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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended:
December 31,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number:
000-51541
GENOMIC HEALTH, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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77-0552594
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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301 Penobscot Drive
Redwood City, California
(Address of principal
executive offices)
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94063
(Zip
Code)
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(650) 556-9300
(Registrants telephone
number, including area code)
Securities registered pursuant
to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered:
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Common Stock, par value $0.0001 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act and Title of Class:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2010, the aggregate market value of voting
and non-voting common stock held by non-affiliates of the
registrant was approximately $206.8 million, based on the
closing price of the common stock as reported on the NASDAQ
Global Market for that date.
There were 29,116,257 shares of the registrants
Common Stock issued and outstanding on February 28, 2011.
DOCUMENTS
INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial
Ownership Reporting Compliance), 11, 12, 13 and 14 of
Part III incorporate by reference information from the
registrants proxy statement to be filed with the
Securities and Exchange Commission in connection with the
solicitation of proxies for the registrants 2011 Annual
Meeting of Stockholders to be held on June 9, 2011.
PART I
This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
When used in this report, the words expects,
anticipates, intends,
estimates, plans, believes,
and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods
and include statements about our expectation that, for the
foreseeable future, a significant amount of our revenues will be
derived from Oncotype DX for breast cancer; the factors that may
impact our financial results; the extent of our net losses and
our ability to achieve sustained 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 reimbursement from third-party payors and
government insurance programs for new tests or in new markets;
our expectations regarding our international expansion and
opportunities, and our expectations regarding revenues from
international sales; our intent to enter into additional foreign
distribution arrangements; the factors we believe to be driving
demand for our tests and our ability to sustain or increase such
demand; our success in increasing patient and physician demand
as a result of our direct sales approach and our sales
forces capacity to sell our tests; plans for, and the
timeframe for the development or commercial launch of, future
tests or enhancements to address different patient populations
of breast or colon cancer, other types of cancer or specific
cancer treatments; the factors that we believe will drive the
establishment of coverage policies; the capacity of our clinical
reference laboratory to process tests and our expectations
regarding capacity; our dependence on collaborative
relationships and the success of those relationships; whether
any tests will result from our collaborations; the applicability
of clinical results to actual outcomes; our estimates and
assumptions with respect to disease incidence; the occurrence,
timing, outcome or success of clinical trials or studies; our
plans with respect to additional development or clinical
studies; our expectations regarding timing of the announcement
or publication of research results; the benefits of our
technology platform; the economic benefits of our tests to the
healthcare system; the ability of our tests to impact treatment
decisions; our beliefs regarding our competitive benefits; our
expectations regarding the ability of our technology to continue
to increase throughput; our expectations regarding our future
technologies and their potential benefits; our belief that
multi-gene analysis provides better analytical information; our
beliefs regarding the benefits of genomic analysis in various
patient populations; our expectations regarding clinical
development processes future tests may follow; our beliefs
regarding the benefits of individual gene reporting; our
expectation that our research and development, general and
administrative and sales and marketing expenses will increase
and our anticipated uses of those funds; our expectations
regarding capital expenditures; our ability to comply with the
requirements of being a public company; our ability to attract
and retain experienced personnel; the adequacy of our product
liability insurance; how we intend to spend our existing cash
and how long we expect our existing cash to last; our
anticipated cash needs and our estimates regarding our capital
requirements and our needs for additional financing; our
expected future sources of cash; our expectations regarding
incurrence of debt; our compliance with federal, state and
foreign regulatory requirements; the potential impact resulting
from the regulation of our tests by the U.S. Food and Drug
Administration, or FDA, and our belief that our tests are
properly regulated under the Clinical Laboratory Improvement
Amendments of 1988, or CLIA; the impact of new or changing
policies, regulation or legislation on our business; our belief
that we have taken reasonable steps to protect our intellectual
property; our strategies regarding filing additional patent
applications to strengthen our intellectual property rights; the
impact of changing interest rates; our beliefs regarding our
unrecognized tax benefits or our valuation allowance; the impact
of accounting pronouncements and our critical accounting
policies, judgments, estimates, models and assumptions on our
financial results; the impact of the economy on our business,
patients and payors; and anticipated trends and challenges in
our business and the markets in which we operate.
Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those expected. These risks and uncertainties
include, but are not limited to, those risks discussed in
Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays
in research and development efforts; the risk that we may not
obtain or maintain reimbursement for our existing tests or any
future tests we may develop; the risk that reimbursement pricing
may change; the risks and
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uncertainties associated with the regulation of our tests by
the FDA; the impact of new legislation or regulations on our
business; our ability to compete against third parties; our
ability to obtain capital when needed; the economic environment;
and our history of operating losses. These forward-looking
statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to update any
forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement
is based.
This report contains statistical data attributable to both
the Mattson Jackson Group, Inc.s CancerMpact database
(November 2010) and the Summary of Globocan 2008 Data
published by the International Journal of Cancer in June 2010,
or data that we derived from these sources. These sources
generally indicate that they believe their information is
reliable but do not guarantee the accuracy and completeness of
their information. Although we believe that the sources are
reliable, we have not independently verified their data..
In this report, all references to Genomic Health,
we, us, or our mean Genomic
Health, Inc.
Genomic Health, the Genomic Health logo, Oncotype, Oncotype
DX and Recurrence Score are trademarks or registered trademarks
of Genomic Health, Inc. We also refer to trademarks of other
corporations and organizations in this report.
Company
Overview
Genomic Health is a molecular diagnostics company focused on the
development and global commercialization of genomic-based
clinical laboratory services that analyze the underlying biology
of cancer, allowing physicians and patients to make
individualized treatment decisions. Our Oncotype DX
platform utilizes quantitative genomic analysis in standard
tumor pathology specimens to provide tumor-specific information,
or the oncotype of a tumor. In January 2004, we
launched our first test for early stage breast cancer patients.
Our Oncotype DX breast cancer test has extensive clinical
evidence validating its ability to predict the likelihood of
breast cancer recurrence and the likelihood of chemotherapy
benefit. We offer the Oncotype DX breast cancer test as a
clinical service, where we analyze the expression levels of 21
genes in tumor tissue samples and provide physicians with a
quantitative gene expression profile expressed as a single
quantitative score, which we call a Recurrence Score. The test
also provides measurements of quantitative gene expression for
estrogen receptor, or ER, progesterone receptor, or PR, and
human epidermal growth factor receptor 2, or HER2, genes, which
are used in the calculation of the Recurrence Score result, in
order to provide additional clinical information.
The Oncotype DX breast cancer test has been extensively
evaluated in thirteen independent studies involving more than
4,000 breast cancer patients, including a large validation study
published in The New England Journal of Medicine in
December 2004 and a chemotherapy benefit study published in the
Journal of Clinical Oncology in May 2006. The American
Society of Clinical Oncologists, or ASCO, and the National
Comprehensive Cancer Network, or NCCN, clinical practice
guidelines include the use of our Oncotype DX breast
cancer test to predict the likelihood of disease recurrence and
the likelihood of chemotherapy benefit for a large portion of
early stage breast cancer patients. As of December 31,
2010, we had received breast cancer test samples from more than
60 countries and established exclusive distribution agreements
for our Oncotype DX breast cancer test with distributors
in 13 countries outside of the United States.
In January 2010, we launched our second product, the Oncotype
DX colon cancer test, the first multigene expression test
developed to assess the risk of recurrence in patients with
stage II disease. We offer the Oncotype DX colon
cancer test as a clinical service, where we analyze the
expression levels of 12 genes in tumor tissue samples and
provide physicians with a Recurrence Score result. For our
Oncotype DX colon cancer test, we used the same rigorous
clinical development strategy and standardized quantitative
technology designed for our Oncotype DX breast cancer
test. We conducted studies of selected genes from four clinical
studies across over 1,800 patient samples in order to
identify clinically useful markers for colon cancer recurrence
and response to chemotherapy. We selected a final set of genes
that have been observed to be statistically significantly
correlated to clinical outcome in stage II colon cancer. We
conducted an independent clinical validation study in
stage II colon cancer for our test, utilizing more than
1,400 patient samples, which demonstrated that the
Oncotype DX colon cancer test can independently predict
individual recurrence risk in stage II colon cancer
patients following surgery. Based on our experience in obtaining
adoption of and reimbursement for our Oncotype DX breast
cancer test, we do
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not expect product revenues from our colon cancer test to
comprise more than 10% of our total revenues for at least the
next year or more.
The Oncotype DX breast and colon cancer tests are
commercially available at list prices of $4,075 and $3,200,
respectively, through our clinical reference laboratory located
in Redwood City, California, which is accredited under the
Clinical Laboratory Improvement Amendments of 1988, or CLIA, and
by the College of American Pathologists, or CAP. As of
December 31, 2010, more than 190,000 Oncotype DX
tests had been delivered for use in treatment planning. Our
headquarters is located in Redwood City, California, and we have
a European subsidiary located in Geneva, Switzerland.
Scientific
Background
Limits
of Existing Approaches for Determining Cancer
Treatments
Cancer is a group of complex molecular diseases characterized by
the uncontrolled growth and spread of abnormal cells resulting
from genetic mutations or damage that can severely disrupt
normal body functions. In 2010, approximately 1.6 million
people in the United States and 12.7 million people
worldwide were diagnosed with cancer. Common types of cancer
include breast, prostate, lung and colon. Cancers are difficult
to treat because each type responds differently, depending upon
the individual and the type and location of the cancer. Cancer
treatment decisions may include whether or not to perform
surgery, whether or not to administer chemotherapy, and whether
or not to utilize other targeted therapies.
To treat cancer effectively, physicians diagnose and gauge the
stage of a patients disease to determine the best course
of therapy. The most common practice used to diagnose cancer is
through pathologic evaluation of tumors under a microscope. For
solid tumors, tumor tissue is typically removed through surgery
or needle biopsy, fixed in a chemical preservative and embedded
in paraffin wax. A pathologist places thin sections of this
fixed paraffin embedded, or FPE, tissue onto glass slides so it
can be studied under a microscope. In many cases, pathologists
also use molecular staining techniques, including
protein-specific staining, to improve the quality of their
diagnosis. After visually examining the sample, the pathologist
judges whether the biopsy contains normal or cancerous cells.
The pathologist may also grade the tumor based on how aggressive
the cancer cells appear under the microscope.
Once a pathologist diagnoses cancer, the patients
physician determines the stage of the cancer based on further
analysis of the patients condition using a variety of
clinical measures, including the tumor pathology grade, size of
the tumor, how deeply the tumor has invaded tissues at the site
of origin and the extent of any invasion into surrounding
organs, lymph nodes or distant sites. Patient history, physical
signs, symptoms and information obtained from other tests are
also evaluated and considered.
Physicians use tumor pathology grade and stage when predicting
whether a cancer will recur, which is the key determinant in
treatment decisions. Because tumor pathology grade and staging
are heavily dependent on visual assessment and human
interpretation, physicians and patients often make treatment
decisions using subjective and qualitative information that may
not reflect the molecular nature of the patients cancer.
As a result, many patients are misclassified as high risk when
they are low risk for recurrence or low risk when they are high
risk for recurrence, resulting in over-treatment for some and
under-treatment for others.
For many cancer patients, chemotherapy is commonly used as a
treatment. Chemotherapy involves the use of highly toxic drugs
to kill cancer cells. It is often given after surgery to kill
remaining cancer cells that could not be physically removed in
order to reduce the risk of disease recurrence. Chemotherapy can
take months to complete and can dramatically impact a
patients quality of life. Patients usually experience a
wide range of acute toxicities, including infection, pain in the
mouth and throat, weight loss, fatigue, hair loss, rashes and
injection site reactions. In addition, long-term effects of
chemotherapy can include cognitive impairment, cardiac tissue
damage, infertility, disease of the central nervous system,
chronic fatigue, secondary malignancies and personality changes.
Overall benefits of chemotherapy vary significantly across
cancer populations, and the benefit of treatment may not always
justify the cost of the therapy or the physical and mental
burden patients endure.
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Use of
Genomics to Understand Cancer
Genomics is the study of complex sets of genes, their expression
and their function in a particular organism. A gene is a set of
instructions or information that is embedded in the DNA of a
cell. For a gene to be turned on or expressed by a
cell, the cell must first transcribe a copy of its DNA sequence
into messenger ribonucleic acid, or RNA, which is then
translated by the cell into protein. Proteins are large
molecules that control most biological processes and make up
molecular pathways, which cells use to carry out their specific
functions.
Genomics can also be used to understand diseases at the
molecular level. Diseases can occur when mutated or defective
genes inappropriately activate or block molecular pathways that
are important for normal biological function. Disease can result
from inheriting mutated genes or from developing mutations in
otherwise normal cells. Such mutations can be the cause of
cancer. The ability to detect a mutation or its functional
results and to understand the process by which the mutation
contributes to disease is crucial to understanding the molecular
mechanisms of a disease.
A common form of genomic analysis is the measurement of gene
expression, or the presence and amount of one or more RNA
sequences in a particular cell or tissue. Mutations may change
the gene expression pattern of a cell as the cell responds to an
altered genetic code. Quantifying the differences in gene
expression has become a common way to study the behavior of an
altered cell. This method allows for the measurement of the
expression of single or multiple genes. These expression levels
can be correlated with disease and clinical outcomes.
Advances in genomic technology have accelerated the rate and
lowered the cost of genomic analysis, including gene expression,
thus providing unprecedented opportunity for clinical utility.
We believe gene expression technology has the potential to
improve the quality of diagnosis and treatment of disease by
arming patients and physicians with an understanding of disease
at a molecular level that is specific to each patient.
Cancer results from alterations in cells caused by the molecular
changes of mutated genes. The behavior of cancer is dependent on
many different genes and how they interact. Cancer is
complicated and it may not be possible to identify a single gene
that adequately signals a more aggressive or less aggressive
type of cancer. The ability to analyze multiple genes expressed
by the tumor provides more valuable information, which enables
individualized cancer assessment and treatment.
The key to utilizing genomics in cancer is identifying specific
sets of genes and gene interactions that are important for
diagnosing different subsets of cancers. Studies can be
performed which link the likelihood of recurrence or response to
therapy to the pattern of gene expression in tumors. These
results can then be used to develop tests that quantify gene
expression of an individuals tumor, allowing physicians to
better understand what treatments are most likely to work for an
individual patient or how likely a cancer is to recur.
Oncotype
DX Platform
Our Oncotype DX platform uses our quantitative molecular
pathology approach to improve cancer treatment decisions. Our
diagnostic approach correlates gene expression to clinical
outcomes and provides an individualized analysis of each
patients tumor. We have built a diagnostic infrastructure
that allows us to move from research into development through to
processing actual patient samples in our clinical reference
laboratory. We have optimized technology for quantitative gene
expression on FPE tissue by developing methods and processes for
screening hundreds of genes at a time using minimal amounts of
tissue. This technology allows us to analyze archived samples of
tissue, retained by hospitals for most cancer patients, to
correlate gene expression analysis with known clinical outcomes,
such as the likelihood of cancer recurrence or progression or
responsiveness to therapy. Once we have established and
validated a test, we can then analyze a patients tumor and
correlate the result to these clinical outcomes.
We believe that our multi-gene analysis, as opposed to
single-gene analysis, provides a more powerful approach to
distinguish tumors as being more or less likely to recur or
progress. This information ultimately allows the physician and
patient to choose a course of treatment that is individualized
for each patient.
Our service fits within current clinical practice and
therapeutic protocols, facilitating product adoption. We offer
Oncotype DX as a clinical laboratory test, where we
analyze tumor tissue samples in our clinical reference
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laboratory and provide physicians with genomic information
specific to the patients tumor. We analyze tissues as they
are currently handled, processed and stored by clinical
pathology laboratories. Once a patient is diagnosed and the
treating physician places an order for an Oncotype DX
test, the local pathology laboratory provides us with the tumor
block or thin sections from the biopsy specimen utilized for the
diagnosis. Because the specimens are chemically preserved and
embedded in paraffin wax, they require no special handling and
can be sent by overnight mail to our clinical reference
laboratory. We believe this provides an advantage over tests
using fresh or frozen tissue that generally require special
handling, such as shipping frozen tissue on dry ice.
Once we receive the tumor sample, it is logged in and processed
by our pathology department. Anatomic pathologists perform
quality control by reviewing each sample that comes into our
clinical reference laboratory, ensuring that the indicated
cancer is present and that the specimen is suitable for further
processing. Suitable samples then undergo a process by which RNA
is extracted and purified. We then analyze the resulting
material and produce a report that shows a single quantitative
score, which we call a Recurrence Score, on a continuum between
0-100. The Recurrence Score report is delivered to the treating
physician within 10 to 14 days of our receipt of the tissue
sample. This is within the crucial decision window after the
tumor has been surgically removed and before the patient and the
treating physician discuss additional treatment options. The
continuous range of scores differentiates Oncotype DX
tests from other tests that predict only high or low risk by
providing an individualized level of risk. The higher the
Recurrence Score, the more aggressive the tumor and the more
likely it is to recur. The lower the Recurrence Score, the less
aggressive the tumor and the less likely it is to recur. The
Recurrence Score result, along with other data and tests that
physicians obtain, forms the basis for the treatment decision.
We believe our service provides information that has the
following benefits:
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Improved Quality of Treatment Decisions. We
believe our approach to genomic-based cancer analysis improves
the quality of cancer treatment decisions by providing an
individualized analysis of each patients tumor that is
correlated to clinical outcome. Our approach represents a
substantial departure from existing approaches to treatment that
often use subjective, anatomic and qualitative factors to
determine treatments. Oncotype DX has been shown in
clinical studies to classify many patients into recurrence risk
categories different from classifications based primarily on
tumor pathology grade and stage. Thus, our solution enables
patients and physicians to make more informed decisions about
treatment risk-benefit considerations and, consequently, design
an individualized treatment plan.
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Improved Economics of Cancer Care. We believe
that improving the quality of treatment decisions can result in
significant economic benefits. For example, in early stage
breast cancer, our data shows that many patients are
misclassified as high or low risk under existing treatment
guidelines. Many low risk patients misclassified as high risk
receive toxic and expensive chemotherapy treatment regimens.
Chemotherapy and related costs may exceed $20,000, as compared
to the Oncotype DX breast cancer tests list price
of $4,075. On the other hand, some high risk breast cancer
patients misclassified as low risk are not provided chemotherapy
treatment, possibly necessitating future treatment costing up to
$50,000 or more if the cancer recurs.
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Oncotype
DX Breast Cancer Test
In 2010, approximately 280,000 people in the United States
and 1.4 million people worldwide were diagnosed with breast
cancer, including ductal carcinoma in situ, or DCIS. Following
diagnosis, a physician determines the stage of the breast cancer
by examining the following:
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the pathology of the tumor,
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the size of the tumor,
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nodal status, referred to as node positive, or N+, where the
tumor has spread to the lymph nodes, and node negative, or N-,
where the tumor has not spread to the lymph nodes, and
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the extent to which the cancer has spread to other parts of the
body.
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Breast cancer tumors are classified as stage
0, I, II, III or IV. Stage 0, which includes
DCIS, generally refers to a pre-invasive tumor with reduced risk
of recurrence. DCIS is typically not treated with chemotherapy
but may be
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treated with lumpectomy or mastectomy, followed by radiation
therapy and hormonal therapy. Stage I and II are generally
referred to as early stage breast cancer, and stage III
and IV are generally referred to as late stage breast
cancer. Prior to the inclusion of our Oncotype DX breast
cancer test in clinical guidelines, standard treatment
guidelines weighed the stage of the cancer and additional
factors to predict cancer recurrence and determine treatment
protocol such as:
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the presence or absence of estrogen receptors, referred to as
estrogen receptor positive, or ER+, where estrogen receptors are
present, and estrogen receptor negative, or ER-, where estrogen
receptors are not present,
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the abundance of human epidermal growth factor receptor-type 2,
or HER2, genes or protein in the tumor,
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the age of the patient, and
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the histological type and grading of the tumor as reported by
the pathologist.
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Because these diagnostic factors have limited capability to
predict future recurrence and chemotherapy benefit, and some are
subjective, a large percentage of early stage breast cancer
patients were classified as high risk under these guidelines. As
a consequence, the use of chemotherapy became standard practice
in stage I and II patients even though the benefit to this
patient group as a whole is small. Most early stage breast
cancer patients have N-, ER+ tumors. These patients have been
demonstrated to respond well to hormonal therapy, such as
tamoxifen. Identifying which of these patients will further
benefit from chemotherapy was a difficult decision under
previous guidelines. A National Surgical Adjuvant Breast and
Bowel Project, or NSABP, study published by The New England
Journal of Medicine in December 2004 demonstrated that the
incremental survival benefit of chemotherapy in N-, ER+ patients
also treated with tamoxifen is only 4%. Our test is designed to
help identify those patients with aggressive tumors who are most
likely to benefit from chemotherapy and to identify those
patients with less aggressive tumors who may receive minimal
clinical benefit from chemotherapy.
In breast cancer, we developed our gene panel by narrowing the
field of approximately 25,000 human genes down to 250
cancer-related genes through review of existing research
literature and computer analysis of genomic databases. We
evaluated the 250 genes in three independent clinical studies to
identify a 21-gene panel whose composite gene expression profile
can be represented by a breast cancer Recurrence Score. Our
clinical validation study with the NSABP Study B-14 population,
published by The New England Journal of Medicine in
December 2004, demonstrated that the breast cancer Recurrence
Score correlated with an individuals likelihood of distant
recurrence within 10 years of diagnosis. Moreover, our
study with the NSABP B-20 population, published in the
Journal of Oncology in May 2006, demonstrated that the
breast cancer Recurrence Score also correlates with the
likelihood of chemotherapy benefit.
Clinical
Utility and Health Economic Benefit
Node
Negative, Estrogen Receptor Positive (N-, ER+)
In December 2007, eight studies were presented at the
San Antonio Breast Cancer Symposium, or SABCS, reinforcing
the clinical utility of our Oncotype DX breast cancer
test. Three of the studies assessing the impact of our test on
treatment decisions concluded that use of the test resulted in
fewer recommendations for and less use of chemotherapy,
demonstrating the actionable nature of our Oncotype DX
breast cancer test in its ability to help reduce unnecessary use
of chemotherapy. In September 2008, the Journal of Clinical
Oncology published clinical results suggesting that the
Oncotype DX breast cancer Recurrence Score result
provides additional prognostic information in patients with
early stage breast cancer beyond that derived from Adjuvant!
Online, an online tool that evaluates clinical variables to help
physicians and patients assess the risks and benefits of getting
additional therapy after surgery. In October 2008, The
American Journal of Surgery published clinical results from
a study of N-, ER+ patients indicating that our test
significantly changed treatment recommendations versus standard
measures alone.
In January 2010, the Journal of Clinical Oncology
published a study showing knowledge of a patients
breast cancer Recurrence Score result changed approximately 30%
of treatment decisions, and a separate study demonstrating that
our test significantly predicts local or regional breast cancer
recurrence. In December 2010, we presented three studies at the
SABCS supporting the clinical utility of our breast cancer test
for N-, ER+ patients,
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including a meta-analysis of seven studies demonstrating a
consistent and large impact of the Recurrence Score result on
breast cancer adjuvant treatment decisions, an analysis showing
that the Recurrence Score result used alone remains the
recommended method to predict relative chemotherapy benefit in
N-, ER+ disease, and a study demonstrating that patient age
alone does not capture differences in underlying individual
tumor biology as the Recurrence Score result does.
Single
Gene Reporting (ER, PR, HER2)
We began providing quantitative gene expression reporting for ER
and PR genes with the Oncotype DX breast cancer test
Recurrence Score report in February 2008 and for HER2 in
September 2008. We believe that reporting individual gene scores
in addition to the Recurrence Score result may have additional
utility in predicting outcomes for specific therapies or disease
subtypes. For example, a quantitative ER score may be a
clinically useful predictor of tamoxifen benefit based on our
clinical studies of the NSABP Study B-14 population. In June
2008, the Journal of Clinical Oncology published results
of a study demonstrating the utility of our Oncotype DX
breast cancer test in measuring gene expression for ER and PR
status, indicating that quantitative reverse transcription
polymerase chain reaction, or RT-PCR, a well-established
technology that we license, is a reliable method for determining
hormone receptor status in breast cancer. At the September 2008
ASCO Breast Cancer Symposium, we presented results from two
studies supporting the use of our breast cancer test in
assessing HER2 status.
Node
Positive, Estrogen Receptor Positive (N+, ER+)
Many patients diagnosed with N+ breast cancer may not benefit
from chemotherapy or may have other health issues that increase
the risk of chemotherapy treatment. Results from studies of our
Oncotype DX breast cancer test in N+ patients utilizing
tumor samples from chemotherapy treated patients (anthracycline
plus cytoxin or anthracycline plus taxotere), completed in
collaboration with the Eastern Cooperative Oncology Group, or
ECOG, and Aventis, Inc., a member of the sanofi-aventis group,
or Aventis, were presented at the June 2007 ASCO annual meeting.
The results of these studies suggest that the Recurrence Score
result provides accurate recurrence risk information for
patients with ER+ breast cancer, regardless of whether they are
N+ or N-. At SABCS in December 2007, we presented results from a
second study conducted in conjunction with the Southwest
Oncology Group, or SWOG, suggesting that our test may be useful
in predicting survival without disease recurrence and
chemotherapy benefit for N+ patients, in addition to N-, ER+
patients.
At SABCS in December 2009, we presented two studies reinforcing
the clinical utility of our Oncotype DX breast cancer
test for N+ patients. One study, completed in collaboration with
SWOG and published in Lancet Oncology in January 2010,
reinforced the conclusion that chemotherapy does not appear to
benefit patients with either 1-3 or 4 or more positive nodes for
disease-free survival over 10 years, if their tumors had a
low Recurrence Score result. A separate abstract presented at
SABCS in December 2009 demonstrated that physicians who use our
Oncotype DX breast cancer test for N+ patients frequently
change their treatment decisions based on Recurrence Score
results, with an overall reduction in chemotherapy treatment
recommendations.
Aromatase
Inhibitors
We conducted studies of our Oncotype DX breast cancer
test with clinical samples from postmenopausal women with breast
cancer who were treated with aromatase inhibitors. Aromatase
inhibitors and tamoxifen are both used as standard treatment for
early stage ER+ breast cancer patients. In March 2010, the
Journal of Clinical Oncology published results from a
European study using our test to analyze tumor samples from over
1,200 patients in the ATAC (Arimedix, Tamoxifen, Alone or
in Combination) trial, which established the wide use of
aromatase inhibitors for adjuvant treatment of postmenopausal
women with hormone receptor-positive breast cancer. The study
demonstrated that, along with other standard measures such as
tumor size, our Oncotype DX breast cancer test
contributes independently to provide a more complete picture of
prognosis for N- and N+ patients treated with aromatase
inhibitors.
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ER
Assessment
In September 2009, we began accepting all appropriate breast
cancer tumor samples, regardless of immunohistochemistry, or
IHC, ER status, to facilitate assessment of uncertain ER status
by either IHC or RT-PCR testing. An Oncotype DX breast
cancer Recurrence Score result is generated if the ER status is
positive by IHC or positive by RT-PCR, even if the sample was
negative by IHC when submitted, allowing more patients to
benefit from the information provided by our test.
Health
Economic Benefits
We sponsor third-party studies conducted by researchers
affiliated with academic institutions to examine the health
economic implications of our Oncotype DX breast cancer
test. Two such studies, one of which was published in The
American Journal of Managed Care in May 2005, demonstrated
that our test provided a more accurate classification of risk
than the NCCN guidelines in place at that time as measured by
10 year distant recurrence-free survival. Based on these
results, a model was designed to forecast quality-adjusted
survival and expected costs, or the net present value of all
costs of treatment until death, if our Oncotype DX breast
cancer test was used in patients classified as low risk or high
risk by NCCN guidelines. The model, when applied to a
hypothetical population of 100 patients with the
demographic and disease characteristics of the patients entered
in the NSABP Study B-14, demonstrated an increase to
quality-adjusted survival in this population of 8.6 years
and a reduction in projected aggregate costs of approximately
$200,000. Furthermore, the model showed that as the expected
costs and anticipated toxicity of chemotherapy regimens
increase, the use of the Recurrence Score result to identify
which patients would benefit from chemotherapy should lead to
larger reductions in projected overall costs. According to this
model, if all early stage breast cancer patients and their
physicians used our test and acted on the information provided
by the breast cancer Recurrence Score result, there would be
significant economic benefit to the healthcare system.
International
Studies
We have completed or initiated multiple international clinical
studies intended to support the adoption of our Oncotype
DX breast cancer test outside of the United States. During
the second quarter of 2009, we initiated our first Taiwanese
Chinese population study in collaboration with the National
Taiwan University. In September 2009, we announced results of a
study confirming that the distribution of Recurrence Score
results in European and Middle Eastern breast cancer patients is
consistent with those observed in patients in the United States.
In November 2010, Breast Cancer Research Treatment
published positive results from a Japanese economic
evaluation study demonstrating that the inclusion of our
Oncotype DX breast cancer test in Japans social
health insurance benefit package would be cost effective. In
December 2010, we presented positive preliminary results from a
large adjuvant breast cancer trial with clinical researchers in
Germany using our test to select patients for study
randomization and treatment. We are also conducting or have
initiated clinical utility trials of our breast cancer test with
clinical researchers in Australia, Canada, Japan, Mexico, Spain
and the United Kingdom.
Oncotype
DX Colon Cancer Test
In 2010, approximately 105,000 people in the United States
and 870,000 people worldwide were diagnosed with colon
cancer. Following diagnosis, a physician determines the stage of
the colon cancer by examining the following:
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the pathology of the tumor,
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the size of the tumor,
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nodal status, referred to as node positive, or N+, where the
tumor has spread to the lymph nodes, and node negative, or N-,
where the tumor has not spread to the lymph nodes, and
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the extent to which the cancer has spread to other parts of the
body.
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Colon cancer tumors are classified as stage
0, I, II, III or IV. Stage 0 generally refers to
a pre-invasive tumor with reduced risk of recurrence that is
typically not treated with chemotherapy but may be treated with
surgery.
