimbursement
In December 2007, the National Comprehensive Cancer Network, or
NCCN, included the use of Oncotype DX to set treatment
planning in its 2008 breast cancer treatment guidelines. In
October 2007, the American Society of Clinical Oncologists, or
ASCO, issued updated clinical practice guidelines that include
the use of Oncotype DX to predict the likelihood of
disease recurrence and the likelihood of chemotherapy benefit
for node negative, or N−,
46
estrogen receptor positive, or ER+, early stage breast cancer
patients. In July 2007, the Blue Cross and Blue Shield
Association Technology Evaluation Center concluded that the use
of Oncotype DX to inform decision making about adjuvant
chemotherapy meets its criteria for women with N−, ER+
tumors who have been treated with tamoxifen. In addition to the
inclusion of Oncotype DX in these clinical treatment
guidelines, we believe the key factors that will drive broader
adoption of Oncotype DX will be acceptance by healthcare
providers of its clinical benefits, demonstration of the
cost-effectiveness of using our test, expanded reimbursement by
third-party payors, and increased marketing and sales efforts.
As of December 31, 2007, Cigna HealthCare, Humana, Inc.,
Health Net, Inc., United HealthCare Insurance Company, Aetna,
Inc., Kaiser Foundation Health Plan, Inc. and NHIC had issued
positive coverage determinations for Oncotype DX.
WellPoint, Inc., a leading health benefits provider, adopted a
policy covering Oncotype DX with certain restrictions. In
January 2008, Medi-Cal, our first Medicaid payor, established a
policy covering our test. In addition, a number of regional
payors, including many regional Blue Cross and Blue Shield
providers, have issued policies supporting reimbursement for
Oncotype DX. As of February 2008, more than 70% of all
U.S. insured lives were covered by health plans that
provide reimbursement for Oncotype DX through contracts,
agreements and policy decisions.
In late 2007, The Centers for Medicare and Medicaid Services, or
CMS, announced that Palmetto Government Benefits Administrators,
or Palmetto, will be replacing NHIC as the Medicare
administrative contractor with jurisdiction over claims
submitted by us to Medicare. Medicare claims processing
responsibility will transition from NHIC to Palmetto over the
next several months with Palmetto expected to assume full
responsibility by the summer of 2008. It is possible that
Palmetto will adopt different coverage or payment policies from
those of NHIC, and its policies may not include reimbursement
for Oncotype DX or may provide for reimbursement on
different terms than are presently in effect.
Product
Pipeline
We are conducting studies with the goal of expanding the
clinical utility of Oncotype DX in breast cancer. In
February 2008, we introduced quantitative gene expression
reporting for ER and PR with the Oncotype DX Recurrence
Score report to provide better information for improved
treatment decision-making. We are also conducting studies using
Oncotype DX in N−, ER+ patients who were treated
with an aromatase inhibitor. At the June 2007 ASCO meeting, we
presented a study suggesting that Oncotype DX Recurrence
Score results provide accurate recurrence risk information for
patients with ER+ breast cancer, regardless of whether they were
N- or N+. At the December 2007 SABCS, we presented results from
a second study suggesting that Oncotype DX may be useful
in predicting survival without disease recurrence and the
benefit of chemotherapy for N+ patients, in addition to those
with N−, ER+ breast cancer. We currently provide
Oncotype DX for N+ patients through a medical
consultation. We also plan to investigate the utility of
Oncotype DX in patients with DCIS, a pre-invasive form of
breast cancer.
Most of our existing reimbursement coverage is specifically for
women with early stage N−, ER+ breast cancer. We may not
be able to obtain reimbursement coverage for Oncotype DX
for post menopausal female breast cancer patients who are N+,
ER+ patients that is similar to the coverage we have obtained
for early stage N−, ER+ patients.
We continue to conduct research and development studies in a
variety of cancers other than breast cancer. For example, we
have now identified multiple genes that have been observed to be
statistically significantly correlated to clinical outcome in
colon cancer. We expect to conduct analytical validation work
with the final gene set and algorithm and a clinical validation
study in 2008. In addition, we entered into a collaboration 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, which is the most common
type of kidney cancer in adults.
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
47
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 generally bill third-party payors for Oncotype DX upon
generation and delivery of a Recurrence Score report to the
physician. As such, we take assignment of benefits and the risk
of collection with the third-party payor. We usually bill the
patient directly for amounts owed after multiple requests for
payment have been denied or only partially paid by the insurance
carrier. As a relatively new test, Oncotype DX may be
considered investigational by some payors and not covered under
their reimbursement policies. Consequently, we pursue
case-by-case
reimbursement where policies are not in place.
Our product revenues for tests performed are recognized when the
following revenue recognition criteria are met:
(1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Criterion
(1) is satisfied when we have an agreement or contract with
the payor in place, or when the payor has issued a policy
addressing reimbursement for our Oncotype DX test.
Criterion (2) is satisfied when we perform the test and
generate and deliver a Recurrence Score report to the physician.
Determination of criteria (3) and (4) is based on
managements judgments regarding the nature of the fee
charged for products or services delivered, contractual
agreements entered into, and the collectibility of those fees
under any contract or agreement. When evaluating collectibility,
we consider whether we can 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. Product
revenues where all criteria set forth above are not met are
recognized when cash is received from the payor.
Product revenues for Oncotype DX, from its commercial
launch in January 2004 through December 31, 2007, have
largely been recognized on a cash basis due to a limited number
of contracts or agreements with third-party payors and limited
collections experience. Beginning in the fourth quarter of 2005
and continuing through 2007, we recognized a portion of product
revenue from third-party payors, including some private payors
and Medicare, on an accrual basis when the criteria described in
the preceding paragraph were satisfied.
Contract revenues are generally derived from studies conducted
with biopharmaceutical and pharmaceutical companies and are
recognized on a contract-specific basis. Under certain
contracts, our input, measured in terms of full-time equivalent
level of effort or running a set of assays through our
laboratory under a contractual protocol, triggers payment
obligations and revenues are recognized as costs are incurred or
assays are processed. Certain contracts have payment obligations
that are triggered as milestones are complete, such as
completion of a successful set of experiments. In these cases,
revenues are recognized when the milestones are achieved under
contracts that satisfy our other revenue recognition criteria.
Allowance
for Doubtful Accounts
In late 2006 we began accruing an allowance for doubtful
accounts against our accounts receivable consistent with
historical payment experience. Bad debt expense is included in
general and administrative expense on our 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, 2007 and 2006, our allowance for
doubtful accounts was $133,000 and $510,000, respectively.
Write-offs for doubtful accounts of $261,000 were recorded
against the
48
allowance during the year ended December 31, 2007; no
write-offs were recorded against the allowance during the year
ended December 31, 2006. Changes in our estimate of
allowance for doubtful accounts resulted in a $115,000 credit to
bad debt expense for the year ended December 31, 2007. Bad
debt expense was $510,000 for the year ended December 31,
2006. No bad debt expense was recorded for the year ended
December 31, 2005 because the vast majority of revenues
were recorded on a cash basis.
Stock-based
Compensation Expense
Through December 31, 2005, we accounted for stock-based
payment transactions under Accounting Principles Board Opinion
No. 25, or APB 25. On January 1, 2006, we adopted
Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment, or SFAS 123R.
SFAS 123R addresses the accounting for stock-based payment
transactions whereby an entity receives employee services in
exchange for equity instruments, including stock options.
SFAS 123R eliminates the ability to account for stock-based
payment transactions using the intrinsic value method under 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. We use the Black-Scholes valuation
method, which requires the use of estimates such as stock price
volatility and expected options lives, as well as expected
option forfeiture rates, to value stock-based compensation. We
have limited historical evidence with respect to developing
these assumptions. Our common stock has been publicly traded for
less than three years, so our expected volatility is based
primarily on comparable peer data. The expected life of options
granted is estimated based on historical option exercise data
and assumptions related to unsettled options.
We elected the modified prospective transition method as
permitted under SFAS 123R and, accordingly, prior periods
have not been restated to reflect the impact of SFAS 123R.
The modified prospective transition method 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, 2007, total
unrecognized compensation expense related to unvested stock
options, net of estimated forfeitures, was $22.6 million.
We expect to recognize this expense over a weighted-average
period of 42 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, or EITF,
Consensus
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, and will be subject to periodic
revaluation over their vesting terms.
