e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51541
GENOMIC HEALTH, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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77-0552594
(I.R.S. Employer Identification No.) |
301 Penobscot Drive
Redwood City, California 94063
(Address of principal executive offices, including Zip Code)
(650) 556-9300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of outstanding shares of the registrants Common Stock, $0.0001 par value, was
28,558,428 as of July 31, 2009.
GENOMIC HEALTH, INC.
INDEX
2
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
GENOMIC HEALTH, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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June 30, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
11,366 |
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$ |
11,171 |
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Short-term investments |
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44,363 |
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45,499 |
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Accounts
receivable (net of allowance for doubtful accounts; June 30, 2009 - $624, December 31, 2008 - $881) |
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7,938 |
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8,807 |
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Prepaid expenses and other current assets |
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5,195 |
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4,781 |
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Total current assets |
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68,862 |
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70,258 |
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Property and equipment, net |
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13,869 |
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15,562 |
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Restricted cash |
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500 |
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500 |
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Other assets |
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337 |
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369 |
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Total assets |
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$ |
83,568 |
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$ |
86,689 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,531 |
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$ |
1,898 |
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Accrued compensation |
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5,929 |
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4,157 |
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Accrued license fees |
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2,392 |
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2,553 |
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Accrued expenses and other current liabilities |
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5,126 |
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4,398 |
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Notes payable current portion |
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835 |
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1,814 |
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Deferred revenues current portion |
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1,492 |
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2,381 |
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Other current liabilities |
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364 |
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364 |
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Total current liabilities |
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18,669 |
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17,565 |
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Notes payable long-term portion |
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105 |
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225 |
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Deferred revenues long-term portion |
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476 |
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1,417 |
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Other liabilities |
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1,113 |
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1,307 |
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Commitments (Note 5) |
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Stockholders equity: |
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Preferred stock, $0.0001 par value per share, 5,000,000 shares authorized, none issued and
outstanding at June 30, 2009 and December 31, 2008 |
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Common stock, $0.0001 par value per share, 100,000,000 shares authorized, 28,555,977 and
28,461,327 shares issued and outstanding at June 30, 2009 and December 31, 2008,
respectively |
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2 |
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2 |
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Additional paid-in capital |
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240,165 |
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234,412 |
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Accumulated other comprehensive income |
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90 |
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245 |
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Accumulated deficit |
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(177,052 |
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(168,484 |
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Total
stockholders equity |
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63,205 |
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66,175 |
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Total liabilities and stockholders equity |
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$ |
83,568 |
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$ |
86,689 |
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See accompanying notes.
3
GENOMIC HEALTH, INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues: |
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Product revenues |
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$ |
35,191 |
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$ |
26,327 |
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$ |
68,618 |
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$ |
49,682 |
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Contract revenues |
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1,361 |
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1,456 |
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1,830 |
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1,541 |
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Total revenues |
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36,552 |
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27,783 |
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70,448 |
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51,223 |
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Operating expenses: |
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Cost of product revenues |
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7,891 |
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6,850 |
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15,719 |
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12,734 |
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Research and development |
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9,243 |
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7,322 |
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17,888 |
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13,728 |
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Selling and marketing |
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15,709 |
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11,827 |
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30,406 |
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24,194 |
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General and administrative |
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7,651 |
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6,225 |
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14,989 |
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12,130 |
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Total operating expenses |
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40,494 |
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32,224 |
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79,002 |
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62,786 |
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Loss from operations |
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(3,942 |
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(4,441 |
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(8,554 |
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(11,563 |
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Interest and other income |
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213 |
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448 |
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462 |
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1,069 |
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Interest and other expense |
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(34 |
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(106 |
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(86 |
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(239 |
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Loss before income taxes |
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(3,763 |
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(4,099 |
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(8,178 |
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(10,733 |
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Provision for income taxes |
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(180 |
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(390 |
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Net loss |
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$ |
(3,943 |
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$ |
(4,099 |
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$ |
(8,568 |
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$ |
(10,733 |
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Basic and diluted net loss per share |
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$ |
(0.14 |
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$ |
(0.15 |
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$ |
(0.30 |
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$ |
(0.38 |
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Shares used in computing basic and diluted net loss per share |
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28,540,832 |
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28,262,407 |
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28,518,518 |
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28,239,908 |
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See accompanying notes.
4
GENOMIC HEALTH, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2009 |
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2008 |
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Operating activities |
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Net loss |
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$ |
(8,568 |
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$ |
(10,733 |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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3,175 |
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2,220 |
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Employee stock-based compensation |
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5,056 |
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4,541 |
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Non-employee stock-based compensation |
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34 |
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1 |
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Gain on disposal of property and equipment |
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(43 |
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Changes in assets and liabilities: |
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Accounts receivable |
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869 |
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(2,271 |
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Prepaid expenses and other assets |
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(409 |
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(1,518 |
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Accounts payable |
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633 |
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(53 |
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Accrued expenses and other liabilities |
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555 |
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1,617 |
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Accrued compensation |
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1,772 |
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482 |
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Deferred revenues |
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(1,830 |
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3,160 |
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Lease incentive obligations |
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(182 |
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508 |
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Net cash provided by (used in) operating activities |
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1,062 |
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(2,046 |
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Investing activities |
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Purchases of property and equipment |
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(1,412 |
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(4,823 |
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Purchases of short-term investments |
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(31,319 |
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(73,569 |
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Maturities of short-term investments |
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32,300 |
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59,299 |
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Net cash used in investing activities |
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(431 |
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(19,093 |
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Financing activities |
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Principal payments of notes payable |
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(1,099 |
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(1,381 |
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Proceeds from issuance of common stock under stock plans |
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663 |
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578 |
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Net cash used in financing activities |
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(436 |
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(803 |
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Net increase (decrease) in cash and cash equivalents |
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195 |
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(21,942 |
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Cash and cash equivalents at the beginning of the period |
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11,171 |
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39,164 |
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Cash and cash equivalents at the end of the period |
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$ |
11,366 |
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$ |
17,222 |
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Cash paid for interest |
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$ |
86 |
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$ |
230 |
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See accompanying notes.
5
GENOMIC HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
The Company
Genomic Health, Inc. (the Company) is a life science company focused on the development and
commercialization of genomic- based clinical diagnostic tests for cancer that allow physicians and
patients to make individualized treatment decisions. In 2004, the Company launched its first test,
the Oncotype DX breast cancer test, which has been shown to predict the likelihood of breast cancer
recurrence and the likelihood of chemotherapy benefit in a large portion of breast cancer patients.
The Company was incorporated in Delaware in August 2000 and is located in Redwood City, California.
Principles of Consolidation
The condensed consolidated financial statements include all the accounts of the Company and
its wholly-owned subsidiaries. The Company has two wholly-owned subsidiaries, Genomic Health
Switzerland LLC, which was established in 2009 to support the
Companys international sales and marketing efforts,
and Oncotype Laboratories, Inc., which was established in 2003 and is inactive. All
significant intercompany balances and transactions have been eliminated.
Basis of Presentation and Use of Estimates
The accompanying interim period condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States (GAAP). The
condensed consolidated balance sheet as of June 30, 2009, condensed consolidated statements of
operations for the three and six months ended June 30, 2009 and 2008 and condensed consolidated
statements of cash flows for the six months ended June 30, 2009 and 2008 are unaudited, but include
all adjustments, consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of its financial position, operating results and cash flows for
the periods presented. The condensed consolidated balance sheet at December 31, 2008 has been
derived from audited financial statements. However, it does not include certain information and
notes required by GAAP for complete consolidated financial statements. In preparing these financial
statements, the Company has evaluated events and transactions for potential recognition or
disclosure through August 7, 2009, the date these financial statements were issued.
The preparation of financial statements in conformity with GAAP requires management to make
judgments, assumptions and estimates that affect the amounts reported in the Companys condensed
consolidated financial statements and accompanying notes. Actual results could differ materially
from those estimates.
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 breast cancer test.
The Company generally bills third-party payors for a test upon generation and delivery of a
Recurrence Score report to the physician. As such, the Company takes assignment of benefits and the
risk of collection with the third-party payor. The Company usually bills the patient directly for
amounts owed after multiple requests for payment have been denied or only partially paid by the
insurance carrier. The Company pursues case-by-case reimbursement where third-party reimbursement
policies are not in place or payment history has not been established.
The Companys product revenues for tests performed are recognized when the following revenue
recognition criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured. Criterion (1) is satisfied when the Company has an
arrangement to pay or contract with the payor in place addressing reimbursement for the Oncotype DX
breast cancer test. In the absence of such arrangements, the Company considers that criterion (1) is satisfied
when a third-party payor pays the Company for the test performed. In addition, the Company must
receive a written request to perform the test from a physician. Criterion (2) is satisfied when the
Company performs the test and generates and delivers to the
physician, or makes available on its web
portal, a Recurrence Score report. Determination of criteria (3) and (4) is based on managements
judgments regarding whether the fee charged for products or services delivered is fixed or
determinable, contractual agreements entered into, and the collectibility of those fees under any
contract or agreement. When
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evaluating collectibility, the Company considers whether it has sufficient history to reliably
estimate a payors individual payment patterns. Based upon at least several months of payment
history, the Company reviews the number of tests paid against the number of tests billed and the
payors outstanding balance for unpaid tests to determine whether payments are being made at a
consistently high percentage of tests billed and at appropriate amounts given the contracted
payment amount. To the extent all criteria set forth above are not met when test results are
delivered, product revenues are recognized when cash is received from the payor.
The
Company recognizes a portion of its product revenues on an accrual basis when the criteria (3) and (4) described in the preceding paragraph are
satisfied. For all periods presented, approximately half of total product revenue recognized was
recorded on an accrual basis.
From
time to time, Company receives requests for refunds. When it
becomes aware of a request for a refund, Company ceases to record
revenue for those payments until such time it determines whether or
not a refund is due.
Contract revenues are generally derived from studies conducted with biopharmaceutical and
pharmaceutical companies. The specific methodology for revenue recognition is determined on a
case-by-case basis according to the facts and circumstances applicable to a given contract. Under
certain contracts, the Companys input, measured in terms of full-time equivalent level of effort
or running a set of assays through its clinical reference laboratory under a contractual protocol,
triggers payment obligations, and revenues are recognized as costs are incurred or assays are
processed. Certain contracts have payments that are triggered as milestones are completed, such as
completion of a successful set of experiments. Milestones are assessed on an individual basis and
revenue is recognized when these milestones are achieved, as evidenced by acknowledgment from
collaborators, provided that (1) the milestone event is substantive and its achievability was not
reasonably assured at the inception of the agreement and (2) the milestone payment is
non-refundable. Where separate milestones do not meet these criteria, the Company typically
defaults to a performance-based model, such as revenue recognition following delivery of effort as
compared to an estimate of total expected effort.
Advance payments received in excess of revenues recognized are classified as deferred revenue
until such time as the revenue recognition criteria have been met.
Allowance for Doubtful Accounts
The Company accrues an allowance for doubtful accounts against its accounts receivable
consistent with historical payment experience. Bad debt expense is included in general and
administrative expense on the Companys condensed consolidated statements of operations. Accounts
receivable are written off against the allowance when the appeals process is exhausted, when an
unfavorable coverage decision is received or when there is other substantive evidence that the
account will not be paid. As of June 30, 2009 and December 31, 2008, the Companys allowance for
doubtful accounts was $624,000 and $881,000, respectively. Write-offs for doubtful accounts of
$475,000 and $800,000 were recorded against the allowance during the three and six months ended
June 30, 2009, respectively, and $7,000 and $138,000 during the three and six months ended June 30,
2008, respectively. Bad debt expense was $395,000 and $543,000 for the three and six months ended June 30, 2009,
respectively and $273,000 and $357,000 for the three and six months ended June 30, 2008,
respectively.
Research and Development Expenses
Research and development expenses are comprised of the following types of costs incurred in
performing research and development activities: salaries and benefits, allocated overhead and
facility occupancy costs, contract services, reagents and laboratory supplies, and costs to acquire
in-process research and development projects and technologies that have no alternative future use.
Research and development expenses also include costs related to activities performed under
contracts with biopharmaceutical and pharmaceutical companies. Research and development costs are
expensed as incurred.
The Company enters into collaboration and clinical study agreements with clinical
collaborators and records these costs as research and development expenses. The Company records
accruals for estimated study costs comprised of work performed by its collaborators under contract
terms. Advance payments for goods or services that will be used or rendered for future research and
development activities are deferred and capitalized and recognized as an expense as the goods are
delivered or the related services are performed.
Emerging Issues Task Force Issue No. 07-1, Accounting for Collaborative Arrangements (EITF
07-1), was ratified by the Financial Accounting Standards Board (FASB) in November 2007 and
adopted by the Company as of January 2009. EITF 07-1
7
defines collaborative arrangements and establishes reporting requirements for transactions
between participants in a collaborative arrangement and between participants in the arrangement and
third parties. EITF 07-1 requires collaborators to present the results of activities for which they
act as the principal on a gross basis and report any payments received from, or made to, other
collaborators based on applicable GAAP or, in the absence of applicable GAAP, based on analogy to
authoritative accounting literature or a reasonable, rational, and consistently applied accounting
policy election. The adoption of EITF 07-1 did not have a material effect on the Companys
condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In April 2009, FASB issued three related Staff Positions: (i) FASB Staff Position 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have
Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4), (ii) FASB
Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairment (FSP FAS 115-2 and FAS 124-2), and (iii) FASB Staff Position FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1), which
are effective for interim and annual periods ending after June 15, 2009. FSP 157-4 provides
guidance on how to determine the fair value of assets and liabilities under Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (SFAS 157) in the current economic
environment and reemphasizes that the objective of a fair value measurement remains an exit price.
FSP FAS 115-2 and FAS 124-2 modifies the requirements for recognizing other-than-temporarily
impaired debt securities and revises the existing impairment model for such securities. FSP FAS
107-1 and APB 28-1 enhances the disclosure of instruments under the scope of SFAS 157 for both
interim and annual periods. The Companys adoption of these Staff Positions as of June 30, 2009 did
not have a material impact on its financial condition or results of operations.