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Standard treatment guidelines weigh the stage of the cancer and
additional factors to predict cancer recurrence and determine
treatment protocol including:
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the age of the patient,
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the histological type and grading of the tumor as reported by
the pathologist,
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the level of mismatch repair, or MMR, also known as
microsatellite instability, or MSI, and
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T-stage, an index of tumor penetration through the bowel.
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In 2010, stage II colon cancer affected approximately
30,000 people in the United States, and the current
treatment paradigm is unclear. The decision to treat patients
with chemotherapy following surgery is based on an assessment of
how likely their disease is to recur. However, accurately
identifying those patients with high recurrence risk is a
critical issue for physicians because the available markers to
determine likelihood of disease recurrence are limited,
resulting in both over-treatment and under-treatment of patients
following surgery. About a third of patients receive adjuvant
chemotherapy; however, research indicates that only 2% to 4% of
patients benefit from this treatment, which has significant
associated toxicity. While there are existing clinical markers
associated generally with higher risk in colon cancer patients,
there was no clinically validated genomic test available that
predicted the likelihood of recurrence for individual patients
prior to the availability of our test.
In developing our colon cancer product, we used the same
rigorous clinical development strategy and standardized
quantitative technology designed for our Oncotype DX
breast cancer test. We developed our gene panel by identifying
761 cancer-related genes through review of existing research
literature and computer analysis of genomic databases. The NSABP
conducted three development studies and the Cleveland Clinic
Foundation conducted one development study, which we funded,
analyzing the 761 candidate genes in over 1,800 patients
with stage II colon cancer. Detailed analysis of gene
expression and colon cancer recurrence was performed to identify
specific genes with the potential to predict the likelihood of
cancer recurrence and response to chemotherapy. The 761
candidate genes were also examined to determine whether they
would be useful beyond other key variables including tumor
stage, tumor grade, lymph nodes examined and MMR/MSI.
We selected a final set of 12 genes which were then
independently evaluated in a validation study of over 1,400
stage II colon cancer patients from the Quick and Simple
and Reliable, or QUASAR, randomized study of adjuvant
chemotherapy in the United Kingdom. This international,
multi-center randomized trial examined the recurrence risk and
the benefit associated with 5-fluorouracil/leucovorin, or
5FU/LV, adjuvant chemotherapy. Gene expression was quantified by
RT-PCR from manually microdissected FPE primary colon cancer
tissue, and recurrence-free interval, disease-free survival and
overall survival were analyzed.
In May 2009, we announced positive results from this clinical
validation study. The study met its primary endpoint to predict
the likelihood of recurrence for stage II colon cancer
patients following surgery and showed that the colon cancer
Recurrence Score provided additional independent clinical value
beyond standard measures of risk. The study showed that the
colon cancer Recurrence Score result maintained significance,
independent of MMR/MSI, T-stage, nodes examined, grade and
lymphovascular invasion. We believe this addresses an unmet need
in the treatment of colon cancer by validating a clinical tool
that can significantly improve risk assessment in the treatment
planning for stage II colon cancer patients. T4 stage and
MMR deficiency were also independently beneficial in predicting
recurrence, and together comprise approximately 25 percent
of patients. T4 stage indicates growth of the tumor through the
wall of the bowel and is associated with higher risk of
recurrence. MMR/MSI is an alteration observed in approximately
15 percent of colon cancers. Patients with tumors
identified as MSI high, or MMR deficient, are considered to be
at low risk of recurrence. We expect that the publication of the
results from this study, planned for 2011, will help to support
adoption of and reimbursement for our Oncotype DX colon
cancer test. Based upon our experience in obtaining adoption and
reimbursement for our breast cancer test, we do not expect
product revenues from our colon cancer test to comprise more
than 10% of our total revenues for at least the next year or
more.
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Clinical
Utility
We believe the Oncotype DX colon cancer Recurrence Score
result will provide the greatest clinical utility for treatment
selection in the more than 70 percent of patients for whom
MMR/MSI and T-stage are uninformative. At the January 2010 ASCO
Gastrointestinal Cancers Symposium, we presented results from a
study demonstrating that the Oncotype DX colon cancer
Recurrence Score result and number of nodes examined are
independent predictors of recurrence in stage II colon
cancer and both should be considered when assessing individual
recurrence risk in this patient population. We are conducting a
second stage II colon cancer recurrence study and plan to
report results in the first half of 2011. In June 2010, we
initiated the first treatment decision impact study of our colon
cancer test and are enrolling patients. We are planning
additional studies to support the clinical utility and assess
the treatment impact and health economic benefit of our
Oncotype DX colon cancer test.
Product
Development
We developed our Oncotype DX tests using the following
multi-phased clinical development program that we are also using
to develop future products for breast, colon and other cancers:
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Research phase. Prior to development, we may
conduct exploratory studies to identify genes, pathways or new
disease opportunities of potential scientific interest.
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Early development phase. In this phase, we
establish a product definition and development plan and select
from the approximately 25,000 genes in the human genome to
identify candidate genes. To date, we have compiled a library of
over 3,000 individual gene assays. Typically, we secure access
to archival tumor biopsy samples correlated with clinical data
in order to identify genes that correlate with a specific
clinical outcome.
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Development phase. If early development
studies successfully identify genes, we conduct additional
clinical studies to refine the gene set in the specific patient
population of interest. We select the final gene panel through
statistical modeling of the gene correlation data. With a gene
panel established, we then finalize the remaining assay
parameters.
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Validation phase. Once the gene panel, assay
chemistry, automation and analysis specifications are finalized,
tested and verified, we begin clinical validation. In this
phase, we conduct one or more validation studies with
prospectively designed endpoints to test our candidate gene
panel and the corresponding quantitative expression score. We
are often able to conduct large validation studies using
archived samples with years of clinical outcomes, thus saving
clinical development time.
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Commercialization and product expansion
phase. Once a test is commercialized, we may
perform additional studies designed to support the tests
clinical utility and potentially to broaden its use in
additional patient populations or for additional indications.
These studies may include prospective studies to verify that our
test is changing physician behavior as well as tests of a
commercial product in new populations. In addition, through our
investigator sponsored trial program, we provide physicians with
our tests for use in specific patient populations to be used in
treatment decisions.
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Product
Development Opportunities
Ductal
Carcinoma in Situ (DCIS)
In 2010, approximately 60,000 patients in the United States
and 280,000 patients worldwide were diagnosed with stage 0
breast cancer, including DCIS. We are investigating the utility
of Oncotype DX in patients with DCIS. In early 2010, we
presented positive results from a DCIS breast cancer feasibility
study demonstrating that RNA extraction and RT-PCR technology
can be successfully performed to assess gene expression profiles
from FPE tissues. We plan to evaluate the use of the Oncotype
DX 21-gene breast cancer panel and also seek to identify
other genes that may be used for treatment planning in DCIS. We
are currently conducting a DCIS clinical validation study and
plan to report results in 2011. Depending upon the results of
these studies, we expect to launch a DCIS test that predicts
likelihood of recurrence in late 2011 if the test uses the
existing Oncotype DX 21-gene breast cancer panel, or in
2013 if the test uses other existing or new genes and gene
combinations.
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Other
Breast Cancer Populations
We continue to conduct research and development studies in other
breast cancer populations. At the May 2009 ASCO meeting, we
presented results from a clinical study that summarized the gene
signatures of male patients for whom the Oncotype DX
breast cancer test was used to guide chemotherapy treatment,
indicating that breast cancer in men displays similar gene
signatures to female breast cancer. We also presented a separate
study at the ASCO meeting demonstrating that there were
significant differences in gene expression between hormone
receptor negative, or triple negative, breast cancer compared
with hormone receptor positive disease.
MMR/MSI
Status
The QUASAR clinical validation study demonstrated that MMR/MSI
status, an alteration observed in approximately 15 percent
of colon cancers, was independently beneficial in predicting
colon cancer recurrence. MMR/MSI testing, although not routinely
performed, is currently provided by many pathology laboratories.
In order to advance the incorporation of MMR/MSI testing in
colon cancer treatment decisions, we are planning to provide MMR
test results in 2011.
Stage III
Colon Cancer Recurrence
We are investigating the utility of the Oncotype DX colon
cancer test in stage III colon cancer, which affects over
25,000 patients each year in the United States. At the
January 2010 ASCO Gastrointestinal Cancers Symposium, we
presented study results from an analysis of various biological
similarities and differences between stage II and
stage III colon cancer suggesting the Oncotype DX
colon cancer Recurrence Score result is stage independent, and
that it may also predict recurrence risk in stage III colon
cancer. In June 2010, we presented positive results from an
evaluation of biological similarities and differences between
stage II and stage III colon cancer suggesting the
Oncotype DX colon cancer Recurrence Score result may also
predict recurrence risk in stage III colon cancer. We plan
to continue conducting early development studies to evaluate our
Oncotype DX colon cancer test for treatment planning in
stage III disease. Depending upon the results of these
studies, we expect to launch a test that predicts likelihood of
recurrence in stage III colon cancer in 2013.
Stage II
and III Colon Cancer Chemotherapy Benefit
We are conducting both early development and development studies
to investigate the Oncotype DX colon cancer tests
ability to predict chemotherapy benefit in stage II and
stage III colon cancer patients treated with oxaliplatin.
Depending upon the outcome of these studies, we expect to launch
a test that predicts the benefit of oxaliplatin chemotherapy for
stage II and stage III colon cancer patients in 2013.
Prostate
Cancer
Approximately 900,000 men worldwide were diagnosed with prostate
cancer in 2010. Based upon the results of prostate-specific
antigen, or PSA, testing, biopsies were performed on over
750,000 men in the United States in 2010, and approximately
250,000 of these patients were diagnosed with prostate cancer.
The vast majority of these patients receive aggressive
treatment, including surgery and radiation therapy, and more
than half of these patients suffer incontinence
and/or
impotence after surgery. Less than 10% of patients choose active
surveillance even though, for most of these patients, their
disease will never cause clinical symptoms or death. In December
2010, we presented positive first results from our prostate gene
identification study. The study, which applied the same
RT-PCR
technology used in our Oncotype DX breast and colon
cancer tests, identified 295 genes strongly associated with
clinical recurrence of prostate cancer following radical
prostatectomy. Based on these results, we announced that we are
moving forward with full clinical development and plan to
conduct multiple additional studies. We expect to report full
gene identification results in 2011 and finalize analytical
methods to support a clinical validation study in 2012.
Depending on the results of these studies, we expect to launch a
test in 2014 which, in conjunction with the Gleason score, or
tumor grading, we believe may improve treatment decisions for
prostate cancer patients.
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Renal
Cancer
In 2010, approximately 48,000 people in the United States
and 275,000 people worldwide were diagnosed with renal
cancer. In June 2010, we presented results from our first renal
gene identification study under our collaboration agreement with
Pfizer Inc. for the development of a genomic test to estimate
the risk of recurrence following surgery for patients with stage
I-III renal carcinoma, clear cell type, that has not spread to
other parts of the body. The clear cell type of renal carcinoma
is the most common type of kidney cancer in adults. The study
demonstrated a strong correlation between gene expression and
recurrence risk in this patient population. Based on these
results, we plan to move forward with a clinical validation
study and to continue to evaluate a potential renal cancer
product depending upon results of validation studies for
specific therapies.
Other
Cancers
We continue to review and evaluate programs in other cancers. In
2010, approximately 170,000 people in the United States and
1.4 million people worldwide were diagnosed with non-small
cell lung cancer. We have conducted early development studies
for a test to predict risk of recurrence for early stage
non-small cell lung cancer patients. In 2010, approximately
75,000 people in the United States and 200,000 people
worldwide were diagnosed with melanoma. We have conducted
initial feasibility studies for the development of a test to
predict risk of recurrence in melanoma patients.
Targeted
Cancer Therapeutics
Anti-cancer drugs recently approved by the U.S. Food and
Drug Administration, or FDA, and new anti-cancer drugs in
clinical development are designed to provide more targeted
treatment, which should improve efficacy and reduce side
effects. A need exists to identify those patients who, based on
the genomic profile of their tumors, are most likely to benefit
from these therapies. We believe genomic analysis has the
potential to improve patient selection for these therapies. We
have had a number of discussions with pharmaceutical companies
regarding the use of Oncotype DX or our clinical
development platform to identify subsets of patients more likely
to respond to a particular therapy.
EGFR
inhibitor response test
We are in the development phase for tests to predict the
likelihood of response to the epidermal growth factor receptor,
or EGFR, inhibitor class of drugs. For example, we entered into
a collaborative agreement with Bristol-Myers Squibb Company and
ImClone Systems Incorporated to develop a genomic test to
predict the likelihood of response to Erbitux in colorectal
cancer. Erbitux is a targeted therapy currently approved for the
treatment of metastatic colorectal cancer. The agreement
provides us commercial rights to diagnostic tests that may
result from the collaboration. In February 2011, the British
Journal of Cancer published results from early studies with
Bristol-Myers Squibb and ImClone, which identified a small
number of genes that could predict response to Erbitux. We may
undertake further studies for the development of an EGFR
inhibitor response test.
Targeted
therapies in breast cancer
We entered into collaborative agreements with Aventis and ECOG
to investigate the ability of gene expression in FPE tissues to
predict the likelihood of response to adjuvant chemotherapy,
including the taxane Taxotere, in patients with early stage
breast cancer and 0-3 involved lymph nodes. The agreements
provide us with commercial rights to diagnostic tests that may
result from the collaboration. Initial study results indicated
that in patients with hormone receptor positive disease who had
a breast cancer Recurrence Score result indicating intermediate
risk of recurrence or above, a number of candidate genes
strongly predicted benefit from treatment with Taxotere. A
genomic classifier predicting differential benefit was
identified and, if validated through additional studies, could
lead to the development of a test to predict the likelihood of
benefit from taxane treatment with a possible product launch in
2014.
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Technology
We utilize existing technologies, such as RT-PCR, and
information technologies and optimize and integrate them into
new processes. We are also incorporating new technologies, such
as high-throughput next generation sequencing, or
NGS, in our research and development laboratory. We expect to
continue to extend the capabilities of the various components of
our process to develop effective products. Our technology allows
us to:
Extract
RNA from FPE-tumor Biopsies
Our product development process requires that we be able to
quantify the relative amounts of RNA in patients FPE
tissue specimens. We have developed proprietary technology,
intellectual property and know-how and are developing new and
improved technologies for optimized and automated methods for
extraction and analysis of RNA from FPE tissue.
Amplify
and Detect Diminished Amounts of RNA Consistently
We currently use RT-PCR as the basis for our quantitative
molecular pathology assays performed in our clinical reference
laboratory. This technology uses polymerase chain reaction, or
PCR, along with fluorescent detection methods to quantify the
relative amount of RNA in a biological specimen. We believe our
technology platform has the following advantages:
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Sensitivity. We have developed protocols for
extracting and quantifying RNA utilizing RT-PCR. Our method for
amplifying small fragmented RNA is designed to allow us in the
future to conduct studies with hundreds to thousands of genes
from 10 micron sections of FPE tissue. The ability to amplify
RNA allows us to maintain a repository of RNA from limited
tissue samples that can be used for later studies.
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Specificity. Our RT-PCR platform is highly
specific because it works only when three different test
reagents, called DNA probes and primers, independently match
each target RNA sequence to be measured. In addition, we have
designed and implemented proprietary software for selecting
optimal probe and primer sequences in an automated,
high-throughput process. The ability to utilize these sequences
allows us to design highly specific assays for closely related
sequences.
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Precision and Reproducibility. The reagents,
materials, instruments and controls in our processes are used by
trained personnel following validated standard operating
procedures. Validation studies have shown that these standard
operating procedures precisely quantify tested RNA with minimal
variability in the assay system across days, instruments and
operators. This enables our clinical reference laboratory to
produce consistently precise and accurate gene expression
results. Our quality control methods for our reagents and
processes, along with our software for automation, sample
tracking, data quality control and statistical analysis, add to
the reproducibility and precision of our test.
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Dynamic Range. Because our RT-PCR platform can
amplify small amounts of RNA in proportion to the amount present
in the sample, we are able to measure RNA levels across as much
as a hundred thousand fold range of differing RNA expression.
Having a broad range of high resolution testing capability
increases the quality of our correlations with clinical outcomes
and therefore the predictive power of our tests.
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Analyze
Thousands of Genes from Small Amounts of Tissue
The methods and know-how we have developed allow us to expand
RT-PCR technology to a scale that enables screening of hundreds
of genes at a time while using minimal amounts of tissue. During
our initial years of operation, we typically screened 48 to 96
genes from a standard FPE tissue sample using RNA from three 10
micron sections of tissue. By 2003, we routinely screened 192
genes from each sample and, by 2004, we screened 384 genes per
sample. We now have the capability to screen up to 768 different
genes per sample without sacrificing the sensitivity,
specificity and reproducibility of RT-PCR. With continued
investment in miniaturization and automation, we believe that
our technology will be capable of continued increases in
throughput.
We are investigating technologies for assaying low liquid
volumes and amplifying trace amounts of RNA in order to develop
products that can evaluate smaller amounts of available tissue,
including prostate biopsies and
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DCIS. We are also developing NGS to be our primary technology
for future gene discovery. NGS technologies parallelize the
sequencing process, producing thousands or millions of sequences
at once. These technologies are intended to provide nucleic acid
sequence information at lower cost than standard methods. We
have created proprietary methods for NGS of FPE tissue nucleic
acids, created bioinformatics programs and infrastructure for
data storage and analysis, and plan to rely on NGS as the basic
source of new biomarker discovery in the future. We expect to
select NGS as our platform for process development in 2012 and
begin using NGS for clinical development in 2013.
Employ
Advanced Information Technology
We have developed computer programs to automate our RT-PCR and
NGS assay processes. We have also developed a laboratory
information management system to track our gene-specific
reagents, instruments, assay processes and the data generated.
Similarly, we have automated data analysis, storage and process
quality control. We use statistical methods to optimize and
monitor assay performance and to analyze data from our early
development and development studies. We are investigating
methods to further automate our workflow by automating the RNA
extraction process.
Commercial
Operations
United
States
Our commercial infrastructure, including our sales force,
managed care group, and patient support network, is critical to
our future success. We are continuing to build a strong domestic
sales, marketing and reimbursement effort by interacting
directly with medical and surgical oncologists, pathologists and
payors. Because oncology is a concentrated specialty, we believe
that a focused marketing organization and specialized sales
force with regional and local experience is necessary in order
to effectively serve the oncology community. We believe our
direct sales approach, targeting oncologists and cancer
surgeons, and our medical education and scientific liaisons,
targeting key opinion leaders, coupled with our plans to
continue to conduct multiple clinical studies with the objective
of having results published in peer-reviewed journals, is the
best approach to increase patient and physician demand and the
number of favorable reimbursement coverage decisions by
third-party payors. Due to significant overlap between breast
and colon oncologists and surgeons, we believe our current sales
force has sufficient capacity to market both our Oncotype
DX breast and colon cancer tests.
We have a managed care department that works with our contract
and reimbursement teams to ensure our tests are being used
effectively. Our call center and patient support network handle
benefits investigation, preauthorization, and precertification
for patients who use our tests. We have the infrastructure, if
needed, to appeal every claim for our tests that is denied by a
third-party payor in order to support the use and encourage
adoption of our tests. In addition, we provide patient education
through our website, material provided to local advocacy groups,
local and national media campaigns and materials provided to
oncologists and surgeons.
All Oncotype DX tests are processed in our clinical
reference laboratory facility in Redwood City, California. Our
current clinical reference laboratory processing capacity is
18,000 tests per calendar quarter. In December 2008, we launched
an online physician portal with enhanced real-time delivery of
patient results to physicians and the capability for placing
Oncotype DX orders online. As test processing for our
Oncotype DX breast and colon cancer tests is essentially
the same, except that the tests utilize different RNA extraction
methods and analyze different genes, we believe that we
currently have sufficient capacity to process both of our tests.
International
We believe our future success is also dependent on our ability
to continue to expand our international commercial presence. We
plan to continue to use essentially the same business model
internationally as we use in the United States, however, there
are significant differences between countries that need to be
considered. For example, different countries may have a public
healthcare system, a combination of public and private
healthcare system or a cash-based payment system. Our initial
commercialization efforts in markets outside the of the
United States have focused on offering products on a
patient self-pay basis and, over time, seeking coverage from
public health systems and private insurance on a country by
country basis. We have sales representatives in certain
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countries outside of the United States. We may decide to work
directly on our own in certain countries while continuing to
utilize distributors in other countries. We established a
European subsidiary in February 2009 and have lead executives
with assignments in the Americas, Europe and Asia to support our
international efforts.
We expect that international sales of our Oncotype DX
tests will be heavily dependent on the availability of
reimbursement. In many countries, governments are primarily
responsible for reimbursing diagnostic tests. Governments often
have significant discretion in determining whether a test will
be reimbursed at all, and if so, how much will be paid. We
expect that it will take several years to establish broad
coverage and reimbursement for our tests in countries outside of
the United States.
Reimbursement
Revenues for clinical laboratory tests may come from several
sources, including commercial third-party payors, such as
insurance companies and health maintenance organizations,
government payors, such as Medicare and Medicaid in the United
States, patient self-pay and, in some cases, from hospitals or
referring laboratories who, in turn, bill third-party payors for
testing. Reimbursement of our Oncotype DX tests by
third-party payors is essential to our commercial success.
Where there is a payor policy, contract or agreement in place,
we bill the third payor, the hospital or referring laboratory as
well as the patient (for deductibles and coinsurance or
copayments, where applicable) in accordance with established
policy terms. Where there is no payor policy in place, we pursue
reimbursement on behalf of each patient on a
case-by-case
basis. Our efforts on behalf of these patients take a
substantial amount of time, and bills may not be paid for many
months, if at all. Furthermore, if a third-party payor denies
coverage after final appeal, it may take a substantial amount of
time to collect from the patient, and we may not be successful.
In determining whether or not Medicare will pay for a test, the
Centers for Medicare and Medicaid Services, or CMS, which
oversees Medicare, can permit third party contractors who
process and pay Medicare claims to make that determination or it
can make a national coverage determination, which will bind all
Medicare contractors. To date, CMS has not issued a national
coverage determination on an Oncotype DX test, and the
local Medicare carrier for California with jurisdiction to
process claims submitted by us decides whether or not and at
what rate Medicare will cover the test when billed by us. In
addition, each state Medicaid program, which pays for services
furnished to the eligible medically indigent, will usually make
its own decision whether or not to cover our Oncotype DX
tests.
Oncotype
DX Breast Cancer Test
We have focused substantial resources on obtaining reimbursement
coverage for our Oncotype DX breast cancer test. We
believe the key factors driving adoption of our Oncotype
DX breast cancer test include our ongoing commercial
efforts, continued publication of peer-reviewed articles on
studies we sponsored, conducted or collaborated on that support
the use and reimbursement of our Oncotype DX breast
cancer test, clinical presentations at major symposia, and the
inclusion of our Oncotype DX breast cancer test in
clinical practice guidelines.
Most national and regional third-party payors in the United
States, along with 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. In June 2009,
the local carrier with jurisdiction for claims submitted by us
for Medicare patients extended its coverage for our breast
cancer test to include ER+ patients with node positive, or N+,
disease (up to three positive lymph nodes). Additionally, some
payors provide policy coverage for the use of our test in ER+
patients with N+ disease, including lymph node micro-metastasis
(greater than 0.2 mm, but not greater than 2.0 mm in size).
However, we may not be able to obtain reimbursement coverage
from other payors for our test for breast cancer patients with
N+, ER+ disease.
Under current Medicare billing rules, claims for Oncotype
DX breast cancer tests performed on Medicare beneficiaries
who were hospital inpatients at the time the tumor tissue
samples were obtained and whose tests were ordered less than
14 days from discharge must be incorporated in the payment
that the hospital receives for the inpatient services provided.
Medicare billing rules also require hospitals to bill for the
test when ordered for hospital outpatients less than
14 days following the date of the hospital procedure where
the tumor tissue samples were
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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 1% of our total breast cancer testing population.
We believe these billing rules may lead to confusion regarding
whether Medicare provides adequate reimbursement for our test,
and could discourage Medicare patients from using our test.
Under recently enacted healthcare reform legislation, Congress
authorized a two year, $100 million demonstration project
under which certain tests subject to the 14 day billing
rule may be billed directly by the laboratory performing the
test rather than the hospital storing the specimen. At this
time, we do not know whether our tests will be eligible for this
demonstration project or, if eligible, whether the conditions
will be favorable for us to participate. We have no assurance
that Medicare will revise or reverse these billing rules to
allow us to bill for these tests, or that Congress will require
Medicare to do so at some point in the future, and we also
cannot ensure that hospitals will agree to arrangements to pay
us for tests performed on patients falling under these rules.
In January 2008, Medi-Cal became the first Medicaid payor to
establish a policy covering our Oncotype DX breast cancer
test. We have also received a limited number of approvals from
other state Medicaid programs.
The majority of our international Oncotype DX breast
cancer test revenues come from patient self-pay, payor
reimbursement through our distributor in Israel and clinical
collaborations in various countries. We have exclusive
distribution agreements for our Oncotype DX breast cancer test
with distributors in 13 countries outside of the United States,
and have established reimbursement arrangements with several
public and private payors and hospitals. We have obtained
coverage for our test in Canada, Ireland, Germany, Greece,
Israel and the United Kingdom. We expect that it will take
several years to establish broad coverage and reimbursement for
our Oncotype DX breast cancer test with payors in
countries outside of the United States.
Oncotype
DX Colon Cancer Test
We expect to continue to focus substantial resources on pursuing
global adoption of and reimbursement for our Oncotype DX
colon cancer test, which we launched in January 2010. We believe
the key factors that will drive adoption of this test include
publication of peer-reviewed articles on the QUASAR clinical
validation study and other studies we sponsored, conducted or
collaborated on that support the use of and reimbursement for
the test, clinical presentations at major symposia and our
ongoing commercial efforts. We are working with public and
private payors and health plans to secure coverage for our colon
cancer test based upon clinical evidence showing the utility of
the test. We may need to hire additional commercial, scientific,
technical and other personnel to support this process.
We have obtained limited reimbursement coverage from third-party
payors for our Oncotype DX colon cancer test. As a new
test, our colon cancer test may be considered investigational by
payors and therefore may not be covered under their
reimbursement policies. Consequently, we intend to pursue
case-by-case
reimbursement and expect that this test will continue to be
reviewed on this basis until policy decisions have been made by
individual payors. We are also working with public and private
payors and health plans to secure coverage for our Oncotype
DX colon cancer test based upon clinical evidence showing
the utility of the test. We believe it may take several years to
achieve reimbursement with a majority of third-party payors for
our colon cancer test. However, we cannot predict whether, or
under what circumstances, payors will reimburse for this test.
Payment
and Coding
Clinical laboratory testing services, when covered by
third-party payors, are paid under various methodologies,
including prospective payment systems and fee schedules. Under
Medicare in the United States, payment is generally made under
the Clinical Laboratory Fee Schedule with amounts assigned to
specific procedure billing codes. Each Medicare carrier
jurisdiction has a fee schedule that establishes the price for
each specific laboratory billing code. The Social Security Act
establishes that these fee schedule amounts are to be adjusted
annually, based upon a formula that incorporates the annual
change in the consumer price index, or CPI, for the prior year
as well as other factors. In addition, the National Limitation
Amount, or NLA, which acts as a ceiling on Medicare
reimbursement, is set at a percentage of the median of all the
carrier fee schedule amounts for each test code.
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In the past, Congress has frequently lowered the percentage of
the median used to calculate the NLA in order to achieve budget
savings. Currently, the NLA ceiling is set at 74% of the medians
for established tests and 100% of the median for diagnostic
tests for which no limitation amount was established prior to
2001. Thus, no Medicare carrier can pay more than the NLA amount
for any specific code.
There is no specific Current Procedural Terminology, or CPT,
procedure code or group of codes to report the Oncotype
DX breast or colon cancer tests. The tests are reported
under a non-specific, unlisted procedure code, which is subject
to manual review of each claim. With regard to Medicares
current reimbursement of our Oncotype DX breast cancer
test, we were informed that, under the local coverage
determination, claims are to be paid consistent with the average
allowed reimbursement rate for claims that were billed and
processed to completion as of September 30, 2005. This
reimbursement rate remains in effect as of the date of this
report, but is subject to review and adjustment.
A Healthcare Common Procedure Coding System, or HCPCS, code has
been issued effective January 1, 2006 for the Oncotype
DX breast cancer test that some private third-party payors
in the United States may accept on claims for the test. However,
Medicare will not accept this HCPCS code. The American Medical
Association, which has the copyright on the CPT coding system,
has announced the formation of a Molecular Pathology Work Group
charged with developing a new coding framework for
non-infectious disease molecular pathology testing and
recommending new codes to the CPT Editorial Panel, which
determines new and revised codes and descriptors. It is possible
that The Molecular Pathology Work Group will propose and the CPT
Editorial Panel will adopt a new code or codes to report
Oncotype DX tests, and these codes could result in higher
or lower reimbursement rates for our tests. Whether or not we
obtain a specific CPT code for our tests, there can be no
assurance that an adequate payment rate will continue to be
assigned to the tests.
On several occasions, including negotiations over the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003,
Congress has considered imposing a 20% co-insurance amount on
clinical laboratory services, which would require beneficiaries
to pay a portion of the cost of their clinical laboratory
testing. Although that requirement has not been enacted at this
time, Congress could decide to impose such an obligation at some
point in the future. If so, these additional co-insurance
payments for our Oncotype DX tests could be difficult to
collect.
Competition
We believe that we compete primarily on the basis of:
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the value of the quantitative information our Oncotype DX
platform provides;
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the clinical validation of our Oncotype DX breast cancer
tests ability to predict recurrence and survival, and
demonstration of its ability to predict the likelihood of
chemotherapy benefit;
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the level of reimbursement coverage for our Oncotype DX
breast cancer test;
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the inclusion of our Oncotype DX breast cancer test in
clinical practice guidelines.