Clinical
Collaborator Costs
We enter into collaboration and clinical trial agreements with
clinical collaborators and record these costs as research and
development expenses. We record accruals for estimated study
costs comprised of work performed by our collaborators under
contract terms.
Under one of our collaboration agreements, we make fixed annual
payments resulting from the commercial launch of Oncotype
DX. The expense related to these payments is recorded as
license fee expense. We recognize the accrued liability and
related expense ratably over the year before the relevant
payment is made. If at any time we discontinue the sale of
commercial products or services resulting from the
collaboration, including Oncotype DX, no future milestone
payments will be payable and we will have no further obligation
under the agreement.
Results
of Operations
Years
Ended December 31, 2007 and 2006
We recorded net loss for the years ended December 31, 2007
and 2006 of $27.3 million and $28.9 million,
respectively. On a basic and diluted per share basis, net loss
was $1.02 and $1.18 for the years ended December 31, 2007
and 2006, respectively.
49
Revenues
We derive our revenues from product sales and contract research
arrangements. We operate in one industry segment. Our product
revenues are derived solely from the sale of our Oncotype
DX test. Payors are billed upon generation and delivery of a
Recurrence Score report to the physician. Product revenues are
recorded on a cash basis unless a contract or 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.
Total revenues were $64.0 million and $29.2 million
for the years ended December 31, 2007 and 2006,
respectively. Product revenues from Oncotype DX were
$62.7 million and $27.0 million for the years ended
December 31, 2007 and 2006, respectively. The increase in
product revenues resulted from increased adoption, reflected by
a 61% increase in test volume year over year, and expanded
reimbursement coverage, resulting in an increase in the amount
paid per test. As in prior periods, the majority of product
revenues were recognized upon cash collection as payments were
received. Approximately $23.0 million, or 37%, of product
revenue for the year ended December 31, 2007 was recorded
on an accrual basis, reflecting established payment patterns
from payors with coverage policies in place, compared to
$10.8 million, or 40%, of product revenue for the year
ended December 31, 2006.
Product revenue from Medicare for the year ended
December 31, 2007 was $14.3 million, or 23% of product
revenue compared to $12.7 million, or 47%, for the year
ended December 31, 2006. Medicare revenue for the year
ended December 31, 2006 included the receipt of
$4.7 million in payments for services provided to Medicare
patients prior to Medicares February 27, 2006
effective coverage date for Oncotype DX.
Contract revenues were $1.3 million and $2.2 million
for the years ended December 31, 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 decrease in contract revenues was due to project timing for
our collaboration with Aventis and the Eastern Cooperative
Oncology Group, partially offset by an increase in revenue from
our ongoing work with Bristol-Myers Squibb and ImClone Systems.
Cost of
Product Revenues
Cost of product revenues represents the cost of materials,
direct labor, equipment and infrastructure expenses associated
with processing tissue samples (including histopathology,
anatomical pathology, paraffin extraction,
RT-PCR 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 our test 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.
License fees represent a significant component of our cost of
product revenues and are expected to remain so for the
foreseeable future.
For the year ended December 31, 2007, cost of product
revenues was $17.3 million for Oncotype DX,
consisting of tissue sample processing costs of
$10.7 million, license fees of $4.9 million and
shipping charges of $1.7 million. For the year ended
December 31, 2006, cost of product revenues was
$9.9 million, consisting of tissue sample processing costs
of $6.7 million, license fees of $2.2 million and
shipping charges of $928,000. Test volume increased 61% year
over year, driving the $4.0 million, or 60%, increase in
tissue processing costs. The increase in tissue sampling costs
for 2007 also reflected higher infrastructure expenses related
to facilities expansion and improvements. The $2.7 million
increase in license fees included higher royalties due to an
increase of $35.7 million, or 130%, in product revenues
recognized. The $758,000 increase in shipping charges reflected
increased test volume and higher international shipping costs.
50
Research
and Development Expenses
Research and development expenses represent costs incurred to
develop our technology and to carry out our clinical studies to
validate our multi-gene tests and include personnel-related
expenses, infrastructure expenses, including allocated facility
occupancy and information technology 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. We charge
all research and development expenses to operations as they are
incurred.
All potential future product programs outside of breast and
colon cancer are in the 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. We do not record or maintain
information regarding costs incurred in research and development
on a program or project specific basis, including activities
performed under contracts with biopharmaceutical and
pharmaceutical companies. 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.
Research and development expenses increased to
$22.1 million for the year ended December 31, 2007
from $12.8 million for the year ended December 31,
2006. The $9.3 million increase in research and development
expenses was primarily due to a $6.3 million increase in
personnel-related expenses, a $1.6 million increase in
infrastructure expenses, including facilities expansion and
improvements, a $936,000 increase in costs incurred for reagents
and lab supplies and a $340,000 increase in travel-related
expenses, partially offset by a $166,000 decrease in
collaboration expense related to timing of projects. We expect
that our research and development expenses will increase as we
increase investment in our product pipeline for a variety of
cancers, including cancers other than breast and colon.
Selling
and Marketing Expenses
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.
Selling and marketing expenses increased to $36.5 million
for the year ended December 31, 2007 from
$24.6 million for the year ended December 31, 2006.
The $11.9 million increase in selling and marketing
expenses was due to a $7.0 million increase in
personnel-related expenses, due mostly to the expansion of our
domestic field sales and support organization, $2.4 million
in higher travel-related expenses primarily associated with
field personnel, a $1.5 million increase in promotional
field and marketing expense and a $1.0 million increase in
infrastructure expenses, including facilities expansion and
improvements. Of the $7.0 million increase in
personnel-related expenses, $6.9 million was attributable
to an increase in the number of selling and marketing personnel.
The average cost per employee remained constant year over year.
We expect that selling and marketing expenses will continue to
increase in future periods as we expand our marketing and sales
programs, including ongoing physician and patient education
programs.
General
and Administrative Expenses
Our general and administrative expenses consist primarily of
personnel-related expenses, legal costs, including intellectual
property defense and prosecution costs, 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.
51
General and administrative expenses increased to
$17.8 million for the year ended December 31, 2007
from $12.8 million for the year ended December 31,
2006. The $5.0 million increase in general and
administrative expenses included a $2.5 million increase in
personnel-related expense due primarily to an increase in
headcount year over year, $966,000 in higher billing and
collection fees paid to third-party billing and collection
vendors, a $612,000 increase in infrastructure expenses,
including facilities expansion and improvements, a $436,000
increase in advocacy and industry relations expenses, a $406,000
increase in legal fees, a $216,000 increase in travel-related
expenses and a $163,000 increase in costs for third-party
service providers related to being a public company, including
investor relations. These increases were partially offset by a
decrease in bad debt expense due to changes in our estimate of
our 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 continue
to increase as we spend more on fees for billing and collections
due to revenue growth and continue to incur costs associated
with regulatory matters and other expenses associated with the
growth of our business.
Interest
and Other Income
Interest and other income was $3.0 million for the year
ended December 31, 2007 compared to $2.5 million for
the year ended December 31, 2006. The increase was due to
increased interest income from higher average short-term
investment balances resulting from our investment of a large
portion of the cash proceeds from our May 2007 public offering
of common stock and higher market yields.
Interest
Expense
Interest expense was $678,000 for the year ended
December 31, 2007 compared to $446,000 for the year ended
December 31, 2006, reflecting interest expense incurred on
our equipment financing line established at the end of March
2005 under which draws have been made and interest expense has
been incurred.
Years
Ended December 31, 2006 and 2005
We recorded net loss for the years ended December 31, 2006
and 2005 of $28.9 million and $31.4 million,
respectively. On a basic and diluted per share basis, net loss
was $1.18 and $4.15 for the years ended December 31, 2006
and 2005, respectively. The decrease in net loss per basic and
diluted share was primarily due to an increase in
weighted-average shares outstanding related to our initial
public offering of common stock which closed on October 4,
2005.
Revenues
Total revenues were $29.2 million and $5.2 million for
the years ended December 31, 2006 and 2005, respectively.
Product revenues from Oncotype DX were $27.0 million
and $4.8 million for the years ended December 31, 2006
and 2005, respectively. Approximately $10.8 million, or
40%, of product revenue for the year ended December 31,
2006 was recorded on an accrual basis compared to $314,000, or
7%, for the year ended December 31, 2005. The majority of
product revenue was recognized upon cash collection as payments
were received.