In May 2009, FASB issued Statement of Financial Accounting Standards No. 165, Subsequent
Events (SFAS 165). SFAS 165 establishes general standards for accounting disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available
to be issued and applies to both interim and annual financial statements. SFAS 165 is effective for
interim or annual financial periods ending after June 15, 2009 and was adopted by the Company as
of June 30, 2009. The adoption of SFAS 165 did not have a material impact on the Companys
financial condition or results of operations.
In June 2009, FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 establishes the FASB Accounting
Standards Codification (Codification) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Certain accounting standards have allowed for the continued
application of superseded accounting standards for transactions that have an ongoing effect in an
entitys financial statements. That superseded guidance has not been included in the Codification,
shall be considered grandfathered, and shall continue to remain authoritative for those
transactions after the effective date of this Statement, which is for financial statements issued
for interim and annual periods ending after September 15, 2009. The Company does not expect the
adoption of SFAS 168 to have a material impact on its financial condition or results of operations.
8
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 calculated by dividing net loss by the
weighted-average number of common shares outstanding for the period and dilutive potential common
shares for the period determined using the treasury-stock method. For purposes of this calculation,
options to purchase common stock are considered to be potential common shares but are not included
in the calculation of diluted net loss per share because their effect is anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except share and per share amounts) |
|
Net loss |
|
$ |
(3,943 |
) |
|
$ |
(4,099 |
) |
|
$ |
(8,568 |
) |
|
$ |
(10,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average net common shares outstanding for basic
and diluted loss per common share |
|
|
28,540,832 |
|
|
|
28,262,407 |
|
|
|
28,518,518 |
|
|
|
28,239,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.14 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding dilutive securities not included in diluted net loss
per share calculation (at end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
4,730,556 |
|
|
|
3,931,216 |
|
|
|
4,730,556 |
|
|
|
3,931,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
The Company reports comprehensive loss and its components as part of total stockholders
equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net loss |
|
$ |
(3,943 |
) |
|
$ |
(4,099 |
) |
|
$ |
(8,568 |
) |
|
$ |
(10,733 |
) |
Unrealized gain (loss) on available-for-sale securities |
|
|
(23 |
) |
|
|
(121 |
) |
|
|
(155 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(3,966 |
) |
|
$ |
(4,220 |
) |
|
$ |
(8,723 |
) |
|
$ |
(10,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Fair Value Measurements
In September 2006, FASB issued SFAS 157, which defines fair value, establishes a framework for
measuring fair value and requires expanded disclosures regarding fair value measurements. SFAS 157
applies whenever standards require (or permit) assets or liabilities to be measured at fair value,
and does not expand the use of fair value in any new circumstances. The Company adopted SFAS 157 as
of January 1, 2008 for financial assets and liabilities measured at fair value and as of January 1,
2009 for non-financial assets and liabilities measured at fair value. There was no financial
statement impact as a result of these adoptions.
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid
to transfer a liability, or an exit price, in the principal or most advantageous market for that
asset or liability in an orderly transaction between market participants on the measurement date.
SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs, where available, and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices in active markets for identical assets or liabilities.
9
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
The following tables set forth the Companys financial instruments that were measured at fair
value on a recurring basis at June 30, 2009 and December 31, 2008 by level within the fair value
hierarchy. The Company did not have any non-financial assets or liabilities that were measured or
disclosed at fair value on a recurring basis at June 30, 2009 or December 31, 2008. As required by
SFAS 157, assets and liabilities measured at fair value are classified in their entirety based on
the lowest level of input that is significant to the fair value measurement. The Companys
assessment of the significance of a particular input to the fair value measurement in its entirety
requires management to make judgments and considers factors specific to the asset or liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted |
|
|
|
|
|
Significant |
|
|
|
|
Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
|
Balance at |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
June 30, 2009 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
As of June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits |
|
$ |
7,141 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,141 |
|
Debt securities of U.S. Government-sponsored
agencies |
|
|
|
|
|
|
40,614 |
|
|
|
|
|
|
|
40,614 |
|
Commercial paper |
|
|
|
|
|
|
3,749 |
|
|
|
|
|
|
|
3,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted |
|
|
|
|
|
Significant |
|
|
|
|
Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
|
Balance at |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
December 31, 2008 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits |
|
$ |
5,926 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,926 |
|
U.S. Treasury securities |
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
1,004 |
|
Debt securities of U.S. Government-sponsored
agencies |
|
|
|
|
|
|
37,350 |
|
|
|
|
|
|
|
37,350 |
|
Commercial paper |
|
|
|
|
|
|
8,149 |
|
|
|
|
|
|
|
8,149 |
|
Corporate bonds |
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
1,000 |
|
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 classified as available for sale.
Realized gains and losses and declines in value, if any, judged to be other than temporary on
available-for-sale securities are reported in other income or expense. When securities are sold,
any associated unrealized gain or loss recorded as a separate
10
component of stockholders equity is
reclassified out of stockholders equity on a specific-identification basis and recorded in
earnings for the period.
The following tables illustrate the Companys available-for-sale securities as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Debt securities of U.S. Government-sponsored agencies |
|
$ |
40,724 |
|
|
$ |
120 |
|
|
$ |
(229 |
) |
|
$ |
40,614 |
|
Commercial paper |
|
|
3,707 |
|
|
|
41 |
|
|
|
|
|
|
|
3,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
44,431 |
|
|
$ |
161 |
|
|
$ |
(229 |
) |
|
$ |
44,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Debt securities of U.S. Government-sponsored agencies |
|
$ |
37,144 |
|
|
$ |
209 |
|
|
$ |
(3 |
) |
|
$ |
37,350 |
|
Corporate debt securities |
|
|
8,110 |
|
|
|
42 |
|
|
|
(3 |
) |
|
|
8,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
45,254 |
|
|
$ |
251 |
|
|
$ |
(6 |
) |
|
$ |
45,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no realized gains or losses on its available-for-sale securities for the
three and six months ended June 30, 2009 and 2008, respectively.
The amortized cost and estimated fair value of available-for-sale securities by contractual
maturity at June 30, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
Market |
|
|
Cost |
|
Value |
|
|
(In thousands) |
Due in one year or less |
|
$ |
44,431 |
|
|
$ |
44,363 |
|
Note 4. Commercial Technology and Licensing Agreements
The Company is a party to various agreements under which it licenses technology on a
nonexclusive basis in the field of human diagnostics. Access to these licenses enables the Company
to process its Oncotype DX breast cancer tests. While certain agreements contain provisions for
fixed annual payments, license fees are generally calculated as a percentage of product revenues,
with rates that
vary by agreement and may be tiered, and payments that may be capped at annual minimum or maximum
amounts. The Company recognized costs recorded under these agreements of $2.4 million and $4.7
million for the three and six months ended June 30, 2009, respectively and $1.9 million and $3.6
million for the three and six months ended June 30, 2008, respectively, which were included in cost
of product revenues.
Note 5. Commitments
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
11
interest in the assets
purchased with the borrowed amounts. The Company can prepay all, but not part of, the amounts
outstanding under the arrangement so long as the Company also pays a 4% premium on the outstanding
principal balance. As of June 30, 2009, the outstanding notes payable principal balance under this
arrangement was $940,000 at annual interest rates ranging from 11.01% 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
as of June 30, 2009.
As of June 30, 2009, the Companys aggregate commitments under its financing arrangement were
as follows:
|
|
|
|
|
|
|
Annual |
|
|
|
Payments |
|
|
|
(In thousands) |
|
|
|
(Unaudited) |
|
Years Ending December 31, |
|
|
|
|
2009 (remainder of the year) |
|
$ |
749 |
|
2010 |
|
|
238 |
|
|
|
|
|
Total minimum payments |
|
|
987 |
|
Less: interest portion |
|
|
(47 |
) |
|
|
|
|
Present value of net minimum payments |
|
|
940 |
|
Less: current portion of obligations |
|
|
(835 |
) |
|
|
|
|
Long-term obligations |
|
$ |
105 |
|
|
|
|
|
Lease Obligations
In September 2005, the Company entered into a non-cancelable lease for 48,000 square feet of
laboratory and office space that the Company occupies in Redwood City, California. The lease
expires in February 2012 and includes lease incentive obligations of $834,000 that are being
amortized on a straight-line basis over the life of the lease. In connection with this lease, the
Company was required to secure a $500,000 letter of credit, which is classified as restricted cash
on the condensed consolidated balance sheets.
In January 2007, the Company entered into a non-cancelable lease for an additional 48,000
square feet of laboratory and office space in a nearby location. The lease expires in February 2012
and includes lease incentive obligations totaling $283,000 that are being amortized on a
straight-line basis over the life of the lease. In connection with this lease, the Company paid a
$151,000 cash security deposit, which is included in other assets on the condensed consolidated
balance sheets.
Future non-cancelable commitments under these operating leases at June 30, 2009 were as
follows:
|
|
|
|
|
|
|
Annual |
|
|
|
Payments |
|
|
|
(In thousands) |
|
|
|
(Unaudited) |
|
Years Ending December 31, |
|
|
|
|
2009 (remainder of the year) |
|
$ |
774 |
|
2010 |
|
|
1,634 |
|
2011 |
|
|
1,723 |
|
2012 |
|
|
290 |
|
|
|
|
|
Total minimum payments |
|
$ |
4,421 |
|
|
|
|
|
Clinical Collaborator Costs
The Company has entered into a variety of collaboration and specimen transfer agreements
relating to its development efforts. The Company recorded expenses of $891,000 and $1.5 million for
the three and six months ended June 30, 2009, respectively, and $416,000 and $493,000 for the three
and six months ended June 30, 2008, respectively, relating to services provided in connection with
these agreements, which are included in research and development expenses. In addition to these
expenses, certain agreements
12
contain provisions for royalties from inventions resulting from these
agreements. The Company has certain options and rights relating to joint inventions arising out of
these agreements.
In addition to costs for research and development, under one of our collaboration agreements,
we make fixed annual payments resulting from the launch and commercialization of the Oncotype DX
breast cancer test. At June 30, 2009, future payments remaining under this agreement totaled
$950,000, of which $475,000 is payable in January 2010 and $475,000 is payable in January 2011.
These payments are recorded in cost of product revenues as license fees. Expense is recorded
ratably over the year before the relevant payment is made. If at any time the Company discontinues
the sale of the Oncotype DX breast cancer test, 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.
Note 6. Stock-Based Compensation
Stock Incentive Plan
On September 8, 2005, the Board of Directors approved the 2005 Stock Incentive Plan (the 2005
Plan), which was later approved by the Companys stockholders. The Company initially 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. On June 8, 2009, the
Companys stockholders approved an amendment to the 2005 Plan to increase the shares reserved for
issuance under the 2005 Plan by 3,980,000 shares. The amended and restated plan also extends the
term under which awards may be granted under the 2005 Plan until January 27, 2019. As of June 30,
2009, the 2005 Plan provides for the issuance of a maximum of 8,980,000 shares, of which 4,874,939
shares of common stock were then available for future issuance.
Stock Options
The Company uses the Black-Scholes option valuation model to value stock options under
Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (SFAS
123R). The Company recorded stock-based compensation expense of $2.5 million and $5.1 million for
the three and six months ended June 30, 2009, respectively, and $2.3 million and $4.5 million for
the three and six months ended June 30, 2008, respectively. Stock-based compensation expense was
calculated based on awards ultimately expected to vest and has been reduced for estimated
forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. The following
table presents the impact of SFAS 123R on selected statements of operations line items for the
three and six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Cost of product revenues |
|
$ |
88 |
|
|
$ |
125 |
|
|
$ |
181 |
|
|
$ |
239 |
|
Research and development |
|
|
770 |
|
|
|
720 |
|
|
|
1,540 |
|
|
|
1,455 |
|
Selling and marketing |
|
|
798 |
|
|
|
648 |
|
|
|
1,595 |
|
|
|
1,278 |
|
General and administrative |
|
|
880 |
|
|
|
792 |
|
|
|
1,740 |
|
|
|
1,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
2,536 |
|
|
$ |
2,285 |
|
|
$ |
5,056 |
|
|
$ |
4,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2009, total
unrecognized compensation expense related to unvested stock options, net of estimated forfeitures,
was $20.6 million. The Company expects to recognize this expense over a weighted-average period of
35 months.
13
Valuation Assumptions
Option valuation models require the input of highly subjective assumptions that can vary over
time. The Companys expected volatility is based on the historical volatility of the Companys
common stock. The expected life of options granted is estimated based on historical option exercise
data and assumptions related to unsettled options. The risk-free interest rate is estimated using
published rates for U.S. Treasury securities with a remaining term approximating the expected life
of the options granted. The Company uses a dividend yield of zero as it has never paid cash
dividends and does not anticipate paying cash dividends in the foreseeable future. The Company
granted options to purchase 80,350 and 207,550 shares of common stock to employees and directors
during the three and six months ended June 30, 2009, respectively. The Company granted options to
purchase 154,600 and 198,200 shares of common stock to employees and directors during the three and
six months ended June 30, 2008, respectively. The weighted-average fair values and the assumptions
used in calculating such values for stock options granted during these periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
Expected volatility |
|
|
55 |
% |
|
|
60 |
% |
|
|
56 |
% |
|
|
60 |
% |
Risk-free interest rate |
|
|
2.73 |
% |
|
|
3.22 |
% |
|
|
2.17 |
% |
|
|
3.14 |
% |
Expected life of options in years |
|
|
5.60 |
|
|
|
5.74 |
|
|
|
5.76 |
|
|
|
5.77 |
|
Weighted-average fair value |
|
$ |
9.57 |
|
|
$ |
10.95 |
|
|
$ |
10.30 |
|
|
$ |
11.19 |
|
Stock Options Exercised
For the three and six months ended June 30, 2009, the Company issued 34,360 and 94,650 shares
of common stock in connection with the exercise of stock options with a weighted-average exercise
price of $4.61 and $7.01 per share and total intrinsic value of $159,000 and $663,000,
respectively. For the three and six months ended June 30, 2008, the Company issued 41,590 and
104,820 shares of common stock in connection with the exercise of stock options with a
weighted-average exercise price of $5.12 and $5.51 per share and total intrinsic value of $213,000
and $578,000, respectively.