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the clinical validation of our Oncotype DX colon cancer
tests ability to predict recurrence and survival;
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our ability to perform clinical studies using archival tissue as
it is currently processed, handled and stored;
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our ability to screen thousands of genes at a time;
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our ability to commercialize products through our clinical
development platform;
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our clinical collaborations with clinical study groups;
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the quality of our clinical reference laboratory, which enables
consistent, reproducible results;
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the level of customer service we provide, both to patients and
health care professionals; and
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our ability to obtain appropriate regulatory approvals in a
timely fashion.
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We believe that we compete favorably with respect to these
factors, although we cannot assure you that we will be able to
continue to do so in the future or that new products that
perform better than our Oncotype DX tests will not be
introduced. We believe that our continued success depends on our
ability to:
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continue to innovate and maintain scientifically advanced
technology;
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successfully market and sell our Oncotype DX tests;
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enhance our Oncotype DX tests to provide information in
response to additional indications;
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continue to validate our tests, especially with respect to
chemotherapy benefit;
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continue to obtain positive reimbursement decisions from payors;
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expand our Oncotype DX platform for use in types of
cancer other than breast and colon;
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continue to expand in countries outside of the United States;
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attract and retain skilled personnel;
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obtain patents or other protection for our products and
technology; and
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obtain and maintain our clinical reference laboratory
accreditations and licenses.
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Our principal competition comes from existing diagnostic methods
used by pathologists and oncologists. These methods have been
used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment
and kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like ours that are performed outside the
pathology laboratory. In addition, few diagnostic methods are as
expensive as our Oncotype DX tests.
We also face competition from companies that offer products or
have conducted research to profile genes, gene expression or
protein expression in breast or colon cancer, including public
companies such as Celera Corporation, GE Healthcare, a business
unit of General Electric Company, Hologic, Inc., Novartis AG,
Myriad Genetics, Inc., Qiagen N.V. and Response Genetics, Inc.,
and many private companies. We face competition from commercial
laboratories with strong distribution networks for diagnostic
tests, such as Laboratory Corporation of America Holdings and
Quest Diagnostics Incorporated. Other potential competitors
include companies that develop diagnostic tests such as Roche
Diagnostics, a division of Roche Holding, Ltd, Siemens AG 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. Additionally, projects related to cancer
genomics have received increased government funding, both in the
United States and internationally. 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 that these products may compete
with ours. In addition, competitors may develop their own
versions of our tests in countries where we did not apply for
patents or where our patents have not issued and compete with us
in those countries, including encouraging the use of their test
by physicians or patients in other countries.
Our Oncotype DX tests are considered relatively expensive
for diagnostic tests. We have changed the list price of our
breast cancer test in the past and we may change prices for our
tests in the future. Any increase or decrease in pricing could
impact reimbursement of and demand for our tests. Many of our
present and potential competitors have widespread brand
recognition and substantially greater financial and technical
resources and development, production and marketing capabilities
than we do. Others may develop lower-priced, less complex tests
that could be viewed by physicians and payors as functionally
equivalent to our tests, which could force us to lower the list
price of our tests and impact our operating margins and our
ability to achieve sustained profitability. Some competitors
have developed tests cleared for marketing by the 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 tests. If we
are unable to compete successfully against current or future
competitors, we may be unable to increase market acceptance for
and sales of our tests, which could prevent us from increasing
or
20
sustaining our revenues or achieving sustained profitability and
could cause the market price of our common stock to decline.
Regulation
United
States
Clinical
Laboratory Improvement Amendments of 1988
As a clinical reference laboratory, we are required to hold
certain federal, state and local licenses, certifications and
permits to conduct our business. Under CLIA, we are required to
hold a certificate applicable to the type of work we perform and
to comply with standards covering personnel, facilities
administration, quality systems and proficiency testing.
We have a current certificate of accreditation under CLIA to
perform testing and are accredited by CAP. To renew our CLIA
certificate, we are subject to survey and inspection every two
years to assess compliance with program standards. The standards
applicable to the testing which we perform may change over time.
We cannot assure that we will be able to operate profitably
should regulatory compliance requirements become substantially
more costly in the future.
If our clinical reference laboratory is out of compliance with
CLIA requirements, we may be subject to sanctions such as
suspension, limitation or revocation of our CLIA certificate, as
well as directed plan of correction, state
on-site
monitoring, civil money penalties, civil injunctive suit or
criminal penalties. We must maintain CLIA compliance and
certification to be eligible to bill for tests provided to
Medicare beneficiaries. If we were to be found out of compliance
with CLIA program requirements and subjected to sanction, our
business could be harmed.
U.S. Food
and Drug Administration
Diagnostic kits that are sold and distributed through interstate
commerce are regulated as medical devices by the FDA. Devices
subject to FDA regulation must undergo pre-market review prior
to commercialization unless the device is of a type exempted
from such review. In addition, manufacturers of medical devices
must comply with various regulatory requirements under the
Federal Food, Drug and Cosmetic Act and regulations promulgated
under that Act, including quality system review regulations,
unless exempted from those requirements for particular types of
devices. Entities that fail to comply with FDA requirements can
be liable for criminal or civil penalties, such as recalls,
detentions, orders to cease manufacturing and restrictions on
labeling and promotion.
Clinical laboratory tests like our Oncotype DX tests are
regulated under CLIA, as administered by CMS, as well as by
applicable state laws. Diagnostic kits that are sold and
distributed through interstate commerce are regulated as medical
devices by the FDA. Clinical laboratory tests that are developed
and validated by a laboratory for its own use, which are
referred to as LDTs, currently are not subject to FDA
regulation, although reagents or software provided by third
parties and used to perform LDTs may be subject to regulation.
We believe that our Oncotype DX tests are not diagnostic
kits and also believe that they are LDTs. As a result, we
believe our tests should not be subject to regulation under
established FDA policies. The container we provide for
collection and transport of tumor samples from a pathology
laboratory to our clinical reference laboratory may be
considered a medical device subject to regulation but is
currently exempt from pre-market review by the FDA.
In January 2006, we received a letter from the FDA regarding our
Oncotype DX breast cancer test inviting us to meet with
the 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, the FDA issued draft guidance on a new class of tests
called In Vitro Diagnostic Multivariate Index
Assays, or IVDMIAs. Under this draft guidance, our
Oncotype DX tests could be classified as either a
Class II or a Class III medical device, which may
require varying levels of FDA pre-market review depending upon
intended use and on the level of control necessary to assure the
safety and effectiveness of the test. In July 2007, the FDA
posted revised draft guidance that addressed some of the
comments submitted in response to the September 2006 draft
guidance. The revised draft guidance included a transition
period of FDA enforcement discretion of up to 18 months
following release of final guidance for currently marketed tests
if the laboratory submits a pre-market review submission within
12 months of the publication of final guidance. The comment
period for this revised guidance expired in October 2007. It is
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unclear whether the FDA will ever issue final guidance on
IVDMIAs or withdraw the draft guidance that was issued in 2007.
In May 2007, the 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, the 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 June 2010, the FDA announced a public meeting to discuss the
agencys oversight of LDTs prompted by the increased
complexity of LDTs and their increasingly important role in
clinical decision making and disease management, particularly in
the context of personalized medicine. The FDA indicated that it
is considering a risk-based application of oversight to LDTs and
that, following public input and discussion, it may issue
separate draft guidance on the regulation of LDTs which may vary
from the previously issued draft guidance on the regulation of
IVDMIAs. The public meeting was held in July 2010 and further
public comments were submitted to the FDA in September 2010. In
November 2010, at a public meeting with the laboratory industry,
an FDA spokesperson indicated that the agency had prepared draft
guidance regarding proposed oversight of LDTs which was under
review for possible issuance.
We cannot provide any assurance that FDA regulation, including
pre-market review, will not be required in the future for our
tests, whether through additional guidance issued by the FDA,
new enforcement policies adopted by the FDA or new legislation
enacted by Congress. Legislative proposals addressing oversight
of genetic testing and LDTs were introduced in the previous two
Congresses and we expect that new legislative proposals will be
introduced in the current Congress that convened in January
2011. It is possible that legislation could be enacted into law
or guidance could be issued by the FDA which may result in
increased regulatory burdens for us to continue to offer our
tests or develop and introduce new 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.
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 the FDA could require
that we stop selling our tests pending pre-market clearance or
approval. If our tests are allowed to remain on the market but
there is uncertainty about our tests, if they are labeled
investigational by the FDA, or if labeling claims the FDA allows
us to make are limited, orders or reimbursement may decline. The
regulatory approval process may involve, among other things,
successfully completing additional clinical trials and
submitting a pre-market clearance notice or filing a PMA
application with the FDA. If pre-market review is required by
the FDA, there can be no assurance that our tests will be
cleared or approved on a timely basis, if at all, nor can there
be assurance that labeling claims will be consistent with our
current claims or adequate to support continued adoption of and
reimbursement for our tests. Ongoing compliance with FDA
regulations would increase the cost of conducting our business,
and subject us to inspection by the FDA and to the requirements
of the FDA and penalties for failure to comply with these
requirements. We may also decide voluntarily to pursue FDA
pre-market review of our tests if we determine that doing so
would be appropriate.
Should any of the reagents obtained by us from vendors and used
in conducting our tests be affected by future regulatory
actions, our business could be adversely affected by those
actions, including increasing the cost of testing or delaying,
limiting or prohibiting the purchase of reagents necessary to
perform testing.
Health
Insurance Portability and Accountability Act
Under the federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, HHS has issued regulations
to protect the privacy and security of protected health
information used or disclosed by health care
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providers, such as us. HIPAA also regulates standardization of
data content, codes and formats used in health care transactions
and standardization of identifiers for health plans and
providers. Penalties for violations of HIPAA regulations include
civil and criminal penalties.
We developed policies and procedures to comply with these
regulations by the respective compliance enforcement dates. The
requirements under these regulations may change periodically and
could have an effect on our business operations if compliance
becomes substantially more costly than under current
requirements.
In addition to federal privacy regulations, there are a number
of state laws governing confidentiality of health information
that are applicable to our operations. New laws governing
privacy may be adopted in the future as well. We have taken
steps to comply with health information privacy requirements to
which we are aware that we are subject. However, we can provide
no assurance that we are or will remain in compliance with
diverse privacy requirements in all of the jurisdictions in
which we do business. Failure to comply with privacy
requirements could result in civil or criminal penalties, which
could have a materially adverse impact on our business.
Federal
and State Physician Self-referral Prohibitions
We are subject to the federal physician self-referral
prohibitions, commonly known as the Stark Law, and to similar
restrictions under Californias Physician Ownership and
Referral Act, commonly known as PORA. Together these
restrictions generally prohibit us from billing a patient or any
governmental or private payor for any test when the physician
ordering the test, or any member of such physicians
immediate family, has an investment interest in or compensation
arrangement with us, unless the arrangement meets an exception
to the prohibition.
Both the Stark Law and PORA contain an exception for referrals
made by physicians who hold investment interests in a publicly
traded company that has stockholders equity exceeding
$75 million at the end of its most recent fiscal year or on
average during the previous three fiscal years, and which
satisfies certain other requirements. In addition, both the
Stark Law and PORA contain an exception for compensation paid to
a physician for personal services rendered by the physician. We
have compensation arrangements with a number of physicians for
personal services, such as speaking engagements and specimen
tissue preparation. We have structured these arrangements with
terms intended to comply with the requirements of the personal
services exception to Stark and PORA.
However, we cannot be certain that regulators would find these
arrangements to be in compliance with Stark, PORA or similar
state laws. We would be required to refund any payments we
receive pursuant to a referral prohibited by these laws to the
patient, the payor or the Medicare program, as applicable.
Sanctions for a violation of the Stark Law include the following:
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denial of payment for the services provided in violation of the
prohibition;
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refunds of amounts collected by an entity in violation of the
Stark Law;
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a civil penalty of up to $15,000 for each service arising out of
the prohibited referral;
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possible exclusion from federal healthcare programs, including
Medicare and Medicaid; and
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a civil penalty of up to $100,000 against parties that enter
into a scheme to circumvent the Stark Laws prohibition.
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These prohibitions apply regardless of the reasons for the
financial relationship and the referral. No finding of intent to
violate the Stark Law is required for a violation. In addition,
under an emerging legal theory, knowing violations of the Stark
Law may also serve as the basis for liability under the Federal
False Claims Act.
Further, a violation of PORA is a misdemeanor and could result
in civil penalties and criminal fines. Finally, other states
have self-referral restrictions with which we have to comply
that differ from those imposed by federal and California law.
While we have attempted to comply with the Stark Law, PORA and
similar laws of other states, it is possible that some of our
financial arrangements with physicians could be subject to
regulatory scrutiny at some point in the future, and we cannot
provide assurance that we will be found to be in compliance with
these laws following any such regulatory review.
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Federal
and State Anti-kickback Laws
The Federal Anti-kickback Law makes it a felony for a provider
or supplier, including a laboratory, to knowingly and willfully
offer, pay, solicit or receive remuneration, directly or
indirectly, in order to induce business that is reimbursable
under any federal health care program. A violation of the
Anti-kickback Law may result in imprisonment for up to five
years and fines of up to $250,000 in the case of individuals and
$500,000 in the case of organizations. Convictions under the
Anti-kickback Law result in mandatory exclusion from federal
health care programs for a minimum of five years. In addition,
HHS has the authority to impose civil assessments and fines and
to exclude health care providers and others engaged in
prohibited activities from Medicare, Medicaid and other federal
health care programs.
Actions which violate the Anti-kickback Law or similar laws may
also involve liability under the Federal False Claims Act, which
prohibits the knowing presentation of a false, fictitious or
fraudulent claim for payment to the U.S. Government.
Actions under the Federal False Claims Act may be brought by the
Department of Justice or by a private individual in the name of
the government.
Although the Anti-kickback Law applies only to federal health
care programs, a number of states, including California, have
passed statutes substantially similar to the Anti-kickback Law
pursuant to which similar types of prohibitions are made
applicable to all other health plans and third-party payors.
Both Californias fee-splitting statute, Business and
Professions Section 650, and its Medi-Cal anti-kickback
statute, Welfare and Institutions Code Section 14107.2,
have been interpreted by the California Attorney General and
California courts in substantially the same way as HHS and the
courts have interpreted the Anti-kickback Law. A violation of
Section 650 is punishable by imprisonment and fines of up
to $50,000. A violation of Section 14107.2 is punishable by
imprisonment and fines of up to $10,000.
Federal and state law enforcement authorities scrutinize
arrangements between health care providers and potential
referral sources to ensure that the arrangements are not
designed as a mechanism to induce patient care referrals and
opportunities. The law enforcement authorities, the courts and
Congress have also demonstrated a willingness to look behind the
formalities of a transaction to determine the underlying purpose
of payments between health care providers and actual or
potential referral sources. Generally, courts have taken a broad
interpretation of the scope of the Anti-kickback Law, holding
that the statute may be violated if merely one purpose of a
payment arrangement is to induce future referrals.
In addition to statutory exceptions to the Anti-kickback Law,
regulations provide for a number of safe harbors. If an
arrangement meets the provisions of a safe harbor, it is deemed
not to violate the Anti-kickback Law. An arrangement must fully
comply with each element of an applicable safe harbor in order
to qualify for protection. There are no regulatory safe harbors
to Californias Section 650.
Among the safe harbors that may be relevant to us is the
discount safe harbor. The discount safe harbor potentially
applies to discounts provided by providers and suppliers,
including laboratories, to physicians or institutions where the
physician or institution bills the payor for the test, not when
the laboratory bills the payor directly. If the terms of the
discount safe harbor are met, the discounts will not be
considered prohibited remuneration under the Anti-kickback Law.
This safe harbor may therefore be potentially applicable to our
agreements to sell tests to hospitals where the hospital submits
a claim to the payor.
California does not have a discount safe harbor. However, as
noted above, Section 650 has generally been interpreted
consistent with the Anti-kickback Law.
The personal services safe harbor to the Anti-kickback Law
provides that remuneration paid to a referral source for
personal services will not violate the Anti-kickback Law
provided all of the elements of that safe harbor are met. One
element is that, if the agreement is intended to provide for the
services of the physician on a periodic, sporadic or part-time
basis, rather than on a full-time basis for the term of the
agreement, the agreement specifies exactly the schedule of such
intervals, their precise length, and the exact charge for such
intervals. Our personal services arrangements with some
physicians do not meet the specific requirement of this safe
harbor that the agreement specify exactly the schedule of the
intervals of time to be spent on the services because the nature
of the services, such as speaking engagements, does not lend
itself to exact scheduling and therefore meeting this element of
the personal services safe harbor is impractical. Failure to
meet the terms of the safe harbor does not render an
24
arrangement illegal. Rather, such arrangements must be evaluated
under the language of the statute, taking into account all facts
and circumstances.
While we believe that we are in compliance with the
Anti-kickback Law and Section 650, there can be no
assurance that our relationships with physicians, hospitals and
other customers will not be subject to investigation or a
successful challenge under such laws. If imposed for any reason,
sanctions under the Anti-kickback Law and Section 650 could
have a negative effect on our business.
Other
Federal and State Fraud and Abuse Laws
In addition to the requirements that are discussed above, there
are several other health care fraud and abuse laws that could
have an impact on our business. For example, provisions of the
Social Security Act permit Medicare and Medicaid to exclude an
entity that charges the federal health care programs
substantially in excess of its usual charges for its services.
The terms usual charge and substantially in
excess are ambiguous and subject to varying
interpretations.
Further, the Federal False Claims Act prohibits a person from
knowingly submitting a claim, making a false record or statement
in order to secure payment or retaining an overpayment by the
federal government. In addition to actions initiated by the
government itself, the statute authorizes actions to be brought
on behalf of the federal government by a private party having
knowledge of the alleged fraud. Because the complaint is
initially filed under seal, the action may be pending for some
time before the defendant is even aware of the action. If the
government is ultimately successful in obtaining redress in the
matter or if the plaintiff succeeds in obtaining redress without
the governments involvement, then the plaintiff will
receive a percentage of the recovery. Finally, the Social
Security Act includes its own provisions that prohibit the
filing of false claims or submitting false statements in order
to obtain payment. Violation of these provisions may result in
fines, imprisonment or both, and possible exclusion from
Medicare or Medicaid programs. California has an analogous state
false claims act applicable to all payors, as do many other
states.
California
Laboratory Licensing
In addition to federal certification requirements of
laboratories under CLIA, licensure is required and maintained
for our clinical reference laboratory under California law. Such
laws establish standards for the
day-to-day
operation of a clinical reference laboratory, including the
training and skills required of personnel and quality control.
In addition, California laws mandate proficiency testing, which
involves testing of specimens that have been specifically
prepared for the laboratory.
If our clinical reference laboratory is out of compliance with
California standards, the California Department of Health
Services, or DHS, may suspend, restrict or revoke our license to
operate our clinical reference laboratory, assess substantial
civil money penalties, or impose specific corrective action
plans. Any such actions could materially affect our business. We
maintain a current license in good standing with DHS. However,
we cannot provide assurance that DHS will at all times in the
future find us to be in compliance with all such laws.
New York
Laboratory Licensing
Because we receive specimens from New York State, our clinical
reference laboratory is required to be licensed by New York,
under New York laws and regulations, which establish standards
for:
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day-to-day
operation of a clinical laboratory, including training and skill
levels required of laboratory personnel;
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physical requirements of a facility;
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equipment; and
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quality control.
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We maintain such licensure for our clinical reference laboratory
for our Oncotype DX tests. New York law also mandates
proficiency testing for laboratories licensed under New York
state law, regardless of whether or not such
25
laboratories are located in New York. If a laboratory is out of
compliance with New York statutory or regulatory standards, the
New York State Department of Health, or DOH, may suspend, limit,
revoke or annul the laboratorys New York license, censure
the holder of the license or assess civil money penalties.
Statutory or regulatory noncompliance may result in a
laboratorys operator being found guilty of a misdemeanor
under New York law. Should we be found out of compliance with
New York laboratory requirements, we could be subject to such
sanctions, which could harm our business. We maintain a current
license in good standing with DOH. However, we cannot provide
assurance that DOH will at all times find us to be in compliance
with all such laws.
Other
States Laboratory Testing
Florida, Maryland, Pennsylvania and Rhode Island require
out-of-state
laboratories which accept specimens from those states to be
licensed. We have obtained licenses in those four states and
believe we are in compliance with applicable licensing laws.
From time to time, we may become aware of other states that
require
out-of-state
laboratories to obtain licensure in order to accept specimens
from the state, and it is possible that other states do have
such requirements or will have such requirements in the future.
If we identify any other state with such requirements or if we
are contacted by any other state advising us of such
requirements, we intend to follow instructions from the state
regulators as to how we should comply with such requirements.
Environmental
Laws
We are subject to regulation under federal, state and local laws
and regulations governing environmental protection and the use,
storage, handling and disposal of hazardous substances. The cost
of complying with these laws and regulations may be significant.
Our activities currently require the controlled use of
potentially harmful biological materials, hazardous materials
and chemicals. We cannot eliminate the risk of accidental
contamination or injury to employees or third parties from the
use, storage, handling or disposal of these materials. In the
event of contamination or injury, we could be held liable for
any resulting damages, and any liability could exceed our
resources or any applicable insurance coverage we may have.
International
When marketing our tests outside of the United States, we are
subject to foreign regulatory requirements governing human
clinical testing, export of tissue and marketing approval for
our products. These requirements vary by jurisdiction, differ
from those in the United States and may require us to perform
additional pre-clinical or clinical testing. In many countries
outside of the United States, coverage, pricing and
reimbursement approvals are also required. We are also required
to maintain accurate information and control over sales and
distributors activities that may fall within the purview
of the Foreign Corrupt Practices Act, its books and records
provisions and its anti-bribery provisions.
Patents
and Proprietary Technology
In order to remain competitive, we must develop and maintain
protection on the proprietary aspects of our technologies. To
that end, we rely on a combination of patents, patent
applications, copyrights and trademarks, as well as contracts,
such as confidentiality, material data transfer, license and
invention assignment agreements. We also rely upon trade secret
laws to protect unpatented know-how and continuing technological
innovation. In addition, we have what we consider to be
reasonable security measures in place to maintain
confidentiality. Our intellectual property strategy is intended
to develop and maintain our competitive position.
As of December 31, 2010, we had 11 issued patents in the
United States and 12 issued patents outside of the United States
covering genes and methods that are components of the
Oncotype DX breast cancer test, six of which were issued
jointly to us and our collaborators, and three of which were
assigned to us by a collaborator. In addition, we have a number
of pending patent applications in the United States and in other
countries, including provisional and non-provisional filings.
Our issued U.S. patents expire at various times between
2024 and 2026. Some of these U.S. patent applications also
have corresponding pending or granted applications under the
Patent Cooperation Treaty in Canada, Europe, Japan, Australia
and other jurisdictions. In these patent applications, we have
either sole
26
or joint ownership positions. In those cases where joint
ownership positions were created, we have negotiated contractual
provisions providing us with the opportunity to acquire
exclusive rights under the patent applications. Under some
patent applications, we have elected to allow exclusive options
to lapse without exercising the option. The joint ownership
agreements generally are in the form of material data transfer
agreements that were executed at the onset of our collaborations
with third parties.
Our patent applications relate to two main areas: gene
expression technology methods, and gene markers for cancer
recurrence and drug response in certain forms of cancer. We
intend to file additional patent applications to strengthen our
intellectual property rights. Our pending and future patent
applications may not result in issued patents, and we cannot
assure you that our issued patents or any patents that might
ultimately be issued by the U.S. Patent and Trademark
Office, or USPTO, will protect our technology. Any patents
issued to United States might be challenged by third parties as
being invalid or unenforceable, or third parties may
independently develop similar or competing technology that
avoids our patents. We cannot be certain that the steps we have
taken will prevent the misappropriation of our intellectual
property, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the United
States.
We have received notices of claims of infringement and
misappropriation or misuse of other parties proprietary
rights in the past and may from time to time receive additional
notices. Some of these claims may lead to litigation. We cannot
assure you that we will prevail in these actions, or that other
actions alleging misappropriation or misuse by us of third-party
trade secrets, infringement by us of third-party patents and
trademarks or the validity of patents issued to us in the
future, will not be asserted or prosecuted against us. We may
also initiate claims to defend our intellectual property.
Assertions of misappropriation, infringement or misuse, or
actions seeking to establish the validity of our patents could
materially or adversely affect our business, financial condition
and results of operations.
An adverse determination in litigation or interference
proceedings to which we may become a party relating to any
patents issued to us in the future, or any patents owned by
third parties, could subject us to significant liabilities to
third parties or require us to seek licenses from third parties.
Furthermore, if we are found to willfully infringe these
patents, we could, in addition to other penalties, be required
to pay treble damages. Although patent and intellectual property
disputes in this area have often been settled through licensing
or similar arrangements, costs associated with such arrangements
may be substantial and could include ongoing royalties. We may
be unable to obtain necessary licenses on satisfactory or
commercially feasible terms, if at all. If we do not obtain
necessary licenses, we may not be able to redesign our
Oncotype DX tests or other tests to avoid infringement,
or such redesign may take considerable time, and force us to
reassess our business plans. Adverse determinations in a
judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and
selling our tests, which would have a significant adverse impact
on our business.
All employees and technical consultants working for us are
required to execute confidentiality agreements in connection
with their employment and consulting relationships with us.
Confidentiality agreements provide that all confidential
information developed or made known to others during the course
of the employment, consulting or business relationship shall be
kept confidential except in specified circumstances. In
addition, agreements with employees provide that all inventions
conceived by the individual while employed by us are our
exclusive property. We cannot provide any assurance that
employees and consultants will abide by the confidentiality or
assignment terms of these agreements. Despite measures taken to
protect our intellectual property, unauthorized parties might
copy aspects of our technology or obtain and use information
that we regard as proprietary.
Roche
License Agreement
We license from Roche Molecular Systems, Inc., on a
non-exclusive basis, a number of U.S. patents claiming
nucleic acid amplification processes known as PCR, homogeneous
polymerase chain reaction, and RT-PCR. We use these processes in
our research and development activities and in the processing of
our Oncotype DX tests. The Roche license is limited to
clinical laboratory services performed within the United States
and Puerto Rico, and does not include the right to make or sell
products using the patented processes. The license continues as
long as the
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underlying patent rights are in effect, but is subject to early
termination by Roche under the following circumstances:
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a change in our ownership;
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a declaration of bankruptcy or insolvency, the making of an
assignment for the benefit of our creditors, having a receiver
appointed, or losing the federal or state licenses necessary for
our operation;
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a change in our status to a non-profit entity or government
institution; or
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our breach of or default under a material term of the license.
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If the Roche license is terminated, we will be unable to use the
licensed processes to conduct research and development
activities or to perform our tests. As payment for the licenses
granted to us, we make royalty payments to Roche consisting of a
specified percentage of our net product revenues.
Research
and Development Expenses
Research and development expenses were $33.2 million,
$35.7 million and $28.6 million for the years ended
December 31, 2010, 2009, and 2008, respectively. During
2010, we continued to conduct research and development studies
in breast cancer, colon cancer and other cancers.
Employees
As of December 31, 2010, we had 472 employees,
including 87 in clinical reference laboratory operations,
99 in research and development, including bioinformatics,
169 in sales and marketing, 60 in information technology and
systems and 57 in general and administrative functions. None of
our employees are covered by collective bargaining arrangements,
and our management considers its relationships with employees to
be good.
Available
Information
We were incorporated in Delaware in August 2000, and our website
is located at www.genomichealth.com. We make available
free of charge on our website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the Securities and Exchange Commission. Our website
and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on
Form 10-K.
We
have a history of net losses, we may incur net losses in the
future, and we expect to continue to incur significant expenses
to develop and market our tests, which may make it difficult for
us to achieve sustained profitability.
We have historically incurred substantial net losses. From our
inception in August 2000 through December 31, 2010, we had
an accumulated deficit of $173.6 million. We expect to
continue to invest in our product pipeline, including our
current Oncotype DX tests and future products, and our
commercial and laboratory infrastructure. For the year ended
December 31, 2010, our research and development expenses
were $33.2 million and our sales and marketing expenses
were $71.4 million. We expect our expense levels to
continue to increase for the foreseeable future as we seek to
expand the clinical utility of our Oncotype DX breast
cancer test, drive adoption of and reimbursement for our
Oncotype DX colon cancer test and develop new tests. As a
result, we will need to generate significant revenues in order
to achieve sustained profitability. Our failure to achieve
sustained profitability in the future could cause the market
price of our common stock to decline.
Continued
weak general economic or business conditions could have a
negative impact on our business.
Continuing concerns over prolonged high unemployment levels
across the United States, the availability and cost of credit,
the U.S. mortgage market, the U.S. real estate market,
Federal budget proposals, inflation, deflation,
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taxation issues, energy costs and geopolitical issues have
contributed to increased volatility and diminished expectations
for the U.S. economy. These factors, combined with declines
in business and consumer confidence and a volatile stock market,
have precipitated an economic slowdown and expectations of
slower economic growth going forward. The economic slowdown
continued to have a negative impact on growth in tests delivered
during the year ended December 31, 2010, particularly in
areas of the United States with high unemployment levels where
patients have lost healthcare coverage, delayed medical checkups
or are unable to pay for our tests. If the economic environment
does not improve or deteriorates, 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.
Healthcare
policy changes, including recently enacted legislation reforming
the U.S. healthcare system, may have a material adverse effect
on our financial condition and results of
operations.
The recently enacted Patient Protection and Affordable Care Act,
as amended by the Health Care and Education Affordability
Reconciliation Act, collectively, the PPACA, which makes changes
that are expected to significantly impact the pharmaceutical and
medical device industries and clinical laboratories. Beginning
in 2013, each medical device manufacturer will have to pay a
sales tax in an amount equal to 2.3% of the price for which such
manufacturer sells its medical devices. Although there are some
exceptions, because the FDA maintains that clinical laboratory
tests that are developed and validated by a laboratory for its
own use, or LDTs, such as our Oncotype DX breast and
colon cancer tests, are medical devices, this tax may apply to
some or all of our current products and products in development.