Product revenue from Medicare was $12.7 million,
representing 47% of total product revenue for the year ended
December 31, 2006; we had no product revenue from Medicare
in 2005. This increase was a result of the February 27,
2006 effective coverage date for Medicare patients and the
receipt of payments for tests provided to Medicare patients
prior to the effective coverage date.
Contract revenues were $2.2 million and $379,000 for the
years ended December 31, 2006 and 2005, respectively. The
increase in contract revenues reflected the initiation of the
collaboration with Aventis, Inc., and the Eastern Cooperative
Oncology Group as well as our ongoing work with Bristol-Myers
Squibb and ImClone Systems.
Cost of
Product Revenues
For the year ended December 31, 2006, cost of product
revenues was $9.9 million for Oncotype DX,
consisting of tissue sample processing costs of
$6.8 million, license fees of $2.2 million and
shipping charges of $928,000. For
52
the year ended December 31, 2005, cost of product revenues
was $6.2 million, consisting of tissue sample processing
costs of $4.9 million, license fees of $786,000 and
shipping charges of $536,000. Test volume for the year ended
December 31, 2006 more than doubled over the prior year,
resulting in a decrease in the cost per test delivered.
Research
and Development Expenses
Research and development expenses increased to
$12.8 million for the year ended December 31, 2006
from $9.5 million for the year ended December 31,
2005. The increase in research and development expenses was
primarily due to a $1.7 million increase in
personnel-related expenses, a $1.2 million increase in
collaboration expense and a $595,000 increase in infrastructure
expenses.
Selling
and Marketing Expenses
Selling and marketing expenses increased to $24.6 million
for the year ended December 31, 2006 from
$15.3 million for the year ended December 31, 2005.
The $9.3 million increase in selling and marketing expenses
was primarily due to a $4.9 million increase in
personnel-related expenses, a $2.7 million increase in
promotional field and marketing expense, $944,000 in higher
travel-related expenses associated with field personnel and a
$698,000 increase in infrastructure expenses. We expanded our
domestic field sales force to support Oncotype DX in the
second half of 2006.
General
and Administrative Expenses
General and administrative expenses increased to
$12.8 million for the year ended December 31, 2006
from $6.5 million for the year ended December 31,
2005. The $6.3 million increase in general and
administrative expenses included a $2.1 million increase in
personnel-related expenses, $1.2 million in higher billing
and collection fees paid to third-party billing and collection
vendors, an increase of $1.1 million in legal and
accounting fees, an increase of $633,000 in infrastructure
expenses, an increase of $510,000 in expense to establish a bad
debt reserve against accounts receivable, an increase of
$310,000 in insurance-related expense and an increase of
$293,000 in costs for third-party service providers related to
being a public company, including investor relations.
Interest
and Other Income
Interest and other income was $2.5 million for the year
ended December 31, 2006 compared to $1.2 million for
the year ended December 31, 2005, The $1.3 million
increase was due to increased interest income from higher
average cash balances and higher market yields.
Interest
Expense
Interest expense was $446,000 for the year ended
December 31, 2006 compared to $258,000 for year ended
December 31, 2005. The $188,000 increase was related to
higher borrowings on our equipment financing line established at
the end of March 2005, under which draws have been made and
interest expense has been incurred.
53
Liquidity
and Capital Resources
Since our inception in August 2000, we have incurred significant
losses and, as of December 31, 2007, we had an accumulated
deficit of approximately $152.4 million. We have not yet
achieved profitability and anticipate that we will continue to
incur net losses for at least the next year. We expect that our
research and development, selling and marketing and general and
administrative expenses will continue to increase and, as a
result, we will need to generate significant product revenues to
achieve profitability. We may never achieve profitability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
68,360
|
|
|
$
|
44,215
|
|
|
$
|
69,527
|
|
Working capital
|
|
|
63,948
|
|
|
|
37,516
|
|
|
|
65,801
|
|
For the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(18,706
|
)
|
|
|
(20,733
|
)
|
|
|
(27,601
|
)
|
Investing activities
|
|
|
(4,744
|
)
|
|
|
13,041
|
|
|
|
(54,218
|
)
|
Financing activities
|
|
|
47,688
|
|
|
|
3,779
|
|
|
|
62,383
|
|
Capital expenditures (included in investing activities above)
|
|
|
(4,881
|
)
|
|
|
(8,424
|
)
|
|
|
(2,972
|
)
|
Sources
of Liquidity
At December 31, 2007, we had cash, cash equivalents and
short-term investments of $68.4 million. Our cash and
short-term investments are held in a variety of interest-bearing
instruments including money market accounts, obligations of
U.S. Government agencies and government-sponsored entities,
high-grade corporate bonds and commercial paper. In accordance
with our investment policy, available cash is invested in
short-term, low-risk, investment-grade debt instruments.
Historically we have financed our operations primarily through
sales of our equity securities and cash received from customers.
In October 2005, we completed an initial public offering and a
concurrent private placement of our common stock, resulting in
net proceeds of $58.5 million. In May 2007, we completed a
public offering of our common stock, resulting in net proceeds
of $49.7 million. Purchases of equipment and leasehold
improvements have been partially financed through capital
equipment financing arrangements. At December 31, 2007 and
2006, we had notes payable under these equipment financing
arrangements of $4.7 million and $7.3 million,
respectively.
Cash
Flows
Net cash used in operating activities was $18.7 million,
$20.7 million and $27.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Net cash
used in operating activities includes net loss adjusted for
certain non-cash items and changes in assets and liabilities.
The $2.0 million decrease in net cash used in operating
activities from 2006 to 2007 was primarily due to a
$6.4 million 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. The
$6.9 million decrease in net cash used in operating
activities from 2006 to 2005 was primarily due to a
$5.4 million decrease in net loss excluding depreciation
and stock-based compensation expense, a $2.2 million
decrease in net cash used related to increases in accounts
payable, accrued expenses and other liabilities and a $523,000
decrease in net cash used due to a decrease in prepaid expenses
and other assets, partially offset by a $1.2 million
increase in net cash used due to an increase in accounts
receivable.
Net cash used in investing activities was $4.7 million for
the year ended December 31, 2007, compared to net cash
provided by investing activities of $13.0 million for the
year ended December 31, 2006 and net cash used in investing
activities of $54.2 million for the year ended
December 31, 2005. Our investing activities have consisted
predominately of purchases and maturities of marketable
securities and capital expenditures. 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
54
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.
The $67.2 million increase in net cash provided by
investing activities from 2005 to 2006 was due primarily to a
$72.1 million increase in net maturities of short-term
investments, the majority of which were purchased with the cash
proceeds of our October 2005 initial public offering, partially
offset by a $5.5 million increase in capital expenditures
for facility expansion and improvements.
Net cash provided by financing activities was
$47.7 million, $3.8 million and $62.4 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. Our financing activities include sales of our
equity securities and capital equipment financing arrangements.
The $43.9 million increase in net cash provided by
financing activities from 2006 to 2007 includes 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. The $58.6 million
decrease in net cash provided by financing activities from 2006
to 2005 reflects the impact of net proceeds of
$58.5 million from our October 2005 initial public offering.
Contractual
Obligations
The following table summarizes our significant contractual
obligations as of December 31, 2007 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
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Notes payable obligations
|
|
$
|
5,245
|
|
|
$
|
3,073
|
|
|
$
|
2,172
|
|
|
$
|
|
|
|
$
|
|
|
Non-cancelable operating lease obligations
|
|
|
6,515
|
|
|
|
1,348
|
|
|
|
3,154
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,760
|
|
|
$
|
4,421
|
|
|
$
|
5,326
|
|
|
$
|
2,013
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 will be reduced to 4% in April
2008. As of December 31, 2007, the outstanding principal
balance under this arrangement was $4.7 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.
In addition to the above, 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. For a period of seven years on each anniversary of this
first payment, we are required to make additional payments in
increasing amounts. The initial payment of $150,000 was made in
January 2004. Payments of $150,000, $300,000 and $300,000 were
made in January 2005, 2006 and 2007, respectively. We are
required to make additional payments of $475,000 in each of 2008
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.
55
Off-Balance
Sheet Activities
As of December 31, 2007, 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 substantial operating losses in
the future and to make capital expenditures to keep pace with
the expansion of our research and development programs and to
scale our commercial operations. It may take years to move any
one of a number of product candidates in research through
development and validation to commercialization. We expect that
our cash and cash equivalents will be used to fund working
capital and for capital expenditures and other general corporate
purposes, such as licensing technology rights, partnering
arrangements for our tests outside the United States or
reduction of debt obligations. We may also use cash to acquire
or invest in complementary businesses, technologies, services or
products. We have no current plans, agreements or commitments
with respect to any such acquisition or investment, and we are
not currently engaged in any negotiations with respect to any
such transaction.