Note 7. Income Tax
For the three and six months ended June 30, 2009, the Company recorded a provision for income
taxes of approximately $180,000 and $390,000, respectively, that is principally comprised of
federal alternative minimum and California income tax. The tax provision for the three and six
months ended June 30, 2009 was based on the Companys estimated taxable income for the year. The
difference between the provision for income taxes that would be derived by applying the statutory
rate to the Companys loss before tax and the income tax provision actually recorded is primarily
due to the impact of non-deductible SFAS 123R stock-based compensation expenses and other currently
non-deductible items, offset by the use of federal net operating loss carry-forwards that reduce the
federal tax expense to the alternative minimum tax amount and California state income tax under their
applicable statutes. For the six months ended June 30, 2008, the Company did not record a provision
for income taxes because it estimated and incurred a taxable loss for the year ended December 31,
2008.
The Company intends to continue maintaining a full valuation allowance on its deferred tax
assets until sufficient evidence exists to support the reversal of all or some portion of these
allowances. Should the actual amounts differ from the Companys estimates, the amount of its
valuation allowance could be materially impacted.
The Company had $575,000 and $413,000 of unrecognized tax benefits as of June 30, 2009 and
2008, respectively. The Company does not anticipate a material change in its unrecognized tax
benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve
months for items that arise in the ordinary course of business.
The Company will recognize accrued interest and penalties related to unrecognized tax benefits
in income tax expense when and if incurred. As of June 30, 2009, the Company had not recognized any
tax-related penalties or interest in its consolidated balance sheets or statements of operations.
All tax years from 2000 forward remain subject to future examination by tax authorities.
14
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the Oncotype DX breast cancer test; the factors that may impact our
financial results; the extent and duration of our net losses or when we may achieve profitability;
our ability to recognize revenues other than on a cash basis; our business strategy and our ability
to achieve our strategic goals; our expectations regarding product revenues; the amount of future
revenues that we may derive from Medicare patients or categories of patients; our plans to pursue
reimbursement on a case-by-case basis; our ability, and expectations as to the amount of time it
will take, to achieve successful reimbursement from third-party payors and government insurance
programs for new tests or markets, including for Oncotype DX for N+ breast cancer patients, our
Oncotype DX colon cancer test, or for patients outside of the U.S.; our expectations regarding our
international expansion and opportunities, and our expectations regarding revenues from
international sales; our intent to enter into additional foreign distribution arrangements; the
factors we believe to be driving demand for the Oncotype DX breast cancer test and our ability to
sustain or increase such demand; our success in increasing patient and physician demand as a result
of our direct sales approach; plans for enhancements of Oncotype DX to address different patient
populations of breast cancer; plans for, and the timeframe for the development or commercial launch
of, future tests addressing different patient populations or other cancers; the factors that we
believe will drive the establishment of coverage policies; the capacity of our clinical reference
laboratory to process tests and our expectations regarding capacity; our dependence on
collaborative relationships and the success of those relationships; whether any tests will result
from our collaborations; the applicability of clinical results to actual outcomes; our assumptions
regarding commercialization of a test for colon cancer and the timing of commercial availability of
any such test; our plans with respect to potential tests for ductal carcinoma in situ, or other
cancers or for patients treated with specific treatments; the occurrence, timing, outcome or
success of clinical trials or studies; our intention to plan additional development or clinical
studies; the benefits of our technology platform; the economic benefits of our test to the
healthcare system; the ability of our test to impact treatment decisions; our beliefs regarding our
competitive benefits; our beliefs regarding the benefits of individual gene reporting; the level of
investment in our sales force; our expectation that our general and administrative, sales and
marketing and research and development expenses will increase and our anticipated uses of those
funds; our expectations regarding capital expenditures; our ability to comply with the requirements
of being a public company; our ability to attract and retain experienced personnel; the adequacy of
our product liability insurance; how we intend to spend our existing cash and cash equivalents and
how long we expect our existing cash to last; our anticipated cash needs and our estimates
regarding our capital requirements and our needs for additional financing; our expected future
sources of cash; our plans to borrow under existing or new financing arrangements; our belief that
we are in material compliance with financial covenants; our expectations regarding repayment of
debt or incurrence of additional debt; our compliance with federal, state and foreign regulatory
requirements; the potential impact resulting from the regulation of Oncotype DX by the U.S. Food
and Drug Administration, or FDA, and our belief that our Oncotype DX breast cancer test is properly
regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA; the impact of new
or changing policies, regulation or legislation on our business; our belief that we have taken
reasonable steps to protect our intellectual property; our strategies regarding filing additional
patent applications to strengthen our intellectual property rights; the impact of changing interest
rates; our beliefs regarding our unrecognized tax benefits; the impact of accounting pronouncements
and our critical accounting policies, judgments, estimates, models and assumptions on our financial
results; the impact of the economy on our business, patients and payors; our expectations regarding
the impact of the economic environment on our liquidity and our investments; and anticipated trends
and challenges in our business and the markets in which we operate.
Forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expected. These risks and uncertainties include, but are
not limited to, those risks discussed in Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays in research and development
efforts; the risk that we may not obtain reimbursement for our existing test and any future tests
we may develop; the risks and uncertainties associated with the regulation of our test by FDA; our
ability to compete against third parties; our ability to obtain capital when needed; the
economic environment; and our history of operating losses. These forward-looking statements
speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any
forward-looking statements contained herein to reflect any change in our expectations with regard
thereto or any change in events, conditions or circumstances on which any such statement is based.
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.
15
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 first Oncotype DX diagnostic test is used for breast cancer
patients to predict the likelihood of cancer recurrence and the likelihood of chemotherapy benefit
and is conducted at our clinical reference laboratory in Redwood City, California. Effective July
1, 2009 the list price of our test increased from $3,820 to $3,975. Substantially all of our
historical revenues have been derived from the sale of Oncotype DX breast cancer tests ordered by
physicians in the United States.
Oncotype DX Breast Cancer Test
For the three and six months ended June 30, 2009, we delivered more than 11,880 and 23,100
Oncotype DX breast cancer test reports for use in treatment planning, compared to more than 9,690
and 18,850 test reports for the three and six months ended June 30, 2008. We believe increased
demand resulted from our ongoing commercial efforts, continued publication of peer-reviewed
articles on studies we sponsored, conducted or collaborated on that support the use and
reimbursement of our Oncotype DX breast cancer test, clinical presentations at major symposia, and
the inclusion of our Oncotype DX breast cancer test in clinical practice guidelines. However, this
increased demand is not necessarily indicative of future growth rates, and we cannot assure you
that this level of increased demand can be sustained or that publication of articles, future
appearances or presentations at medical conferences or increased commercial efforts will have a
similar impact on demand for our test in the future. We have in the past, and may in the future,
experience slower sequential growth in demand for our test in the second and third calendar
quarters, which we believe may be attributed to physicians, surgeons and patients scheduling
vacations during this time. As of June 30, 2009, our clinical reference laboratory had the capacity
to process up to 15,000 tests per calendar quarter.
We depend on third-party payors to provide reimbursement for our test. Accordingly, we have
focused substantial resources on obtaining reimbursement coverage from third-party payors. Several
large national third-party payors, a number of regional payors, and Palmetto Government Benefits
Administrators, or Palmetto GBA, the local Medicare carrier for California with jurisdiction for
claims submitted by us for Medicare patients, have issued positive coverage determinations for our
Oncotype DX breast cancer test for patients with node negative, or N-, estrogen receptor positive,
or ER+, disease through contracts, agreements or policy decisions. Effective August 1, 2009, we
negotiated a contracted rate of reimbursement with Anthem Insurance Companies, Inc., a subsidiary
of one of the nations largest health benefits companies.
Beginning in the second half of 2008 and continuing through the first half of 2009, we
experienced an increase in usage of our Oncotype DX breast cancer test for node positive, or N+,
patients. While some payors provide policy coverage for the use of our test in patients with lymph
node micro-metastasis (greater than 0.2mm, but not greater than 2.0 mm in size), a substantial
portion of our existing reimbursement coverage has been limited to women with early-stage N-, ER+
breast cancer. Effective June 28, 2009, Palmetto GBA extended its coverage for the Oncotype DX
breast cancer test to include ER+ patients with N+ disease (up to three positive lymph nodes).
However, we may not be able to obtain additional reimbursement coverage from other payors for our
test for breast cancer patients with N+, ER+ disease.
Our domestic sales, marketing and reimbursement efforts are focused on direct interaction with
medical and surgical oncologists, pathologists and payors. In January 2009, we hired an additional
20 U.S. sales representatives, increasing our domestic sales force to a total of 80 sales
representatives. We have also continued to expand internationally. As of June 30, 2009, we had
received test samples from over 40 countries and established exclusive distribution agreements for
our Oncotype DX breast cancer test with partners in over ten countries outside of the U.S. We
established a European subsidiary in February 2009 and have lead executives with assignments in
Europe and in Asia to support our international efforts. In June 2009, the St. Gallen International
Consensus Panel on the Primary Therapy of Early Breast Cancer recommended for the first time that
validated multigene assays should be considered as an adjunct to standard measures in helping
determine chemotherapy benefit for early-stage breast cancer patients. We have completed or
initiated
multiple international clinical studies intended to support the adoption of our test outside
of the U.S. For example, in April 2009, we announced results of a multi-center study in Japan
demonstrating that our test had significant prognostic value in Japanese women with ER+ early-stage
breast cancer. This was the first study to examine the utility of our Oncotype DX breast cancer
test in a specific ethnic population. During the second quarter of 2009, we initiated our first
Taiwanese Chinese population study in collaboration with the National Taiwan University. We do not
expect international product revenues to comprise more than 10% of our total revenues for at least
the next two years.
16
Oncotype DX Colon Cancer Test Commercialization
At the May 2009 American Society of Clinical Oncology, or ASCO, meeting, we presented positive
results from our independent clinical validation study in stage II colon cancer for our Oncotype DX
colon cancer test. The study, which utilized more than 1,400 patient samples from the
international, multi-center QUASAR trial, demonstrated that the Oncotype DX colon cancer test can
independently predict the individual recurrence risk in stage II colon cancer patients following
surgery, and indicated that the colon cancer Recurrence Score provided additional independent
clinical value beyond standard measures of risk.
We are proceeding with commercialization plans to make our Oncotype DX colon cancer test
available to physicians and patients in early 2010. We expect to incur additional expenses,
including infrastructure, sales and marketing and information technology costs, related to the
commercial launch of our colon cancer test. Based upon our experience in obtaining adoption and
reimbursement for our Oncotype DX breast cancer test, we do not expect product revenues from our
colon cancer test to comprise more than 10% of our total revenues for at least the next three
years.
Product Pipeline
We continue to conduct research and development studies in breast cancer, colon cancer and
other cancers. At the May 2009 ASCO meeting, we presented results from a clinical study that
summarized the gene signatures of male patients for whom the Oncotype DX breast cancer test was
used to guide chemotherapy treatment, indicating that breast cancer in men displays similar gene
signatures to female breast cancer. We also presented a separate study at the ASCO meeting
demonstrating that there were significant differences in gene expression between hormone receptor
negative, or triple negative, breast cancer compared with hormone receptor positive disease. We are
investigating the utility of our Oncotype DX breast cancer test in patients with ductal carcinoma
in situ, or DCIS, which generally refers to a pre-invasive tumor with reduced risk of recurrence.
We plan to evaluate the use of the Oncotype DX breast cancer gene panel and also seek to identify
other genes that may be used for treatment planning in DCIS.
We are planning additional studies in colon cancer for both stage II and stage III patients in
order to provide additional information regarding treatment with agents such as oxaliplatin,
epidermal growth factor, or EGFR, inhibitors and anti-angiogenesis agents. We completed processing
samples related to gene discovery work under our contract research agreement for the development of
a genomic test to estimate the risk of recurrence following surgery for patients with Stage I-III
renal carcinoma, clear cell type. We have established agreements and identified sources of clinical
samples in connection with our prostate and lung cancer programs.
Economic Environment
Continuing concerns over inflation, deflation, energy costs, geopolitical issues, the
availability and cost of credit, the Federal stimulus plan, Federal budget proposals, the U.S.
mortgage market and a declining real estate market in the U.S. have contributed to increased
volatility and diminished expectations for the global economy and expectations of slower global
economic growth going forward. These factors, combined with volatile oil prices, declining business
and consumer confidence, a volatile stock market and increased unemployment, have precipitated an
economic slowdown and recession. We continue to evaluate the impact of this environment on our cash
management, cash collection activities and volume of tests delivered.
As of the date of this report, we have not experienced a loss of principal on any of our
investments, and we expect that we will continue to be able to access or liquidate these
investments as needed to support our business activities. From time to time, we monitor the
financial position of our significant third-party payors, which include Medicare and managed care
companies. As of the date of this report, we do not expect the current economic environment to have
a material negative impact on our ability to collect payments from our third-party payors through
the end of 2009. The economic slowdown could negatively impact the volume of tests we deliver in
the future if patients lose healthcare coverage, delay medical checkups or are unable to pay for
our test.
We intend to continue to assess the impact of the economic environment on our business
activities. If the economic climate in the U.S. does not improve or continues to deteriorate, our
cash position, cash collection activities and volume of tests delivered could be negatively
impacted and we could experience lower revenues.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of operations is based on
our condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the
date of the financial statements, as well as revenues and expenses during the reporting periods. We
evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical
experience and on various other factors we believe are reasonable under the circumstances, the
results of which
17
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results could therefore differ
materially from those estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our financial statements.
Revenue Recognition
We exercise judgment in determining whether revenue is recognized on an accrual basis when
test results are delivered or on a cash basis when cash is received from the payor. Our revenues
for tests performed are recognized when the following criteria are met: (1) persuasive evidence
that an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured. We assess whether the fee is fixed or
determinable based on the nature of the fee charged for the products or services delivered and
existing contractual agreements. When evaluating collectibility, we consider whether we have
sufficient history to reliably estimate a payors individual payment patterns. Based upon at least
several months of payment history, we review the number of tests paid against the number of tests
billed and the payors outstanding balance for unpaid tests to determine whether payments are being
made at a consistently high percentage of tests billed and at appropriate amounts given the
contracted payment amount. To the extent all criteria set forth above are not met, including where
there is no evidence of payment history at the time test results are delivered, product revenues
are recognized on a cash basis when cash is received from the payor.