The PPACA also mandates a reduction in payments for clinical
laboratory services paid under the Medicare Clinical Laboratory
Fee Schedule of 1.75% for the years 2011 through 2015. This
adjustment is in addition to a productivity adjustment to the
Medicare Clinical Laboratory Fee Schedule. These reductions in
payments may apply to some or all of our clinical laboratory
test services furnished to Medicare beneficiaries.
Other significant measures contained in the PPACA include, for
example, coordination and promotion of research on comparative
clinical effectiveness of different technologies and procedures,
initiatives to revise Medicare payment methodologies, such as
bundling of payments across the continuum of care by providers
and physicians, and initiatives to promote quality indicators in
payment methodologies. The PPACA also includes significant new
fraud and abuse measures, lowering the governments
thresholds to find violations and increasing potential penalties
for such violations. In addition, the PPACA establishes an
Independent Payment Advisory Board, or IPAB, to reduce the per
capita rate of growth in Medicare spending. The IPAB has broad
discretion to propose policies to reduce expenditures, which may
have a negative impact on payment rates for services, including
clinical laboratory services. IPAB proposals may impact payments
for clinical laboratory services beginning in 2016 and for
hospital services beginning in 2020.
In addition to the PPACA, the effect of which cannot presently
be fully quantified given its recent enactment, various
healthcare reform proposals have also emerged at the state
level. Changes in healthcare policy, such as changes in the FDA
regulatory policy for LDTs, the creation of broad test
utilization limits for diagnostic products in general or
requirements that Medicare patients pay for portions of clinical
laboratory tests or services received, could substantially
impact the sales of our tests, increase costs and divert
managements attention from our business. In addition,
sales of our tests outside of the United States make us subject
to foreign regulatory requirements, which may also change over
time.
We cannot predict whether future healthcare initiatives will be
implemented at the federal or state level, or the effect any
future legislation or regulation will have on us. The taxes
imposed by the new federal legislation and the expansion in
governments role in the U.S. healthcare industry may
result in decreased profits to us, lower reimbursements by
payors for our products or reduced medical procedure volumes,
all of which may adversely affect our business, financial
condition and results of operations, possibly materially.
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If
third-party payors, including managed care organizations and
Medicare, do not provide reimbursement, breach, rescind or
modify their contracts or reimbursement policies or delay
payments for our Oncotype DX tests, our commercial success could
be compromised.
Physicians and patients may not order our Oncotype DX
tests unless third-party payors, such as managed care
organizations as well as government payors such as Medicare and
Medicaid, pay a substantial portion of the test price.
Reimbursement by a third-party payor may depend on a number of
factors, including a payors determination that tests using
our technologies are:
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not experimental or investigational,
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medically necessary,
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appropriate for the specific patient,
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cost-effective,
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supported by peer-reviewed publications, and
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included in clinical practice guidelines.
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There is uncertainty concerning third-party payor reimbursement
of any test incorporating new technology, including tests
developed using our Oncotype DX platform. Several
entities conduct technology assessments of new medical tests and
devices and provide the results of their assessments for
informational purposes to other parties. These assessments may
be used by third-party payors and health care providers as
grounds to deny coverage for a test or procedure. Although there
are a number of favorable assessments of our Oncotype DX
breast cancer test, the test has received negative assessments
in the past and our tests may receive negative assessments in
the future. For example, in April 2010, the Medical Advisory
Panel of the Blue Cross and Blue Shield Associations
Technology Evaluation Center, a technology assessment group,
published its conclusion that the existing clinical data in
support of our Oncotype DX breast cancer test did not
meet the panels technology criteria for clinical
effectiveness and appropriateness for usage in patients with N+
disease.
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 positive coverage determinations for our Oncotype DX
breast cancer test for N-, ER+ patients from most third-party
payors in the United States through contracts, agreements or
policy decisions. We cannot be certain that coverage for this
test will be provided in the future by additional third-party
payors or that existing contracts, agreements or policy
decisions or reimbursement levels will remain in place or be
fulfilled within existing terms and provisions.
Following the reporting of clinical studies to support the use
of our Oncotype DX breast cancer test in patients with
N+, ER+ disease, we experienced an increase in usage for N+
patients. We may not be able to obtain reimbursement coverage
for our test for breast cancer patients with N+, ER+ disease
that is similar to the coverage we have obtained for early stage
N-, ER+ patients.
We have obtained limited reimbursement coverage from third-party
payors in the United States for our Oncotype DX colon
cancer test launched in January 2010. We expect to focus
substantial resources on obtaining adoption of and reimbursement
coverage for this test. Because it is new, our Oncotype
DX colon cancer test may be considered investigational by
payors and therefore may not be covered under their
reimbursement policies. We believe it may take several years to
achieve reimbursement with a majority of third-party payors.
However, we cannot predict whether, under what circumstances, or
at what payment levels payors will reimburse for our test. If we
fail to establish broad adoption of and reimbursement for our
Oncotype DX colon cancer test, our reputation could be
harmed and our future prospects and our business could suffer.
If we are unable to obtain reimbursement from private payors and
Medicare and Medicaid programs for our tests or new tests or
test enhancements we may develop in the future, our ability to
generate revenues could be limited. We have in the past, and
will likely in the future, experience delays and temporary
interruptions in the receipt of payments from third-party payors
due to contract implementation steps, documentation requirements
and other issues, which could cause our revenues to fluctuate
from period to period.
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The
prices at which our tests are reimbursed may be reduced by
Medicare and private and other payors, and any such changes
could have a negative impact on our revenues.
Even if we are being reimbursed for our tests, Medicare and
private and other payors may withdraw their coverage policies or
cancel their contracts with us at any time, review and adjust
the rate of reimbursement or stop paying for our tests, which
would reduce our total revenues. In addition, insurers,
including managed care organizations as well as government
payors such as Medicare and Medicaid, have increased their
efforts to control the cost, utilization and delivery of
healthcare services. These measures have resulted in reduced
payment rates and decreased utilization for the clinical
laboratory industry. From time to time, Congress has considered
and implemented changes to the Medicare fee schedules in
conjunction with budgetary legislation, and pricing for tests
covered by Medicare is subject to change at any time. Reductions
in the reimbursement rate of payors may occur in the future.
Reductions in the prices at which our tests are reimbursed could
have a negative impact on our revenues.
There is no specific Current Procedural Terminology, or CPT,
procedure code or group of codes to report the Oncotype
DX breast or colon cancer tests. The tests are reported
under a non-specific, unlisted procedure code, which is subject
to manual review of each claim. With regard to Medicares
current reimbursement of our Oncotype DX breast cancer
test, we were informed that, under the local coverage
determination, claims are to be paid consistent with the average
allowed reimbursement rate for claims that were billed and
processed to completion as of September 30, 2005. This
reimbursement rate remains in effect as of the date of this
report, but is subject to review and adjustment.
A Healthcare Common Procedure Coding System, or HCPCS, code has
been issued effective January 1, 2006 for the Oncotype
DX breast cancer test that some private third-party payors
may accept on claims for the test. However, Medicare will not
accept this HCPCS code. The American Medical Association, which
has the copyright on the CPT coding system, has recently
established a work group to develop a new coding framework for
non-infectious disease molecular pathology testing and recommend
new codes to the panel, which determines new and revised codes
and descriptors. It is possible that this process will result in
a new code or codes to report our Oncotype DX tests, and
the codes may result in higher or lower reimbursement of our
tests. Whether or not we obtain a specific CPT code for our
tests, there can be no assurance that an adequate payment rate
will continue to be assigned to the tests, which could have a
negative impact on our revenues.
If we
are unable to obtain or maintain adequate reimbursement for our
tests outside of the United States, our ability to expand
internationally will be compromised.
The majority of our international product revenues are currently
generated by patient self-pay and third party reimbursement for
our Oncotype DX breast cancer test and through clinical
collaborations. In many countries outside of the United States,
various coverage, pricing and reimbursement approvals are
required. We expect that it will take several years to establish
broad coverage and reimbursement for our tests with payors in
countries outside of the United States, and our efforts may not
be successful. In addition, because we rely on distributors to
obtain reimbursement for our tests, to the extent we do not have
direct reimbursement arrangements with payors, we may not be
able to retain reimbursement coverage with a particular payor if
our agreement with a distributor is terminated or expires.
Because
of Medicare billing rules, we may not receive reimbursement for
all tests provided to Medicare patients.
Under current Medicare billing rules, claims for our Oncotype
DX breast cancer tests performed on Medicare beneficiaries
who were hospital inpatients at the time the tumor tissue
samples were obtained and whose tests were ordered less than
14 days from discharge must be incorporated in the payment
that the hospital receives for the inpatient services provided.
Medicare billing rules also require hospitals to bill for the
test when ordered for hospital outpatients less than
14 days following the date of the hospital procedure where
the tumor tissue samples were obtained. Accordingly, we are
required to bill individual hospitals for tests performed on
Medicare beneficiaries during these time frames. Because we
generally do not have a written agreement in place with these
hospitals to purchase these tests, we may not be paid for our
tests or may have to pursue payment from the hospital on a
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case-by-case
basis. We believe patients coming under this rule represent
approximately 1% of our total breast cancer testing population.
We believe these billing rules may lead to confusion regarding
whether Medicare provides adequate reimbursement for our breast
cancer test, and could discourage Medicare patients from using
our test. If we obtain Medicare reimbursement coverage for our
Oncotype DX colon cancer test in the future, these
billing rules would also apply to those tests performed for
hospital inpatients ordered less than 14 days from
discharge. We have no assurance that Medicare will reverse or
revise the billing rule to allow us to bill for tests subject to
the 14 day billing rule or that Congress will require
Medicare to do so at some point in the future, and we also
cannot ensure that hospitals will agree to arrangements to pay
us for Oncotype DX tests performed on patients falling
under these rules.
We
depend on Medicare for a significant portion of our product
revenues and if Medicare or other significant payors stop
providing reimbursement or decrease the amount of reimbursement
for our tests, our revenues could decline.
Reimbursement on behalf of patients covered by Medicare
accounted for 21%, 20% and 22% of our product revenues for the
years ended December 31, 2010, 2009, and 2008,
respectively. While there were no other third-party payors with
product revenues of 10% or more for these periods, there have
been in the past, and may be in the future, other payors
accounting for 10% or more of our product revenues. Because the
majority of stage II colon cancer patients in the United
States are age 65 and over, we may become more dependent on
Medicare reimbursement in the future. It is possible that
Medicare or other third-party payors that provide reimbursement
for our tests may suspend, revoke or discontinue coverage at any
time, or may reduce the reimbursement rates payable to us. Any
such action could have a negative impact on our revenues.
Our
financial results depend largely on the 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 near future, we expect to derive substantially all of
our revenues from sales of one test, our Oncotype DX
breast cancer test. We have been selling this test since January
2004. While we launched our test for colon cancer in January
2010, we do not expect to recognize significant revenues from
this test until adoption of and reimbursement for this test have
been established. We are in various stages of research and
development for other tests that we may offer as well as for
enhancements to our existing tests. We may not be able to
successfully commercialize tests for other cancers or diseases.
If we are unable to increase sales of our breast cancer test,
establish adoption of and reimbursement for our colon cancer
test, or successfully develop and commercialize other tests or
enhancements, our revenues and our ability to achieve sustained
profitability would be impaired.
If the
FDA were to begin regulating our tests, we could incur
substantial costs and time delays associated with meeting
requirements for pre-market clearance or approval or we could
experience decreased demand for or reimbursement of our
tests.
Clinical laboratory tests like ours are regulated under the
Clinical Laboratory Improvement Amendments of 1988, or CLIA, as
administered by the Centers for Medicare and Medicaid Services,
as well as by applicable state laws. Diagnostic kits that are
sold and distributed through interstate commerce are regulated
as medical devices by the FDA. Most LDTs are not currently
subject to FDA regulation, although reagents or software
provided by third parties and used to perform LDTs may be
subject to regulation. We believe that our Oncotype DX
tests are not diagnostic kits and also believe that they are
LDTs. As a result, we believe our tests should not be subject to
regulation under established FDA policies. The container we
provide for collection and transport of tumor samples from a
pathology laboratory to our clinical reference laboratory may be
a medical device subject to FDA regulation but is currently
exempt from pre-market review by the FDA.
At various times since 2006, the FDA has issued guidance
documents or announced draft guidance regarding initiatives that
may require varying levels of FDA oversight of our tests. We
cannot provide any assurance that FDA regulation, including
pre-market review, will not be required in the future for our
tests, whether through additional guidance issued by the FDA,
new enforcement policies adopted by the FDA or new legislation
enacted by Congress. Legislative proposals addressing oversight
of genetic testing and LDTs were introduced in the previous two
Congresses and we expect that new legislative proposals will be
introduced in the current Congress as well. It is
32
possible that legislation will be enacted into law or guidance
could be issued by the FDA which may result in increased
regulatory burdens for us to continue to offer our tests or to
develop and introduce new 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.
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 the FDA could require
that we stop selling our tests pending pre-market clearance or
approval. If our tests are allowed to remain on the market but
there is uncertainty about our tests, if they are labeled
investigational by the FDA, or if labeling claims the 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
pre-market approval application with the FDA. If pre-market
review is required by the FDA, there can be no assurance that
our tests will be cleared or approved on a timely basis, if at
all, nor can there be assurance that labeling claims will be
consistent with our current claims or adequate to support
continued adoption of and reimbursement for our tests. Ongoing
compliance with FDA regulations would increase the cost of
conducting our business, and subject us to inspection by and the
requirements of the FDA and penalties for failure to comply with
these requirements. We may also decide voluntarily to pursue FDA
pre-market review of our tests if we determine that doing so
would be appropriate.
Should any of the reagents obtained by us from vendors and used
in conducting our tests be affected by future regulatory
actions, our business could be adversely affected by those
actions, including increasing the cost of testing or delaying,
limiting or prohibiting the purchase of reagents necessary to
perform testing.
If we
were required to conduct additional clinical trials prior to
continuing to sell our breast and colon cancer tests or any
other tests we may develop, those trials could lead to delays or
failure to obtain necessary regulatory approval, which could
cause significant delays in commercializing any future products
and interruption in sales of our current tests and harm our
ability to achieve sustained profitability.
If the 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 of any future tests and interrupt sales of our
current tests. Many of the factors that may cause or lead to a
delay in the commencement or completion of clinical trials may
also ultimately lead to delay or denial of regulatory clearance
or approval. The commencement of clinical trials may be delayed
due to insufficient patient enrollment, which is a function of
many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical
sites and the eligibility criteria for the clinical trial.
We may find it necessary to engage contract research
organizations to perform data collection and analysis and other
aspects of our clinical trials, which might increase the cost
and complexity of our trials. We may also depend on clinical
investigators, medical institutions and contract research
organizations to perform the trials properly. If these parties
do not successfully carry out their contractual duties or
obligations or meet expected deadlines, or if the quality,
completeness or accuracy of the clinical data they obtain is
compromised due to the failure to adhere to our clinical
protocols or for other reasons, our clinical trials may have to
be extended, delayed or terminated. Many of these factors would
be beyond our control. We may not be able to enter into
replacement arrangements without undue delays or considerable
expenditures. If there are delays in testing or approvals as a
result of the failure to perform by third parties, our research
and development costs would increase, and we may not be able to
obtain regulatory clearance or approval for our tests. In
addition, we may not be able to establish or maintain
relationships with these parties on favorable terms, if at all.
Each of these outcomes would harm our ability to market our
tests, or to achieve sustained profitability.
33
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 through our accreditation by the College of American
Pathologists, or CAP. 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.
Although we are required to hold a certificate of accreditation
under CLIA that allows us to perform high complexity testing, we
are not required to hold a certificate of accreditation through
CAP. We could alternatively maintain a certificate of
accreditation from another accrediting organization or a
certificate of compliance through inspection by surveyors acting
on behalf of the CLIA program. If our accreditation under CAP
were to terminate, either voluntarily or involuntarily, we would
need to convert our certification under CLIA to a certificate of
compliance (or to a certificate of accreditation with another
accreditation organization) in order to maintain our ability to
perform clinical testing and to continue commercial operations.
Whether we would be able to successfully maintain operations
through either of these alternatives would depend upon the facts
and circumstances surrounding termination of our CAP
accreditation, such as whether any deficiencies were identified
by CAP as the basis for termination and, if so, whether these
were addressed to the satisfaction of the surveyors for the CLIA
program (or another accrediting organization).
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.
In addition, our clinical reference laboratory is required to be
licensed on a product-specific basis by New York State. New York
law also mandates proficiency testing for laboratories licensed
under New York state law, regardless of whether or not such
laboratories are located in New York. Moreover, several other
states require that we hold licenses to test specimens from
patients in those states. Other states may have similar
requirements or may adopt similar requirements in the future.
Finally, we may be subject to regulation in foreign
jurisdictions as we seek to expand international distribution of
our tests.
If we were to lose our CLIA accreditation or California license,
whether as a result of a revocation, suspension or limitation,
we would no longer be able to sell our tests, which would limit
our revenues and harm our business. If we were to lose our
license in New York or in other states where we are required to
hold licenses, we would not be able to test specimens from those
states.
We are subject to other regulation by both the federal
government and the states in which we conduct our business,
including:
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Medicare billing and payment regulations applicable to clinical
laboratories;
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the Federal Anti-kickback Law and state anti-kickback
prohibitions;
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the Federal physician self-referral prohibition, commonly known
as the Stark Law, and the state equivalents;
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the Federal Health Insurance Portability and Accountability Act
of 1996;
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the Medicare civil money penalty and exclusion
requirements; and
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the Federal False Claims Act civil and criminal penalties and
state equivalents.
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We have adopted policies and procedures designed to comply with
these laws, including policies and procedures relating to
financial arrangements between us and physicians who refer
patients to us. In the ordinary course of our business, we
conduct internal reviews of our compliance with these laws. Our
compliance is also subject to governmental review. The growth of
our business and sales organization may increase the potential
of violating these laws or our internal policies and procedures.
The risk of our being found in violation of these laws and
regulations is further increased by the fact that many of them
have not been fully interpreted by the regulatory
34
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.
New
test development involves a lengthy and complex process, and we
may be unable to commercialize on a timely basis, or at all, any
of the tests we are currently developing.
We have multiple tests in development and devote considerable
resources to research and development. For example, we are
conducting early development studies in colon cancer for
stage III patients, prostate, renal cell and lung cancers.
There can be no assurance that our technologies will be capable
of reliably predicting the recurrence of cancers other than
breast and colon cancer with the sensitivity and specificity
necessary to be clinically and commercially useful, or that our
colon cancer test will result in a commercially successful
product. In addition, before we can develop diagnostic tests for
new cancers or other diseases and commercialize any new
products, we will need to:
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conduct substantial research and development;
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conduct validation studies;
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expend significant funds; and
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develop and scale our laboratory processes to accommodate
different tests.
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This product development process involves a high degree of risk
and may take several years. Our product development efforts may
fail for many reasons, including:
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failure of the product at the research or development stage;
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difficulty in accessing archival tissue samples, especially
tissue samples with known clinical results; or
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lack of clinical validation data to support the effectiveness of
the product.
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Few research and development projects result in commercial
products, and success in early clinical trials often is not
replicated in later studies. At any point, we may abandon
development of a product candidate or we may be required to
expend considerable resources repeating clinical trials, which
would adversely impact the timing for generating potential
revenues from those product candidates. In addition, as we
develop products, we will have to make significant investments
in product development, marketing and selling resources. If a
clinical validation study fails to demonstrate the prospectively
defined endpoints of the study, we might choose to abandon the
development of the product or product feature that was the
subject of the clinical trial, which could harm our business. In
addition, competitors may develop and commercialize competing
products faster than we are able to do so.
If we
are unable to support demand for our tests, including
successfully managing the evolution of our technology and
manufacturing platforms, our business could
suffer.
As our test volume grows, we will need to continue to ramp up
our testing capacity, implement increases in scale and related
processing, customer service, billing and systems process
improvements, and expand our internal quality assurance program,
technology and manufacturing platforms to support testing on a
larger scale. We will also need additional certified laboratory
scientists and other scientific and technical personnel to
process higher volumes of our tests. We cannot assure you that
any increases in scale, related improvements and quality
assurance will be successfully implemented or that appropriate
personnel will be available. As additional products are
commercialized, we will need to bring new equipment on-line,
implement new systems, technology, controls and procedures and
hire personnel with different qualifications. Failure to
implement necessary procedures or to hire the necessary
personnel could result in higher cost of processing or an
inability to meet market demand. There can be no assurance that
we will be able to perform tests on a timely basis at a level
consistent with demand, that our efforts to
35
scale our commercial operations will not negatively affect the
quality of our test results, or that we will be successful in
responding to the growing complexity of our testing operations.
If we encounter difficulty meeting market demand or quality
standards for our tests, our reputation could be harmed and our
future prospects and our business could suffer.
We may
experience limits on our revenues if physicians decide not to
order our tests.
If medical practitioners do not order our Oncotype DX
tests or any future tests developed by us, we will likely not be
able to create demand for our products in sufficient volume for
us to achieve sustained profitability. 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 and maintain 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 recommended that chemotherapy be
considered in most cases, including many cases in which our test
might indicate that, based on our clinical trial results,
chemotherapy would be of little or no benefit. Accordingly,
physicians may be reluctant to order a test that may suggest
recommending against chemotherapy in treating breast cancer.
Moreover, our test provides quantitative information not
currently provided by pathologists and it is performed at our
facility rather than by the pathologist in a local laboratory,
so pathologists may be reluctant to support our test. These
facts may make it difficult for us to convince medical
practitioners to order our test for their patients, which could
limit our ability to generate revenues and achieve sustained
profitability.
Our Oncotype DX colon cancer test predicts recurrence
but, unlike our breast cancer test, does not predict
chemotherapy benefit. We will need to educate physicians,
patients and payors about the benefits and cost-effectiveness of
our colon cancer test and to establish reimbursement
arrangements for this test with payors. We may need to hire
additional commercial, scientific, technical and other personnel
to support this process. If our marketing and educational
efforts do not result in sufficient physician or patient demand,
we may not be able to obtain adequate reimbursement for our
colon cancer test. If we fail to successfully establish adoption
of and reimbursement for our colon cancer test, our reputation
could be harmed and our business could suffer.
We may
experience limits on our revenues if patients decide not to use
our tests.
Some patients may decide not to use our Oncotype DX tests
due to their price, all or part of which may be payable directly
by the patient if the applicable payor denies reimbursement in
full or in part. Even if medical practitioners recommend that
their patients use our tests, patients may still decide not to
use our tests, either because they do not want to be made aware
of the likelihood of recurrence or they wish to pursue a
particular course of therapy regardless of test results.
Additionally, the current economic environment could continue to
negatively impact patients, resulting in loss of healthcare
coverage, delayed medical checkups or inability to pay for
relatively expensive tests. If only a small portion of the
patient population decides to use our tests, we will experience
limits on our revenues and our ability to achieve sustained
profitability.
Our
rights to use technologies licensed from third parties are not
within our control, and we may not be able to sell our products
if we lose our existing rights or cannot obtain new rights on
reasonable terms.
We license from third parties technology necessary to develop
our products. For example, we license technology from Roche that
we use to analyze genes for possible inclusion in our tests and
that we use in our clinical reference laboratory to conduct our
tests. In return for the use of a third partys technology,
we may agree to pay the licensor royalties based on sales of our
products. Royalties are a component of cost of product revenues
and impact the margins on our tests. 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
36
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 develop products to keep pace with rapid
technological, medical and scientific change, our operating
results and competitive position could be harmed.
In recent years, there have been numerous advances in
technologies relating to the diagnosis and treatment of cancer.
For example, technologies in addition to ours now reportedly
permit measurement of gene expression in fixed paraffin-embedded
tissue specimens. New chemotherapeutic or biologic strategies
are being developed that may increase survival time and reduce
toxic side effects. There have also been advances in methods
used to analyze very large amounts of genomic information,
including next-generation sequencing. These advances require us
to continuously develop our technology, develop new products and
enhance existing products to keep pace with evolving standards
of care. Our tests could become obsolete unless we continually
innovate and expand our products to demonstrate recurrence and
treatment benefit in patients treated with new therapies. New
treatment therapies typically have only a few years of clinical
data associated with them, which limits our ability to perform
clinical studies and correlate sets of genes to a new
treatments effectiveness. If we are unable to demonstrate
the applicability of our tests to new treatments, sales of our
test could decline, which would harm our revenues.
If we
are unable to maintain intellectual property protection, our
competitive position could be harmed.
Our ability to compete and to achieve sustained 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 we cannot guarantee that a joint owner
will cooperate with us in the enforcement of patent rights.
As of December 31, 2010, we had 11 issued patents in the
United States and 12 issued patents internationally covering
genes and methods that are components of the Oncotype DX
breast cancer test, six of which were issued jointly to us and
our collaborators and three of which were assigned to us by a
collaborator. In addition, we have a number of pending patent
applications in the United States and in other countries. 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, or USPTO, will protect our technology. Any
patents that may be issued to us might be challenged by third
parties as being invalid or unenforceable, or third parties may
independently develop similar or competing technology that
avoids our patents. We cannot be certain that the steps we have
taken will prevent the misappropriation and use of our
intellectual property, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as in
the United States.
From time to time, the U.S. Supreme Court, other federal
courts, the U.S. Congress or the USPTO may change the
standards of patentability and any such changes could have a
negative impact on our business. In addition, competitors may
develop their own versions of our test in countries where we did
not apply for patents or where our patents have not issued and
compete with us in those countries, including encouraging the
use of their test by physicians or patients in other countries.
On October 30, 2008, the Court of Appeals for the Federal
Circuit issued a decision that methods or processes cannot be
patented unless they are tied to a machine or involve a physical
transformation. The U.S. Supreme Court reversed that
decision in 2010, finding that the
machine-or-transformation
test is not the only test for determining patent eligibility.
The Court, however, declined to specify how and when processes
are patentable. In response, the USPTO issued an Interim
Guidance for Determining Subject Matter Eligibility for Process
Claim dated July 27, 2010. We cannot assure you that our
patent portfolio will not be negatively impacted by the decision
described above, rulings in other cases or changes in guidance
or procedures issued by the USPTO.
A suit brought by multiple plaintiffs, including the American
Civil Liberties Union, or ACLU, against Myriad Genetics and the
USPTO, could also impact biotechnology patents. That case
involves certain of Myriads
37
U.S. patents related to the breast cancer susceptibility
genes BRCA1 and BRCA2. Related European patents were canceled in
2004 by the European Patent Office after opposition, and a
similar challenge is pending in Australia. The plaintiffs in the
Myriad case filed motions for summary judgment in the Southern
District of New York requesting that the court, among other
things, find that the breast cancer genes are not patentable
subject matter. We joined other diagnostic companies in filing
an amici brief in this case. The U.S. District Court
for the Southern District of New York filed an opinion on this
case on March 20, 2010, finding that Myriads BRCA
sequence and sequence related claims are unpatentable under the
Federal Circuit machine or transformation test. This
case is currently pending before the Federal Circuit, which has
been instructed by the Supreme Court to use broader
patentability principles. It is unknown how this case will be
decided on appeal, whether this decision will have an indirect
impact on gene patents generally, or if this decision will have
a significant impact on the ability of biotechnology companies
to obtain or enforce gene patents in the future.
Also, on February 5, 2010, the Secretarys Advisory
Committee on Genetics, Health and Society for HHS voted to
approve a report entitled Gene Patents and Licensing
Practices and Their Impact on Patient Access to Genetic
Tests. That report defines patent claims on
genes broadly to include claims to isolated nucleic acid
molecules as well as methods of detecting particular sequences
or mutations. The report also contains six recommendations,
including the creation of an exemption from liability for
infringement of patent claims on genes for anyone making, using,
ordering, offering for sale, or selling a test developed under
the patent for patient care purposes, or for anyone using the
patent-protected genes in the pursuit of research. In addition,
the report recommended that the Secretary should explore,
identify, and implement mechanisms that will encourage more
voluntary adherence to current guidelines that promote
non-exclusive in-licensing of diagnostic genetic and genomic
technologies. It is unclear whether these recommendations will
be acted upon by the HHS, or if the recommendations would result
in a change in law or process that could negatively impact our
patent portfolio or future research and development efforts.
We may
face intellectual property infringement claims that could be
time-consuming and costly to defend, and could result in our
loss of significant rights and the assessment of treble
damages.
We have received notices of claims of infringement and
misappropriation or misuse of other parties proprietary
rights in the past and may from time to time receive additional
notices. Some of these claims may lead to litigation. We 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 or to seek relief on allegations that
we use, sell, or offer to sell technology that incorporates
third party intellectual property. Intellectual property
litigation, regardless of outcome, is expensive and
time-consuming, could divert managements attention from
our business and have a material negative effect on our
business, operating results or financial condition. If there is
a successful claim of infringement against us, we may be
required to pay substantial damages (including treble damages if
we were to be found to have willfully infringed a third
partys patent) to the party claiming infringement, develop
non-infringing technology, stop selling our tests or using
technology that contains the allegedly infringing intellectual
property or enter into royalty or license agreements that may
not be available on acceptable or commercially practical terms,
if at all. Our failure to develop non-infringing technologies or
license the proprietary rights on a timely basis could harm our
business. In addition, revising our tests to include the
non-infringing technologies would require us to re-validate our
tests, which would be costly and time consuming. Also, we may be
unaware of pending patent applications that relate to our tests.
Parties making infringement claims on future issued patents may
be able to obtain an injunction that could prevent us from
selling our tests or using technology that contains the
allegedly infringing intellectual property, which could harm our
business.
It is possible that a third party or patent office might take
the position that one or more patents or patent applications
constitute prior art in the field of genomic-based diagnostics.
In such a case, we might be required to pay royalties, damages
and costs to firms who own the rights to these patents, or we
might be restricted from using any of the inventions claimed in
those patents.
38
If we
are unable to compete successfully, we may be unable to increase
or sustain our revenues or achieve sustained
profitability.