The amount and timing of actual expenditures may vary
significantly depending upon a number of factors, such as the
progress of our product development, regulatory requirements,
commercialization efforts, the amount of cash used by operations
and progress in reimbursement. As reimbursement contracts with
third-party payors continue to be put into place, we expect an
increase in the number and level of payments received for
Oncotype DX billings.
We currently anticipate that our cash, cash equivalents and
short-term investments, together with collections from
Oncotype DX and amounts available under our equipment
credit facility, will be sufficient to fund our operations and
facility expansion plans for at least the next 12 months.
We cannot be certain that any of our reimbursement contract
programs or development of future products will be successful or
that we will be able to raise sufficient additional funds to see
these programs through to a successful result.
Our future funding requirements will depend on many factors,
including the following:
|
|
|
|
|
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
development 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;
|
|
|
|
the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our products or
operations; and
|
|
|
|
the economic and other terms and timing of any collaborations,
licensing or other arrangements into which we may enter.
|
Until we can generate a sufficient amount of product revenues to
finance our cash requirements, which we may never do, we expect
to finance future cash needs primarily through public or private
equity offerings, debt financings, borrowings or strategic
collaborations. The issuance of equity securities may result in
dilution to stockholders, or may provide for rights, preferences
or privileges senior to those of our holders of common stock. If
we raise funds by issuing debt securities, these debt securities
would have rights, preferences and privileges senior to those of
holders of our common stock. The terms of debt securities or
borrowings could impose significant restrictions on our
operations. We do not know whether additional funding will be
available on acceptable terms, or at all. If we are not able to
secure additional funding when needed, we may have to delay,
reduce the scope of or eliminate one or more research and
development programs or selling and marketing initiatives. In
addition, we may
56
have to work with a partner on one or more of our product
development programs or market development programs, which would
lower the economic value of those programs to our company.
Recent
Accounting Pronouncements
In June 2007, FASB ratified the consensus reached by the
Emerging Issues Task Force on Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities, or
EITF 07-3.
EITF 07-3
requires nonrefundable advance payments for goods or services to
be used in future research and development activities to be
capitalized and recognized as expense as the related goods are
delivered or services are performed, or when the goods or
services are no longer expected to be received.
EITF 07-3
is effective for fiscal years beginning after December 15,
2007, and is to be applied prospectively for contracts entered
into on or after the effective date. We do not expect the
adoption of
EITF 07-3
to have a material impact on our financial condition or results
of operations.
In February 2007, FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, or SFAS 159.
SFAS 159 permits companies to choose to measure certain
financial instruments and other items at fair value. The
standard requires that unrealized gains and losses are reported
in earnings for items measured using the fair value option.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We do not expect the adoption of
SFAS 159 to have a material impact on our financial
condition or results of operations.
In September 2006, FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or
SFAS 157. SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. In February 2008, the FASB issued FASB
Staff Position
157-2,
Effective Date of FASB Statement No. 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. The
measurement and disclosure requirements related to financial
assets and financial liabilities are effective for fiscal years
beginning after November 15, 2007. We have elected a
partial deferral of SFAS 157 under the provisions of
FSP 157-2.
We do not expect the partial adoption of SFAS 157 for
financial assets and financial liabilities, which is effective
for us as of January 1, 2008, to have a significant impact
on our financial condition or results of operations. However,
the resulting fair values calculated under SFAS 157 after
adoption may be different from the fair values that would have
been calculated under previous guidance. We are currently
evaluating the impact that SFAS 157 will have on our
financial condition and results of operations when it is applied
to non-financial assets and non-financial liabilities beginning
January 1, 2009.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market 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. These investments are also
subject to interest rate risk and will decrease in value if
market rate interest rates increase.
In 2007, the U.S. economy was affected by increased
defaults on consumer subprime mortgages, which caused a
tightening in the credit markets and created volatility in the
capital markets. In an attempt to increase liquidity and
stimulate the economy, the U.S. Government has recently
reduced the interest rate charged to institutional borrowers.
Short term interest rates have declined into early 2008 and may
fluctuate in the near term in excess of historical norms.
Our cash, cash equivalents and short-term investments totaling
$68.4 million at December 31, 2007 did not include any
auction preferred stock, auction rate securities or
mortgage-backed investments. Based on our portfolio content and
our ability to hold investments to maturity, we believe that, if
market interest rates were to change immediately and uniformly
by 10% from levels at December 31, 2007, the impact on the
fair value of these securities or our cash flows or income would
not be material.
57
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data.
|
Genomic
Health, Inc.
Index to consolidated financial statements
58
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, 2007 and 2006, and
the related consolidated statements of operations, convertible
preferred stock and stockholders equity (deficit), and
cash flows for each of the three years in the period ended
December 31, 2007. These consolidated financial statements
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, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial
statements, under the heading Stock-Based Compensation, the
Company adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, effective
January 1, 2006.
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, 2007, 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 14, 2008
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Palo Alto, California
March 14, 2008
59
GENOMIC
HEALTH, INC.
Consolidated
Balance Sheets
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
39,164
|
|
|
$
|
14,926
|
|
Short-term investments
|
|
|
29,196
|
|
|
|
29,289
|
|
Accounts receivable (net of allowance for doubtful accounts;
2007 $133, 2006 $510)
|
|
|
5,089
|
|
|
|
1,862
|
|
Prepaid expenses and other current assets
|
|
|
3,105
|
|
|
|
1,609
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
76,554
|
|
|
|
47,686
|
|
Property and equipment, net
|
|
|
10,412
|
|
|
|
9,421
|
|
Restricted cash
|
|
|
500
|
|
|
|
500
|
|
Other assets
|
|
|
463
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
87,929
|
|
|
$
|
58,024
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,966
|
|
|
$
|
2,523
|
|
Accrued compensation
|
|
|
3,672
|
|
|
|
1,868
|
|
Accrued license fees
|
|
|
1,798
|
|
|
|
907
|
|
Accrued expenses and other current liabilities
|
|
|
1,948
|
|
|
|
1,474
|
|
Notes payable current portion
|
|
|
2,687
|
|
|
|
2,547
|
|
Deferred revenues current portion
|
|
|
337
|
|
|
|
710
|
|
Lease incentive obligations current portion
|
|
|
198
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,606
|
|
|
|
10,170
|
|
Notes payable long-term portion
|
|
|
2,039
|
|
|
|
4,726
|
|
Deferred revenues long-term portion
|
|
|
671
|
|
|
|
137
|
|
Lease incentive obligations long-term portion
|
|
|
629
|
|
|
|
587
|
|
Other liabilities
|
|
|
818
|
|
|
|
575
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, none issued and outstanding at December 31,
2007 and 2006
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 28,181,859 and 24,548,060 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
223,507
|
|
|
|
166,922
|
|
Accumulated other comprehensive income
|
|
|
52
|
|
|
|
8
|
|
Accumulated deficit
|
|
|
(152,395
|
)
|
|
|
(125,103
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
71,166
|
|
|
|
41,829
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
87,929
|
|
|
$
|
58,024
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
60
GENOMIC
HEALTH, INC.
Consolidated
Statements of Operations
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
62,745
|
|
|
$
|
27,006
|
|
|
$
|
4,823
|
|
Contract revenues
|
|
|
1,282
|
|
|
|
2,168
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
64,027
|
|
|
|
29,174
|
|
|
|
5,202
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
17,331
|
|
|
|
9,908
|
|
|
|
6,249
|
|
Research and development
|
|
|
22,053
|
|
|
|
12,841
|
|
|
|
9,465
|
|
Selling and marketing
|
|
|
36,456
|
|
|
|
24,625
|
|
|
|
15,348
|
|
General and administrative
|
|
|
17,849
|
|
|
|
12,765
|
|
|
|
6,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
93,689
|
|
|
|
60,139
|
|
|
|
37,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(29,662
|
)
|
|
|
(30,965
|
)
|
|
|
(32,345
|
)
|
Interest and other income
|
|
|
3,048
|
|
|
|
2,491
|
|
|
|
1,242
|
|
Interest expense
|
|
|
(678
|
)
|
|
|
(446
|
)
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
26,759,798
|
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
61
GENOMIC
HEALTH, INC.