Contract revenues are generally derived from studies conducted with biopharmaceutical and
pharmaceutical companies and are recognized on a contract-specific basis. Under certain contracts,
revenues are recognized as costs are incurred or assays are processed. We may exercise judgment
when estimating full-time equivalent level of effort, costs incurred and time to project
completion. For certain contracts, we utilize the performance-based method of revenue recognition,
which requires that we estimate the total amount of costs to be expended for a project and
recognize revenue equal to the portion of costs expended to date. The estimated total costs to be
expended are necessarily subject to revision from time to time as the underlying facts and
circumstances change.
Allowance for Doubtful Accounts
We accrue an allowance for doubtful accounts against our accounts receivable based on
estimates consistent with historical payment experience. Our allowance for doubtful accounts is
evaluated quarterly and adjusted when trends or significant events indicate that a change in
estimate is appropriate. As of June 30, 2009 and December 31, 2008, our allowance for doubtful
accounts was $624,000 and $881,000, respectively. The decrease in our allowance for doubtful
accounts reflected the impact of writedowns and improved collections on our outstanding accounts
receivable.
Research and Development Expenses
We enter into collaboration and clinical trial agreements with clinical collaborators and
record these costs as research and development expenses. We record accruals for estimated study
costs based on estimates of services received and effort expended by our collaborators pursuant to
these agreements. The financial terms of these agreements are subject to negotiations, may vary
from contract to contract, and may result in uneven payment flows. We determine our estimates
through discussion with internal clinical development personnel and outside service providers as to
the progress or stage of completion of services provided and the agreed upon fee to be paid for
such services. Advance payments for goods or services that will be used or rendered for research
and development activities are deferred and capitalized and recognized as an expense as the goods
are delivered or the related services are performed.
All potential future product programs outside of breast and colon cancer are in the research
or early development phase. The expected time frame in which a test for one of these other cancers
can be brought to market is uncertain given the technical challenges and clinical variables that
exist between different types of cancers. In 2008, we began maintaining information regarding costs
incurred for activities performed under certain contracts with biopharmaceutical and pharmaceutical
companies. However, we do not
generally record or maintain information regarding costs incurred in research and development
on a program-specific basis. Our research and development staff and associated infrastructure
resources are deployed across several programs. Many of our costs are thus not attributable to
individual programs. As a result, we are unable to determine the duration and completion costs of
our research and development programs or when, if ever, and to what extent we will receive cash
inflows from the commercialization and sale of a product.
18
Stock-based Compensation Expense
Under the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment, or SFAS 123R, our employee stock-based compensation is estimated at the date
of grant based on the fair value of the award using the Black-Scholes option-pricing model and is
recognized as expense ratably over the requisite service period. The application of SFAS 123R
requires significant judgment and the use of estimates, particularly surrounding assumptions used
in determining fair value. The Black-Scholes valuation method requires the use of estimates such as
stock price volatility and expected option lives, as well as expected option forfeiture rates, to
value stock-based compensation. Our assumptions regarding expected volatility are based on the
historical volatility of our common stock. The expected life of options is estimated based on
historical option exercise data and assumptions related to unsettled options. Expected option
forfeiture rates are based on historical data, and compensation expense is adjusted for actual
results.
As required under SFAS 123R, we review our valuation assumptions on an ongoing basis, and, as
a result, our valuation assumptions used to value employee stock-based awards granted in future
periods may change. See Note 6, Stock-Based Compensation, in the Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
Results of Operations
Three and Six Months Ended June 30, 2009 and 2008
We recorded a net loss for the three and six months ended June 30, 2009 of $3.9 million and
$8.6 million, respectively, compared to a net loss for the three and six months ended June 30, 2008
of $4.1 million and $10.7 million, respectively. On a basic and diluted per share basis, net loss
was $0.14 and $0.30 for the three and six months ended June 30, 2009, respectively, compared to
$0.15 and $0.38 for the three and six months ended June 30, 2008, respectively.
Revenues
We derive our revenues from product sales and, to a lesser extent, from contract research
arrangements. We operate in one industry segment. All of our product revenues have been derived
solely from the sale of our Oncotype DX breast cancer test. Payors are billed upon generation and
delivery of a breast cancer Recurrence Score report to the physician. Product revenues are recorded
on a cash basis unless a contract or arrangement to pay is in place with the payor at the time of
billing and collectibility is reasonably assured. Contract revenues are derived from studies
conducted with biopharmaceutical and pharmaceutical companies and are recorded as contractual
obligations are completed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months Ended |
|
|
|
Ended June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Product revenues |
|
$ |
35,191 |
|
|
$ |
26,327 |
|
|
$ |
68,618 |
|
|
$ |
49,682 |
|
Contract revenues |
|
|
1,361 |
|
|
|
1,456 |
|
|
|
1,830 |
|
|
|
1,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
36,552 |
|
|
$ |
27,783 |
|
|
$ |
70,448 |
|
|
$ |
51,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase in product revenues |
|
$ |
8,864 |
|
|
|
|
|
|
$ |
18,936 |
|
|
|
|
|
Period over period percentage increase in product revenues |
|
|
34 |
% |
|
|
|
|
|
|
38 |
% |
|
|
|
|
The period over period increases in product revenues resulted from increased adoption, as
evidenced by a 23% increase in test volume for both the three and six month comparative periods. We
also experienced expanded reimbursement coverage and an increase in the amount of revenue
recognized per test for both the three and six month comparative periods. For all periods
presented, approximately 50% of product revenues were recorded on an accrual basis and recognized
at the time the test results were delivered. The balance of product revenues was recognized upon
cash collection as payments were received.
Product revenues from Medicare payments were $6.4 million, or 18%, and $13.0 million, or 19%,
of product revenues for the three and six months ended June 30, 2009, respectively compared to $5.7
million, or 22%, and $11.4 million, or 23%, of product revenues for the three and six months ended
June 30, 2008, respectively. Product revenues from United HealthCare Insurance Company payments
were $3.0 million, or 8%, and $5.8 million, or 8%, of product revenues for the three and six months
ended June 30, 2009,
19
respectively, compared to $3.3 million, or 12%, and $6.4 million, or 13%, of
product revenues for the three and six months ended June 30, 2008, respectively.
Contract revenues were $1.4 million and $1.8 million for the three and six months ended June
30, 2009, respectively, compared to $1.5 million for each of the three and six months ended June
30, 2008. Contract revenues represented studies assessing our gene expression technology or work in
gene selection and protocol design with our pharmaceutical partners. The period over period
variances in contract revenues were due to project timing for ongoing contract research and
development activities. We expect that our contract revenues will continue to fluctuate based on
the number and timing of studies being conducted.
Cost of Product Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Tissue sample processing costs |
|
$ |
5,381 |
|
|
$ |
4,837 |
|
|
$ |
10,808 |
|
|
$ |
8,897 |
|
Stock-based compensation |
|
|
88 |
|
|
|
125 |
|
|
|
181 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tissue sample processing costs |
|
|
5,469 |
|
|
|
4,962 |
|
|
|
10,989 |
|
|
|
9,137 |
|
License fees |
|
|
2,422 |
|
|
|
1,888 |
|
|
|
4,730 |
|
|
|
3,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product revenues |
|
$ |
7,891 |
|
|
$ |
6,850 |
|
|
$ |
15,719 |
|
|
$ |
12,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase |
|
$ |
1,041 |
|
|
|
|
|
|
$ |
2,985 |
|
|
|
|
|
Period over period percentage increase |
|
|
15 |
% |
|
|
|
|
|
|
23 |
% |
|
|
|
|
Cost of product revenues represents the cost of materials, direct labor, equipment and
infrastructure expenses associated with processing tissue samples (including histopathology,
anatomical pathology, paraffin extraction, reverse transcription polymerase chain reaction, or
RT-PCR, quality control analyses and shipping charges to transport tissue samples), stock-based
compensation and license fees. Infrastructure expenses include allocated facility occupancy and
information technology costs. Costs associated with performing our test are recorded as tests are
processed. Costs recorded for tissue sample processing represent the cost of all the tests
processed during the period regardless of whether revenue was recognized with respect to a specific
test. Royalties for licensed technology calculated as a percentage of product revenues and fixed
annual payments relating to the launch and commercialization of our Oncotype DX breast cancer test
are recorded as license fees in cost of product revenues at the time product revenues are
recognized or in accordance with other contractual obligations. License fees represent a
significant component of our cost of product revenues and are expected to remain so for the
foreseeable future.
The
$544,000, or 11%, increase in tissue sample processing costs for the three months ended
June 30, 2009 compared to the three months ended June 30, 2008 reflected a 23% increase in test
volume, partially offset by lower consulting expenses and other cost efficiencies. The
$1.9 million, or 22%, increase in tissue sample processing costs for the six months ended June 30,
2009 compared to the six months ended June 30, 2008 reflected a 23% increase in test volume. The
$534,000, or 28%, and $1.1 million, or 31%, increases in license fees for the three and six month
comparative periods included higher royalties due to increases of $8.9 million, or 34%, and $18.9
million, or 38%, respectively, in product revenues recognized. We expect the cost of product
revenues to increase to the extent we process more tests.
20
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Personnel-related expenses |
|
$ |
4,550 |
|
|
$ |
4,037 |
|
|
$ |
9,258 |
|
|
$ |
7,788 |
|
Stock-based compensation |
|
|
770 |
|
|
|
720 |
|
|
|
1,540 |
|
|
|
1,455 |
|
Collaboration expenses |
|
|
891 |
|
|
|
416 |
|
|
|
1,495 |
|
|
|
493 |
|
Infrastructure and all other costs |
|
|
3,032 |
|
|
|
2,149 |
|
|
|
5,595 |
|
|
|
3,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
9,243 |
|
|
$ |
7,322 |
|
|
$ |
17,888 |
|
|
$ |
13,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase |
|
$ |
1,921 |
|
|
|
|
|
|
$ |
4,160 |
|
|
|
|
|
Period over period percentage increase |
|
|
26 |
% |
|
|
|
|
|
|
30 |
% |
|
|
|
|
Research and development expenses represent costs incurred to develop our technology and
carry out clinical studies and include personnel-related expenses, reagents and supplies used in
research and development laboratory work, infrastructure expenses, including allocated overhead and
facility occupancy costs, contract services and other outside costs. Research and development
expenses also include costs related to activities performed under contracts with biopharmaceutical
and pharmaceutical companies.
The $1.9 million, or 26%, increase in research and development expenses for the three months
ended June 30, 2009 compared to the three months ended June 30, 2008 reflected a $513,000 increase
in personnel-related expenses, an $883,000 increase in infrastructure and other expenses
and a $475,000 increase in collaboration expenses related to clinical studies for a variety of
cancers. The $4.2 million, or 30%, increase in research and development expenses for the six months
ended June 30, 2009 compared to the six months ended June 30, 2008 reflected a $1.5 million
increase in personnel-related expenses, a $1.6 million increase in infrastructure and other
expenses and a $1.0 million increase in collaboration expenses. We expect our research and
development expenses to increase as we continue to invest in our product pipeline for breast, colon
and other cancers.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Personnel-related expenses |
|
$ |
7,417 |
|
|
$ |
5,334 |
|
|
$ |
14,654 |
|
|
$ |
11,192 |
|
Stock-based compensation |
|
|
798 |
|
|
|
648 |
|
|
|
1,629 |
|
|
|
1,278 |
|
Promotional and marketing materials |
|
|
3,439 |
|
|
|
2,960 |
|
|
|
5,949 |
|
|
|
5,841 |
|
Travel, meetings and seminars |
|
|
1,927 |
|
|
|
1,621 |
|
|
|
3,985 |
|
|
|
3,297 |
|
Infrastructure and all other costs |
|
|
2,128 |
|
|
|
1,264 |
|
|
|
4,188 |
|
|
|
2,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing expenses |
|
$ |
15,709 |
|
|
$ |
11,827 |
|
|
$ |
30,406 |
|
|
$ |
24,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase |
|
$ |
3,882 |
|
|
|
|
|
|
$ |
6,212 |
|
|
|
|
|
Period over period percentage increase |
|
|
33 |
% |
|
|
|
|
|
|
26 |
% |
|
|
|
|
Our selling and marketing expenses consist primarily of personnel-related expenses,
education and promotional expenses, and infrastructure expenses, including allocated facility
occupancy and information technology costs. These expenses include the costs of educating
physicians, laboratory personnel and other healthcare professionals regarding our genomic
technologies, how our Oncotype
DX breast cancer test was developed and validated and the value of the quantitative
information that the test 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 our Oncotype DX platform.
The $3.9 million, or 33%, increase in selling and marketing expenses for the three months
ended June 30, 2009 compared to the three months ended June 30, 2008 was due to a $2.1 million
increase in personnel-related expenses, due primarily to the addition of 20 domestic field sales
representatives in January 2009, a $864,000 increase in infrastructure expenses, including
allocations for
21
information technology, recruiting and other expenses, $306,000 in higher
travel-related expenses primarily associated with the increase in field sales personnel and our
international expansion, a $150,000 increase in stock-based compensation, and a $479,000 increase
in promotional field and marketing materials. The $6.2 million, or 26%, increase in selling and
marketing expenses for the six months ended June 30, 2009 was due to a $3.5 million increase in
personnel-related expenses, due primarily to the addition of field sales personnel, a $1.6 million
increase in infrastructure expenses, $688,000 in higher travel-related expenses, and a $351,000
increase in stock-based compensation. We expect selling and marketing expenses to increase in
future periods as we prepare for the commercialization of our Oncotype DX colon cancer test and
continue to expand our commercial efforts in international markets.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Personnel-related expenses |
|
$ |
4,811 |
|
|
$ |
3,736 |
|
|
$ |
9,616 |
|
|
$ |
7,126 |
|
Stock-based compensation |
|
|
880 |
|
|
|
792 |
|
|
|
1,740 |
|
|
|
1,569 |
|
Professional fees and all other costs |
|
|
1,960 |
|
|
|
1,697 |
|
|
|
3,633 |
|
|
|
3,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses |
|
$ |
7,651 |
|
|
$ |
6,225 |
|
|
$ |
14,989 |
|
|
$ |
12,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase |
|
$ |
1,426 |
|
|
|
|
|
|
$ |
2,859 |
|
|
|
|
|
Period over period percentage increase |
|
|
23 |
% |
|
|
|
|
|
|
24 |
% |
|
|
|
|
Our general and administrative expenses consist primarily of personnel-related expenses
and professional fees and other 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.