Our principal competition comes from existing diagnostic methods
used by pathologists and oncologists. These methods have been
used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment
and kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like ours that are performed outside the
pathology laboratory. In addition, few diagnostic methods are as
expensive as our Oncotype DX tests.
We also face competition from companies that offer products or
have conducted research to profile genes, gene expression or
protein expression in breast or colon cancer, including public
companies such as Celera Corporation, GE Healthcare, a business
unit of General Electric Company, Hologic, Inc., Novartis AG,
Myriad Genetics, Inc., Qiagen N.V. and Response Genetics Inc.,
and many private companies. We face competition from commercial
laboratories with strong distribution networks for diagnostic
tests, such as Laboratory Corporation of America Holdings and
Quest Diagnostics Incorporated. Other potential competitors
include companies that develop diagnostic tests such as Roche
Diagnostics, a division of Roche Holding Ltd, Siemens AG 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. Additionally, projects related to cancer
genomics have received increased government funding, both in the
United States and internationally. As more information regarding
cancer genomics becomes available to the public, we anticipate
that more products aimed at identifying targeted treatment
options will be developed and these products may compete with
ours. In addition, competitors may develop their own versions of
our tests in countries where we did not apply for patents or
where our patents have not issued and compete with us in those
countries, including encouraging the use of their test by
physicians or patients in other countries.
We have changed the list price of our breast cancer test in the
past and we may change prices for our tests in the future. Any
increase or decrease in pricing could impact reimbursement of
and demand for our tests. Many of our present and potential
competitors have widespread brand recognition and substantially
greater financial and technical resources and development,
production and marketing capabilities than we do. Others may
develop lower-priced, less complex tests that could be viewed by
physicians and payors as functionally equivalent to our tests,
which could force us to lower the list prices of our tests and
impact our operating margins and our ability to achieve
sustained profitability. Some competitors have developed tests
cleared for marketing by the 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 of and reimbursement for our tests. If we are unable to
compete successfully against current or future competitors, we
may be unable to increase market acceptance for and sales of our
tests, which could prevent us from increasing or sustaining our
revenues or achieving sustained 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, clinical partners,
pharmaceutical companies, or companies developing therapeutics
on a timely basis, or at all, 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.
39
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, the National Surgical Adjuvant Breast
and Bowel Project, or NSABP. Our success in the future depends
in part on our ability to enter into agreements with other
leading cancer organizations. This can be difficult due to
internal and external constraints placed on these organizations.
Some organizations may limit the number of collaborations they
have with any one company so as to not be perceived as biased or
conflicted. Organizations may also have insufficient
administrative and related infrastructure to enable
collaborations with many companies at once, which can extend the
time it takes to develop, negotiate and implement a
collaboration. Additionally, organizations often insist on
retaining the rights to publish the clinical data resulting from
the collaboration. The publication of clinical data in
peer-reviewed journals is a crucial step in commercializing and
obtaining reimbursement for a test such as ours, and our
inability to control when, if ever, results are published may
delay or limit our ability to derive sufficient revenues from
any product that may result from a collaboration.
From time to time we expect to engage in discussions with
potential clinical collaborators which may or may not lead to
collaborations. However, we cannot guarantee that any
discussions will result in clinical collaborations or that any
clinical studies which may result will be enrolled or completed
in a reasonable time frame or with successful outcomes. Once
news of discussions regarding possible collaborations are known
in the medical community, regardless of whether the news is
accurate, failure to announce a collaboration agreement or the
entitys announcement of a collaboration with an entity
other than us could result in adverse speculation about us, our
product or our technology, resulting in harm to our reputation
and our business.
The
loss of key members of our senior management team or our
inability to retain highly skilled scientists, clinicians and
salespeople could adversely affect our business.
Our success depends largely on the skills, experience and
performance of key members of our executive management team and
others in key management positions. The efforts of each of these
persons together will be critical to us as we continue to
develop our technologies and testing processes and as we
transition to a company with multiple commercialized products.
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. In addition, it
is expected that there will be a shortage of clinical laboratory
scientists in coming years, which would make it more difficult
to hire sufficient numbers of qualified personnel. We also face
competition from universities and public and private research
institutions in recruiting and retaining highly qualified
scientific personnel. In addition, our success depends on our
ability to attract and retain salespeople with extensive
experience in oncology and close relationships with medical
oncologists, surgeons, pathologists and other hospital
personnel. We may have difficulties locating, recruiting or
retaining qualified salespeople, which could cause a delay or
decline in the rate of adoption of our products. If we are not
able to attract and retain the necessary personnel to accomplish
our business objectives, we may experience constraints that
could adversely affect our ability to support our research and
development and sales programs. All of our employees are at-will
employees, which means that either we or the employee may
terminate their employment at any time.
40
If our
sole laboratory facility becomes inoperable, we will be unable
to perform our tests and our business will be
harmed.
We do not have redundant clinical reference laboratory
facilities outside of Redwood City, California. Redwood City is
situated near earthquake fault lines. Our facility and the
equipment we use to perform our tests would be costly to replace
and could require substantial lead time to repair or replace.
The facility may be harmed or rendered inoperable by natural or
man-made disasters, including earthquakes, flooding and power
outages, which may render it difficult or impossible for us to
perform our tests for some period of time. The inability to
perform our tests or the backlog of tests that could develop if
our facility is inoperable for even a short period of time may
result in the loss of customers or harm our reputation, and we
may be unable to regain those customers in the future. Although
we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient
to cover all of our potential losses and may not continue to be
available to us on acceptable terms, if at all.
In order to rely on a third party to perform our tests, we could
only use another facility with established state licensure and
CLIA accreditation under the scope of which Oncotype DX
tests could be performed following validation and other required
procedures. We cannot assure you that we would be able to find
another
CLIA-certified
facility willing to comply with the required procedures, that
this laboratory would be willing to perform the tests for us on
commercially reasonable terms, or that it would be able to meet
our quality standards. In order to establish a redundant
clinical reference laboratory facility, we would have to spend
considerable time and money securing adequate space,
constructing the facility, recruiting and training employees,
and establishing the additional operational and administrative
infrastructure necessary to support a second facility. We may
not be able, or it may take considerable time, to replicate our
testing processes or results in a new facility. Additionally,
any new clinical reference laboratory facility opened by us
would be subject to certification under CLIA and licensing 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.
International
expansion of our business exposes us to business, regulatory,
political, operational, financial and economic risks associated
with doing business outside of the United States.
Our business strategy incorporates international expansion,
including establishing and maintaining direct sales and
physician outreach and education capabilities outside of the
United States and expanding our relationships with distributors.
Doing business internationally involves a number of risks,
including:
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multiple, conflicting and changing laws and regulations such as
tax laws, export and import restrictions, employment laws,
regulatory requirements and other governmental approvals,
permits and licenses;
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failure by us or our distributors to obtain regulatory approvals
for the use of our tests in various countries;
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difficulties in staffing and managing foreign operations;
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complexities associated with managing multiple payor
reimbursement regimes or patient 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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natural disasters, political and economic instability, including
wars, terrorism, and political unrest, outbreak of disease,
boycotts, curtailment of trade and other business
restrictions; and
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regulatory and compliance risks that relate to maintaining
accurate information and control over sales and
distributors activities that may fall within the purview
of the Foreign Corrupt Practice Act, its books and records
provisions or its anti-bribery provisions.
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41
Any of these factors could significantly harm our future
international expansion and operations and, consequently, our
revenues and results of operations.
Our
dependence on distributors for foreign sales of our Oncotype DX
tests could limit or prevent us from selling our test in foreign
markets and from realizing long-term international revenue
growth.
As of December 31, 2010, we had exclusive distribution
agreements for our Oncotype DX breast cancer test in 13
countries outside of the United States, 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, form joint ventures or make
investments in other companies or technologies 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
in 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, or make
investments in other companies. 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 experience losses related to
investments in other companies, which could have a material
negative effect on our results of operations. We may not
identify or complete these transactions in a timely manner, on a
cost-effective basis, or at all, and we may not realize the
anticipated benefits of any acquisition, technology license,
strategic alliance, joint venture or investment.
To finance any acquisitions or investments, we may choose to
issue shares of our common stock as consideration, which would
dilute the ownership of our stockholders. Periods of upheaval in
the capital markets and world economy have in the past, and may
in the future, cause volatility in the market price of our
common stock. If the price of our common stock is low or
volatile, we may not be able to acquire other companies for
stock. Alternatively, it may be necessary for us to raise
additional funds for acquisitions through public or private
financings. Additional funds may not be available on terms that
are favorable to us, or at all.
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, similar types of
investments have in the past and may in the future experience
losses in value or liquidity issues which differ from historical
patterns. Should a portion of our marketable securities lose
value or have their liquidity impaired, it could adversely
affect our overall financial position by imperiling our ability
to fund our operations and forcing us to seek additional
financing sooner than we would otherwise. Such financing, if
available, may not be available on commercially attractive terms.
42
Our
inability to raise additional capital on acceptable terms in the
future may limit our ability to develop and commercialize new
tests and technologies and expand our operations.
We expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure,
commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other
things:
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sustain commercialization of our Oncotype DX tests and
enhancements to those tests;
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fund commercialization of any future tests we may develop;
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increase our selling and marketing efforts to drive market
adoption and address competitive developments;
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further expand our clinical laboratory operations;
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expand our technologies into other areas of cancer or other
diseases;
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expand our research and development activities;
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acquire, license or invest in technologies;
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acquire or invest in complementary businesses or assets; and
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finance capital expenditures and general and administrative
expenses.
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Our present and future funding requirements will depend on many
factors, including:
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the rate of progress in establishing reimbursement arrangements
with domestic and international third-party payors;
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the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts;
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the rate of progress and cost of research and development
activities associated with expansion of our Oncotype DX
breast and colon cancer tests;
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the rate of progress and cost of selling and marketing
activities associated with establishing adoption of and
reimbursement for our Oncotype DX colon cancer test;
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the rate of progress and cost of research and development
activities associated with products in research and early
development focused on cancers other than breast and colon
cancer;
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the cost of acquiring or achieving access to tissue samples and
technologies;
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the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
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the effect of competing technological and market developments;
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costs related to international expansion;
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the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our products or
operations;
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the impact of changes in Federal, state and international
taxation; and
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the economic and other terms and timing of any collaborations,
licensing or other arrangements into which we may enter or
acquisitions we may seek to effect.
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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.
The terms of debt securities issued or borrowings 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
43
unprecedented turmoil and upheaval characterized by the
bankruptcy, failure, collapse or sale of various financial
institutions and an unprecedented level of intervention from the
U.S. federal government. These events have generally made
equity and debt financing more difficult to obtain. Accordingly,
additional equity or debt financing might not be available on
reasonable terms, if at all. If we are not able to secure
additional funding when needed, we may have to delay, reduce the
scope of or eliminate one or more research and development
programs or selling and marketing initiatives. In addition, we
may have to work with a partner on one or more of our product or
market development programs, which could lower the economic
value of those programs to our company.
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.
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, or
those materials do not meet our quality
specifications.
We rely solely on Applied Biosystems, a division of Life
Technologies Corporation, to supply some of the laboratory
equipment on which we perform our tests. We periodically
forecast our needs for laboratory equipment and enter into
standard purchase orders with Applied Biosystems based on these
forecasts. We believe that there are relatively few equipment
manufacturers other than Applied Biosystems that are currently
capable of supplying the equipment necessary for our
Oncotype DX platform. Even if we were to identify other
suppliers, there can be no assurance that we will be able to
enter into agreements with such suppliers on a timely basis on
acceptable terms, if at all. If we should encounter delays or
difficulties in securing from Applied Biosystems the quality and
quantity of equipment we require for our tests, we may need to
reconfigure our test processes, which would result in delays in
commercialization or an interruption in sales. If any of these
events occur, our business and operating results could be
harmed. Additionally, if Applied Biosystems deems us to have
become uncreditworthy, it has the right to require alternative
payment terms from us, including payment in advance. We are also
required to indemnify Applied Biosystems against any damages
caused by any legal action or proceeding brought by a third
party against Applied Biosystems for damages caused by our
failure to obtain required approval with any regulatory agency.
We also rely on several sole suppliers for certain laboratory
materials which we use to perform our tests. While we have
developed alternate sourcing strategies for these materials, we
cannot be certain that these strategies will be effective. If we
should encounter delays or difficulties in securing these
laboratory materials, or if the materials do not meet our
quality specifications, delays in commercialization or an
interruption in sales could occur.
We may
be unable to manage our future growth effectively, which could
make it difficult to execute our business
strategy.
Future growth will impose significant added responsibilities on
management, including the need to identify, recruit, train and
integrate additional employees. In addition, rapid and
significant growth may place strain on our administrative and
operational infrastructure, including customer service and our
clinical reference laboratory. Our ability to manage our
operations and growth will require us to continue to improve our
operational, financial and management controls, reporting
systems and procedures. If we are unable to manage our growth
effectively, it may be difficult for us to execute our business
strategy.
44
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 patients with ER- breast cancers. 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.
We
must implement additional and expensive finance and accounting
systems, procedures and controls as we grow our business and
organization and to satisfy public company reporting
requirements, which will increase our costs and require
additional management resources.
As a public reporting company, we are required to comply with
the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the Securities and Exchange Commission.
Compliance with Section 404 of the Sarbanes-Oxley Act and
other requirements has increased our costs and required
additional management resources. We will need to continue to
implement additional finance and accounting systems, procedures
and controls as we grow our business and organization and to
satisfy existing reporting requirements. If we fail to maintain
or implement adequate controls, if we are unable to complete the
required Section 404 assessment as to the adequacy of our
internal control over financial reporting in future
Form 10-K
filings, or if our independent registered public accounting firm
is unable to provide us with an unqualified report as to the
effectiveness of our internal control over financial reporting
in future
Form 10-K
filings, our ability to obtain additional financing could be
impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and
in the accuracy of our periodic reports filed under the Exchange
Act. A lack of investor confidence in the reliability and
accuracy of our public reporting could cause our stock price to
decline.
We are
subject to increasingly complex taxation rules and practices,
which may affect how we conduct our business and our results of
operations.
As our business grows, we are required to comply with
increasingly complex taxation rules and practices. We are
subject to tax in multiple U.S. tax jurisdictions and in
foreign tax jurisdictions as we expand internationally. The
development of our tax strategies requires additional expertise
and may impact how we conduct our business. Our future effective
tax rates could be unfavorably affected by changes in, or
interpretations of, tax rules and regulations in the
jurisdictions in which we do business, by lapses of the
availability of the U.S. research and development tax
credit or by changes in the valuation of our deferred tax assets
and liabilities. Furthermore, we provide for certain tax
liabilities that involve significant judgment. We are subject to
the examination of our tax returns by federal, state
45
and foreign tax authorities, which could focus on our
intercompany transfer pricing methodology as well as other
matters. If our tax strategies are ineffective or we are not in
compliance with domestic and international tax laws, our
financial position, operating results and cash flows could be
adversely affected.
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ITEM 1B.
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Unresolved
Staff
Comments.
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None.
At December 31, 2010, we leased approximately
126,500 square feet of laboratory and office space in
Redwood City, California under operating leases that expire
between March 2018 and March 2019, with options for us to extend
the term of each lease for an additional five years. We also
leased approximately 2,500 square feet of office space in
Geneva, Switzerland under an operating lease that expires in May
2015. We believe that these facilities are adequate to meet our
business requirements for the near term and that additional
space, when needed, will be available on commercially reasonable
terms.
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ITEM 3.
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Legal
Proceedings.
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We were not a party to any material legal proceedings at
December 31, 2010, or at the date of this report.
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ITEM 4.
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(Removed
and Reserved).
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Executive
Officers of the Registrant
The names of our executive officers and their ages as of
March 1, 2011, are as follows:
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Name
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Age
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Position
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Randal W. Scott, Ph.D.
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53
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Executive Chairman of the Board
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Kimberly J. Popovits
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52
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President and Chief Executive Officer and Director
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G. Bradley Cole
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55
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Chief Operating Officer; Secretary
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Steven Shak, M.D.
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60
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Chief Medical Officer
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Joffre B. Baker, Ph.D.
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63
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Chief Scientific Officer
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Dean L. Schorno
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48
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Chief Financial Officer
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Randal W. Scott, Ph.D., has served as our Executive
Chairman of the Board since January 2009, Chairman of the Board
and Chief Executive Officer since our inception in August 2000
until December 2008, President from August 2000 until February
2002, Chief Financial Officer from December 2000 until April
2004, and Secretary from August 2000 until December 2000 and
from May 2003 until February 2005. Dr. Scott was a founder
of Incyte Corporation, a genomic information company, and served
Incyte in various roles, including Chairman of the Board from
August 2000 to December 2001, President from January 1997 to
August 2000, and Chief Scientific Officer from March 1995 to
August 2000. Dr. Scott holds a B.S. in Chemistry from
Emporia State University and a Ph.D. in Biochemistry from the
University of Kansas.
Kimberly J. Popovits has served as our President and
Chief Executive Officer since January 2009, President and Chief
Operating Officer since February 2002 and as a director since
March 2002. From November 1987 to February 2002,
Ms. Popovits served in various roles at Genentech, Inc., a
biotechnology company, most recently serving as Senior Vice
President, Marketing and Sales from February 2001 to February
2002, and as Vice President, Sales from October 1994 to February
2001. Prior to joining Genentech, she served as
Division Manager, Southeast Region, for American Critical
Care, a division of American Hospital Supply, a supplier of
health care products to hospitals. Ms. Popovits holds a
B.A. in Business from Michigan State University.
G. Bradley Cole has served as our Chief Operating
Officer since January 2009, and also served as Chief Financial
Officer from July 2004 until January 2011. Prior to that,
Mr. Cole served as Executive Vice President, Operations
from January 2008 and as Executive Vice President and Chief
Financial Officer from July 2004 until January 2009.
Mr. Cole has also served as Secretary since February 2005.
From December 1997 to May 2004, he served in various roles at
Guidant Corporation, a medical device company, most recently
serving as Vice President, Finance and Business Development for
the Endovascular Solutions Group from January 2001 until May
2004. From July 1994 to December 1997, Mr. Cole was Vice
President, Finance and Chief Financial Officer of Endovascular
46
Technologies, Inc., a medical device company that was acquired
by Guidant Corporation. From December 1988 to February 1994, he
served as Vice President, Finance and Chief Financial Officer of
Applied Biosystems Incorporated, a life sciences systems
company. Mr. Cole holds a B.S. in Business from Biola
University and an M.B.A. from San Jose State University.
Steven Shak, M.D., has served as our Chief Medical
Officer since December 2000. From July 1996 to October 2000,
Dr. Shak served in various roles in Medical Affairs at
Genentech, most recently as Senior Director and Staff Clinical
Scientist. From November 1989 to July 1996, Dr. Shak served
as a Director of Discovery Research at Genentech, where he was
responsible for Pulmonary Research, Immunology, and Pathology.
Prior to joining Genentech, Dr. Shak was an Assistant
Professor of Medicine and Pharmacology at the New York
University School of Medicine. Dr. Shak holds a B.A. in
Chemistry from Amherst College and an M.D. from the New York
University School of Medicine, and completed his post-doctoral
training at the University of California, San Francisco.
Joffre B. Baker, Ph.D., has served as our Chief
Scientific Officer since December 2000. From March 1997 to
October 2000, Dr. Baker served as Vice President for
Research Discovery at Genentech. From March 1993 to October
2000, Dr. Baker oversaw Research Discovery at Genentech,
which included the departments of Cardiovascular Research,
Oncology, Immunology, Endocrinology, and Pathology. From July
1991 to October 1993, he served as Genentechs Director of
Cardiovascular Research. Prior to joining Genentech,
Dr. Baker was a member of the faculty of the Department of
Biochemistry at the University of Kansas. He holds a B.S. in
Biology and Chemistry from the University of California,
San Diego and a Ph.D. in Biochemistry from the University
of Hawaii.
Dean L. Schorno has served as our Chief Financial Officer
since January 2011, Senior Vice President, Finance from February
2010, Vice President, Finance from August 2008 until February
2010, and as Vice President, Operations from January 2004 until
August 2008. From July 2001 through December 2003, he led the
Companys finance group as a Director and then Senior
Director. Before joining Genomic Health, from 1991 through 2001,
Mr. Schorno headed an accounting and consulting firm, which
he founded. From 1985 to 1991, Mr. Schorno worked at an
international accounting firm. Mr. Schorno holds a B.S in
Business Administration from the University of California,
Berkeley and is a Certified Public Accountant.
PART II
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ITEM 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity
Securities.
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Our common stock, par value $0.0001 per share, is traded on the
NASDAQ Global Market under the symbol GHDX. The
following table sets forth the range of high and low sales
prices for our common stock for the periods indicated:
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2010
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First
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Second
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Third
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Fourth
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Quarter
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Quarter
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Quarter
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Quarter
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Stock price high
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$
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20.15
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$
|
17.75
|
|
|
$
|
15.45
|
|
|
$
|
23.72
|
|
Stock price low
|
|
$
|
16.20
|
|
|
$
|
12.83
|
|
|
$
|
11.94
|
|
|
$
|
13.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Stock price high
|
|
$
|
25.16
|
|
|
$
|
27.22
|
|
|
$
|
22.00
|
|
|
$
|
21.73
|
|
Stock price low
|
|
$
|
18.63
|
|
|
$
|
16.25
|
|
|
$
|
15.81
|
|
|
$
|
18.29
|
|
According to the records of our transfer agent, we had 85
stockholders of record as of February 28, 2011.
Dividends
We have never declared or paid any cash dividends on our capital
stock, and we do not currently intend to pay any cash dividends
on our common stock in the foreseeable future. We expect to
retain any future earnings to fund the development and growth of
our business. Our board of directors will determine future cash
dividends, if any. There are currently no contractual
restrictions on our ability to pay dividends.
47
Stock
Performance Graph
The following information is not deemed to be soliciting
material or to be filed with the Securities
and Exchange Commission or subject to Regulation 14A or 14C
under the Securities Exchange Act of 1934 or to the liabilities
of Section 18 of the Securities Exchange Act of 1934, and
will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent we specifically
incorporate it by reference into such a filing.
Set forth below is a line graph showing the cumulative total
stockholder return (change in stock price plus reinvested
dividends) assuming the investment of $100 on December 31,
2005 in each of our common stock, the NASDAQ Market Index and
the NASDAQ Biotechnology Index for the period commencing on
December 31, 2005 and ending on December 31, 2010. The
comparisons in the table are required by the Securities and
Exchange Commission and are not intended to forecast or be
indicative of future performance of our common stock.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG GENOMIC HEALTH INC.,
NASDAQ MARKET INDEX AND NASDAQ BIOTECHNOLOGY INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
Genomic Health, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
204.17
|
|
|
|
$
|
248.52
|
|
|
|
$
|
213.83
|
|
|
|
$
|
214.71
|
|
|
|
$
|
234.80
|
|
NASDAQ Market Index
|
|
|
$
|
100.00
|
|
|
|
$
|
111.74
|
|
|
|
$
|
124.67
|
|
|
|
$
|
73.77
|
|
|
|
$
|
107.12
|
|
|
|
$
|
125.93
|
|
NASDAQ Biotechnology Index
|
|
|
$
|
100.00
|
|
|
|
$
|
99.71
|
|
|
|
$
|
103.09
|
|
|
|
$
|
96.34
|
|
|
|
$
|
106.49
|
|
|
|
$
|
114.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
ITEM 6.
|
Selected
Financial
Data.
|
The following selected consolidated financial data should be
read together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this report. The selected consolidated
balance sheets data at December 31, 2010 and 2009 and the
selected consolidated statements of operations data for each
year ended December 31, 2010, 2009 and 2008 have been
derived from our audited consolidated financial statements that
are included elsewhere in this report. The selected consolidated
balance sheets data at December 31, 2008, 2007 and 2006 and
the selected consolidated statements of operations data for each
year ended December 31, 2007 and 2006 have been derived
from our audited consolidated financial statements not included
in this report. Historical results are not necessarily
indicative of the results to be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
174,870
|
|
|
$
|
146,581
|
|
|
$
|
108,658
|
|
|
$
|
62,745
|
|
|
$
|
27,006
|
|
Contract revenues
|
|
|
3,231
|
|
|
|
2,967
|
|
|
|
1,921
|
|
|
|
1,282
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
178,101
|
|
|
|
149,548
|
|
|
|
110,579
|
|
|
|
64,027
|
|
|
|
29,174
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
34,634
|
|
|
|
32,562
|
|
|
|
27,185
|
|
|
|
17,331
|
|
|
|
9,908
|
|
Research and development
|
|
|
33,225
|
|
|
|
35,691
|
|
|
|
28,624
|
|
|
|
22,053
|
|
|
|
12,841
|
|
Selling and marketing
|
|
|
71,405
|
|
|
|
61,132
|
|
|
|
46,668
|
|
|
|
36,456
|
|
|
|
24,625
|
|
General and administrative
|
|
|
34,913
|
|
|
|
29,564
|
|
|
|
25,617
|
|
|
|
17,849
|
|
|
|
12,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
174,177
|
|
|
|
158,949
|
|
|
|
128,094
|
|
|
|
93,689
|
|
|
|
60,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
3,924
|
|
|
|
(9,401
|
)
|
|
|
(17,515
|
)
|
|
|
(29,662
|
)
|
|
|
(30,965
|
)
|
Interest and other income, net
|
|
|
228
|
|
|
|
550
|
|
|
|
1,365
|
|
|
|
2,370
|
|
|
|
2,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
4,152
|
|
|
|
(8,851
|
)
|
|
|
(16,150
|
)
|
|
|
(27,292
|
)
|
|
|
(28,920
|
)
|
Income tax expense (benefit)
|
|
|
(136
|
)
|
|
|
560
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,288
|
|
|
$
|
(9,411
|
)
|
|
$
|
(16,089
|
)
|
|
$
|
(27,292
|
)
|
|
$
|
(28,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.15
|
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.14
|
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income
(loss) per share
|
|
|
28,815
|
|
|
|
28,563
|
|
|
|
28,298
|
|
|
|
26,760
|
|
|
|
24,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing diluted net income
(loss) per share
|
|
|
29,653
|
|
|
|
28,563
|
|
|
|
28,298
|
|
|
|
26,760
|
|
|
|
24,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes non-cash charges for employee stock-based compensation
expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
342
|
|
|
$
|
364
|
|
|
$
|
491
|
|
|
$
|
375
|
|
|
$
|
167
|
|
Research and development
|
|
|
2,881
|
|
|
|
3,098
|
|
|
|
2,913
|
|
|
|
1,882
|
|
|
|
821
|
|
Selling and marketing
|
|
|
3,086
|
|
|
|
3,171
|
|
|
|
2,622
|
|
|
|
1,876
|
|
|
|
779
|
|
General and administrative
|
|
|
4,035
|
|
|
|
3,522
|
|
|
|
3,112
|
|
|
|
2,152
|
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,344
|
|
|
$
|
10,155
|
|
|
$
|
9,138
|
|
|
$
|
6,285
|
|
|
$
|
2,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
76,818
|
|
|
$
|
57,448
|
|
|
$
|
56,670
|
|
|
$
|
68,360
|
|
|
$
|
44,215
|
|
Working capital
|
|
|
76,097
|
|
|
|
55,541
|
|
|
|
52,693
|
|
|
|
63,948
|
|
|
|
37,516
|
|
Total assets
|
|
|
110,861
|
|
|
|
88,107
|
|
|
|
86,689
|
|
|
|
87,929
|
|
|
|
58,024
|
|
Notes payable
|
|
|
|
|
|
|
225
|
|
|
|
2,039
|
|
|
|
4,726
|
|
|
|
7,273
|
|
Accumulated deficit
|
|
|
(173,607
|
)
|
|
|
(177,895
|
)
|
|
|
(168,484
|
)
|
|
|
(152,395
|
)
|
|
|
(125,103
|
)
|
Total stockholders equity
|
|
|
86,110
|
|
|
|
68,509
|
|
|
|
66,175
|
|
|
|
71,166
|
|
|
|
41,829
|
|
|
|
ITEM 7.
|
Managements Discussion and Analysis of Financial Condition
and Results of
Operations.
|
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the related notes included
in Item 8 of this report. Historical results are not
necessarily indicative of future results.
Business
Overview
We are a molecular diagnostic company focused on the development
and global commercialization of genomic-based clinical
laboratory services that analyze the underlying biology of
cancer, allowing physicians and patients to make individualized
treatment decisions. In January 2004, we launched our first
Oncotype DX test, which is used to predict the likelihood
of cancer recurrence and the likelihood of chemotherapy benefit
in early stage breast cancer patients. Effective June 1,
2010, the list price of our Oncotype DX breast cancer
test increased from $3,975 to $4,075. In January 2010, we
launched our second Oncotype DX test, which is used to
predict the likelihood of cancer recurrence in stage II
colon cancer patients. The list price for our Oncotype DX
colon cancer test is $3,200. Substantially all of our historical
revenues have been derived from the sale of Oncotype DX
breast cancer tests ordered by physicians in the United States.
For the year ended December 31, 2010, more than 57,270
Oncotype DX test reports were delivered for use in
treatment planning, compared to more than 49,030 and 39,640 test
reports delivered for the years ended December 31, 2009 and
2008, respectively. All of our tests are conducted at our
clinical reference laboratory in Redwood City, California. Our
clinical reference laboratory processing capacity is currently
approximately 18,000 tests per calendar quarter. As test
processing for our Oncotype DX breast and colon cancer
tests is essentially the same, except that the tests use
different RNA extraction methods and analyze different genes, we
believe that we currently have sufficient capacity to process
both of our tests.
We depend upon third-party payors to provide reimbursement for
our tests. Accordingly, we have and expect to continue to focus
substantial resources on obtaining reimbursement coverage from
third-party payors.