Consolidated
Statements of Convertible Preferred Stock and Stockholders
Equity (Deficit)
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Convertible Preferred Stock
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock-based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance at January 1, 2005
|
|
|
48,480,819
|
|
|
$
|
103,212
|
|
|
|
|
1,951,161
|
|
|
$
|
|
|
|
$
|
4,124
|
|
|
$
|
(3,456
|
)
|
|
$
|
|
|
|
$
|
(64,822
|
)
|
|
$
|
(64,154
|
)
|
Issuance of common stock to employees upon exercise of stock
options for cash
|
|
|
|
|
|
|
|
|
|
|
|
266,916
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
Issuance of common stock to consultants upon exercise of stock
options for cash
|
|
|
|
|
|
|
|
|
|
|
|
5,197
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Issuance of common stock for cash, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
5,016,722
|
|
|
|
|
|
|
|
53,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,458
|
|
Issuance of common stock to Incyte for cash
|
|
|
|
|
|
|
|
|
|
|
|
416,666
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Conversion of preferred stock into common stock
|
|
|
(48,480,819
|
)
|
|
|
(103,212
|
)
|
|
|
|
16,814,319
|
|
|
|
2
|
|
|
|
103,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,212
|
|
Stock-based compensation expense related to consultant options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
|
|
(917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
1,076
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,361
|
)
|
|
|
(31,361
|
)
|
Change in unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loss 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
GENOMIC
HEALTH, INC.
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,995
|
|
|
|
2,629
|
|
|
|
1,522
|
|
Employee stock-based compensation
|
|
|
6,285
|
|
|
|
2,904
|
|
|
|
1,076
|
|
Non-employee stock-based compensation
|
|
|
65
|
|
|
|
83
|
|
|
|
92
|
|
Gain on disposal of property and equipment
|
|
|
|
|
|
|
(3
|
)
|
|
|
(31
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,227
|
)
|
|
|
(1,548
|
)
|
|
|
(314
|
)
|
Employee note receivable
|
|
|
|
|
|
|
37
|
|
|
|
76
|
|
Prepaid expenses and other assets
|
|
|
(1,647
|
)
|
|
|
(228
|
)
|
|
|
(790
|
)
|
Accounts payable
|
|
|
(557
|
)
|
|
|
1,130
|
|
|
|
292
|
|
Accrued expenses and other liabilities
|
|
|
1,608
|
|
|
|
933
|
|
|
|
1,247
|
|
Accrued compensation
|
|
|
1,804
|
|
|
|
913
|
|
|
|
352
|
|
Deferred revenues
|
|
|
161
|
|
|
|
609
|
|
|
|
238
|
|
Lease incentive obligations
|
|
|
99
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(18,706
|
)
|
|
|
(20,733
|
)
|
|
|
(27,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,881
|
)
|
|
|
(8,424
|
)
|
|
|
(2,972
|
)
|
Purchase of short-term investments
|
|
|
(66,065
|
)
|
|
|
(40,068
|
)
|
|
|
(50,688
|
)
|
Maturities of short-term investments
|
|
|
66,158
|
|
|
|
61,467
|
|
|
|
|
|
Unrealized gains (losses) on investment securities
|
|
|
44
|
|
|
|
66
|
|
|
|
(58
|
)
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(4,744
|
)
|
|
|
13,041
|
|
|
|
(54,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
|
|
|
|
4,912
|
|
|
|
4,090
|
|
Principal payments of notes payable
|
|
|
(2,547
|
)
|
|
|
(1,312
|
)
|
|
|
(417
|
)
|
Net proceeds from issuance of common stock
|
|
|
50,235
|
|
|
|
179
|
|
|
|
58,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
47,688
|
|
|
|
3,779
|
|
|
|
62,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
24,238
|
|
|
|
(3,913
|
)
|
|
|
(19,436
|
)
|
Cash and cash equivalents at the beginning of period
|
|
|
14,926
|
|
|
|
18,839
|
|
|
|
38,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
39,164
|
|
|
$
|
14,926
|
|
|
$
|
18,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
678
|
|
|
$
|
446
|
|
|
$
|
258
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock converted to common stock upon initial public
offering
|
|
$
|
|
|
|
$
|
|
|
|
$
|
103,212
|
|
See accompanying notes.
63
GENOMIC
HEALTH, INC.
December 31, 2007
|
|
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.
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.
On September 23, 2005, the Company effected a
1-for-3
reverse stock split of its common stock. All share and per share
amounts have been retroactively restated in the accompanying
consolidated financial statements and notes for all periods
presented.
Certain reclassifications of prior period amounts, including
lease incentive obligations and other liabilities, 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. All investments are
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.
64
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restricted
Cash
In September 2005, the Company entered into a non-cancelable
facilities lease with the facility owner that has a term of six
years. In connection with this lease, the Company was required
to secure a letter of credit, which totaled $500,000 and is
classified as restricted cash on the consolidated balance sheets.
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.
Concentration
of Risk
Cash, 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 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, 2007, no material losses had been
incurred.
Substantially all of the Companys tests to date have been
delivered to physicians in the United States. One third-party
payor accounted for approximately 23% and 47% of the
Companys product revenue for the years ended
December 31, 2007 and 2006, respectively. This payor
represented 55% and 59% of the Companys net accounts
receivable balance as of December 31, 2007 and 2006,
respectively. Another third-party payor accounted for
approximately 13% and 5% of the Companys revenue in 2007
and 2006, respectively. This payor represented 10% and 0% of the
Companys accounts receivable balance as of
December 31, 2007 and 2006, respectively.
Allowance
for Doubtful Accounts
In late 2006 the Company began accruing 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, 2007 and 2006, the
Companys allowance for doubtful accounts was $133,000 and
$510,000, respectively. Write-offs for doubtful accounts of
$261,000 were recorded against the allowance during the year
ended December 31, 2007; no write-offs were recorded
against the allowance during the year ended December 31,
2006. Changes in the Companys estimate of allowance for
doubtful accounts resulted in a $115,000 reduction of bad debt
expense for the year ended December 31, 2007. Bad debt
expense was $510,000 for the year ended December 31, 2006.
No bad debt expense was recorded for the year ended
December 31, 2005 because the vast majority of revenues
were recorded on a cash basis.
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.
65
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 software costs, which are included in property and
equipment, are depreciated over three to five 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 definite 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.
Through December 31, 2007, there have been no such losses.
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, 2007 and 2006.
Income
Taxes
The Company uses the liability method for income taxes, whereby
deferred income taxes are provided on items recognized for
financial reporting purposes over different periods than for
income tax purposes. Valuation allowances are provided when the
expected realization of tax assets does not meet a
more-likely-than-not criterion.
The Company adopted Financial Accounting Standards Board
(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.
66
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 investments
available for sale.
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 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 the nature of the
fee charged for products or services delivered, contractual
agreements entered into, and the collectibility of those fees
under any contract or agreement. When evaluating collectibility,
the Company considers whether it can 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. Product revenues where all criteria
set forth above are not met are recognized when cash is received
from the payor.
To date, product revenues have largely been recognized on a cash
basis because the Company has a limited number of contracts or
agreements with payors and limited collections experience. The
Company recognizes a portion of product revenue from third-party
payors, including some private payors and Medicare, on an
accrual basis when the criteria described in the preceding
paragraph are satisfied.
Contract revenues are generally derived from studies conducted
with biopharmaceutical and pharmaceutical companies and are
recognized on a contract-specific basis. Under certain
contracts, the Companys input, measured in terms of
full-time equivalent level of effort or running a set of assays
through its laboratory under a contractual protocol, triggers
payment obligations and revenues are recognized as costs are
incurred or assays are processed. Certain contracts have payment
obligations that are triggered as milestones are complete, such
as completion of a successful set of experiments. In these
cases, revenues are recognized when the milestones are achieved
under contracts that satisfy the Companys other revenue
recognition criteria.
Stock-based
Compensation
Through December 31, 2005, the Company accounted for
stock-based payment transactions under Accounting Principles
Board Opinion No. 25 (APB 25). On
January 1, 2006, the Company adopted Statement of Financial
67
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 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. The Company
has limited historical evidence with respect to developing these
assumptions. The Companys common stock has been publicly
traded for just over two years, so expected volatility is based
primarily on comparable peer data. The expected life of options
granted is estimated based on historical option exercise data
and assumptions related to unsettled options.