The $1.4 million, or 23%, and $2.9 million, or 24%, increases in general and administrative
expenses for the three and six month comparative periods, respectively, were primarily due to
increases in personnel-related expenses due to increases in headcount period over period. We expect
general and administrative expenses to increase as we hire additional staff and incur other
expenses to support the growth of our business and to the extent we spend more on fees for billing
and collections as we process more tests.
Interest and Other Income
Interest and other income was $213,000 and $462,000 for the three and six months ended June
30, 2009, respectively, compared to $448,000 and $1.1 million for the three and six months ended
June 30, 2008, respectively. The $235,000 and $607,000 decreases for the three and six month
comparative periods were primarily due to lower market yields. We expect our interest income may
continue to decrease if the overall decline in interest rates continues.
Interest and Other Expense
Interest and other expense was $34,000 and $86,000 for the three and six months ended June 30,
2009 compared to $106,000 and $239,000 for the three and six months ended June 30, 2008. The
$72,000 and $153,000 decreases for the three and six month comparative periods were primarily due
to lower average balances on our equipment financing notes as we paid them down. We
expect our interest expense to decline as we continue to make payments on our equipment
financing. We do not anticipate using additional equipment financing as a funding source in the
next twelve months.
Income Tax Expense
For the three and six months ended June 30, 2009, we recorded income tax expense of
approximately $180,000 and $390,000, respectively, which was principally comprised of federal
alternative minimum tax and California income tax. The provision for income taxes for the three and
six months ended June 30, 2009 was based on our estimated taxable income for the year. For the
three and six months ended June 30, 2008, we did not record a provision for income taxes because we
estimated and incurred a taxable loss for the year ended December 31, 2008.
22
We intend to maintain a full valuation allowance on our deferred tax assets until sufficient
evidence exists to support the reversal of all or some portion of these allowances. Should the
actual amounts differ from our estimates, the amount of our valuation allowance could be materially
impacted.
Liquidity and Capital Resources
As of June 30, 2009, we had an accumulated deficit of $177.1 million. We have not yet achieved
profitability and anticipate that we will likely incur additional net losses. We cannot provide
assurance as to when, if ever, we will achieve profitability. We expect that our research and
development, selling and marketing and general and administrative expenses will continue to
increase and, as a result, we will need to generate significant product revenues to achieve
profitability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
As of June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments |
|
$ |
55,729 |
|
|
$ |
60,627 |
|
|
$ |
(4,898 |
) |
Working capital |
|
|
50,193 |
|
|
|
56,661 |
|
|
|
(6,468 |
) |
For the six months ended June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
1,062 |
|
|
|
(2,046 |
) |
|
|
3,108 |
|
Investing activities |
|
|
(431 |
) |
|
|
(19,093 |
) |
|
|
18,662 |
|
Financing activities |
|
|
(436 |
) |
|
|
(803 |
) |
|
|
367 |
|
Capital expenditures (included in investing activities above) |
|
|
(1,412 |
) |
|
|
(4,823 |
) |
|
|
3,411 |
|
Sources of Liquidity
At June 30, 2009, we had cash, cash equivalents and short-term investments of $55.7 million
compared to $60.6 million at June 30, 2008. In accordance with our investment policy, available
cash is invested in short-term, low-risk, investment-grade debt instruments. Our cash and
short-term investments are held in a variety of interest-bearing instruments including money market
accounts, obligations of U.S. government-sponsored entities, high-grade corporate bonds and
commercial paper. At June 30, 2009, our holdings of obligations of U.S. government-sponsored
entities consisted entirely of debt securities issued by the Federal Home Loan Bank, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Historically we have financed our operations primarily through sales of our equity securities
and cash received in payment for our tests. At June 30, 2009, we had approximately $46.5 million of
securities available for issuance under a shelf registration statement. Purchases of equipment and
leasehold improvements have been partially financed through capital equipment financing
arrangements. At June 30, 2009 and 2008, we had notes payable under these equipment financing
arrangements of $940,000 and $3.3 million, respectively. Our existing notes payable under these
arrangements are scheduled to be fully paid by November 2010.
Cash Flows
Net cash provided by operating activities was $1.1 million for the six months ended June 30,
2009 compared to net cash used in operating activities of $2.0 million for the six months ended
June 30, 2008. Net cash provided by (used in) operating activities includes net loss adjusted for
certain non-cash items and changes in assets and liabilities. Net cash provided by operating
activities for
the six months ended June 30, 2009 reflected a $1.8 million increase in accrued compensation
expense and a $1.2 million increase in accounts payable, accrued expenses and other liabilities,
partially offset by a $1.8 million decrease in deferred revenues reflecting the recognition of
collaboration contract revenue. Net cash used in operating activities for the six months ended June
30, 2008 reflected a $4.0 million net loss excluding depreciation and stock-based compensation for
the period, a $2.3 million increase in accounts receivable and a $1.5 million increase in prepaid
expenses and other assets, partially offset by the receipt of $3.7 million in advance collaboration
contract payments and a $2.1 million decrease in accrued expenses and other liabilities.
Net cash used in investing activities was $431,000 for the six months ended June 30, 2009,
compared to $19.1 million for the six months ended June 30, 2008. Our investing activities have
consisted predominately of purchases and maturities of marketable securities and capital
expenditures. Net cash used in investing activities for the six months ended June 30, 2009 included
$1.4 million in capital expenditures, partially offset by $1.0 million in net maturities of
short-term investments. Net cash used in investing activities for the six months ended June 30,
2008 included $14.3 million in net purchases of short-term investments, reflecting the investment
of
23
a portion of the cash proceeds from our May 2007 public offering of common stock, and $4.8
million in capital expenditures, primarily for facility expansion and improvements.
Net cash used in financing activities was $436,000 for the six months ended June 30, 2009,
compared to $803,000 for the six months ended June 30, 2008. Our financing activities include
proceeds from the sale of our common stock and payments on our capital equipment financing
arrangements. Net cash used in financing activities for the six months ended June 30, 2009 included
$1.1 million in principal payments on our debt, partially offset by $663,000 in proceeds from the
issuance of our common stock upon the exercise of stock options. Net cash used in financing
activities for the six months ended June 30, 2008 included $1.4 million in principal payments on
our debt, partially offset by $578,000 in proceeds from the issuance of our common stock upon the
exercise of stock options.
Contractual Obligations
The following summarizes our significant contractual obligations as of June 30, 2009 and the
effect those obligations are expected to have on our liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
than 5 |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
Years |
|
|
|
(In thousands) |
|
Notes payable obligations |
|
$ |
987 |
|
|
$ |
879 |
|
|
$ |
108 |
|
|
$ |
|
|
|
$ |
|
|
Non-cancelable operating lease obligations |
|
|
4,421 |
|
|
|
1,582 |
|
|
|
2,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,408 |
|
|
$ |
2,461 |
|
|
$ |
2,947 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our notes payable obligations are for principal and interest payments on capital
equipment financing. In March 2005, we entered into an arrangement to finance the acquisition of
laboratory equipment, computer hardware and software, leasehold improvements and office equipment.
In connection with this arrangement, we granted the lender a security interest in the assets
purchased with these borrowings. We can prepay all, but not part, of the amounts owing under the
arrangement so long as we also pay a 4% premium on the remaining payments. As of June 30, 2009, the
outstanding notes payable principal balance under this arrangement totaled $940,000 at annual
interest rates ranging from 11.01% 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 office space in a nearby location. Both leases expire in
February 2012.
We are required to make a series of annual payments under one of our collaboration agreements
beginning on the date that we commercially launched our Oncotype DX breast cancer test. At June 30,
2009, future annual payments due under this agreement totaled $950,000, of which $475,000 is due
each of the years 2010 and 2011. However, because either party may terminate the agreement upon
thirty days prior written notice, these payments are not included in the table above.
We have also committed to make potential future payments to third parties as part of our
collaboration agreements. Payments under these agreements generally become due and payable only
upon achievement of specific project milestones. Because the achievement of these milestones is
generally neither probable nor reasonably estimable, such commitments have not been included in the
table above.
Off-Balance Sheet Arrangements
As of June 30, 2009, we have no material off-balance sheet arrangements other than the lease
obligations and payments under clinical study agreements discussed above.
24
Operating Capital and Capital Expenditure Requirements
We expect to continue to incur net losses in the future and to make capital expenditures to
keep pace with the expansion of our research and development programs, to scale our commercial
operations, including the commercialization and launch of our Oncotype DX colon cancer test and to
support our international expansion efforts. We expect to spend approximately $6.2 million over the
next twelve months for planned laboratory equipment and other expenditures to support the growth of
our business. It may take years to move any one of a number of product candidates in research
through development and validation to commercialization. We expect that our cash and cash
equivalents will be used to fund working capital and for capital expenditures and other general
corporate purposes, such as licensing technology rights, partnering arrangements for our tests
outside the 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 commercialization efforts, product development, regulatory
requirements, the amount of cash used by operations and progress in reimbursement.
We currently anticipate that our cash, cash equivalents and short-term investments, together
with collections from our Oncotype DX breast cancer test, will be sufficient to fund our operations
and facilities expansion plans for at least the next 12 months. We cannot be certain that our
international expansion, the commercialization of our Oncotype DX colon cancer test or the
development of future tests will be successful or that we will be able to raise sufficient
additional funds to see these activities 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 selling and marketing activities associated with
commercialization of Oncotype DX for colon cancer; |
|
|
|
|
the rate of progress and cost of research and development activities associated with
products in the research and early development phase focused on cancers other than breast
and colon cancer; |
|
|
|
|
the cost of acquiring or achieving access to tissue samples and technologies; |
|
|
|
|
the cost of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; |
|
|
|
|
the effect of competing technological and market developments; |
|
|
|
|
costs related to international expansion; |
|
|
|
|
the cost and delays in product development as a result of any changes in regulatory
oversight applicable to our products or operations; and |
|
|
|
|
the economic and other terms and timing of any contract research arrangements, clinical
study agreements, licensing or other arrangements into which we may enter. |
Until we can generate and maintain sufficient product revenues to finance our cash
requirements, which we may never do, we expect to finance future cash needs primarily through
public or private equity offerings, debt financings, borrowings or strategic collaborations. The
issuance of equity securities may result in dilution to stockholders, or may provide for rights,
preferences or privileges senior to those of our holders of common stock. If we raise funds by
issuing debt securities, these debt securities would have rights, preferences and privileges senior
to those of holders of our common stock. The terms of debt securities or borrowings could impose
significant restrictions on our operations. We do not know whether additional funding will be
available on acceptable terms, if at all. If we are not able to secure additional funding when
needed, we may have to delay, reduce the scope of or eliminate one or more research and development
programs or selling and marketing initiatives. In addition, we may have to work with a partner on
one or more of our product or market development programs, which would lower the economic value of
those programs to our company.
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Recent Accounting Pronouncements
In April 2009, Financial Accounting Standards Board, or FASB, issued three related Staff
Positions: (i) FASB Staff Position 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That
Are Not Orderly, or FSP 157-4, (ii) FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairment, or FSP FAS 115-2 and FAS 124-2, and (iii) FASB
Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments, or FSP FAS 107-1 and APB 28-1, which was effective for interim and annual periods
ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair value of
assets and liabilities under Statement of Financial Accounting Standards No. 157, Fair Value
Measurements, or SFAS 157, in the current economic environment and reemphasizes that the objective
of a fair value measurement remains an exit price. FSP FAS 115-2 and FAS 124-2 modifies the
requirements for recognizing other-than-temporarily impaired debt securities and revises the
existing impairment model for such securities. FSP FAS 107-1 and APB 28-1 enhances the disclosure
of instruments under the scope of SFAS 157 for both interim and annual periods. Our adoption of
these Staff Positions as of June 30, 2009 did not have a material impact on our financial condition
or results of operations.
In May 2009, FASB issued Statement of Financial Accounting Standards No. 165, Subsequent
Events (SFAS 165). SFAS 165 establishes general standards for accounting disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available
to be issued and applies to both interim and annual financial statements. SFAS 165 is effective for
interim or annual financial periods ending after June 15, 2009. Our adoption of SFAS 165 as of
June 30, 2009 did not have a material impact on our financial condition or results of operations.
In June 2009, FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 establishes the FASB Accounting
Standards Codification (Codification) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Certain accounting standards have allowed for the continued
application of superseded accounting standards for transactions that have an ongoing effect in an
entitys financial statements. That superseded guidance has not been included in the Codification,
shall be considered grandfathered, and shall continue to remain authoritative for those
transactions after the effective date of this Statement, which is for financial statements issued
for interim and annual periods ending after September 15, 2009. We do not expect the adoption of
SFAS 168 to have a material impact on our financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to our cash equivalents and marketable securities. The
primary objective of our investment activities is to preserve our capital to fund operations. We
also seek to maximize income from our investments without assuming significant risk. Our investment
policy provides for investments in short-term, low-risk, investment-grade debt instruments. Our
investments in marketable securities, which are comprised primarily of money market funds,
obligations of U.S. Government agencies and government-sponsored entities, high-grade corporate
bonds and commercial paper, are subject to default, changes in credit rating and changes in market
value. Due to recent financial and economic conditions, similar investments have experienced losses
in value and liquidity constraints which differ from historical patterns. These investments are
also subject to interest rate risk and will decrease in value if market rate interest rates
increase.