We have also continued to expand our business, both in the
United States and internationally. We plan to continue to use
essentially the same business model internationally as we use in
the United States, however, there are significant differences
between countries that need to be considered. For example,
different countries may have a public healthcare system, a
combination of public and private healthcare system or a
cash-based payment system. Our initial commercialization efforts
in markets outside of the United States have focused on offering
products on a patient self-pay basis and, over time, seeking
coverage from public health systems and private insurance on a
country by country basis. We have sales representatives in
certain countries outside of the United States. We may decide to
work directly on our own in certain countries while continuing
to utilize distributors in other countries. We established a
European subsidiary in February 2009 and have lead executives
with assignments in the Americas, Europe and Asia to support our
international efforts.
We expect that international sales of our Oncotype DX
tests will be heavily dependent on the availability of
reimbursement. In many countries, governments are primarily
responsible for reimbursing diagnostic tests. Governments often
have significant discretion in determining whether a test will
be reimbursed at all, and if
50
so, how much will be paid. We expect that it will take several
years to establish broad coverage and reimbursement for our
tests in countries outside of the United States, and we do not
expect international product revenues to comprise more than 10%
of our total revenues until the second half of 2011.
Oncotype
DX Breast Cancer Test
We believe increased demand for our Oncotype DX breast
cancer test resulted from our ongoing commercial efforts,
continued publication of peer-reviewed articles on studies we
sponsored, conducted or collaborated on that support the use of
and reimbursement for the test, clinical presentations at major
symposia, and the inclusion of our breast cancer test in
clinical practice guidelines. However, this increased demand is
not necessarily indicative of future growth rates, and we cannot
assure you that this level of increased demand can be sustained
or that publication of articles, future appearances or
presentations at medical conferences or increased commercial
efforts will have a similar impact on demand for our breast
cancer test in the future. Sequential quarterly demand for our
breast cancer test may also be impacted by other factors,
including the economic environment and continued high
unemployment levels, seasonal effects relating to physician and
patient vacation schedules, our shift in commercial focus to our
Oncotype DX colon cancer test or any future products we
may develop, and the number of clinical trials in process by
cooperative groups or makers of other tests conducting
experience studies.
Most national and regional third-party payors in the United
States, along with 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. In June 2009,
the local carrier with jurisdiction for claims submitted by us
for Medicare patients extended its coverage for our breast
cancer test to include ER+ patients with node positive, or N+,
disease (up to three positive lymph nodes). Additionally, some
payors provide policy coverage for the use of our test in ER+
patients with N+ disease, including lymph node micro-metastasis
(greater than 0.2 mm, but not greater than 2.0 mm in size).
However, we may not be able to obtain reimbursement coverage
from other payors for our test for breast cancer patients with
N+, ER+ disease.
As of December 31, 2010, we had exclusive distribution
agreements for our Oncotype DX breast cancer test with
distributors in 13 countries outside of the United States, and
have established reimbursement arrangements for this test with
several public and private payors and hospitals. We have
obtained coverage for our test in Canada, Ireland, Germany,
Greece, Israel and the United Kingdom and have completed or
initiated multiple international studies intended to support the
adoption of our breast cancer test outside of the United States.
In October 2010, we announced positive results from our first
European clinical decision impact study demonstrating that
knowledge of the Oncotype DX breast cancer Recurrence
Score result changed oncologists treatment decisions in
over 30% of patients, which is consistent with
U.S. decision impact studies. In November 2010, Breast
Cancer Research Treatment published positive results from a
Japanese economic evaluation study demonstrating that the
inclusion of Oncotype DX in Japans social health
insurance benefit package would be cost effective. In December
2010, we presented positive preliminary results from a large
adjuvant breast cancer trial with clinical researchers in
Germany using the Oncotype DX breast cancer test to
select patients for study randomization and treatment.
Oncotype
DX Colon Cancer Test
We expect to continue to focus substantial resources on pursuing
global adoption of and reimbursement for our Oncotype DX
colon cancer test, which we launched in January 2010. We believe
the key factors that will drive adoption of this test include
publication of peer-reviewed articles on the QUASAR clinical
validation study and other studies we sponsored, conducted or
collaborated on that support the use of and reimbursement for
the test, clinical presentations at major symposia and our
ongoing commercial efforts. We are working with public and
private payors and health plans to secure coverage for our colon
cancer test based upon clinical evidence showing the utility of
the test. We may need to hire additional commercial, scientific,
technical and other personnel to support this process.
We have obtained limited reimbursement coverage from third-party
payors for our Oncotype DX colon cancer test. As a new
test, our colon cancer test may be considered investigational by
payors and therefore may not be covered under their
reimbursement policies. Consequently, we intend to pursue
case-by-case
reimbursement and
51
expect that this test will continue to be reviewed on this basis
until policy decisions have been made by individual payors. We
are also working with public and private payors and health plans
to secure coverage for our Oncotype DX colon cancer test
based upon clinical evidence showing the utility of the test. We
believe it may take several years to achieve reimbursement with
a majority of third-party payors for our colon cancer test.
However, we cannot predict whether, or under what circumstances,
payors will reimburse for this test. Based upon our experience
in obtaining adoption of and reimbursement for our Oncotype
DX breast cancer test, we do not expect product revenues
from our colon cancer test to comprise more than 10% of our
total revenues for at least the next year or more.
During the second quarter of 2010, we completed sample
processing for our second stage II colon cancer recurrence
study and plan to report results in 2011. We also initiated the
first treatment decision impact study of our colon cancer test
and are currently enrolling patients. We are planning additional
studies to support the clinical utility and assess the treatment
impact and health economic benefit of our colon cancer test.
Product
Pipeline
We are investigating the utility of Oncotype DX in
patients with ductal carcinoma in situ, or DCIS, breast cancer,
which generally refers to a pre-invasive tumor with reduced risk
of recurrence. In early 2010, we presented positive results from
a DCIS breast cancer feasibility study demonstrating that
ribonucleic acid, or RNA, extraction and reverse transcription
polymerase chain reaction, or RT-PCR, technology can be
successfully performed to assess gene expression profiles from
fixed paraffin-embedded, or FPE, tissues. We plan to evaluate
the use of the Oncotype DX 21-gene breast cancer panel
and also seek to identify other genes that may be used for
treatment planning in DCIS. We are conducting a DCIS clinical
validation study and plan to report results in the first half of
2011.
In June 2010, we presented positive results from an evaluation
of biological similarities and differences between stage II
and stage III colon cancer suggesting the Oncotype
DX colon cancer Recurrence Score result may also predict
recurrence risk in stage III colon cancer. We plan to
continue conducting early development tests to evaluate our
Oncotype DX colon cancer test for treatment planning in
stage III disease, and we are also conducting studies to
investigate our colon cancer tests ability to predict
chemotherapy benefit in stage II and stage III colon
cancer patients treated with oxaliplatin.
In December 2010, we presented positive first results from our
prostate gene identification study. The study, which applied the
same RT-PCR technology used in our Oncotype DX breast and
colon cancer tests, identified 295 genes strongly associated
with clinical recurrence of prostate cancer following radical
prostatectomy. Based on these results, we announced that we are
moving forward with full clinical development for a prostate
cancer test and plan to conduct multiple additional studies. We
expect to report full gene identification results in 2011.
In June 2010, we presented results from our first renal gene
identification study under our collaboration agreement with
Pfizer Inc. for the development of a genomic test to estimate
the risk of recurrence following surgery for patients with stage
I-III renal carcinoma, clear cell type, that has not spread to
other parts of the body. The study results demonstrated a strong
correlation between gene expression and recurrence risk in this
patient population. We plan to initiate a renal cancer clinical
validation study in 2011.
Technology
We are developing high-throughput, next generation
sequencing, or NGS, to be our primary technology for future gene
discovery. NGS technologies parallelize the sequencing process,
producing thousands or millions of sequences at once. These
technologies are intended to provide DNA sequence information at
lower cost than standard methods. We have created proprietary
methods for NGS of FPE tissue nucleic acids, created
bioinformatics programs and infrastructure for data storage and
analysis, and plan to rely on NGS as the basic source of new
biomarkers in the future.
52
Economic
Environment
Continuing concerns over prolonged high unemployment levels
across the United States, the availability and cost of credit,
the U.S. mortgage market, the U.S. real estate market,
Federal budget proposals, inflation, deflation, taxation issues,
energy costs and geopolitical issues have contributed to
increased volatility and diminished expectations for the
U.S. economy. These factors, combined with declines in
business and consumer confidence and a volatile stock market,
have precipitated an economic slowdown and expectations of
slower global economic growth going forward. We periodically
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 third-party payors in the foreseeable
future. The economic environment continued to have a negative
impact on growth in tests delivered during the year ended
December 31, 2010, particularly in areas of the United
States with high unemployment levels where patients have lost
healthcare coverage, delayed medical checkups or are unable to
pay for our tests. We intend to continue to assess the impact of
the economic environment on our business activities. If the
economic environment does not improve or deteriorates, the
volume of tests delivered could continue to be negatively
impacted and we could, in turn, experience lower revenues.
U.S.
Healthcare Legislation
The recently enacted Patient Protection and Affordable Care Act,
as amended by the Health Care and Education Affordability
Reconciliation Act, or, collectively, the PPACA, makes changes
that are expected to significantly impact the pharmaceutical and
medical device industries and clinical laboratories. The PPACA
contains a number of provisions designed to generate the
revenues necessary to fund expanded health insurance coverage,
including new fees or taxes on certain health-related
industries, including medical device manufacturers. Beginning in
2013, each medical device manufacturer will have to pay sales
tax in an amount equal to 2.3% of the price for which such
manufacturer sells its medical devices. Though there are some
exceptions to the tax, because the FDA maintains that clinical
laboratory tests that are developed and validated by a
laboratory for its own use, or LDTs, such as our Oncotype
DX breast and colon cancer tests, are medical devices, it
may apply to some or all of our current products and products in
development. The PPACA also mandates a reduction in payments for
clinical laboratory services paid under the Medicare Clinical
Laboratory Fee Schedule, in addition to a productivity
adjustment to the Clinical Laboratory Fee Schedule. In addition,
the PPACA establishes a board that is charged with reducing the
per capita rate of growth in Medicare spending. These reductions
in payments may apply to some or all of our clinical laboratory
tests delivered to Medicare beneficiaries.
We are monitoring the impact of the PPACA in order to enable us
to determine the trends and changes that may be necessitated by
the legislation that may potentially impact on our business over
time.
Critical
Accounting Policies and Significant Judgments and
Estimates
This discussion and analysis of our financial condition and
results of operations is based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements, as well as revenues and expenses during the
reporting periods. We evaluate our estimates and judgments on an
ongoing basis. We base our estimates on historical experience
and on various other factors we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results
could therefore differ materially from those estimates under
different assumptions or conditions.
We believe the following critical accounting policies reflect
our more significant estimates and assumptions used in the
preparation of our financial statements.
53
Revenue
Recognition
We determine whether revenue is recognized on an accrual basis
when test results are delivered or on a cash basis when cash is
received from the payor. Our revenues for tests performed are
recognized on an accrual basis when the following criteria are
met: (1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. We assess whether
the fee is fixed or determinable based on the nature of the fee
charged for the products or services delivered and existing
contractual agreements. When evaluating collectibility, we
consider whether we have sufficient history to reliably estimate
a payors individual payment patterns. Based upon at least
several months of payment history, we review the number of tests
paid against the number of tests billed and the payors
outstanding balance for unpaid tests to determine whether
payments are being made at a consistently high percentage of
tests billed and at appropriate amounts given the contracted
payment amount. To the extent all criteria set forth above are
not met, including where there is no evidence of payment history
at the time test results are delivered, product revenues are
recognized on a cash basis when cash is received from the payor.
As of December 31, 2010, we had distributor agreements in
13 countries outside of the United States The distributor
provides us with certain marketing and administrative services
within its territory. As a condition of these agreements, the
distributor pays us an agreed upon fee per test and we process
the tests. The same revenue recognition criteria described above
generally apply to tests received through international
distributors. Product revenues for tests performed are
recognized on an accrual basis when the following revenue
recognition criteria are met: (1) persuasive evidence that
an arrangement exists; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured.
To the extent all criteria set forth above are not met when test
results are delivered, product revenues are generally recognized
when cash is received from the distributor.
Test revenue recognized on an accrual basis is recorded upon
delivery of each test performed, net of any contractual discount
at the amount that we expect to collect. We determine the amount
we expect to collect on a per payor, per contract or agreement
basis, based on our analysis of historical average payments.
This average amount is typically lower than the agreed upon
amount due to several factors, such as the amount of patient
co-payments, the existence of secondary payors and claim
denials. We typically review our analysis annually, or at the
time a contractual price change is implemented or when
information comes to our attention that leads us to believe an
adjustment may be warranted.
As of December 31, 2010, amounts outstanding for tests
delivered, net of write-downs and adjustments, which were not
recognized as revenue upon delivery because our accrual revenue
recognition criteria were not met and which had not been
collected, totaled approximately $33 million. We cannot
provide any assurance as to when, if ever, and to what extent
these amounts will be collected.
From time to time, we receive requests for refunds of payments,
generally due to overpayments made by third-party payors. Upon
becoming aware of a refund request, we establish an accrued
liability for tests covered by the refund request until such
time as we determine whether or not a refund is due. If we
determine that a refund is due, we credit cash and reduce the
accrued liability. Accrued refunds were $659,000 and $757,000 at
December 31, 2010 and 2009, respectively.
Contract revenues are generally derived from studies conducted
with biopharmaceutical and pharmaceutical companies and are
recognized on a contract-specific basis. Under certain
contracts, revenues are recognized as costs are incurred or
assays are processed. We may exercise judgment when estimating
full-time equivalent level of effort, costs incurred and time to
project completion. For certain contracts, we utilize the
performance-based method of revenue recognition, which requires
that we estimate the total amount of costs to be expended for a
project and recognize revenue equal to the portion of costs
expended to date. The estimated total costs to be expended are
necessarily subject to revision from
time-to-time
as the underlying facts and circumstances change.
Accounts
Receivable
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
54
trends or significant events indicate that a change in estimate
is appropriate. Historically, the amounts of uncollectible
accounts receivable that have been written off have been
consistent with managements expectations. We cannot assure
you that we will not experience higher than expected write-offs
in the future. As of December 31, 2010 and 2009, our
allowance for doubtful accounts was $680,000 and $545,000,
respectively. See Liquidity and Capital Resources
for additional information, including a summary of accounts
receivable aging by payor mix.
Research
and Development Expenses
We enter into collaboration and clinical trial agreements with
clinical collaborators and record these costs as research and
development expenses. We record accruals for estimated study
costs comprised of work performed by our collaborators under
contract terms. 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 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.
All potential future product programs outside of breast and
colon cancer are in the research or early development phase.
Although we have estimated the time frame in which some of these
products may be brought to market, the timing is uncertain given
the technical challenges and clinical variables that exist
between different types of cancers. We maintain information
regarding costs incurred for activities performed under certain
contracts with biopharmaceutical and pharmaceutical companies.
However, we do not generally record or maintain information
regarding costs incurred in research and development on a
program-specific basis. Our research and development staff and
associated infrastructure resources are deployed across several
programs. Many of our costs are thus not attributable to
individual programs. As a result, we are unable to determine the
duration and completion costs of our research and development
programs or when, if ever, and to what extent we will receive
cash inflows from the commercialization and sale of a product.
Stock-based
Compensation Expense
Our employee stock-based compensation is estimated at the date
of grant based on the fair value of the award using the
Black-Scholes option valuation model and is recognized as
expense ratably over the requisite service period. The
application of option valuation models requires significant
judgment and the use of estimates, particularly surrounding
assumptions used in determining fair value. The Black-Scholes
option valuation model requires the use of estimates such as
stock price volatility and expected option lives, as well as
expected option forfeiture rates, to value stock-based
compensation. Our assumptions regarding expected volatility are
based on the historical volatility of our common stock. The
expected life of options is estimated based on historical option
exercise data and assumptions related to unsettled options.
Expected option forfeiture rates are based on historical data,
and compensation expense is adjusted for actual results.
We review our valuation assumptions on an ongoing basis, and, as
a result, our assumptions used to value employee stock-based
awards granted in future periods may change. See Note 9,
Stock-Based Compensation, in the Notes to
Consolidated Financial Statements in Part II, Item 8
of this Annual Report on
Form 10-K
for more information.
Deferred
Tax Assets
We are required to reduce our deferred tax assets by a valuation
allowance if it is more likely than not that some or all of our
deferred tax assets will not be realized. We must use judgment
in assessing the potential need for a valuation allowance, which
requires an evaluation of both negative and positive evidence.
The weight given to the potential effect of negative and
positive evidence should be commensurate with the extent to
which it can be objectively verified. In determining the need
for and amount of our valuation allowance, if any, we assess the
likelihood that we will be able to recover our deferred tax
assets using historical levels of income, estimates of future
income and tax planning strategies. As a result of historical
cumulative losses, we determined that, based on all available
evidence, there was substantial uncertainty as to our ability to
realize recorded net deferred taxes in future
55
periods. Accordingly, we recorded a valuation allowance against
all of our net deferred tax assets for the years ended
December 31, 2010 and 2009, respectively.
Results
of Operations
Comparison
of Years Ended December 31, 2010, 2009 and
2008
We recorded net income of $4.3 million for the year ended
December 31, 2010, compared to a net loss for the years
ended December 31, 2009 and 2008 of $9.4 million and
$16.1 million, respectively. On a basic per share basis,
net income was $0.15 for the year ended December 31, 2010
and net loss was $0.33 and $0.57 for the years ended
December 31, 2009 and 2008, respectively. On a diluted per
share basis, net income was $0.14 for the year ended
December 31, 2010 and net loss was $0.33 and $0.57 for the
years ended December 31, 2009 and 2008, respectively. We
may incur net losses in future periods due to future spending
and fluctuations in our business, and we may not maintain profit
levels in the future.
Revenues
We derive our revenues primarily from product sales and, to a
lesser extent, from contract research arrangements. We operate
in one industry segment. As of December 31, 2010,
substantially all of our product revenues have been derived from
the sale of our Oncotype DX breast cancer test. Payors
are billed upon generation and delivery of a Recurrence Score
report to the physician. Product revenues are recorded on a cash
basis unless a contract or arrangement to pay is in place with
the payor at the time of billing and collectibility is
reasonably assured. Contract revenues are derived from studies
conducted with biopharmaceutical and pharmaceutical companies
and are recorded as contractual obligations are completed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Product revenues
|
|
$
|
174,870
|
|
|
$
|
146,581
|
|
|
$
|
108,658
|
|
Contract revenues
|
|
|
3,231
|
|
|
|
2,967
|
|
|
|
1,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
178,101
|
|
|
$
|
149,548
|
|
|
$
|
110,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase in product revenues
|
|
$
|
28,289
|
|
|
$
|
37,923
|
|
|
|
|
|
Year over year percentage increase in product revenues
|
|
|
19
|
%
|
|
|
35
|
%
|
|
|
|
|
The year over year increases in product revenues resulted from
increased adoption, as evidenced by a 17% increase in test
volume for the year ended December 31, 2010 and a 24%
increase in test volume for the year ended December 31,
2009. We also experienced expanded reimbursement coverage and an
increase in revenues recorded on an accrual basis. Approximately
$97.7 million, or 56%, of product revenues for the year
ended December 31, 2010, were recorded on an accrual basis
and recognized at the time the test results were delivered,
compared to $75.3 million, or 51%, and $55.1 million,
or 51%, of product revenues for the years ended
December 31, 2009 and 2008, respectively. For all periods,
the balance of product revenues was recognized upon cash
collection as payments were received.
Product revenues related to Medicare patients for the year ended
December 31, 2010 were $36.3 million, or 21%, of
product revenues, compared to $28.8 million, or 20%, and
$23.7 million, or 22%, of product revenues for the years
ended December 31, 2009 and 2008, respectively. There were
no other third-party payors comprising product revenues of 10%
or more for those years. International product revenues were
$10.1 million, or 6% of product revenues, for the year
ended December 31, 2010, compared to $6.1 million, or
4% of product revenues, and $3.7 million, or 3% of product
revenues, for the years ended December 31, 2009 and 2008,
respectively.
Product revenues for the year ended December 31, 2009 were
affected by delayed receipt of approximately $2.5 million
in payments from two third-party payors. The delays resulted
from interruptions in payments due to contract and documentation
requirements, which were resolved and recorded in the first half
of 2010. The timing of recognition of revenue related to these
and other third-party payments may cause fluctuations in product
revenues from period to period.
56
Contract revenues were $3.2 million, $3.0 million and
$1.9 million for the years ended December 31, 2010,
2009 and 2008, respectively. Contract revenues represented
studies assessing our gene expression technology or
collaborative work in gene selection and protocol design with
our pharmaceutical partners. The increase in contract revenues
for 2010 compared to 2009 was due primarily to the recognition
of deferred revenue from a previously completed contract. The
increase in contract revenues for 2009 compared to 2008 was due
entirely to ongoing activities related to our collaboration with
Pfizer Inc. We expect that our contract revenues will continue
to fluctuate based on the number and timing of studies being
conducted.
Cost of
Product Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Tissue sample processing costs
|
|
$
|
23,802
|
|
|
$
|
22,103
|
|
|
$
|
18,893
|
|
Employee stock-based compensation
|
|
|
342
|
|
|
|
364
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tissue sample processing costs
|
|
|
24,144
|
|
|
|
22,467
|
|
|
|
19,384
|
|
License fees
|
|
|
10,490
|
|
|
|
10,095
|
|
|
|
7,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product revenues
|
|
$
|
34,634
|
|
|
$
|
32,562
|
|
|
$
|
27,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
2,072
|
|
|
$
|
5,377
|
|
|
|
|
|
Year over year percentage increase
|
|
|
6
|
%
|
|
|
20
|
%
|
|
|
|
|
Cost of product revenues represents the cost of materials,
direct labor, equipment and infrastructure expenses associated
with processing tissue samples (including histopathology,
anatomical pathology, paraffin extraction, RT-PCR, quality
control analyses and shipping charges to transport tissue
samples) and license fees. Infrastructure expenses include
allocated facility occupancy and information technology costs.
Costs associated with performing our test are recorded as tests
are processed. Costs recorded for tissue sample processing
represent the cost of all the tests processed during the period
regardless of whether revenue was recognized with respect to
that test. Royalties for licensed technology calculated as a
percentage of product revenues and fixed annual payments
relating to the launch and commercialization of Oncotype
DX tests are recorded as license fees in cost of product
revenues at the time product revenues are recognized or in
accordance with other contractual obligations. While license
fees are generally calculated as a percentage of product
revenues, the percentage increase in license fees does not
correlate exactly to the percentage increase in product revenues
because certain agreements contain provisions for fixed annual
payments and other agreements have tiered rates and payments
that may be capped at annual minimum or maximum amounts. License
fees represent a significant component of our cost of product
revenues and are expected to remain so for the foreseeable
future.
Tissue sample processing costs increased $1.7 million, or
8%, in 2010 compared to 2009, and $3.2 million, or 17%, in
2009 compared to 2008, driven by increases in test volume of 17%
and 24% in 2010 and 2009, respectively, which were partially
offset by cost controls and efficiency gains. License fees
increased $395,000, or 4%, in 2010 compared to 2009 and
$2.3 million, or 29%, in 2009 compared to 2008. License
fees for the year ended December 31, 2010 included a
decrease of approximately $1.7 million related to the
discontinuance of certain license fees, representing 1% of
product revenues, resulting from the abandonment of a patent by
the licensor. These decreases were offset by increases in
license fees (related to other licenses) of $1.8 million,
due to primarily to increased product revenues, and $350,000 of
expense related to fixed annual payments to one of our
collaborators triggered by the January 2010 launch of our
Oncotype DX colon cancer test. We expect the cost of
product revenues to increase in future periods to the extent we
process more tests.
57
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
16,650
|
|
|
$
|
18,413
|
|
|
$
|
16,534
|
|
Employee stock-based compensation
|
|
|
2,881
|
|
|
|
3,098
|
|
|
|
2,913
|
|
Collaboration expenses
|
|
|
2,244
|
|
|
|
2,192
|
|
|
|
1,433
|
|
Reagents and laboratory supplies
|
|
|
2,068
|
|
|
|
2,976
|
|
|
|
1,972
|
|
Infrastructure and all other costs
|
|
|
9,382
|
|
|
|
9,012
|
|
|
|
5,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
33,225
|
|
|
$
|
35,691
|
|
|
$
|
28,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase (decrease)
|
|
$
|
(2,466
|
)
|
|
$
|
7,067
|
|
|
|
|
|
Year over year percentage increase (decrease)
|
|
|
(7
|
)%
|
|
|
25
|
%
|
|
|
|
|
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 $2.5 million, or 7%, decrease in research and
development expenses for 2010 compared to 2009 included a
$1.8 million decrease in personnel-related expenses and a
$908,000 decrease in reagents and laboratory supplies expense
due primarily to cost controls, efficiency gains, project timing
and reagents and supplies use for ongoing research and
development activities, and the movement of our Oncotype
DX colon cancer test from development and commercialization
in 2009 to product launch in 2010. These decreases were
partially offset by a $370,000 increase in infrastructure and
other expenses, including allocated information technology
salaries and benefits and other costs for projects related to
NGS. Of the $1.8 million decrease in personnel-related
expenses, $1.0 million was attributable to decreases in
salaries, benefits and related expenses, $431,000 was related to
lower bonus payments and $298,000 was attributable to decreased
contract labor and consulting expenses. The decreases in
salaries and bonus payments were primarily due to lower
headcount, as open positions resulting from attrition had not
been filled in 2010.
The $7.1 million, or 25%, increase in research and
development expenses for 2009 compared to 2008 included a
$2.5 million increase in allocated information technology
salaries and benefits and other costs related to the development
of our colon cancer test, a $1.9 million increase in
personnel-related expenses, a $1.0 million increase in
reagents and laboratory supplies, a $759,000 increase in
collaborations expense due primarily to gene discovery work and
a $740,000 increase in infrastructure and other costs. The
$1.9 million increase in personnel-related expenses
included $1.6 million in salary increases and $266,000 in
higher benefits and other expenses. The increases in reagents,
laboratory supplies and collaboration expenses were primarily
due to early development studies for renal, prostate, and
small-cell lung cancer programs. We expect our research and
development expenses due to increased investment in new our
product pipeline for breast, colon, renal, prostate and other
cancers.
58
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
35,288
|
|
|
$
|
29,589
|
|
|
$
|
21,208
|
|
Employee stock-based compensation
|
|
|
3,086
|
|
|
|
3,171
|
|
|
|
2,622
|
|
Promotional and marketing materials
|
|
|
13,665
|
|
|
|
12,402
|
|
|
|
10,961
|
|
Travel, meetings and seminars
|
|
|
8,253
|
|
|
|
7,468
|
|
|
|
6,086
|
|
Infrastructure and all other costs
|
|
|
11,113
|
|
|
|
8,502
|
|
|
|
5,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling and marketing expenses
|
|
$
|
71,405
|
|
|
$
|
61,132
|
|
|
$
|
46,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
10,273
|
|
|
$
|
14,464
|
|
|
|
|
|
Year over year percentage increase
|
|
|
17
|
%
|
|
|
31
|
%
|
|
|
|
|
Our selling and marketing expenses consist primarily of
personnel-related expenses, education and promotional expenses
and infrastructure expenses, including allocated facility
occupancy and information technology costs. These expenses
include the costs of educating physicians, laboratory personnel
and other healthcare professionals regarding our genomic
technologies, how our Oncotype DX tests are developed and
validated and the value of the quantitative information that our
tests provide. Selling and marketing expenses also include the
costs of sponsoring continuing medical education, medical
meeting participation and dissemination of scientific and
economic publications related to our Oncotype DX tests.
Our sales force compensation includes annual salaries and
eligibility for quarterly commissions based on the achievement
of predetermined sales goals.
The $10.3 million, or 17%, increase in selling and
marketing expenses for 2010 compared to 2009 was primarily due
to a $5.7 million increase in personnel-related expenses, a
$2.6 million increase in infrastructure and other expenses,
including allocations for information technology, recruiting and
other expenses, a $1.3 million increase in promotional
field expenses and marketing materials and a $785,000 increase
in travel, meetings and seminars expenses. These increases
included costs related to the addition of eight U.S. sales
representatives in January 2010 and to our continued
international expansion efforts. Of the $5.7 million
increase in personnel-related expenses, $2.8 million was
attributable to increases in salaries, benefits and related
expenses, $1.7 million was attributable to higher
consulting expenses to support our international expansion and
colon cancer product launch and $1.2 million was
attributable to higher commissions and bonus payments.
The $14.5 million, or 31%, increase in selling and
marketing expenses for 2009 compared to 2008 was primarily due
to an $8.4 million increase in personnel-related expenses,
a $2.7 million increase in infrastructure and other
expenses, a $1.5 million increase in promotional field
expenses and marketing materials, a $1.4 million increase
in travel-related expenses, and a $549,000 increase in
stock-based compensation. These increases included costs related
to the addition of 20 U.S. sales representatives in January
2009 and to our international expansion activities. Of the
$8.4 million increase in personnel-related expenses,
$6.3 million was attributable to increases in salaries,
benefits and related expenses, $1.0 million was
attributable to higher consulting expenses to support our
international expansion and colon product launch, $866,000 was
attributable to higher commissions and bonus payments, and
$213,000 was attributable to increases in recruiting and
relocation expenses.
We expect selling and marketing expenses will continue to
increase in future periods due to our efforts to establish
adoption of and reimbursement for our Oncotype DX colon
cancer test, continued investment in our global commercial
infrastructure and increases in our sales force.
59
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Personnel-related expenses
|
|
$
|
13,591
|
|
|
$
|
10,001
|
|
|
$
|
9,184
|
|
Employee stock-based compensation
|
|
|
4,035
|
|
|
|
3,522
|
|
|
|
3,112
|
|
Billing and collection fees
|
|
|
6,524
|
|
|
|
5,611
|
|
|
|
3,922
|
|
Bad debt expense
|
|
|
2,231
|
|
|
|
1,438
|
|
|
|
1,278
|
|
Professional fees and all other costs
|
|
|
8,532
|
|
|
|
8,992
|
|
|
|
8,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
34,913
|
|
|
$
|
29,564
|
|
|
$
|
25,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over year dollar increase
|
|
$
|
5,349
|
|
|
$
|
3,947
|
|
|
|
|
|
Year over year percentage increase
|
|
|
18
|
%
|
|
|
15
|
%
|
|
|
|
|
Our general and administrative expenses consist primarily of
personnel-related expenses, billing and collection fees, bad
debt expense and professional fees and other costs, including
intellectual property defense and prosecution costs, and other
professional and administrative costs and related infrastructure
expenses, including allocated facility occupancy and information
technology costs.