The Company elected the modified prospective transition method
as permitted under SFAS 123R and, accordingly, prior
periods have not been restated to reflect the impact of
SFAS 123R. The modified prospective transition method
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, 2007, total
unrecognized compensation expense related to unvested stock
options, net of estimated forfeitures, was $22.6 million.
The Company expects to recognize this expense over a
weighted-average period of 42 months.
Equity instruments granted to non-employees are valued using the
Black-Scholes method and accounted for as prescribed by
SFAS 123R and Emerging Issues Task Force Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
(EITF 96-18),
and will be subject to periodic revaluation over their vesting
terms.
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 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.
68
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Clinical
Collaborator Costs
The Company enters into collaboration and clinical trial
agreements with clinical collaborators and record these costs as
research and development expenses. The Company records accruals
for estimated study costs comprised of work performed by our
collaborators under contract terms.
Under one of these collaboration agreements, the Company makes
fixed annual payments resulting from the commercial launch of
Oncotype DX. These payments are recorded in cost of
product revenues as license payments. 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, including
Oncotype DX, no future annual payments will be payable
and the Company will have no further obligation under the
agreement.
Recently
Issued Accounting Pronouncements
In June 2007, FASB ratified the consensus reached by the
Emerging Issues Task Force on Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
requires nonrefundable advance payments for goods or services to
be used in future research and development activities to be
capitalized and recognized as expense as the related goods are
delivered or services are performed, or when the goods or
services are no longer expected to be received.
EITF 07-3
is effective for fiscal years beginning after December 15,
2007, and is to be applied prospectively for contracts entered
into on or after the effective date. The Company does not expect
the adoption of
EITF 07-3
to have a material impact on its financial condition or results
of operations.
In February 2007, FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits companies to
choose to measure certain financial instruments and other items
at fair value. The standard requires that unrealized gains and
losses are reported in earnings for items measured using the
fair value option. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company does not
expect the adoption of SFAS 159 to have a material impact
on its financial condition or results of operations.
In September 2006, FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. In February
2008, the 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
measurement and disclosure requirements related to financial
assets and financial liabilities are effective for fiscal years
beginning after November 15, 2007. The Company has elected
a partial deferral of SFAS 157 under the provisions of
FSP 157-2.
The Company does not expect the partial adoption of
SFAS 157 for financial assets and financial liabilities,
which is effective for the Company as of January 1, 2008,
to have a significant impact on its financial condition or
results of operations. However, the resulting fair values
calculated under SFAS 157 after adoption may be different
from the fair values that would have been calculated under
previous guidance. The Company is currently evaluating the
impact that SFAS 157 will have on its financial condition
and results of operations when the standard is applied to
non-financial assets and non-financial liabilities beginning
January 1, 2009.
69
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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 less the weighted-average
unvested common shares subject to repurchase and dilutive
potential common shares for the period determined using the
treasury-stock method. Options to purchase common stock have not
been included in the calculation of diluted net loss per share
as their inclusion would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net loss
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average net common shares outstanding for basic and
diluted loss per common share
|
|
|
26,759,798
|
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common shares at period end not included in diluted
net loss per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
3,919,720
|
|
|
|
2,940,803
|
|
|
|
2,021,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
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 $15.50 per
share pursuant to the Companys shelf registration
statement on
Form S-3.
Net proceeds from the offering after deducting underwriting
discounts, commissions and 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, 2007, the Company had
approximately $46.5 million of securities available for
sale under the shelf registration statement.
On October 4, 2005, the Company closed the initial public
offering of 5,016,722 shares of its common stock at $12.00
per share. Net proceeds from the offering were
$53.5 million. An additional $5.0 million was raised
on October 4, 2005, through the private sale of
416,666 shares of common stock to Incyte Corporation, a
related party. As of December 31, 2006, to the
Companys knowledge, Incyte Corporation had divested its
holdings in the Companys common stock. See Note 10
for further information on related parties.
|
|
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. The
Company recognized costs recorded under these agreements for the
years ended December 31, 2007, 2006 and 2005 of
$4.9 million, $2.2 million and $786,000, respectively,
which were included in cost of product revenues.
|
|
Note 5.
|
Collaboration
and Specimen Transfer Agreements
|
The Company has entered into a variety of collaboration and
specimen transfer agreements relating to its development
efforts. The Company recorded collaboration expenses of
$1.3 million, $1.5 million and $333,000 for the years
ended December 31, 2007, 2006 and 2005, 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.
70
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2007, future fixed annual payments,
exclusive of royalty payments, relating to the launch and
commercialization of Oncotype DX totaled approximately
$1.9 million and were payable as follows (in thousands):
|
|
|
|
|
|
|
Annual
|
|
|
|
Payments
|
|
|
|
(In thousands)
|
|
|
January 2008
|
|
$
|
475
|
|
January 2009
|
|
|
475
|
|
January 2010
|
|
|
475
|
|
January 2011
|
|
|
475
|
|
|
|
|
|
|
Total
|
|
$
|
1,900
|
|
|
|
|
|
|
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.
In addition, the Company has secured certain options and rights
relating to any joint inventions arising out of the
collaborations.
|
|
Note 6.
|
Short-term
Investments
|
The following tables illustrate the Companys
available-for-sale securities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
51
|
|
|
|
|
|
|
|
26,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,144
|
|
|
$
|
52
|
|
|
$
|
|
|
|
$
|
29,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Debt securities of U.S. government-sponsored entities
|
|
$
|
9,082
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
9,085
|
|
Corporate debt securities
|
|
|
20,199
|
|
|
|
5
|
|
|
|
|
|
|
|
20,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,281
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
29,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no realized gains or losses on its
available-for-sale securities for the years ended
December 31, 2007, 2006 and 2005, respectively.
The amortized cost and estimated fair value of
available-for-sale securities by contractual maturity at
December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Cost
|
|
|
Market Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
29,144
|
|
|
$
|
29,196
|
|
71
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 7.
|
Property
and Equipment
|
The following table summarizes the Companys property and
equipment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Laboratory equipment
|
|
$
|
9,881
|
|
|
$
|
7,007
|
|
Computer equipment and software
|
|
|
1,520
|
|
|
|
1,264
|
|
Furniture and fixtures
|
|
|
1,736
|
|
|
|
914
|
|
Leasehold improvements
|
|
|
7,297
|
|
|
|
6,663
|
|
Construction in progress
|
|
|
276
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,710
|
|
|
|
15,970
|
|
Less accumulated depreciation and amortization
|
|
|
(10,298
|
)
|
|
|
(6,549
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,412
|
|
|
$
|
9,421
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, 2006 and 2005, the
Company recorded depreciation and amortization expense of
$3.9 million, $2.6 million and $1.5 million,
respectively.
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 will be reduced to 4% in April 2008. As of December 31,
2007, the outstanding notes payable principal balance under this
arrangement was $4.7 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, 2007, 2006 and 2005.
72
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2007, the Companys aggregate
commitments under its financing arrangement were as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
|
(In thousands)
|
|
|
Years Ending December 31,
|
|
|
|
|
2008
|
|
$
|
3,073
|
|
2009
|
|
|
1,934
|
|
2010
|
|
|
238
|
|
|
|
|
|
|
Total minimum payments
|
|
|
5,245
|
|
Less: interest portion
|
|
|
(519
|
)
|
|
|
|
|
|
Present value of net minimum payments
|
|
|
4,726
|
|
Less: current portion of obligations
|
|
|
(2,687
|
)
|
|
|
|
|
|
Long-term obligations
|
|
$
|
2,039
|
|
|
|
|
|
|
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 its 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 its consolidated balance sheets.
Rent expense under all operating leases amounted to
$1.2 million, $810,000 and $838,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Future non-cancelable commitments under these operating leases
at December 31, 2007 were as follows (in thousands):
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
|
(In thousands)
|
|
|
Years Ending December 31,
|
|
|
|
|
2008
|
|
$
|
1,348
|
|
2009
|
|
|
1,520
|
|
2010
|
|
|
1,634
|
|
2011
|
|
|
1,723
|
|
2012
|
|
|
290
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
6,515
|
|
|
|
|
|
|
73
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Common
Stock
As of December 31, 2007, the Company had
28,181,859 shares of common stock outstanding. Shares of
common stock reserved for future issuance as of
December 31, 2007 were as follows:
|
|
|
|
|
Stock options outstanding
|
|
|
3,919,720
|
|
Future stock option grants
|
|
|
2,084,461
|
|
|
|
|
|
|
Shares of common stock reserved for future issuance
|
|
|
6,004,181
|
|
|
|
|
|
|
Dividend
On September 8, 2005, the board of directors of the Company
declared a conditional dividend of 791,210 shares of common
stock, which was allocated upon the closing of the
Companys initial public offering on a pro rata basis to
all of the Companys stockholders and option holders of
record as of September 28, 2005. The Company issued
740,030 shares to its stockholders pursuant to this
dividend at the closing of the initial public offering on
October 4, 2005, less an aggregate of 86 shares for
which cash was paid in lieu of fractional interests, and the
number of shares underlying outstanding stock options were
increased by approximately 51,080 shares, less any
fractional shares resulting from such adjustment. The dividend
has been given retroactive effect in the accompanying
consolidated financial statements.