Our cash, cash equivalents and marketable securities, totaling $55.7 million at June 30, 2009,
did not include any auction preferred stock, auction rate securities or mortgage-backed
investments. We currently do not hedge interest rate exposure, and we do not have any foreign
currency or other derivative financial instruments. The securities in our investment portfolio are
classified as available for sale and are, due to their short-term nature, subject to minimal
interest rate risk. To date, we have not experienced a loss of principal on any of our investments.
Although we currently expect that our ability to access or liquidate these investments as needed to
support our business activities will continue, we cannot ensure that this will not change. We
believe that, if market interest rates were to change immediately and uniformly by 10% from levels
at June 30, 2009, the impact on the fair value of these securities or our cash flows or income
would not be material.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,
or Exchange Act, that are designed to ensure that information required
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to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Our disclosure controls and
procedures have been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in internal control over financial reporting. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
occurred during our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS.
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 six months ended June 30,
2009 and 2008, we incurred net losses of $8.6 million and $10.7 million, respectively. From our
inception in August 2000 through June 30, 2009, we had an accumulated deficit of $177.1 million. To
date, we have not, and we may never, achieve revenues sufficient to offset expenses. We expect to
devote substantially all of our resources to continue to invest in our product pipeline, including
our Oncotype DX breast and colon cancer tests and future products, and our commercial and
laboratory infrastructure. We expect to incur additional losses in the future and we may never
achieve profitability.
We expect to continue to incur significant research and development expenses, which may make it
difficult for us to achieve profitability.
In recent years, we have incurred significant costs in connection with the development of our
Oncotype DX platform. Our research and development expenses were $17.9 million and $13.7 million,
respectively, for the six months ended June 30, 2009 and 2008. We expect our research and
development expense levels to remain high and to continue to increase for the foreseeable future as
we seek to expand the clinical utility of our Oncotype DX breast cancer test and develop new tests.
As a result, we will need to generate significant revenues in order to achieve profitability. Our
failure to achieve profitability in the future could cause the market price of our common stock to
decline.
Declining general economic or business conditions may have a negative impact on our business.
Continuing concerns over inflation, deflation, energy costs, geopolitical issues, the
availability and cost of credit, the Federal stimulus package, Federal budget proposals, the U.S.
mortgage market and a declining real estate market in the U.S. have contributed to increased
volatility and diminished expectations for the global economy and expectations of slower global
economic growth going forward. These factors, combined with volatile oil prices, declining business
and consumer confidence, a declining stock market and increased unemployment, have precipitated an
economic slowdown and recession. If the economic climate in the U.S. does not improve or continues
to deteriorate, our business, including our patient population, our suppliers and our third-party
payors, could be negatively affected, resulting in a negative impact on our product revenues.
If third-party payors, including managed care organizations and Medicare, do not provide
reimbursement or rescind their favorable reimbursement policies for our Oncotype DX tests, our
commercial success could be compromised.
Physicians and patients may decide not to order our Oncotype DX tests unless third-party
payors, such as managed care organizations as well as government payors such as Medicare and
Medicaid, pay a substantial portion of the test price. Reimbursement by a third-party payor may
depend on a number of factors, including a payors determination that tests using our technologies
are:
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not experimental or investigational, |
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medically necessary, |
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appropriate for the specific patient, |
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cost-effective, |
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supported by peer-reviewed publications, and |
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included in clinical practice guidelines. |
There is uncertainty concerning third-party payor reimbursement of any test incorporating new
technology, including our Oncotype DX platform. Several entities conduct technology assessments of
new medical tests and devices and provide the results of their assessments for informational
purposes to other parties. These assessments may be used by third-party payors and health care
providers as grounds to deny coverage for a test or procedure. Although there are a number of
favorable assessments of our Oncotype DX breast cancer test, the test has received negative
assessments in the past and may receive additional negative assessments in the future.
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Since each payor makes its own decision as to whether to establish a policy to reimburse our
test, seeking these approvals is a time-consuming and costly process. To date, we have secured
policy-level reimbursement approval for our Oncotype DX breast cancer test for N- patients from a
number of third-party payors. We cannot be certain that coverage for this test will be provided in
the future by additional third-party payors or that existing reimbursement policies will remain in
place.
Under current Medicare billing rules, claims for Oncotype DX breast cancer tests performed on
Medicare beneficiaries who were hospital inpatients at the time the tumor tissue samples were
obtained and whose tests were ordered less than 14 days from discharge must be incorporated in the
payment that the hospital receives for the inpatient services provided. Medicare billing rules also
require hospitals to bill for the test when ordered for hospital outpatients less than 14 days
following the date of the hospital procedure where the tumor tissue samples were obtained.
Accordingly, we are required to bill individual hospitals for tests performed on Medicare
beneficiaries during these time frames. Because we generally do not have a written agreement in
place with these hospitals to purchase these tests, we may not be paid for our tests or may have to
pursue payment from the hospital on a case-by-case basis. We believe patients coming under this
rule represent approximately 3% of our total testing population. We believe these billing rules may
lead to confusion regarding whether Medicare provides adequate reimbursement for our test, and
could discourage Medicare patients from using our test. Although we are working with Medicare and
Congress, as well as with other diagnostic laboratories to revise or reverse these billing rules,
we have no assurance that Medicare will do so or that Congress will require Medicare to do so, and
we also cannot ensure that hospitals will agree to arrangements to pay us for tests performed on
patients falling under these rules.
Insurers, including managed care organizations as well as government payors such as Medicare
and Medicaid, have increased their efforts to control the cost, utilization and delivery of health
care services. From time to time, Congress has considered and implemented changes in the Medicare
fee schedules in conjunction with budgetary legislation. Further reductions of reimbursement for
Medicare services may be implemented from time to time. Reductions in the reimbursement rates of
other third-party payors have occurred and may occur in the future. These measures have resulted in
reduced payment rates and decreased test utilization for the clinical laboratory industry.
Following the reporting of clinical studies to support the use of our Oncotype DX breast
cancer test in patients with N+, ER+ disease, we experienced an increase in usage for N+ patients.
We may not be able to obtain reimbursement coverage for our test for breast cancer patients who are
N+, ER+ that is similar to the coverage we have obtained for early-stage N-, ER+ patients. In
addition, we may not be able to obtain reimbursement coverage for any other new test or test
enhancement we may develop in the future.
If we are unable to obtain reimbursement approval from private payors and Medicare and
Medicaid programs for our tests, or if the amount reimbursed is inadequate, our ability to generate
revenues from our tests 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 or other payors stop providing reimbursement or decrease the amount of reimbursement for
our test, our revenues could decline.
For the three and six months ended June 30, 2009, payments from the administrator for Medicare
accounted for 18% and 19% of our product revenues, respectively,
compared to 22% and 23%, respectively, for the
same periods in 2008. Payments from United HealthCare Insurance Company accounted for 8% of our
product revenues for each of the three and six months ended June 30, 2009 compared to 12% and 13%, respectively,
for the same periods in 2008. In the future, it is possible that these or other third-party payors
that provide reimbursement for our test may suspend, revoke or discontinue coverage at any time, or
may reduce the reimbursement rates payable to us. Any such actions could have a negative impact on
our revenues.
If FDA were to begin regulating our test, we could incur substantial costs and time delays
associated with meeting requirements for pre-market clearance or approval or we could experience
decreased demand for or reimbursement of our tests.
Clinical laboratory tests like ours are regulated under CLIA, as administered through CMS, as
well as by applicable state laws. Diagnostic kits that are sold and distributed through interstate
commerce are regulated as medical devices by FDA. Clinical laboratory tests that are developed and
validated by a laboratory for its own use are called laboratory developed tests, or LDTs. Most LDTs
are not currently subject to FDA regulation, although reagents or software provided by third
parties and used to perform LDTs may be subject to regulation. We believe that Oncotype DX is not a
diagnostic kit and also believe that it is an LDT. As a result, we believe Oncotype DX should not
be subject to regulation under established FDA policies. The container we provide for collection
and transport of tumor samples from a pathology laboratory to our laboratory may be a medical
device subject to FDA regulation but is currently exempt from pre-market review by FDA.
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In January 2006, we received a letter from FDA regarding our Oncotype DX breast cancer test
inviting us to meet with FDA to discuss the nature and appropriate regulatory status of and the
least burdensome ways that we may fulfill any FDA pre-market review requirements that may apply. In
September 2006, FDA issued draft guidance on a new class of tests called In Vitro Diagnostic
Multivariate Index Assays, or IVDMIAs. Under this draft guidance, our test 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 PMAs, and pre-market notification,
or 510(k), submissions for pharmacogenetic and other human genetic tests, whether testing is for
single markers or for multiple markers simultaneously (multiplex tests).
In addition, the Secretary of the Department of Health and Human Services, or HHS, requested
that its Advisory Committee on Genetics, Health and Society make recommendations about the
oversight of genetic testing. A final report was published in April 2008. If the reports
recommendations for increased oversight of genetic testing were to result in further regulatory
burdens it could have a negative impact on our business and could delay the commercialization of
tests in development.
We cannot provide any assurance that FDA regulation, including pre-market review, will not be
required in the future for our tests, either through new enforcement policies adopted by FDA or new
legislation enacted by Congress. It is possible that legislation will be enacted into law and may
result in increased regulatory burdens for us to continue to offer our tests.
If pre-market review is required, our business could be negatively impacted until such review
is completed and clearance to market or approval is obtained, and FDA could require that we stop
selling our test pending pre-market clearance or approval. If our test is allowed to remain on the
market but there is uncertainty about our test, if it is labeled investigational by FDA, or if
labeling claims FDA allows us to make are very limited, orders or 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 our tests if we determine that doing so would be appropriate.
Should any of the reagents obtained by us from vendors and used in conducting our 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 our
Oncotype DX breast cancer test or marketing our colon cancer test or any other new test, those
trials could lead to delays or failure to obtain necessary regulatory approval, which could cause
significant delays in commercializing any future products and harm our ability to become
profitable.
If FDA decides to regulate our tests, it may require additional pre-market clinical testing
prior to submitting a regulatory notification or application for commercial sales. If we are
required to conduct pre-market clinical trials, whether using prospectively acquired samples or
archival samples, delays in the commencement or completion of clinical testing could significantly
increase our test development costs and delay commercialization. Many of the factors that may cause
or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to
delay or denial of regulatory clearance or approval. The commencement of clinical trials may be
delayed due to insufficient patient enrollment, which is a function of many factors, including the
size of the patient population, the nature of the protocol, the proximity of patients to clinical
sites and the eligibility criteria for the clinical trial.
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We may find it necessary to engage contract research organizations to perform data collection
and analysis and other aspects of our clinical trials, which might increase the cost and complexity
of our trials. We may also depend on clinical investigators, medical institutions and contract
research organizations to perform the trials properly. If these parties do not successfully carry
out their contractual duties or obligations or meet expected deadlines, or if the quality,
completeness or accuracy of the clinical data they obtain is compromised due to the failure to
adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended,
delayed or terminated. Many of these factors would be beyond our control. We may not be able to
enter into replacement arrangements without undue delays or considerable expenditures. If there are
delays in testing or approvals as a result of the failure to perform by third parties, our research
and development costs would increase, and we may not be able to obtain regulatory clearance or
approval for our test. In addition, we may not be able to establish or maintain relationships with
these parties on favorable terms, if at all. Each of these outcomes would harm our ability to
market our test, or to become profitable.
Complying with numerous regulations pertaining to our business is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties.
We are subject to CLIA, a federal law that regulates clinical laboratories that perform
testing on specimens derived from humans for the purpose of providing information for the
diagnosis, prevention or treatment of disease. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the United States by mandating specific standards in the
areas of personnel qualifications, administration, and participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. We have a current
certificate of accreditation under CLIA to perform testing. To renew this certificate, we are
subject to survey and inspection every two years. Moreover, CLIA inspectors may make random
inspections of our clinical reference laboratory.
We are also required to maintain a license to conduct testing in California. California laws
establish standards for day-to-day operation of our clinical reference laboratory, including the
training and skills required of personnel and quality control. Because we receive specimens from
New York State, our clinical reference laboratory is required to be licensed by New York. New York
law also mandates proficiency testing for laboratories licensed under New York state law,
regardless of whether or not such laboratories are located in New York. Moreover, several other
states require that we hold licenses to test specimens from patients in those states. Other states
may have similar requirements or may adopt similar requirements in the future. Finally, we may be
subject to regulation in foreign jurisdictions as we seek to expand international distribution of
our 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 our test, which would
limit our revenues and harm our business. If we were to lose our license in New York or in other
states where we are required to hold licenses, we would not be able to test specimens from those
states.
We are subject to other regulation by both the federal government and the states in which we
conduct our business, including:
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Medicare billing and payment regulations applicable to clinical laboratories; |
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the federal Medicare and Medicaid Anti-kickback Law and state anti-kickback prohibitions; |
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the federal physician self-referral prohibition, commonly known as the Stark Law, and the
state equivalents; |
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the federal Health Insurance Portability and Accountability Act of 1996; |
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the Medicare civil money penalty and exclusion requirements; and |
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the federal civil and criminal False Claims Act and state equivalents. |
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.
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Our financial results depend on sales of one test, our Oncotype DX breast cancer test, and we
will need to generate sufficient revenues from this and other tests to run our business.
For the foreseeable future, we expect to derive substantially all of our revenues from sales
of one test, our Oncotype DX breast cancer test. We have been selling this test since January 2004.
While we currently expect to commercialize a test for colon cancer in early 2010, there can be no
assurance that we will be successful in doing so. 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
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 our test 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.
Commercialization of our Oncotype DX colon cancer test will require significant effort and
expense on our part, and our commercialization efforts may not be successful.
Commercialization of our Oncotype DX colon cancer test will require significant effort and
expense on our part. For example, we will need to expand our clinical reference laboratory
capabilities, internal quality assurance and information technology systems and processes to
accommodate processing of more than one type of test. In addition, we will need to obtain CLIA
certification and some state permits before we may conduct a second type of test at our clinical
reference laboratory. We will also need to educate physicians, patients and payors about the
benefits and cost-effectiveness of our Oncotype DX colon cancer test and to establish reimbursement
arrangements for this test with payors. We will be required to implement additional customer
service and billing processes and procedures to handle a second test, and we may need to hire
additional scientific, technical and other personnel to support the commercialization process. We
cannot assure you that our commercialization efforts will be successfully implemented, that our
educational efforts will result in sufficient physician or patient demand or that we will be able
to obtain adequate reimbursement for our colon cancer test. If we fail to successfully
commercialize our Oncotype colon cancer test, our reputation could be harmed and our future
prospects and our business could suffer.