The $5.3 million, or 18%, increase in general and
administrative expenses for 2010 compared to 2009 included a
$3.6 million increase in personnel-related expenses,
including the addition of in-house legal staff in 2010 and in
the second half of 2009, salary increases and benefits expenses,
a $913,000 increase in billing and collection fees related to
increased test volume and cash collections, a $793,000 increase
in bad debt expense and a $513,000 increase in stock-based
compensation, partially offset by a $326,000 decrease in
professional fees, including legal expenses.
The $3.9 million, or 15%, increase in general and
administrative expenses for 2009 compared to 2008 included a
$1.7 million increase in billing and collection fees
related to increases in the number of tests processed and cash
collections, an $817,000 increase in personnel-related expenses,
including the addition of in-house legal staff in the second
half of 2009, salary increases and benefits expenses, a $547,000
increase in professional fees, due primarily to legal fees for
regulatory and international matters, a $410,000 increase in
stock-based compensation, a $213,000 increase in infrastructure
expenses, a $176,000 increase in travel-related expenses and a
$161,000 increase in bad debt expense.
We expect general and administrative expenses to increase in
future periods as we hire additional staff and incur other
expenses to support the growth of our business, and to the
extent we spend more on both billing and collections fees and
bad debt expense. We expect billing and collections fees and bad
debt expense in total will continue to be approximately 5% of
product revenues for at least the next year or more.
Interest
and Other Income
Interest and other income was $277,000 for the year ended
December 31, 2010 compared to $670,000 and
$1.8 million for the years ended December 31, 2009 and
2008, respectively. The decreases in interest and other income
for 2010 and 2009 compared to the prior year comparative periods
reflected lower market yields on our investment portfolio. We
expect our interest income will remain nominal if the current
low interest rate environment continues.
Interest
and Other Expense
Interest and other expense was $49,000 for the year ended
December 31, 2010 compared to $120,000 and $386,000 for the
years ended December 31, 2009 and 2008, respectively. The
decreases in interest and other expense for 2010 and 2009
compared to prior year comparative periods were primarily due to
lower average balances on our equipment financing notes as we
paid them down. These notes were paid in full as of November
2010. We do not anticipate using additional equipment financing
as a funding source in the next twelve months.
60
Income
Tax Expense (Benefit)
For the year ended December 31, 2010, we recorded an income
tax benefit of $136,000, which was principally comprised of a
benefit for the reversal of 2009 alternative minimum income tax,
partially offset by other state income taxes and foreign taxes.
For the year ended December 31, 2009, we recorded income
tax expense of approximately $560,000, which was principally
comprised of California state income tax, federal alternative
minimum tax and foreign income taxes. For the year ended
December 31, 2008, we recorded income tax benefit of
approximately $61,000, which was comprised of minimum state
income taxes excluding the impact of an estimated refundable
credit receivable.
As a result of historical losses since inception and based on
all available evidence, we continue to believe that there is
substantial uncertainty as to whether we will recover recorded
net deferred taxes in future periods. Accordingly, we continue
to maintain a full valuation allowance on our net deferred tax
assets for the years ended December 31, 2010 and 2009,
respectively. We intend to maintain a full valuation allowance
on our deferred tax assets until sufficient evidence exists to
support the reversal of all or some portion of these allowances.
Liquidity
and Capital Resources
As of December 31, 2010, we had an accumulated deficit of
$173.6 million. We may incur net losses in the future, and
we cannot provide assurance as to when, if ever, we will achieve
sustained profitability. We expect that our research and
development, selling and marketing and general and
administrative expenses will increase in future periods and, as
a result, we will need to continue to generate significant
product revenues to achieve sustained profitability.
Sources
of Liquidity
At December 31, 2010, we had cash, cash equivalents and
short-term investments of $76.8 million compared to
$57.4 million at December 31, 2009. The
$19.4 million increase was attributable to increased cash
collections from sales of our tests, payments from collaborators
and cash received from the exercise of employee stock options,
which were partially offset by investments in the growth of our
business, including research and development, international
expansion and activities related to our colon cancer product
launch in January 2010. 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, U.S. Treasury
securities, debt obligations of U.S. government-sponsored
entities, and high-grade commercial paper and corporate bonds.
Historically we have financed our operations primarily through
sales of our equity securities and cash received in payment for
our tests. Purchases of equipment and leasehold improvements
have been partially financed through capital equipment financing
arrangements. Our notes payable under these arrangements were
paid in full as of November 2010.
Accounts
Receivable
At December 31, 2010 and 2009, $14.3 million, or 13%,
and $11.1 million, or 13%, respectively, of our total
assets consisted of accounts receivable. The $3.2 million
year over year increase in accounts receivable was attributable
to additional payors moving from cash basis to accrual basis
during 2010. Days sales outstanding, or DSOs, is a measure of
the average number of days it takes for us to collect our
accounts receivable, calculated from the date that tests are
billed. At December 31, 2010 and 2009, our average DSOs
were 52 days and 48 days, respectively. The timing of
our billing and cash collections causes fluctuations in our
monthly DSOs and accounts receivable.
61
The following tables summarize accounts receivable by payor mix
at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
31-60
|
|
|
61-90
|
|
|
91-120
|
|
|
121 to 180
|
|
|
Over 180
|
|
|
|
Total
|
|
|
Total
|
|
|
Current
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
|
(In thousands)
|
|
|
Managed care and other
|
|
$
|
9,725
|
|
|
|
65
|
%
|
|
$
|
5,367
|
|
|
$
|
1,598
|
|
|
$
|
706
|
|
|
$
|
525
|
|
|
$
|
579
|
|
|
$
|
950
|
|
Medicare
|
|
|
5,261
|
|
|
|
35
|
|
|
|
4,070
|
|
|
|
666
|
|
|
|
73
|
|
|
|
110
|
|
|
|
103
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,986
|
|
|
|
100
|
%
|
|
$
|
9,437
|
|
|
$
|
2,264
|
|
|
$
|
779
|
|
|
$
|
635
|
|
|
$
|
682
|
|
|
$
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accounts receivable
|
|
$
|
14,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
31-60
|
|
|
61-90
|
|
|
91-120
|
|
|
121 to 180
|
|
|
Over 180
|
|
|
|
Total
|
|
|
Total
|
|
|
Current
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
|
(In thousands)
|
|
|
Managed care and other
|
|
$
|
6,591
|
|
|
|
56
|
%
|
|
$
|
3,391
|
|
|
$
|
1,164
|
|
|
$
|
563
|
|
|
$
|
386
|
|
|
$
|
410
|
|
|
$
|
677
|
|
Medicare
|
|
|
5,077
|
|
|
|
44
|
|
|
|
1,459
|
|
|
|
2,018
|
|
|
|
885
|
|
|
|
218
|
|
|
|
193
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,668
|
|
|
|
100
|
%
|
|
$
|
4,850
|
|
|
$
|
3,182
|
|
|
$
|
1,448
|
|
|
$
|
604
|
|
|
$
|
603
|
|
|
$
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accounts receivable
|
|
$
|
11,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
76,818
|
|
|
$
|
57,448
|
|
|
$
|
56,670
|
|
Working capital
|
|
|
76,097
|
|
|
|
55,541
|
|
|
|
52,693
|
|
For the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
21,583
|
|
|
|
4,826
|
|
|
|
(818
|
)
|
Investing activities
|
|
|
(2,240
|
)
|
|
|
(6,837
|
)
|
|
|
(26,167
|
)
|
Financing activities
|
|
|
2,758
|
|
|
|
(78
|
)
|
|
|
(1,008
|
)
|
Capital expenditures (included in investing activities above)
|
|
|
(4,442
|
)
|
|
|
(3,744
|
)
|
|
|
(10,057
|
)
|
Net cash provided by operating activities for the year ended
December 31, 2010 was $21.6 million, compared to net
cash provided by operating activities of $4.8 million and
net cash used in operating activities of $818,000 for the years
ended December 31, 2009 and 2008, respectively. Net cash
provided by (used in) operating activities includes net income
(loss) adjusted for certain non-cash items and changes in assets
and liabilities. Net cash provided by operating activities of
$21.6 million for the year ended December 31, 2010
reflected net income of $4.2 million, adjusted for
$17.5 million of depreciation and stock-based compensation
expense, a $2.7 million increase in accounts payable and a
$1.2 million increase in accrued compensation expense,
partially offset by a $3.2 million increase in accounts
receivable and a $2.4 million increase in prepaid expenses
and other assets. Net cash provided by operating activities of
$4.8 million for the year ended December 31, 2009
reflected a net loss of $9.4 million, adjusted for
$16.7 million of depreciation and stock-based compensation
expense, and a $2.0 million increase in accrued
compensation expense, partially offset by a $3.4 million
increase in accounts receivable, prepaid assets and other assets
and a $1.6 million decrease in deferred revenues. Net cash
used in operating activities of $818,000 for the year ended
December 31, 2008 reflected a net loss of
$16.1 million, adjusted for $14.1 million of
depreciation and stock-based compensation expense, and a
$5.4 million increase in accounts receivable, prepaid
assets and other assets, partially offset by a $3.2 million
increase in accrued expenses and other liabilities, a
62
$2.8 million increase in deferred revenue, which included
$3.7 million in advance collaboration contract payments,
and a $485,000 increase in accrued compensation expense.
Net cash used in investing activities was $2.2 million for
the year ended December 31, 2010, compared to net cash used
in investing activities of $6.8 million and
$26.2 million for the years ended December 31, 2009
and 2008, respectively. Our investing activities have consisted
predominantly of purchases and maturities of marketable
securities and capital expenditures. Net cash used in investing
activities of $2.2 million for the year ended
December 31, 2010 included $4.4 million of capital
expenditures and a $500,000 investment in non-marketable equity
securities, partially offset by $2.7 million in net
maturities of marketable securities. Net cash used in investing
activities of $6.8 million for the year ended
December 31, 2009 included $3.1 million in net
purchases of marketable securities and $3.7 million of
capital expenditures. Net cash used in investing activities of
$26.2 million for the year ended December 31, 2008
included $16.1 million in net purchases of marketable
securities as we invested a portion of the cash proceeds from
our May 2007 public offering of common stock and
$10.1 million of capital expenditures for facility
expansion and improvements.
Net cash provided by financing activities was $2.8 million
for the year ended December 31, 2010, compared to net cash
used in financing activities of $78,000 and $1.0 million
for the years ended December 31, 2009 and 2008,
respectively. Our financing activities included sales of our
equity securities and capital equipment financing arrangements.
Net cash provided by financing activities of $2.8 million
for the year ended December 31, 2010 included
$3.0 million in proceeds from issuance of common stock,
partially offset by $225,000 in payments on our equipment
financing notes payable, which were paid in full in November
2010. Net cash used in financing activities of $78,000 for the
year ended December 31, 2009 included $1.8 million in
payments on our notes payable, partially offset by
$1.7 million in proceeds from issuance of common stock. Net
cash used in financing activities of $1.0 million for the
year ended December 31, 2008 included $2.7 million in
payments on our notes payable, partially offset by
$1.7 million in proceeds from issuance of common stock.
Contractual
Obligations
The following table summarizes our significant contractual
obligations as of December 31, 2010 and the effect those
obligations are expected to have on our liquidity and cash flows
in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
Less Than
|
|
|
|
|
|
More Than
|
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
|
(In thousands)
|
|
Non-cancelable operating lease obligations
|
|
$
|
21,208
|
|
|
$
|
2,443
|
|
|
$
|
5,707
|
|
|
$
|
6,028
|
|
|
$
|
7,030
|
|
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 November 2010,
we exercised an option to extend the term of this lease to March
2019. In January 2007, we entered into a non-cancelable lease
for 48,000 square feet of additional laboratory and office
space in a nearby location. In November 2010, we exercised an
option to extend the term of this lease to March 2018. In
October 2009, we entered into a non-cancelable lease an
additional 30,500 square feet of office space in a nearby
location. This lease expires in March 2018. In May 2010, we
entered into a non-cancelable lease for 2,500 square feet
of property in Geneva, Switzerland. This lease expires in May
2015.
We are required to make a series of fixed annual payments under
one of our collaboration agreements beginning on the date that
we commercially launched our Oncotype DX breast cancer
test. We made payments under this agreement of $475,000 in each
of the years 2007, 2008, 2009 and 2010. A final annual payment
of $475,000 was made under this agreement in January 2011. We
are also required to make a series of fixed annual payments
under a separate collaboration agreement beginning with the
January 2010 launch of our Oncotype DX colon cancer test.
We made a payment of $150,000 in 2010. As of December 31,
2010, future annual payments under this agreement totaled
$1.9 million, of which $200,000 is due in 2011, $300,000 is
due in 2012 and $450,000 is due in each of the years 2013, 2014
and 2015. However, because both of these agreements may be
terminated by either party upon 30 days prior written
notice, these payments are not included in the table above.
63
We have also committed to make potential future payments to
third parties as part of our collaboration agreements. Payments
under these agreements generally become due and payable only
upon achievement of specific project milestones. Because the
achievement of these milestones is generally neither probable
nor reasonably estimable, such commitments have not been
included in the table above.
Off-Balance
Sheet Activities
As of December 31, 2010, we had no material off-balance
sheet arrangements.
Operating
Capital and Capital Expenditure Requirements
We achieved positive operating cash flow for the years ended
December 31, 2010 and 2009. We currently anticipate that
our cash, cash equivalents and short-term investments, together
with payments for our Oncotype DX tests, will be
sufficient to fund our operations and facilities expansion plans
for at least the next 12 months, including the expansion of
our research and development programs, establishment of adoption
of and reimbursement for our Oncotype DX colon cancer
test, and our international expansion efforts. We expect to
spend approximately $8.0 million over the next
12 months for planned laboratory equipment, information
technology expansion and facilities expansion. We may also use
cash to acquire or invest in complementary businesses,
technologies, services or products. We expect that our cash,
cash equivalents and short term investments will be also be used
to fund working capital and for other general corporate
purposes, such as licensing technology rights, distribution
arrangements for our tests outside of the United States or
expanding our direct sales capabilities outside of the U.S.
The amount and timing of actual expenditures may vary
significantly depending upon a number of factors, such as the
amount of cash provided by our operations, the progress of our
commercialization efforts, product development, regulatory
requirements, progress in reimbursement for our tests and
available strategic opportunities for acquisition of or
investment in complementary businesses, technologies, services
or products.
We cannot be certain that our international expansion plans,
efforts to establish adoption of and reimbursement for our
Oncotype DX colon cancer test or the development of
future products will be successful or that we will be able to
raise sufficient additional funds to see these activities
through to a successful result. It may take years to move any
one of a number of product candidates in research through
development and validation to commercialization.
Our future funding requirements will depend on many factors,
including the following:
|
|
|
|
|
the rate of progress in establishing reimbursement arrangements
with domestic and international third-party payors;
|
|
|
|
the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts;
|
|
|
|
the rate of progress and cost of research and development
activities associated with expansion of our Oncotype DX
breast and colon cancer tests;
|
|
|
|
the rate of progress and cost of selling and marketing
activities associated with establishing adoption of and
reimbursement for our Oncotype DX colon cancer test;
|
|
|
|
the rate of progress and cost of research and development
activities associated with products in research and early
development focused on cancers other than breast and colon
cancer;
|
|
|
|
costs related to future product launches;
|
|
|
|
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;
|
64
|
|
|
|
|
the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our products or
operations;
|
|
|
|
the impact of changes in Federal, state and international
taxation; and
|
|
|
|
the economic and other terms and timing of any collaborations,
licensing or other arrangements into which we may enter or
investments or acquisitions we might seek to effect.
|
If we are not able to generate and maintain sustained product
revenues to finance our cash requirements, we will need to
finance future cash needs primarily through public or private
equity offerings, debt financings, borrowings or strategic
collaborations or licensing arrangements. If we raise funds by
issuing equity securities, dilution to stockholders may result.
Any equity securities issued may also provide for rights,
preferences or privileges senior to those of holders of our
common stock. If we raise funds by issuing debt securities,
these debt securities would have rights, preferences and
privileges senior to those of holders of our common stock. The
terms of debt securities or borrowings could impose significant
restrictions on our operations. 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 market and financial services industry have in
the past, and may in the future, experience periods of upheaval
that could impact the availability and cost of equity and debt
financing. If we are not able to secure additional funding when
needed, on acceptable terms, we may have to delay, reduce the
scope of or eliminate one or more research and development
programs or selling and marketing initiatives. In addition, we
may have to work with a partner on one or more of our product or
market development programs, which could lower the economic
value of those programs to us.
Recent
Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board, or
FASB, issued authoritative guidance for applying the milestone
method of revenue recognition to research and development
arrangements. Under this guidance, revenue contingent upon the
achievement of a milestone in its entirety may be recognized in
the period in which the milestone is achieved only if the
milestone meets all the criteria within the guidance to be
considered substantive. This guidance is effective on a
prospective basis for research and development milestones
achieved in fiscal years, and interim periods within those
years, beginning on or after June 15, 2010. This guidance,
which we do not expect to have a material impact on our
financial condition and results of operations, will become
effective for us on January 1, 2011.
In October 2009, the FASB issued authoritative guidance that
amends existing guidance for identifying separate deliverables
in a revenue-generating transaction where multiple deliverables
exist, and provides guidance for allocating and recognizing
revenue based on those separate deliverables. The guidance is
expected to result in more multiple-deliverable arrangements
being separable than under current guidance and is required to
be applied prospectively to new or significantly modified
revenue arrangements. This guidance, which we do not expect to
have a material impact on our financial condition and results of
operations, will become effective for us on January 1, 2011.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Interest
Rate Risk
Our exposure to market risk for changes in interest rates
relates primarily to interest earned on our cash equivalents and
marketable securities. The primary objective of our investment
activities is to preserve our capital to fund operations. We
also seek to maximize income from our investments without
assuming significant risk. Our investment policy provides for
investments in short-term, low-risk, investment-grade debt
instruments. Our investments in marketable securities, which are
comprised primarily of money market funds, obligations of
U.S. Government agencies and government-sponsored entities,
commercial paper and corporate bonds, are subject to default,
changes in credit rating and changes in market value. These
investments are subject to interest rate risk and will decrease
in value if market interest rates increase.
Our cash, cash equivalents and marketable securities, totaling
$76.8 million at December 31, 2010, did not include
any auction preferred stock, auction rate securities or
mortgage-backed investments. We currently do not
65
hedge interest rate exposure, and we do not have any foreign
currency or other derivative financial instruments. The
securities in our investment portfolio are classified as
available for sale and are, due to their short-term nature,
subject to minimal interest rate risk. To date, we have not
experienced a loss of principal on any of our investments.
Although we currently expect that our ability to access or
liquidate these investments as needed to support our business
activities will continue, we cannot ensure that this will not
change. We believe that, if market interest rates were to change
immediately and uniformly by 10% from levels at
December 31, 2010, the impact on the fair value of these
securities or our cash flows or income would not be material.
Foreign
Currency Exchange Risk
Substantially all of our revenues are recognized in
U.S. dollars. Certain expenses related to our international
activities are payable in foreign currencies. As a result,
factors such as changes in foreign currency exchange rates or
weak economic conditions in foreign markets will affect our
financial results. We recognized net realized foreign exchange
transaction losses of $35,000 for the year ended
December 31, 2010. We had no foreign currency transaction
gains or losses for the years ended December 31, 2009 and
2008, respectively, as our total payables denominated in foreign
currency during those periods were not material. The functional
currency of our wholly-owned European subsidiary is the
U.S. dollar, so we are not currently subject to gains and
losses from foreign currency translation of the subsidiary
financial statements. We currently do not hedge foreign currency
exchange rate exposure. Although the impact of currency
fluctuations on our financial results has been immaterial in the
past, there can be no guarantee the impact of currency
fluctuations related to our international activities will not be
material in the future.
66
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data.
|
Genomic
Health, Inc.
Index to
consolidated financial statements
67
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Genomic Health, Inc.
We have audited the accompanying consolidated balance sheets of
Genomic Health, Inc. as of December 31, 2010 and 2009, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2010. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Genomic Health, Inc. at December 31,
2010 and 2009, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Genomic Health, Inc.s internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 11, 2011
expressed an unqualified opinion thereon.
Palo Alto, California
March 11, 2011
68
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,183
|
|
|
$
|
9,082
|
|
Short-term investments
|
|
|
45,635
|
|
|
|
48,366
|
|
Accounts receivable (net of allowance for doubtful accounts;
2010 $680, 2009 $545)
|
|
|
14,306
|
|
|
|
11,123
|
|
Prepaid expenses and other current assets
|
|
|
6,541
|
|
|
|
5,677
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
97,665
|
|
|
|
74,248
|
|
Property and equipment, net
|
|
|
10,345
|
|
|
|
12,865
|
|
Restricted cash
|
|
|
608
|
|
|
|
500
|
|
Other assets
|
|
|
2,243
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
110,861
|
|
|
$
|
88,107
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,968
|
|
|
$
|
1,304
|
|
Accrued compensation
|
|
|
7,352
|
|
|
|
6,188
|
|
Accrued license fees
|
|
|
3,126
|
|
|
|
3,016
|
|
Accrued expenses and other current liabilities
|
|
|
5,584
|
|
|
|
5,372
|
|
Notes payable
|
|
|
|
|
|
|
225
|
|
Deferred revenues current portion
|
|
|
1,295
|
|
|
|
2,238
|
|
Other current liabilities
|
|
|
243
|
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,568
|
|
|
|
18,707
|
|
Deferred revenues long-term portion
|
|
|
1,526
|
|
|
|
|
|
Other liabilities
|
|
|
1,657
|
|
|
|
891
|
|
Commitments (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, none issued and outstanding at December 31,
2010 and 2009
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 29,007,564 and 28,681,047 shares issued and
outstanding at December 31, 2010 and 2009 respectively
|
|
|
3
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
259,724
|
|
|
|
246,383
|
|
Accumulated other comprehensive income (loss)
|
|
|
(10
|
)
|
|
|
19
|
|
Accumulated deficit
|
|
|
(173,607
|
)
|
|
|
(177,895
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
86,110
|
|
|
|
68,509
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
110,861
|
|
|
$
|
88,107
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
69
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
174,870
|
|
|
$
|
146,581
|
|
|
$
|
108,658
|
|
Contract revenues
|
|
|
3,231
|
|
|
|
2,967
|
|
|
|
1,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
178,101
|
|
|
|
149,548
|
|
|
|
110,579
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
34,634
|
|
|
|
32,562
|
|
|
|
27,185
|
|
Research and development
|
|
|
33,225
|
|
|
|
35,691
|
|
|
|
28,624
|
|
Selling and marketing
|
|
|
71,405
|
|
|
|
61,132
|
|
|
|
46,668
|
|
General and administrative
|
|
|
34,913
|
|
|
|
29,564
|
|
|
|
25,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
174,177
|
|
|
|
158,949
|
|
|
|
128,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
3,924
|
|
|
|
(9,401
|
)
|
|
|
(17,515
|
)
|
Interest and other income
|
|
|
277
|
|
|
|
670
|
|
|
|
1,751
|
|
Interest and other expense
|
|
|
49
|
|
|
|
120
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
4,152
|
|
|
|
(8,851
|
)
|
|
|
(16,150
|
)
|
Income tax expense (benefit)
|
|
|
(136
|
)
|
|
|
560
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,288
|
|
|
$
|
(9,411
|
)
|
|
$
|
(16,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.15
|
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per share
|
|
|
28,815
|
|
|
|
28,563
|
|
|
|
28,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.14
|
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per share
|
|
|
29,653
|
|
|
|
28,563
|
|
|
|
28,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
70
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2007
|
|
|
28,182
|
|
|
$
|
2
|
|
|
$
|
223,507
|
|
|
$
|
52
|
|
|
$
|
(152,395
|
)
|
|
$
|
71,166
|
|
Issuance of common stock upon exercise of stock options for cash
|
|
|
279
|
|
|
|
|
|
|
|
1,679
|
|
|
|
|
|
|
|
|
|
|
|
1,679
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
9,138
|
|
|
|
|
|
|
|
|
|
|
|
9,138
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,089
|
)
|
|
|
(16,089
|
)
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
28,461
|
|
|
|
2
|
|
|
|
234,412
|
|
|
|
245
|
|
|
|
(168,484
|
)
|
|
|
66,175
|
|
Issuance of common stock upon exercise of stock options for cash
|
|
|
220
|
|
|
|
|
|
|
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
1,736
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
10,155
|
|
|
|
|
|
|
|
|
|
|
|
10,155
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,411
|
)
|
|
|
(9,411
|
)
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
28,681
|
|
|
$
|
2
|
|
|
$
|
246,383
|
|
|
$
|
19
|
|
|
|
(177,895
|
)
|
|
$
|
68,509
|
|
Issuance of common stock upon exercise of stock options for cash
|
|
|
327
|
|
|
|
1
|
|
|
|
2,982
|
|
|
|
|
|
|
|
|
|
|
|
2,983
|
|
Stock-based compensation expense related to employee stock
options
|
|
|
|
|
|
|
|
|
|
|
10,344
|
|
|
|
|
|
|
|
|
|
|
|
10,344
|
|
Stock-based compensation expense related to consultant stock
options
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,288
|
|
|
|
4,288
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,259
|
|
Balance at December 31, 2010
|
|
|
29,008
|
|
|
$
|
3
|
|
|
$
|
259,724
|
|
|
$
|
(10
|
)
|
|
$
|
(173,607
|
)
|
|
$
|
86,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
,
71
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,288
|
|
|
$
|
(9,411
|
)
|
|
$
|
(16,089
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,180
|
|
|
|
6,591
|
|
|
|
5,012
|
|
Employee stock-based compensation
|
|
|
10,344
|
|
|
|
10,155
|
|
|
|
9,138
|
|
Non-employee stock-based compensation
|
|
|
15
|
|
|
|
80
|
|
|
|
88
|
|
Gain on disposal of property and equipment
|
|
|
(45
|
)
|
|
|
(44
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,183
|
)
|
|
|
(2,316
|
)
|
|
|
(3,718
|
)
|
Prepaid expenses and other assets
|
|
|
(2,365
|
)
|
|
|
(1,127
|
)
|
|
|
(1,687
|
)
|
Accounts payable
|
|
|
2,664
|
|
|
|
(594
|
)
|
|
|
(68
|
)
|
Accrued compensation
|
|
|
1,164
|
|
|
|
2,031
|
|
|
|
485
|
|
Accrued expenses and other liabilities
|
|
|
938
|
|
|
|
1,021
|
|
|
|
3,231
|
|
Deferred revenues
|
|
|
583
|
|
|
|
(1,560
|
)
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
21,583
|
|
|
|
4,826
|
|
|
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,442
|
)
|
|
|
(3,744
|
)
|
|
|
(10,057
|
)
|
Purchase of short-term investments
|
|
|
(84,303
|
)
|
|
|
(60,318
|
)
|
|
|
(112,109
|
)
|
Maturities of short-term investments
|
|
|
87,005
|
|
|
|
57,225
|
|
|
|
95,999
|
|
Investment in equity method investee
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,240
|
)
|
|
|
(6,837
|
)
|
|
|
(26,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments of notes payable
|
|
|
(225
|
)
|
|
|
(1,814
|
)
|
|
|
(2,687
|
)
|
Proceeds from issuance of common stock upon exercise of stock
options
|
|
|
2,983
|
|
|
|
1,736
|
|
|
|
1,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,758
|
|
|
|
(78
|
)
|
|
|
(1,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
22,101
|
|
|
|
(2,089
|
)
|
|
|
(27,993
|
)
|
Cash and cash equivalents at the beginning of period
|
|
|
9,082
|
|
|
|
11,171
|
|
|
|
39,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
31,183
|
|
|
$
|
9,082
|
|
|
$
|
11,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
13
|
|
|
$
|
120
|
|
|
$
|
386
|
|
Cash paid for income taxes
|
|
$
|
622
|
|
|
$
|
28
|
|
|
$
|
|
|
See accompanying notes.
72
GENOMIC
HEALTH, INC.
December 31,
2010
|
|
Note 1.
|
Organization
and Summary of Significant Accounting Policies
|
The
Company
Genomic Health, Inc. (the Company) is a molecular
diagnostics company focused on the development and global
commercialization of genomic-based clinical laboratory services
that analyze the underlying biology of cancer, allowing
physicians and patients to make individualized treatment
decisions. The Company was incorporated in Delaware in August
2000. The Companys first product, the Oncotype DX
breast cancer test, was launched in 2004 and is used for early
stage breast cancer patients to predict the likelihood of breast
cancer recurrence and the likelihood of chemotherapy benefit. In
January 2010, the Company launched its second product, the
Oncotype DX colon cancer test, which is used to predict
the likelihood of colon cancer recurrence in patients with
stage II disease.
Principles
of Consolidation
The consolidated financial statements include all the accounts
of the Company and its wholly-owned subsidiaries. The Company
has three wholly-owned subsidiaries. Genomic Health
International LLC, a European subsidiary that was established in
2009, and Genomic Health, LLC, a Delaware limited liability
company that was established in December 2010, support the
Companys international sales and marketing efforts.
Oncotype Laboratories, Inc., which was established in 2003, is
inactive. The functional currency for Genomic Health
International LLC is the U.S. dollar. All significant
intercompany balances and transactions have been eliminated.
Basis
of Presentation and Use of Estimates
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The
preparation of financial statements in conformity with GAAP
requires management to make judgments, assumptions and estimates
that affect the amounts reported in the Companys
consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Cash
Equivalents
The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash
equivalents.