Convertible
Preferred Stock
From November 2000 through December 2004, the Company completed
private placements for the sale of 48,480,819 shares of
Series A through Series E convertible preferred stock
resulting in gross proceeds of $103.6 million. On
October 4, 2005, the Company completed its initial public
offering of 5,016,722 shares of common stock at a price to
the public of $12.00 per share. Upon consummation of the
offering, all 48,480,819 outstanding shares of preferred stock
were converted into 16,160,273 of shares of common stock and a
dividend of 654,046 common shares was distributed to the
stockholders on conversion.
|
|
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) that 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.
74
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 immediately prior to the
next annual meeting of the Companys stockholders.
Nonstatutory stock options granted to outside directors must
have an exercise price equal to 100% of the fair market value of
the common stock on the date of grant. Nonstatutory stock
options terminate on the earlier of the day before the tenth
anniversary of the date of grant or the date twelve months after
termination of the outside directors service as a member
of the board of directors.
Restricted shares, stock appreciation rights, and stock units
granted under the 2005 Plan are governed by restricted stock
agreements, SAR agreements, and stock unit agreements between
the Company and recipients of the awards. Terms of the
agreements are determined by the Compensation Committee.
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.
Adoption
of SFAS 123R
Until December 31, 2005, the Company followed APB 25 to
account for employee stock options using the intrinsic value
method. Under APB 25, no compensation expense is recognized when
the exercise price of the Companys employee stock options
equals the market price of the underlying stock on the date of
grant. On January 1, 2006, the Company adopted
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. SFAS 123R eliminates the ability to account for
stock-based compensation transactions using the intrinsic value
method under APB 25, and instead requires that such transactions
be accounted for using a fair-value based method. The Company
uses the Black-Scholes option valuation model to value stock
options under SFAS 123R.
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. The Company elected to adopt the alternative
transition method provided in this FASB Staff Position 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.
75
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pro
Forma Information for Period Prior to Adoption of
SFAS 123R
For the year ended December 31, 2005, the following pro
forma net loss and loss per share were determined as if the
Company had accounted for employee stock-based compensation for
its stock option plans under the fair value method prescribed by
SFAS 123:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
(In thousands,
|
|
|
|
|
|
|
except per share
|
|
|
|
|
|
|
amounts)
|
|
|
|
|
|
Net loss as reported
|
|
$
|
(31,361
|
)
|
|
|
|
|
Add: Total stock-based employee compensation expense included in
net loss
|
|
|
1,076
|
|
|
|
|
|
Deduct: Total stock-based employee compensation expense
determined under the fair-value based method for all awards
|
|
|
(1,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, pro forma
|
|
$
|
(31,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted, pro forma
|
|
$
|
(4.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock-Based Compensation Expense
Employee stock-based compensation expense for the years ended
December 31, 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 $6.3 million and $2.9 million for the years ended
December 31, 2007 and 2006, respectively, as a result of
the adoption of SFAS 123R. 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, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
375
|
|
|
$
|
167
|
|
Research and development
|
|
|
1,882
|
|
|
|
821
|
|
Selling and marketing
|
|
|
1,876
|
|
|
|
779
|
|
General and administrative
|
|
|
2,152
|
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,285
|
|
|
$
|
2,904
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense represents expense
related to stock options granted on or after January 1,
2006, as well as stock options granted prior to, but not yet
vested as of, January 1, 2006. As of December 31,
2007, total unrecognized compensation expense related to
unvested stock options, net of estimated forfeitures, was
$22.6 million. The Company expects to recognize this
expense over a weighted-average period of 42 months.
Valuation
Assumptions
The employee stock-based compensation expense recognized under
SFAS 123R and presented in the pro forma disclosure
required under SFAS 123 was determined using the
Black-Scholes option valuation model. Option
76
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
valuation models require the input of highly subjective
assumptions that can vary over time. The Companys common
stock has been publicly traded for just over two years, so
expected volatility is based primarily on comparable peer data.
The expected life of options granted is estimated based on
historical option exercise data and assumptions related to
unsettled options. The risk-free interest rate is estimated
using published rates for U.S. Treasury securities with a
remaining term approximating the expected life of the options
granted. The Company uses a dividend yield of zero as it has
never paid cash dividends and does not anticipate paying cash
dividends in the foreseeable future. The weighted-average fair
values and assumptions used in calculating such values during
each fiscal period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
61
|
%
|
|
|
68
|
%
|
|
|
77
|
%
|
Risk-free interest rate
|
|
|
3.93
|
%
|
|
|
4.76
|
%
|
|
|
4.00
|
%
|
Expected life of options in years
|
|
|
5.8
|
|
|
|
5.5
|
|
|
|
4.8
|
|
Weighted-average fair value
|
|
$
|
12.77
|
|
|
$
|
10.27
|
|
|
$
|
6.39
|
|
Stock
Options Granted to Non-employees
The Company grants stock options to outside consultants from
time to time in exchange for services performed for the Company.
During the years ended December 31, 2007, 2006 and 2005,
the Company granted options to purchase 9,600, 2,850 and
10,172 shares, respectively, to outside 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 period of the
consulting arrangement and, therefore, the Company revalues the
options periodically and records additional compensation expense
related to these options over the remaining vesting periods.
During the years ended December 31, 2007, 2006 and 2005,
compensation expense related to these options was $65,000,
$83,000 and $92,000, respectively.
77
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock
Option Activity
The following is a summary of option activity for the years
ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Shares Available
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Balance at January 1, 2004
|
|
|
604,510
|
|
|
|
1,423,508
|
|
|
$
|
1.71
|
|
Options authorized
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(877,606
|
)
|
|
|
877,606
|
|
|
$
|
8.48
|
|
Options exercised
|
|
|
|
|
|
|
(272,113
|
)
|
|
$
|
0.93
|
|
2001 Plan shares expired
|
|
|
(443,998
|
)
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
7,725
|
|
|
|
(7,725
|
)
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of stock options exercised during 2007, 2006
and 2005 was $2.9 million, $948,000 and $942,000
respectively. The estimated fair value of options vesting in
2007, 2006 and 2005 was $5.6 million, $2.7 million and
$1.6 million, respectively.
The following table summarizes information concerning
outstanding and exercisable options under the 2001 and 2005
Plans as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Options Exercisable
|
|
Exercise
|
|
Number
|
|
|
Years Remaining
|
|
|
Weighted-Average
|
|
|
Number
|
|
|
Weighted-Average
|
|
Price Range
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$0.58 $1.33
|
|
|
472,171
|
|
|
|
5.89
|
|
|
$
|
1.14
|
|
|
|
422,191
|
|
|
$
|
1.12
|
|
$2.88 $2.88
|
|
|
462,525
|
|
|
|
6.95
|
|
|
$
|
2.88
|
|
|
|
323,660
|
|
|
$
|
2.88
|
|
$3.17 $3.17
|
|
|
69,348
|
|
|
|
1.92
|
|
|
$
|
3.17
|
|
|
|
52,011
|
|
|
$
|
3.17
|
|
$9.39 $9.39
|
|
|
582,439
|
|
|
|
7.73
|
|
|
$
|
9.39
|
|
|
|
283,230
|
|
|
$
|
9.39
|
|
$9.55 $16.02
|
|
|
435,815
|
|
|
|
7.79
|
|
|
$
|
11.91
|
|
|
|
198,629
|
|
|
$
|
11.31
|
|
$16.51 $18.88
|
|
|
227,395
|
|
|
|
9.33
|
|
|
$
|
17.66
|
|
|
|
15,635
|
|
|
$
|
17.32
|
|
$18.89 $18.89
|
|
|
646,040
|
|
|
|
8.71
|
|
|
$
|
18.89
|
|
|
|
174,627
|
|
|
$
|
18.89
|
|
$18.97 $22.82
|
|
|
226,457
|
|
|
|
9.44
|
|
|
$
|
20.61
|
|
|
|
4,550
|
|
|
$
|
20.91
|
|
$23.31 $24.60
|
|
|
797,530
|
|
|
|
9.91
|
|
|
$
|
23.34
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,919,720
|
|
|
|
|
|
|
|
|
|
|
|
1,474,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2007, the aggregate intrinsic value of the
outstanding options was $37.1 million and the aggregate
intrinsic value of the exercisable options was
$23.2 million. The weighted-average remaining contractual
life for exercisable options was 6.93 years.