New test development involves a lengthy and complex process, and we may be unable to
commercialize any of the tests we are currently developing.
We have multiple tests in early development and devote considerable resources to research and
development. For example, we are conducting early development studies in colon cancer for stage III
patients, prostate, renal cell and lung cancers. There can be no assurance that our technologies
will be capable of reliably predicting the recurrence of cancers other than breast cancer with the
sensitivity and specificity necessary to be clinically and commercially useful, or that our colon
cancer test will result in a commercially successful product. In addition, before we can develop
diagnostic tests for new cancers and commercialize any new products, we will need to:
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conduct substantial research and development; |
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conduct validation studies; |
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expend significant funds; and |
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develop and scale our laboratory processes to accommodate different tests. |
This product development process involves a high degree of risk and takes several years. Our
product development efforts may fail for many reasons, including:
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failure of the product at the research or development stage; |
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difficulty in accessing archival tissue samples, especially tissue samples with known
clinical results; or |
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lack of clinical validation data to support the effectiveness of the product. |
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
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resources repeating clinical trials, which would adversely impact the timing for generating
potential revenues from those product candidates. In addition, as we develop products, we will have
to make significant investments in product development, marketing and selling resources. If a
clinical validation study fails to demonstrate the prospectively defined endpoints of the study, we
might choose to abandon the development of the product or product feature that was the subject of
the clinical trial, which could harm our business.
If we are unable to support demand for our tests, our business may suffer.
We have added a second shift at our clinical laboratory facility and will need to ramp up our
testing capacity as our test volume grows. We will need to continue to implement increases in scale
and related processing, customer service, billing and systems process improvements, and to expand
our internal quality assurance program to support testing on a larger scale. We will also need
additional certified laboratory scientists and other scientific and technical personnel to process
higher volumes of our tests. We cannot assure you that any increases in scale, related improvements
and quality assurance will be successfully implemented or that appropriate personnel will be
available. As our colon cancer test and additional products are commercialized, we will need to
bring new equipment on-line, implement new systems, controls and procedures and hire personnel with
different qualifications. Failure to implement necessary procedures or to hire the necessary
personnel could result in higher cost of processing or an inability to meet market demand. There
can be no assurance that we will be able to perform tests on a timely basis at a level consistent
with demand, that our efforts to scale our commercial operations will not negatively affect the
quality of our test results, or that we will be successful in responding to the growing complexity
of our testing operations. If we encounter difficulty meeting market demand or quality standards
for our tests, our reputation could be harmed and our future prospects and our business could
suffer.
We may experience limits on our revenues if physicians decide not to order our test.
If medical practitioners do not order our Oncotype DX breast cancer test, our colon cancer
test once it is commercially available, or any future tests developed by us, we will likely not be
able to create demand for our products in sufficient volume for us to become profitable. To
generate demand, we will need to continue to make oncologists, surgeons and pathologists aware of
the benefits of each type of test through published papers, presentations at scientific conferences
and one-on-one education by our sales force. In addition, we will need to demonstrate our ability
to obtain adequate reimbursement coverage from third-party payors.
Prior to the inclusion of our Oncotype DX breast cancer test in clinical guidelines,
guidelines and practices regarding the treatment of breast cancer often recommended that
chemotherapy be considered in most cases, including many cases in which our test might indicate
that, based on our clinical trial results, chemotherapy would be of little or no benefit.
Accordingly, physicians may be reluctant to order a test that may suggest recommending against
chemotherapy in treating breast cancer. Moreover, our test provides quantitative information not
currently provided by pathologists and it is performed at our facility rather than by the
pathologist in a local laboratory, so pathologists may be reluctant to support our test. These
facts may make it difficult for us to convince medical practitioners to order our test for their
patients, which could limit our ability to generate revenues and our ability to achieve
profitability.
We may experience limits on our revenues if patients decide not to use our test.
Some patients may decide not to use our Oncotype DX breast cancer test due to its price, part
or all of which may be payable directly by the patient if the applicable payor denies reimbursement
in full or in part. Even if medical practitioners recommend that their patients use our test,
patients may still decide not to use our test, either because they do not want to be made aware of
the likelihood of recurrence or they wish to pursue a particular course of therapy regardless of
test results. Additionally, the current economic slowdown could negatively impact patients,
resulting in loss of healthcare coverage, delayed medical checkups or inability to pay for a
relatively expensive test. If only a small portion of the patient population decides to use our
test, we will experience limits on our revenues and our ability to achieve profitability.
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If we are unable to develop products to keep pace with rapid technological, medical and
scientific change, our operating results and competitive position would be harmed.
In recent years, there have been numerous advances in technologies relating to the diagnosis
and treatment of cancer. For example, technologies in addition to ours now reportedly permit
measurement of gene expression in fixed paraffin embedded, or FPE, tissue specimens. New
chemotherapeutic or biologic strategies are being developed that may increase survival time and
reduce toxic side effects. These advances require us to continuously develop new products and
enhance existing products to keep pace with evolving standards of care. Our tests 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 tests to new treatments, then sales of our test could
decline, which would harm our revenues.
Our rights to use technologies licensed from third parties are not within our control, and we may
not be able to sell our products if we lose our existing rights or cannot obtain new rights on
reasonable terms.
We license from third parties technology necessary to develop our products. For example, we
license technology from Roche that we use to analyze genes for possible inclusion in our tests and
that we use in our clinical reference laboratory to conduct our 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 technologies to commercialize future products. Our business may suffer
if these licenses terminate, if the licensors fail to abide by the terms of the license or fail to
prevent infringement by third parties, if the licensed patents or other rights are found to be
invalid or if we are unable to enter into necessary licenses on acceptable terms. Companies that
attempt to replicate our tests could be set up in countries that do not recognize our intellectual
property. Such companies could send test results into the United States and therefore reduce sales
of our tests.
If we are unable to maintain intellectual property protection, our competitive position could be
harmed.
Our ability to compete and to achieve and maintain profitability is impacted by our ability to
protect our proprietary discoveries and technologies. We currently rely on a combination of patent
applications, copyrights, trademarks, and confidentiality, material data transfer, license and
invention assignment agreements to protect our intellectual property rights. We also rely upon
trade secret laws to protect unpatented know-how and continuing technological innovation. Our
intellectual property strategy is intended to develop and maintain our competitive position.
Patents may be granted to us jointly with other organizations, and while we may have a right of
first refusal, 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 June 30, 2009, we had four issued patents in the U.S. covering genes and methods that
are components of the Oncotype DX breast cancer test, one of which was issued jointly to us and to
the National Surgical Adjuvant Breast and Bowel Project, or NSABP, and one European patent for
methods used to determine gene expression. Our pending patent applications may not result in issued
patents, and we cannot assure you that our issued patents or any patents that might ultimately be
issued by the U.S. Patent and Trademark Office will protect our technology. Any patents that may be
issued to us might be challenged by third parties as being invalid or unenforceable, or third
parties may independently develop similar or competing technology that avoids our patents. We
cannot be certain that the steps we have taken will prevent the misappropriation and use of our
intellectual property, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
From time to time, the United States Supreme Court, other federal courts, the U.S. Congress or
the U.S. Patent and Trademark Office may change the standards of patentability and any such changes
could have a negative impact on our business. In addition, competitors may develop their own
versions of our test in countries where we did not apply for patents or where our patents have not
issued and compete with us in those countries, including encouraging the use of their test by
physicians or patients in other countries.
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We may face intellectual property infringement claims that could be time-consuming and costly to
defend and could result in our loss of significant rights and the assessment of treble damages.
We have received notices of claims of infringement or misuse of other parties proprietary
rights in the past and may from time to time receive additional notices. Some of these claims may
lead to litigation. We cannot assure you that we will prevail in such actions, or that other
actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us
of third-party patents and trademarks or the validity of our patents, will not be asserted or
prosecuted against us. We may also initiate claims to defend our intellectual property.
Intellectual property litigation, regardless of outcome, is expensive and time-consuming, could
divert managements attention from our business and have a material negative effect on our
business, operating results or financial condition. If there is a successful claim of infringement
against us, we may be required to pay substantial damages (including treble damages if we were to
be found to have willfully infringed a third partys patent) to the party claiming infringement,
develop non-infringing technology, stop selling our test or using technology that contains the
allegedly infringing intellectual property or enter into royalty or license agreements that may not
be available on acceptable or commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on a timely basis could harm our
business. In addition, revising our test to include the non-infringing technologies would require
us to re-validate our test, which would be costly and time-consuming. Also, we may be unaware of
pending patent applications that relate to our test. Parties making infringement claims on future
issued patents may be able to obtain an injunction that would prevent us from selling our test or
using technology that contains the allegedly infringing intellectual property, which could harm our
business.
It is possible that a third party or patent office might take the position that one or more
patents or patent applications constitute prior art in the field of genomic-based diagnostics. In
such a case, we might be required to pay royalties, damages and costs to firms who own the rights
to these patents, or we might be restricted from using any of the inventions claimed in those
patents.
If we are unable to compete successfully, we may be unable to increase or sustain our revenues or
achieve profitability.
Our principal competition comes from existing diagnostic methods used by pathologists and
oncologists. These methods have been used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment and kits or reagents to local
pathology laboratories represent another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more readily than tests like ours that are
performed outside the pathology laboratory. In addition, few diagnostic methods are as expensive as
our Oncotype DX breast cancer test.
We also face competition from many public and private companies that offer products or have
conducted research to profile genes, gene expression or protein expression in breast cancer, such
as Celera Corporation, Clarient Diagnostic Services, Agendia B.V., Applied Genomics,
bioTheranostics, Exagen Diagnostics and University Genomics. Commercial laboratories with strong
distribution networks for diagnostic tests, such as Genzyme Corporation, Laboratory Corporation of
America Holdings and Quest Diagnostics Incorporated, may become competitors. Other potential
competitors include companies that develop diagnostic tests such as Bayer Diagnostics, a division
of Siemens AG, Roche Diagnostics, a division of F. Hoffmann-La Roche Ltd, and Veridex LLC, a
Johnson & Johnson company, 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 Oncotype DX breast cancer test is considered relatively expensive for a diagnostic test.
Effective July 1, 2009, we increased the list price of our test from $3,820 to $3,975, and we may
raise prices in the future. This could impact reimbursement of and demand for our test. 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 tests, 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
35
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 clinical partners, or
if other laboratories or our competitors secure access to these samples before us, our ability to
research, develop and commercialize future products will be limited or delayed.
If we cannot maintain our current clinical collaborations and enter into new collaborations, our
product development could be delayed.
We rely on and expect to continue to rely on clinical collaborators to perform a substantial
portion of our clinical trial functions. If any of our collaborators were to breach or terminate
its agreement with us or otherwise fail to conduct the contracted activities successfully and in a
timely manner, the research, development or commercialization of the products contemplated by the
collaboration could be delayed or terminated. If any of our collaboration agreements are
terminated, or if we are unable to renew those agreements on acceptable terms, we would be required
to seek alternatives. We may not be able to negotiate additional collaborations on acceptable
terms, if at all, and these collaborations may not be successful.
In the past, we have entered into clinical trial collaborations with highly regarded
organizations in the cancer field including, for example, NSABP. Our success in the future depends
in part on our ability to enter into agreements with other leading cancer organizations. This can
be difficult due to internal and external constraints placed on these organizations. Some
organizations may limit the number of collaborations they have with any one company so as to not be
perceived as biased or conflicted. Organizations may also have insufficient administrative and
related infrastructure to enable collaborations with many companies at once, which can extend the
time it takes to develop, negotiate and implement a collaboration. Additionally, organizations
often insist on retaining the rights to publish the clinical data resulting from the collaboration.
The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and
obtaining reimbursement for a test such as ours, and our inability to control when, if ever,
results are published may delay or limit our ability to derive sufficient revenues from any product
that may result from a collaboration.
From time to time we expect to engage in discussions with potential clinical collaborators
which may or may not lead to collaborations. However, we cannot guarantee that any discussions will
result in clinical collaborations or that any clinical studies which may result will be enrolled or
completed in a reasonable time frame or with successful outcomes. Once news of discussions
regarding possible collaborations are known in the medical community, regardless of whether the
news is accurate, failure to announce a collaboration agreement or the entitys announcement of a
collaboration with an entity other than us 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 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
36
discovery, development and sales programs. All of our employees are at-will employees, which
means that either we or the employee may terminate their employment at any time.
If our sole laboratory facility becomes inoperable, we will be unable to perform our test and our
business will be harmed.
We do not have redundant clinical reference laboratory facilities outside of Redwood City,
California. Redwood City is situated near earthquake fault lines. Our facility and the equipment we
use to perform our tests would be costly to replace and could require substantial lead time to
repair or replace. The facility may be harmed or rendered inoperable by natural or man-made
disasters, including earthquakes, flooding and power outages, which may render it difficult or
impossible for us to perform our tests for some period of time. The inability to perform our tests
or the backlog of tests that could develop if our facility is inoperable for even a short period of
time may result in the loss of customers or harm our reputation, and we may be unable to regain
those customers in the future. Although we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient to cover all of our potential
losses and may not continue to be available to us on acceptable terms, if at all.
In order to rely on a third party to perform our tests, we could only use another facility
with established state licensure and CLIA accreditation under the scope of which Oncotype DX tests
could be performed following validation and other required procedures. We cannot assure you that we
would be able to find another CLIA-certified facility willing to comply with the required
procedures, that this laboratory would be willing to perform the tests for us on commercially
reasonable terms, or that it would be able to meet our quality standards. In order to establish a
redundant clinical reference laboratory facility, we would have to spend considerable time and
money securing adequate space, constructing the facility, recruiting and training employees, and
establishing the additional operational and administrative infrastructure necessary to support a
second facility. We may not be able, or it may take considerable time, to replicate our testing
processes or results in a new facility. Additionally, any new clinical reference laboratory
facility opened by us would be subject to certification under CLIA and licensed by several states,
including California and New York, which could take a significant amount of time and result in
delays in our ability to begin operations.