Deferred
Stock-based Compensation
During 2004, stock options were granted with exercise prices
that were equal to the estimated fair value of the common stock
on the date of grant as determined by the Board of Directors.
Subsequent to the commencement of the initial public offering
process, the Company reassessed the fair value of its common
stock and determined that options granted from January 2004
through September 2005 were granted at exercise prices that were
below the reassessed fair value of the common stock on the date
of grant. Accordingly, deferred stock-based compensation of
$3.6 million was recorded during 2004 in accordance with
APB 25 and presented as a separate component of
stockholders equity. In the year ended December 31,
2005, an additional $917,000 of deferred stock-based
compensation was recorded. The Company recorded stock-based
compensation expense of $1.1 million for the years ended
December 31, 2005.
On January 1, 2006, in accordance with the provisions of
SFAS 123R, the Company reversed the balance of deferred
compensation to additional paid-in capital on its consolidated
balance sheet.
|
|
Note 11.
|
Related
Party Transactions
|
During 2000 and 2001, Incyte Corporation purchased shares of the
Companys Series A Preferred Stock and Series C
Preferred Stock for an aggregate purchase price of
$6.0 million. The Company has two active agreements with
Incyte that were entered into in March 2001 in connection with
the sale of convertible preferred stock to Incyte; a LifeSeq
collaborative agreement and a patent license agreement. The
Company also entered into a collaboration and technology
transfer agreement with Incyte and a Proteome BioKnowledge
Library license agreement with Proteome, Inc., a then
wholly-owned subsidiary of Incyte, both of which have been
terminated. Under these agreements, the Company incurred
royalties expense of $627,000, $270,000 and $48,000 in 2007,
2006 and 2005, respectively.
In connection with the completion of the Companys initial
public offering on October 4, 2005, Incytes shares of
the Companys preferred stock were converted into common
stock. Additionally, in connection with its initial public
offering, the Company exercised an election under which Incyte
was required to acquire an additional $5.0 million of the
Companys common stock. 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 has not recognized a provision for income taxes for
any of the periods presented because the Company has incurred
net operating losses since inception.
As of December 31, 2007 and 2006, the Company had deferred
tax assets of approximately $59.6 million and
$50.7 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 $8.9 million, $11.3 million and
$12.3 million during the years ended December 31,
2007, 2006 and 2005, respectively. Deferred tax assets primarily
relate to net operating loss and tax credit carryforwards.
79
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
52,508
|
|
|
$
|
45,503
|
|
Research tax credits
|
|
|
3,396
|
|
|
|
2,684
|
|
Capitalized costs
|
|
|
1,193
|
|
|
|
1,310
|
|
Other
|
|
|
2,457
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
59,554
|
|
|
|
50,667
|
|
Valuation allowance
|
|
|
(59,554
|
)
|
|
|
(50,667
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company had federal and state
net operating loss carryforwards of approximately
$132.6 million and $127.5 million, respectively, and
federal and state research and development tax credit
carryforwards of approximately $2.1 million and
$2.0 million, respectively. The net operating loss and tax
credit carryforwards will expire at various dates beginning in
2013 if not utilized.
The Company is tracking 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, 2007, the portion of the
federal and state net operating loss related to stock option
benefits was approximately $984,000.
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 consolidated balance sheet.
The Company had $413,000 of unrecognized tax benefits as of
December 31, 2007. The following table summarizes the
activity related to our unrecognized tax benefits:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2007
|
|
$
|
|
|
Increases related to prior year tax positions
|
|
|
413
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
413
|
|
|
|
|
|
|
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,
2007, the Company had not recognized any tax-related penalties
or interest in its consolidated balance sheets or statements of
operations. The Company does
80
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 2001 forward remain subject to future examination
by tax authorities.
|
|
Note 13.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table contains selected unaudited statement of
operations information for each of the quarters in 2007 and
2006. 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)
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,088
|
|
|
$
|
14,690
|
|
|
$
|
15,901
|
|
|
$
|
19,348
|
|
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
|
)
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
5,060
|
|
|
$
|
8,379
|
|
|
$
|
7,119
|
|
|
$
|
8,616
|
|
Net loss
|
|
|
(6,830
|
)
|
|
|
(4,915
|
)
|
|
|
(8,180
|
)
|
|
|
(8,995
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.28
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.37
|
)
|
The increase in revenue for the first quarter of 2007 was
attributable to increased reimbursement for Oncotype DX
by third-party payors and the continued expansion of the
Companys domestic field sales organization. The increase
in revenue for the fourth quarter of 2007 was also attributable
to the inclusion of Oncotype DX in the American Society
of Clinical Oncologys updated clinical practice guidelines
in October 2007.
The increase in revenue in the second quarter of 2006 was
attributable to increased demand following clinical
presentations at major symposia in December 2005 and February
2006, as well as the May 2006 publication of two peer-reviewed
articles supporting the use and reimbursement of Oncotype
DX. In addition, several third-party payors, including
National Heritage Insurance Company (NHIC), the local Medicare
carrier for California with jurisdiction for claims submitted by
the Company for Medicare patients, issued positive coverage
determinations for the test.
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.
81
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
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, 2007. 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, 2007, 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:
82
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, 2007, 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, 2007, 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, 2007 and 2006, and the related consolidated
statements of operations, convertible preferred stock and
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2007 and
our report dated March 14, 2008 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Palo Alto, California
March 14, 2008
83
(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 2008 Annual Meeting of Stockholders to be held on
May 21, 2008, 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 Chief Executive
Officer, President and Chief Operating Officer, 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 Chief Executive Officer,
President and Chief Operating Officer, 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 Mr. Michael D. Goldberg. 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.
84
|
|
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
Accountant 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
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.
85
|
|
|
|
|
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 April 27,
2006 (incorporated by reference to exhibit 3(ii) to the
Companys Current Report on Form 8-K filed on May 2, 2006.
|
|
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 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).
|
86
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
10
|
.8
|
|
Lease dated January 2, 2007 between the Company and Metropolitan
Life Insurance Company (incorporated by reference to exhibit
10.8 filed with the Companys Annual Report on Form 10-K
for the year ended December 31, 2006).
|
|
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 Ernst & Young LLP, independent registered public
accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (see page 88 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.
|
|
(c)
|
Financial
Statements and Schedules
|
Reference is made to Item 15(a)(2) above.
87
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.
Randal W. Scott, Ph.D.
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: March 14, 2008
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/ Randal
W. Scott
Randal
W. Scott, Ph.D.
|
|
Chief Executive Officer and Chairman of the Board (Principal
Executive Officer)
|
|
March 14, 2008
|
|
|
|
|
|
/s/ G.
Bradley Cole
G.
Bradley Cole
|
|
Executive Vice President, Operations and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Kimberly
J. Popovits
Kimberly
J. Popovits
|
|
President, Chief Operating Officer and Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Julian
C. Baker
Julian
C. Baker
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Brook
H. Byers
Brook
H. Byers
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Fred
E. Cohen
Fred
E. Cohen, MD., Ph.D.
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Samuel
D. Colella
Samuel
D. Colella
|
|
Director
|
|
March 14, 2008
|
88
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
D. Goldberg
Michael
D. Goldberg
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Randall
S. Livingston
Randall
S. Livingston
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Woodrow
A. Myers
Woodrow
A. Myers Jr., MD
|
|
Director
|
|
March 14, 2008
|
89
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
April 27, 2006 (incorporated by reference to
exhibit 3(ii) to the Companys Current Report on
Form 8-K
filed on May 2, 2006).
|
|
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
(FileNo.
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).
|
|
12
|
.1*
|
|
Statement Regarding Computation of Ratios.
|
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
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 Ernst & Young LLP, independent registered
public accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (see page 88 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.