We are dependent on our information technology and telecommunications systems, and any failure of
these systems could harm our business.
We depend on information technology, or IT, and telecommunications systems for significant
aspects of our operations. In addition, our third-party billing and collections provider is
dependent upon telecommunications and data systems provided by outside vendors and information it
receives from us on a regular basis. These IT and telecommunications systems support a variety of
functions, including test processing, sample tracking, quality control, customer service and
support, billing and reimbursement, research and development activities, and our general and
administrative activities. Failures or significant downtime of our IT or telecommunications systems
or those used by our third-party service providers could prevent us from processing tests,
providing test results to physicians, billing payors, processing reimbursement appeals, handling
patient or physician inquiries, conducting research and development activities, and managing the
administrative aspects of our business. Any disruption or loss of IT or telecommunications systems
on which critical aspects of our operations depend could have an adverse effect on our business and
our product revenues.
Changes in healthcare policy could increase our costs and impact sales of and reimbursement for
our tests.
Healthcare policy has been a subject of extensive discussion in the executive and legislative
branches of the federal and many state governments. We developed our commercialization strategy for
our tests based on existing healthcare policies. 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 impact the sales of our tests, increase costs and divert managements
attention. For example, in 1989, the U.S. Congress passed federal self-referral prohibitions
commonly known as the Stark Law, significantly restricting, regulating and changing laboratories
relationships with physicians. In addition, sales of our tests outside of the U.S. makes us subject
to foreign regulatory requirements, which may also change over time. We cannot predict what
changes, if any, will be proposed or adopted or the effect that such proposals or adoption may have
on our business, financial condition and results of operations.
Several proposals to reform the system of health care delivery in the U.S. are currently being
considered by the federal and state governments. Some of the reforms call for a government
sponsored health plan. A number of states are also contemplating significant reform of their
healthcare policies. A proposal for additional government-funded health care could subject
expenditures for health care to governmental budget constraints and limits on spending. We cannot
predict what healthcare policy reforms, if any, will be adopted or the effect that such adoption
may have on our business, financial condition and results of operations.
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We rely on a limited number of suppliers or, in some cases, a sole supplier, for some of our
laboratory instruments and materials and may not be able to find replacements in the event our
suppliers no longer supply that equipment or those materials.
We rely solely on Applied Biosystems, a division of Life Technologies Corporation, to supply
some of the laboratory equipment on which we perform our tests. We periodically forecast our needs
for laboratory equipment and enter into standard purchase orders with Applied Biosystems based on
these forecasts. We believe that there are relatively few equipment manufacturers other than
Applied Biosystems that are currently capable of supplying the equipment necessary for our Oncotype
DX platform. Even if we were to identify other suppliers, there can be no assurance that we will be
able to enter into agreements with such suppliers on a timely basis on acceptable terms, if at all.
If we should encounter delays or difficulties in securing from Applied Biosystems the quality and
quantity of equipment we require for our tests, we may need to reconfigure our test 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 tests could lead to the filing of product liability claims
if someone were to allege that our tests failed to perform as it was designed. We may also be
subject to liability for errors in the test results we provide to physicians or for a
misunderstanding of, or inappropriate reliance upon, the information we provide. For example,
physicians sometimes order our Oncotype DX breast cancer test for patients who do not have the same
specific clinical attributes indicated on the report form as those for which the test provides
clinical experience information from validation studies. It is our practice to offer medical
consultation to physicians ordering our test for such patients, including ER- breast cancer
patients. A product liability or professional liability claim could result in substantial damages
and be costly and time consuming for us to defend. Although we believe that our existing product
and professional liability insurance is adequate, we cannot assure you that our insurance would
fully protect us from the financial impact of defending against product liability or professional
liability claims. Any product liability or professional liability claim brought against us, with or
without merit, could increase our insurance rates or prevent us from securing insurance coverage in
the future. Additionally, any product liability lawsuit could cause injury to our reputation,
result in the recall of our products, or cause current clinical partners to terminate existing
agreements and potential clinical partners to seek other partners, any of which could impact our
results of operations.
If we use biological and hazardous materials in a manner that causes injury, we could be liable
for damages.
Our activities currently require the controlled use of potentially harmful biological
materials, hazardous materials and chemicals and may in the future require the use of radioactive
compounds. We cannot eliminate the risk of accidental contamination or injury to employees or third
parties from the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for any resulting damages, and any liability could
exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject
on an ongoing basis to federal, state and local laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste products. The cost of compliance with
these laws and regulations may become significant and could negatively affect our operating
results.
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International expansion of our business may expose us to business, regulatory, political,
operational, financial and economic risks associated with doing business outside of the United
States.
Our business strategy contemplates international expansion, including establishing direct
sales and physician outreach and education capabilities outside of the United States and expanding
our relationship with distributors. In February 2009, we established a subsidiary in Geneva,
Switzerland and we may establish operations in other countries in the future. Doing business
internationally involves a number of risks, including:
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multiple, conflicting and changing laws and regulations such as tax laws, export and
import restrictions, employment laws, regulatory requirements and other governmental
approvals, permits and licenses; |
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failure by us or our distributors to obtain regulatory approvals for the use of our test
in various countries; |
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difficulties in staffing and managing foreign operations; |
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complexities associated with managing multiple payor reimbursement regimes or self-pay
systems; |
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logistics and regulations associated with shipping tissue samples, including
infrastructure conditions and transportation delays; |
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limits in our ability to penetrate international markets if we are not able to process
tests locally; |
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financial risks, such as longer payment cycles, difficulty collecting accounts receivable
and exposure to foreign currency exchange rate fluctuations; |
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political and economic instability, including wars, terrorism, and political unrest,
outbreak of disease, boycotts, curtailment of trade and other business restrictions; and |
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regulatory and compliance risks that relate to maintaining accurate information and
control over sales and distributors activities that may fall within the purview of the
Foreign Corrupt Practice Act, its books and records provisions or its anti-bribery
provisions. |
Any of these factors could significantly harm our future international expansion and
operations and, consequently, our revenues and results of operations.
Our dependence on distributors for foreign sales of our Oncotype DX breast cancer test could
limit or prevent us from selling our test in foreign markets and from realizing long-term
international revenue growth.
As of June 30, 2009, we had exclusive distribution agreements for our Oncotype DX breast
cancer test in over ten countries outside of the U.S., and we may enter into other similar
arrangements in other countries in the future. We intend to grow our business internationally, and
to do so we may need to attract additional distributors to expand the territories in which we sell
our test. Distributors may not commit the necessary resources to market and sell our test to the
level of our expectations. If current or future distributors do not perform adequately, or we are
unable to locate distributors in particular geographic areas, we may not realize long-term
international revenue growth. Regulatory requirements, costs of doing business outside of the
United States and the reimbursement process in foreign markets may also impact our revenues from
international sales or impact our ability to increase international sales in the future.
We may acquire other businesses or form joint ventures that could harm our operating results,
dilute our stockholders ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of complementary businesses and
assets, as well as technology licensing arrangements. We also may pursue strategic alliances that
leverage our core technology and industry experience to expand our product offerings or
distribution. We have no experience with respect to acquiring other companies and limited
experience with respect to the formation of 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-
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effective basis, or at all, and we may not realize the anticipated benefits of any
acquisition, technology license, strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of our common stock as
consideration, which would dilute the ownership of our stockholders. If the price of our common
stock is low or volatile, we may not be able to acquire other companies for stock. The market price
of our common stock has been particularly volatile during the recent period of upheaval in the
capital markets and world economy, and this excessive volatility may continue for an extended
period of time. Alternatively, it may be necessary for us to raise additional funds for
acquisitions through public or private financings. Additional funds may not be available on terms
that are favorable to us, or at all.
Our marketable securities are subject to risks that could adversely affect our overall financial
position.
We invest our cash in accordance with an established internal policy in instruments which
historically have been highly liquid and carried relatively low risk. However, with recent credit
market conditions, similar types of investments have experienced losses in value or liquidity
issues which differ from their historical pattern. Should a portion of our marketable securities
lose value or have their liquidity impaired, it could adversely affect our overall financial
position by imperiling our ability to fund our operations and forcing us to seek additional
financing sooner than we would otherwise. Such financing, if available, may not be available on
commercially attractive terms.
Our inability to raise additional capital on acceptable terms in the future may limit our ability
to develop and commercialize new tests and technologies and expand our operations
We expect capital outlays and operating expenditures to increase over the next several years
as we expand our infrastructure, commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other things:
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sustain commercialization of our breast cancer test and enhancements to that test |
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fund commercialization of our colon cancer test, enhancements to that test or any future
tests we may develop; |
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increase our selling and marketing efforts to drive market adoption and address
competitive developments; |
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further expand our clinical laboratory operations; |
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expand our technologies into other areas of cancer; |
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expand our research and development activities; |
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acquire or license technologies; and |
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finance capital expenditures and general and administrative expenses. |
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;
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changes in regulatory policies or laws that affect our operations. |
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If we raise funds by issuing equity securities, dilution to our stockholders could result. Any
equity securities issued also may provide for rights, preferences or privileges senior to those of
holders of our common stock. If we raise funds by issuing debt securities, these debt securities
would have rights, preferences and privileges senior to those of holders of our common stock, and
the terms of the debt securities issued could impose significant restrictions on our operations. If
we raise funds through collaborations and licensing arrangements, we might be required to
relinquish significant rights to our technologies or products, or grant licenses on terms that are
not favorable to us. The credit markets and the financial services industry have been experiencing
a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse
or sale of various financial institutions and an unprecedented level of intervention from the
United States federal government. These events have generally made equity and debt financing more
difficult to obtain. Accordingly, additional equity or debt financing might not be available on
reasonable terms, if at all. If adequate funds are not available, we may have to scale back our
operations or limit our research and development activities.
We must implement additional and expensive finance and accounting systems, procedures and
controls as we grow our business and organization and to satisfy public company reporting
requirements, which will increase our costs and require additional management resources.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002
and the related rules and regulations of the Securities and Exchange Commission. Compliance with
Section 404 of the Sarbanes-Oxley Act and other requirements has increased our costs and required
additional management resources. We will need to continue to implement additional finance and
accounting systems, procedures and controls as we grow our business and organization and to satisfy
existing reporting requirements. If we fail to maintain or implement adequate controls, if we are
unable to complete the required Section 404 assessment as to the adequacy of our internal control
over financial reporting in future Form 10-K filings, or if our independent registered public
accounting firm is unable to provide us with an unqualified report as to the effectiveness of our
internal control over financial reporting in future Form 10-K filings, our ability to obtain
additional financing could be impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and in the accuracy of our periodic
reports filed under the Exchange Act. A lack of investor confidence in the reliability and accuracy
of our public reporting could cause our stock price to decline.
41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on June 8, 2009, the stockholders:
|
1. |
|
Elected the persons listed below to serve as
directors of Genomic Health, each for a one-year term
or until their successors are elected and qualified. |
|
|
2. |
|
Approved the Amended and Restated Genomic Health, Inc. 2005 Stock Incentive Plan. |
|
|
3. |
|
Ratified the selection of Ernst & Young LLP as the Companys independent
registered public accounting firm for the year ending December 31, 2009. |
The following sets forth information regarding the results of the voting at the Annual
Meeting:
Proposal 1. Election of Directors
|
|
|
|
|
|
|
|
|
|
|
Votes |
Nominee |
|
For |
|
Withheld |
Randal W. Scott, Ph.D. |
|
|
26,615,460 |
|
|
|
82,497 |
|
Kimberly J. Popovits |
|
|
26,637,532 |
|
|
|
60,425 |
|
Julian C. Baker |
|
|
26,111,291 |
|
|
|
586,666 |
|
Brook H. Byers |
|
|
26,152,419 |
|
|
|
545,538 |
|
Fred E.
Cohen, M.D., D. Phil. |
|
|
26,641,591 |
|
|
|
56,366 |
|
Samuel D. Colella |
|
|
26,638,591 |
|
|
|
59,366 |
|
Ginger L. Graham |
|
|
26,639,078 |
|
|
|
58,879 |
|
Randall S. Livingston |
|
|
26,639,077 |
|
|
|
58,880 |
|
Woodrow A. Myers, Jr., M.D. |
|
|
26,144,548 |
|
|
|
553,409 |
|
Proposal 2. Approval of the Amended and Restated Genomic Health, Inc. 2005 Stock Incentive Plan
|
|
|
|
|
|
|
Votes |
For |
|
Against |
|
Abstain |
|
Non Votes |
17,248,123
|
|
7,157,944
|
|
7,676
|
|
2,284,214 |
Proposal 3. Appointment of Ernst & Young LLP as the Companys independent registered public
accounting firm
|
|
|
|
|
Votes |
For |
|
Against |
|
Abstain |
26,640,991
|
|
46,177
|
|
10,789 |
42
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1#
|
|
Amended and Restated Genomic
Health, Inc. 2005 Stock Incentive Plan. |
|
|
|
10.2#
|
|
Form of Stock Option Agreement. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1*
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
32.2*
|
|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
# |
|
Indicates management contract or compensatory plan or arrangement. |
|
* |
|
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form
10-Q and will not be deemed filed for purposes of Section 18 of the Exchange Act. |
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
GENOMIC HEALTH, INC.
|
|
Date: August 7, 2009 |
By: |
/s/ Kimberly J. Popovits
|
|
|
|
Kimberly J. Popovits |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: August 7, 2009 |
By: |
/s/ G. Bradley Cole
|
|
|
|
G. Bradley Cole |
|
|
|
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer) |
|
|
44
GENOMIC HEALTH, INC.
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1#
|
|
Amended and Restated Genomic
Health, Inc. 2005 Stock Incentive Plan. |
|
|
|
10.2#
|
|
Form of Stock Option Agreement. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1*
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
32.2*
|
|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
# |
|
Indicates management contract or compensatory plan or arrangement. |
|
* |
|
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form
10-Q and will not be deemed filed for purposes of Section 18 of the Exchange Act. |