Marketable
Securities
The Company invests in marketable securities, primarily money
market funds, obligations of U.S. Government agencies and
government-sponsored entities, corporate bonds and commercial
paper. The Company considers all investments with a maturity
date of less than one year as of the balance sheet date to be
short-term investments. These securities are carried at
estimated fair value with unrealized gains and losses included
in stockholders equity. Those investments with a maturity
date greater than one year as of the balance sheet date are
considered to be long-term investments. As of December 31,
2010 and 2009, respectively, all investments in marketable
securities were classified as available for sale.
Realized gains and losses and declines in value, if any, judged
to be other than temporary on
available-for-sale
securities are reported in other income or expense. When
securities are sold, any associated unrealized gain or loss
initially recorded as a separate component of stockholders
equity is reclassified out of stockholders equity on a
specific-identification basis and recorded in earnings for the
period. The cost of securities sold is determined using specific
identification.
73
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The Companys financial instruments consist principally of
cash and cash equivalents, marketable securities, trade
receivables, accounts payable and notes payable. The carrying
amounts of certain of these financial instruments, including
cash and cash equivalents, trade receivables and accounts
payable, approximate fair value due to their short maturities.
Based on borrowing rates available to the Company for loans and
capital lease obligations with similar terms, the carrying value
of the Companys notes payable approximate fair value.
See Note 3, Fair Value Measurements for
further information on the fair value of the Companys
financial instruments
Concentration
of Risk
Cash equivalents, marketable securities and trade accounts
receivable are financial instruments which potentially subject
the Company to concentrations of credit risk. Through
December 31, 2010, no material losses had been incurred.
The Company is subject to credit risk from its portfolio of cash
equivalents and marketable securities. The Company invests in
money market funds through a major U.S. bank and is exposed
to credit risk in the event of default by the financial
institution to the extent of amounts recorded on the
consolidated balance sheets. The Company invests in short-term,
investment-grade debt instruments and by policy limits the
amount in any one type of investment, except for securities
issued or guaranteed by the U.S. government. Under its
investment policy, the Company limits amounts invested in such
securities by credit rating, maturity, industry group,
investment type and issuer, except for securities issued by the
U.S. government. The Company is not exposed to any
significant concentrations of credit risk from these financial
instruments. The goals of the Companys investment policy,
in order of priority, are as follows: safety and preservation of
principal and diversification of risk; liquidity of investments
sufficient to meet cash flow requirements; and a competitive
after-tax rate of return.
The Company is also subject to credit risk from its accounts
receivable related to its product sales. The Company performs
evaluations of customers financial condition and generally
does not require collateral. The majority of the Companys
accounts receivable arises from product sales in the United
States and Israel. As of December 31, 2010, substantially
all of the Companys product revenues have been derived
from sales of one product, the Oncotype DX breast cancer
test. The majority of the Companys tests to date have been
delivered to physicians in the United States. All Oncotype
DX tests are processed in the Companys clinical
reference laboratory facility in Redwood City, California. One
third-party payor accounted for approximately 21%, 20% and 22%
of the Companys product revenues for the years ended
December 31, 2010, 2009 and 2008, respectively. This payor
represented 37% and 46% of the Companys net accounts
receivable balance as of December 31, 2010 and 2009,
respectively.
Allowance
for Doubtful Accounts
The Company accrues an allowance for doubtful accounts against
its accounts receivable based on estimates consistent with
historical payment experience. Bad debt expense is included in
general and administrative expense on the Companys
consolidated statements of operations. Accounts receivable are
written off against the allowance when the appeals process is
exhausted, when an unfavorable coverage decision is received or
when there is other substantive evidence that the account will
not be paid. As of December 31, 2010 and 2009, the
Companys allowance for doubtful accounts was $680,000 and
$545,000, respectively. Write-offs for doubtful accounts of
$2.1 million and $1.8 million were recorded against
the allowance during the years ended December 31, 2010 and
2009, respectively. Bad debt expense was $2.2 million,
$1.4 million, and $1.3 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
74
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property
and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to five
years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the
assets or the remaining term of the lease, whichever is shorter.
Internal-Use
Software
The Company capitalizes certain costs incurred for software
developed or obtained for internal use, including external
direct material and service costs and employee payroll and
payroll-related costs. Capitalized internal-use software costs,
which are included in property and equipment, are generally
depreciated over three years.
Intangible
Assets
Intangible assets with finite useful lives are recorded at cost,
less accumulated amortization. Amortization is recognized over
the estimated useful lives of the assets. The Companys
intangible assets with finite lives, which are related to patent
licenses, are not material and are included in non-current other
assets on the Companys consolidated balance sheets.
Equity
Method Investments in Unconsolidated Affiliates
Generally, a controlling financial interest is ownership of 51%
or more of the voting interest of an entity. However, a
controlling financial interest may also exist in entities, such
as a variable interest entity (VIE), through
arrangements that do not involve controlling voting interests.
The Company applies the accounting standard that requires
consolidation of VIEs if the Company is the primary beneficiary,
with both the power to direct the activities that most
significantly impact the entitys economic performance and
either the obligation to absorb losses or the right to receive
benefits that could potentially be significant to the VIE.
Investments in and the operating results of 50%-or-less owned
entities not required to be consolidated are included in the
consolidated financial statements on the basis of the equity
method of accounting. The initial investment is recorded at
cost. The carrying amount of the investment is adjusted for the
Companys share of earnings or losses of the investee,
excluding intra-entity profits and losses, after the date of the
investment. The Companys share of earnings or losses of
the investee is recognized as earnings or losses in net income
(loss). In December 2010, the Company invested $500,000 in the
equity securities of a non-public company representing 21% of
the entitys outstanding voting shares. The Company
determined that is was not the primary beneficiary of this VIE
and, accordingly, applied the equity method of accounting and
included this investment in non-current other assets on the
consolidated balance sheets as of December 31, 2010.
Impairment
of Long-lived Assets
The Company reviews long-lived assets, which include property
and equipment, intangible assets and equity method investments,
for impairment whenever events or changes in business
circumstances indicate that the carrying amounts of the assets
may not be fully recoverable. For property and equipment and
intangible assets, an impairment loss would be recognized when
estimated discounted future cash flows expected to result from
the use of the asset and its eventual disposition are less than
its carrying amount. Impairment, if any, is assessed using
discounted cash flows. For equity method investments, evidence
of impairment might include the absence of an ability to recover
the carrying amount of the investment or the inability of the
investee to sustain an earnings capacity which would justify the
carrying amount of the investment. The Companys assessment
as to whether any impairment is other than temporary is based on
its ability and intent to hold the investment and whether
evidence
75
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
indicating the carrying value of the investment is recoverable
within a reasonable period of time outweighs evidence to the
contrary. If the fair value of the investment is determined to
be less than the carrying value and the decline in value is
considered to be other than temporary, the asset is written down
to its fair value. There were no impairment losses for the years
ended December 31, 2010, 2009 and 2008.
Income
Taxes
The Company uses the liability method for income taxes, whereby
deferred income taxes are provided on items recognized for
financial reporting purposes over different periods than for
income tax purposes. Valuation allowances are provided when the
expected realization of tax assets does not meet a
more-likely-than-not criterion.
The Company accounts for uncertain income tax positions using a
benefit recognition model with a two-step approach, a
more-likely-than-not recognition criterion and a measurement
attribute that measures the position as the largest amount of
tax benefit that is greater than 50% likely of being realized
upon ultimate settlement, in accordance with the accounting
guidance for uncertain tax positions. If it is not more likely
than not that the benefit will be sustained on its technical
merits, no benefit is recorded. Uncertain tax positions that
relate only to timing of when an item is included on a tax
return are considered to have met the recognition threshold. The
Company recognizes accrued interest and penalties related to
unrecognized tax benefits in income tax expense when and if
incurred. See Note 10, Income Taxes, for
additional disclosures regarding unrecognized tax benefits.
Revenue
Recognition
The Company derives its revenues from product sales and contract
research arrangements. The Company operates in one industry
segment. Substantially all of the Companys historical
product revenues have been derived from the sale of the
Oncotype DX breast cancer test. The Company generally
bills third-party payors upon generation and delivery of a
Recurrence Score report to the physician. As such, the Company
takes assignment of benefits and the risk of collection with the
third-party payor. The Company usually bills the patient
directly for amounts owed after multiple requests for payment
have been denied or only partially paid by the insurance
carrier. The Company pursues
case-by-case
reimbursement where policies are not in place or payment history
has not been established.
The Companys product revenues for tests performed are
recognized when the following revenue recognition criteria are
met: (1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Criterion
(1) is satisfied when the Company has an arrangement to pay
or a contract with the payor in place addressing reimbursement
for the Oncotype DX test. In the absence of such
arrangements, the Company considers that criterion (1) is
satisfied when a third-party payor pays the Company for the test
performed. Criterion (2) is satisfied when the Company
performs the test and generates and delivers to the physician,
or makes available on its web portal, a Recurrence Score report.
Determination of criteria (3) and (4) is based on
managements judgments regarding whether the fee charged
for products or services delivered is fixed or determinable, and
the collectibility of those fees under any contract or
agreement. When evaluating collectibility, the Company considers
whether it has sufficient history to reliably estimate a
payors individual payment patterns. Based upon at least
several months of payment history, the Company reviews the
number of tests paid against the number of tests billed and the
payors outstanding balance for unpaid tests to determine
whether payments are being made at a consistently high
percentage of tests billed and at appropriate amounts given the
contracted payment amount. To the extent all criteria set forth
above are not met when test results are delivered, product
revenues are recognized when cash is received from the payor.
As of December 31, 2010, the Company had distributor
agreements in 13 countries outside of the United States. The
distributor provides certain marketing and administrative
services for the Company within its territory. As a condition of
these agreements, the distributor pays the Company an agreed
upon fee per test and the Company processes the tests. The same
revenue recognition criteria described above generally apply to
tests received through international distributors. Product
revenues for tests performed are recognized on an accrual basis
when the
76
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
following revenue recognition criteria are met:
(1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. To the extent all
criteria set forth above are not met when test results are
delivered, product revenues are generally recognized when cash
is received from the distributor.
From time to time, the Company receives requests for refunds of
payments, generally due to overpayments made by third
party-payors. Upon becoming aware of a refund request, the
Company establishes an accrued liability for tests covered by
the refund request until such time as the Company determines
whether or not a refund is due. Accrued refunds were $659,000
and $757,000 at December 31, 2010 and 2009, respectively.
Contract revenues are generally derived from studies conducted
with biopharmaceutical and pharmaceutical companies. The
specific methodology for revenue recognition is determined on a
case-by-case
basis according to the facts and circumstances applicable to a
given contract. Under certain contracts, the Companys
input, measured in terms of full-time equivalent level of effort
or running a set of assays through its clinical reference
laboratory under a contractual protocol, triggers payment
obligations, and revenues are recognized as costs are incurred
or assays are processed. Certain contracts have payments that
are triggered as milestones are completed, such as completion of
a successful set of experiments. Milestones are assessed on an
individual basis and revenue is recognized when these milestones
are achieved, as evidenced by acknowledgment from collaborators,
provided that (1) the milestone event is substantive and
its achievability was not reasonably assured at the inception of
the agreement and (2) the milestone payment is
non-refundable. Where separate milestones do not meet these
criteria, the Company typically defaults to a performance-based
model, such as revenue recognition following delivery of effort
as compared to an estimate of total expected effort.
Advance payments received in excess of revenues recognized are
classified as deferred revenue until such time as the revenue
recognition criteria have been met.
Cost
of Product Revenues
Cost of product revenues includes the cost of materials, direct
labor, equipment and infrastructure expenses associated with
processing tissue samples (including histopathology, anatomical
pathology, paraffin extraction, RT-PCR, quality control analyses
and shipping charges to transport tissue samples) and license
fees. Infrastructure expenses include allocated facility
occupancy and information technology costs. Costs associated
with performing the Companys tests are recorded as tests
are processed. Costs recorded for tissue sample processing and
shipping charges represent the cost of all the tests processed
during the period regardless of whether revenue was recognized
with respect to that test. Royalties for licensed technology
calculated as a percentage of product revenues and fixed annual
payments relating to the launch and commercialization of the
Companys tests are recorded as license fees in cost of
product revenues at the time product revenues are recognized or
in accordance with other contractual obligations.
Research
and Development Expenses
Research and development expenses are comprised of costs
incurred to develop technology and carry out clinical studies
and include: salaries and benefits, reagents and supplies used
in research and development laboratory work, infrastructure
expenses, including allocated facility occupancy and information
technology costs, contract services, and other outside costs.
Research and development expenses also include costs related to
activities performed under contracts with biopharmaceutical and
pharmaceutical companies. Research and development costs are
expensed as incurred.
The Company enters into collaboration and clinical trial
agreements with clinical collaborators and records these costs
as research and development expenses. The Company records
accruals for estimated study costs comprised of work performed
by its collaborators under contract terms. Advance payments for
goods or services
77
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that will be used or rendered for future research and
development activities are deferred and capitalized and
recognized as expense as the goods are delivered or the related
services are performed.
Stock-based
Compensation
The Company uses the Black-Scholes option valuation model, which
requires the use of estimates such as stock price volatility and
expected option lives, as well as expected option forfeiture
rates, to value employee stock-based compensation at the date of
grant, and recognizes stock-based compensation expense ratably
over the requisite service period.
Equity instruments granted to non-employees are valued using the
Black-Scholes option valuation model and are subject to periodic
revaluation over their vesting terms.
401(k)
Plan
Substantially all of the Companys employees are covered by
its defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code. The Company
pays dollar for dollar matching of employee contributions up to
a maximum of $1,000 for each employee per year based on a full
calendar year of service. The match is funded concurrently with
a participants semi-monthly contributions to the 401(k)
Plan. The Company recorded expense of for its contributions
under the 401(k) Plan of $431,000, $400,000 and $320,000 for the
years ended December 31, 2010, 2009 and 2008 respectively.
Foreign
Currency Transactions
Net foreign currency transaction gains or losses are included in
interest and other expense on the Companys consolidated
statements of income. Net transaction losses totaled $35,000 for
the year ended December 31, 2010. We had no foreign
currency transaction gains or losses for the years ended
December 31, 2009 and 2008, respectively.
Comprehensive
Gain or Loss
The Company displays comprehensive gain or loss and its
components within its consolidated statements of
stockholders equity. Other comprehensive gain or loss
consists of unrealized gains and losses on
available-for-sale
securities.
Leases
The Company enters into lease agreements for its laboratory and
office facilities. These leases are classified as operating
leases. Rent expense is recognized on a straight-line basis over
the term of the lease. Incentives granted under the
Companys facilities leases, including allowances to fund
leasehold improvements and rent holidays, are capitalized and
are recognized as reductions to rental expense on a
straight-line basis over the term of the lease.
Guarantees
and Indemnifications
The Company, as permitted under Delaware law and in accordance
with its bylaws, indemnifies its officers and directors for
certain events or occurrences, subject to certain limits, while
the officer or director is or was serving at the Companys
request in such capacity. The term of the indemnification period
is for the officers or directors lifetime. The
maximum amount of potential future indemnification is unlimited;
however, the Company has a director and officer insurance policy
that limits its exposure and may enable it to recover a portion
of any future amounts paid. The Company believes the fair value
of these indemnification agreements is minimal. Accordingly, the
Company has not recorded any liabilities for these agreements as
of December 31, 2010 and 2009.
78
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recently
Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board
(FASB) issued authoritative guidance for applying
the milestone method of revenue recognition to research and
development arrangements. Under this guidance, revenue
contingent upon the achievement of a milestone in its entirety
may be recognized in the period in which the milestone is
achieved only if the milestone meets all the criteria within the
guidance to be considered substantive. This guidance is
effective on a prospective basis for research and development
milestones achieved in fiscal years, and interim periods within
those years, beginning on or after June 15, 2010. This
guidance, which the Company does not expect to have a material
impact on its financial condition and results of operations,
will become effective for the Company on January 1, 2011.
In October 2009, the FASB issued authoritative guidance that
amends existing guidance for identifying separate deliverables
in a revenue-generating transaction where multiple deliverables
exist, and provides guidance for allocating and recognizing
revenue based on those separate deliverables. The guidance is
expected to result in more multiple-deliverable arrangements
being separable than under current guidance and is required to
be applied prospectively to new or significantly modified
revenue arrangements. This guidance, which the Company does not
expect to have a material impact on its financial condition and
results of operations, will become effective for the Company on
January 1, 2011.
|
|
Note 2.
|
Net
Income (Loss) Per Share
|
Basic net income (loss) per share is calculated by dividing net
income (loss) for the period by the weighted-average number of
common shares outstanding for the period without consideration
of potential common shares. Diluted net income (loss) per share
is calculated by dividing net income (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. The following table
is a reconciliation of the numerator and denominator used in the
calculation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,288
|
|
|
$
|
(9,411
|
)
|
|
$
|
(16,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding used in the
calculation of basic net income (loss) per share
|
|
|
28,815
|
|
|
|
28,563
|
|
|
|
28,298
|
|
Effect of dilutive securities: Options to purchase common stock
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding used in the
calculation of diluted net income (loss) per share
|
|
|
29,653
|
|
|
|
28,563
|
|
|
|
28,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.15
|
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.14
|
|
|
$
|
(0.33
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 4.1 million weighted-average shares of
the Companys common stock were outstanding during the year
ended December 31, 2010, but were not included in the
computation of diluted net income (loss) per share because the
options exercise prices were greater than the average
market price of the Companys common stock during these
periods; therefore, their effect is anti-dilutive. Options to
purchase 4.7 million shares of the Companys common
stock were outstanding at December 31, 2009 and 2008,
respectively, but are not included in the computation of diluted
net income (loss) per share because their effect is
anti-dilutive.
79
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3.
|
Fair
Value Measurements
|
The Company measures certain financial assets, including cash
equivalents and
available-for-sale
securities, at their fair value on a recurring basis. The fair
value of these financial assets was determined based on a
hierarchy of three levels of inputs, of which the first two are
considered observable and the last unobservable, as follows:
Level 1: Quoted prices in active
markets for identical assets or liabilities.
Level 2: Observable inputs other
than Level 1 inputs, 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.
Assets and liabilities measured at fair value are classified in
their entirety based on the lowest level of input that is
significant to the fair value measurement. The Companys
assessment of the significance of a particular input to the fair
value measurement in its entirety requires management to make
judgments and consider factors specific to the asset or
liability. The Company did not have any non-financial assets or
liabilities that were measured or disclosed at fair value on a
recurring basis at December 31, 2010 and 2009,
respectively. The following tables set forth the Companys
financial instruments that were measured at fair value on a
recurring basis at December 31, 2010 and 2009 by level
within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits
|
|
$
|
9,956
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,956
|
|
U.S. Treasury securities
|
|
|
3,818
|
|
|
|
|
|
|
|
|
|
|
|
3,818
|
|
Debt securities of U.S. government-sponsored agencies
|
|
|
|
|
|
|
20,819
|
|
|
|
|
|
|
|
20,819
|
|
Commercial paper
|
|
|
|
|
|
|
11,869
|
|
|
|
|
|
|
|
11,869
|
|
Corporate debt securities
|
|
|
|
|
|
|
9,129
|
|
|
|
|
|
|
|
9,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,774
|
|
|
$
|
41,817
|
|
|
$
|
|
|
|
$
|
55,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits
|
|
$
|
6,011
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,011
|
|
U.S. Treasury securities
|
|
|
4,546
|
|
|
|
|
|
|
|
|
|
|
|
4,546
|
|
Debt securities of U.S. government-sponsored agencies
|
|
|
|
|
|
|
44,820
|
(1)
|
|
|
|
|
|
|
44,820
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,557
|
|
|
$
|
44,820
|
|
|
$
|
|
|
|
$
|
55,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a $1.0 million debt security maturing within three
months of December 31, 2009 and classified as a cash
equivalent on the consolidated balance sheets. |
80
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys debt securities of
U.S. government-sponsored entities, commercial paper and
corporate bonds are classified as Level 2 as they are
valued using multi-dimensional relational pricing models that
use observable market inputs, including benchmark yields,
reported trades, broker-dealer quotes, issuer spreads, benchmark
securities, bids, offers and reference data. Not all inputs
listed are available for use in the evaluation process on any
given day for each security evaluation. In addition, market
indicators, industry and economic events are monitored and may
serve as a trigger to acquire further corroborating market data.
There were no transfers between Level 1 and Level 2
categories during the years ended December 31, 2010 and
2009, respectively.
The following tables illustrate the Companys
available-for-sale
marketable securities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury securities
|
|
$
|
3,818
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,818
|
|
Debt securities of U.S. government-sponsored entities
|
|
|
20,825
|
|
|
|
1
|
|
|
|
(7
|
)
|
|
|
20,819
|
|
Commercial paper
|
|
|
11,868
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
11,869
|
|
Corporate debt securities
|
|
|
9,134
|
|
|
|
0
|
|
|
|
(5
|
)
|
|
|
9,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,645
|
|
|
$
|
3
|
|
|
$
|
(13
|
)
|
|
$
|
45,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of U.S. government-sponsored entities
|
|
$
|
43,800
|
|
|
$
|
29
|
|
|
$
|
(9
|
)
|
|
$
|
43,820
|
|
Commercial paper
|
|
|
4,547
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
4,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,347
|
|
|
$
|
29
|
|
|
$
|
(10
|
)
|
|
$
|
48,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no realized gains or losses on its
available-for-sale
marketable securities for the years ended December 31,
2010, 2009 and 2008, respectively.
As of December 31, 2010, all of the Companys
available-for-sale
marketable securities had contractual maturities of one year or
less.
81
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Property
and Equipment
|
The following table summarizes the Companys property and
equipment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Laboratory equipment
|
|
$
|
16,390
|
|
|
$
|
14,430
|
|
Computer equipment
|
|
|
3,961
|
|
|
|
2,377
|
|
Computer software internal use
|
|
|
1,335
|
|
|
|
986
|
|
Furniture and fixtures
|
|
|
2,662
|
|
|
|
2,655
|
|
Leasehold improvements
|
|
|
13,082
|
|
|
|
12,981
|
|
Construction in progress
|
|
|
269
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,699
|
|
|
|
33,448
|
|
Less accumulated depreciation and amortization
|
|
|
(27,354
|
)
|
|
|
(20,583
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,345
|
|
|
$
|
12,865
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008, the
Company recorded property and equipment depreciation and
amortization expense of $7.0 million, $6.5 million and
$4.9 million, respectively.
|
|
Note 5.
|
Accrued
Expenses and Other Current Liabilities
|
The following table summarizes the Companys accrued
expenses and other current liabilities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Accrued expenses
|
|
$
|
1,365
|
|
|
$
|
794
|
|
Accrued accounts payable
|
|
|
1,891
|
|
|
|
873
|
|
Accrued professional and other service fees
|
|
|
958
|
|
|
|
1,278
|
|
Accrued refunds
|
|
|
659
|
|
|
|
757
|
|
Accrued collaboration expense
|
|
|
395
|
|
|
|
962
|
|
Accrued taxes payable
|
|
|
180
|
|
|
|
605
|
|
Other current liabilities
|
|
|
136
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,584
|
|
|
$
|
5,372
|
|
|
|
|
|
|
|
|
|
|
Accrued accounts payable includes expenses for invoices received
but not processed. Accrued professional and other service fees
include third-party billing and collections costs, legal
expenses, accounting and audit fees and investor relations
expenses. Accrued refunds include overpayments due to
third-party payors.
|
|
Note 6.
|
Collaboration
and Commercial Technology Licensing Agreements
|
The Company has entered into a variety of collaboration and
specimen transfer agreements relating to its development
efforts. The Company recorded collaboration expenses of
$2.2 million, $2.2 million and $1.4 million for
the years ended December 31, 2010, 2009 and 2008,
respectively, relating to services provided in connection with
these agreements. In addition to these expenses, some of the
agreements contain provisions for royalties from inventions
resulting from these collaborations. The Company has specified
options and rights relating to joint inventions arising out of
the collaborations.
82
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is a party to various agreements under which it
licenses technology on a non-exclusive basis in the field of
human diagnostics. Access to these licenses enables the Company
to process its laboratory tests for the Oncotype DX
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 for the years ended
December 31, 2010, 2009 and 2008 of $10.5 million,
$10.1 million and $7.8 million, respectively, which
were included in cost of product revenues.
At December 31, 2010, future fixed annual payments,
exclusive of royalty payments, relating to the launch and
commercialization of our Oncotype DX breast and colon
cancer tests totaled $2.3 million and were payable as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncotype DX
|
|
|
Oncotype DX
|
|
|
Total Fixed Future
|
|
|
|
Breast Cancer
|
|
|
Colon Cancer
|
|
|
Annual Payments
|
|
|
|
(In thousands)
|
|
|
Payment Due:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2011
|
|
$
|
475
|
|
|
$
|
200
|
|
|
$
|
675
|
|
January 2012
|
|
|
|
|
|
|
300
|
|
|
|
300
|
|
January 2013
|
|
|
|
|
|
|
450
|
|
|
|
450
|
|
January 2014
|
|
|
|
|
|
|
450
|
|
|
|
450
|
|
January 2015
|
|
|
|
|
|
|
450
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
475
|
|
|
$
|
1,850
|
|
|
$
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These payments are recorded in cost of product revenues as
license fees. Expense for payments included in the table above
is recorded ratably over the year before the relevant payment is
due. If at any time the Company discontinues the sale of the
products covered by the agreement, no future annual payments
will be payable and the Company will have no further obligation
under the applicable agreements.
Lease
Obligations
In September 2005, the Company entered into a non-cancelable
lease for 48,000 square feet of laboratory and office space
that the Company currently occupies in Redwood City, California.
In November 2010, the Company exercised an option to extend the
term of the lease for an additional five years. The lease
expires in March 2019. The agreement included lease incentive
obligations of $834,000 that are being amortized on a
straight-line basis over the life of the lease. In connection
with original lease, the Company was required to secure a
$500,000 letter of credit, which is classified as restricted
cash on the consolidated balance sheets. Upon execution of the
lease amendment, the Company agreed to pay a $317,000 cash
security deposit, which is included in other assets on the
consolidated balance sheets as of December 31, 2010, in
exchange for the release of the $500,000 letter of credit held
as security under the original lease. The letter of credit was
released in January 2011.
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. In November 2010, the Company
exercised an option to extend the term of the lease for an
additional five years. The lease expires in March 2018. The
agreement included lease incentive obligations totaling $283,000
that are being amortized on a straight-line basis over the life
of the lease. In connection with this lease, the Company paid a
$151,000 cash security deposit, which is included in other
assets on the consolidated balance sheets.
In October 2009, the Company entered into a non-cancelable
agreement to lease an additional 30,500 square feet of
office space near the locations the Company currently occupies.
The lease expires in March 2018, with an option for the Company
to extend the term of the lease for an additional five years.
The agreement includes lease
83
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
incentive obligations of $307,000 which are being amortized on a
straight-line basis over the life of the lease. In connection
with this lease, the Company paid a $183,000 cash security
deposit, which is included in other assets on the consolidated
balance sheets.
In May 2010, the Companys European subsidiary entered into
a non-cancelable lease for approximately 2,500 square feet
of office space in Geneva, Switzerland. The lease commenced on
June 1, 2010 and expires in May 2015. In connection
with this lease, the Company paid a CHF 100,800 cash security
deposit, which is classified as restricted cash on the
consolidated balance sheets.
Rent expense under all operating leases amounted to
$1.7 million, $1.2 million and $1.1 million for
the years ended December 31, 2010, 2009 and 2008,
respectively. Future non-cancelable commitments under these
operating leases at December 31, 2010 were as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payments
|
|
|
|
(In thousands)
|
|
|
Years Ending December 31,
|
|
|
|
|
2011
|
|
$
|
2,443
|
|
2012
|
|
|
2,787
|
|
2013
|
|
|
2,920
|
|
2014
|
|
|
3,003
|
|
2015 and thereafter
|
|
|
10,055
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
21,208
|
|
|
|
|
|
|
Common
Stock
As of December 31, 2010, the Company had
29,007,564 shares of common stock outstanding. Shares of
common stock reserved for future issuance as of
December 31, 2010 were as follows:
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
(In thousands)
|
|
|
Shares to be issued upon exercise of outstanding stock options
|
|
|
5,322
|
|
Shares available for future stock option grants
|
|
|
3,832
|
|
|
|
|
|
|
Shares of common stock reserved for future issuance
|
|
|
9,154
|
|
|
|
|
|
|
|
|
Note 9.
|
Stock-based
Compensation
|
2005
Stock Incentive Plan
On September 8, 2005, the Board of Directors approved the
2005 Stock Incentive Plan (the 2005 Plan), which was
later approved by the Companys stockholders. Pursuant to
the 2005 Plan, stock options, restricted shares, stock units,
and stock appreciation rights may be granted to employees,
consultants, and outside directors of the Company. Options
granted may be either incentive stock options or nonstatutory
stock options. The Company initially reserved
5,000,000 shares of the Companys common stock for
issuance under the 2005 Plan, effective upon the closing of the
Companys initial public offering on October 4, 2005.
On June 8, 2009, the Companys stockholders approved
an amendment to the 2005 Plan to increase the shares reserved
for issuance under the 2005 Plan by 3,980,000 shares. The
amended and restated plan also extends the term under which
awards may be granted under the 2005 Plan until January 27,
2019.
84
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock options are governed by stock option agreements between
the Company and recipients of stock options. Incentive stock
options may be granted under the 2005 Plan at an exercise price
of not less than 100% of the fair market value of the common
stock on the date of grant, determined by the Compensation
Committee of the Board of Directors. Nonstatutory stock options
may be granted under the 2005 Plan at an exercise price of not
less than 80% of the fair market value of the common stock on
the date of grant, determined by the Compensation Committee of
the Board of Directors. Options become exercisable and expire as
determined by the Compensation Committee, provided that the term
of incentive stock options may not exceed 10 years from the
date of grant. Stock option agreements may provide for
accelerated exercisability in the event of an optionees
death, disability, or retirement or other events.
Under the 2005 Plan, each outside director who joins the board
after the effective date of the 2005 Plan will receive an
automatic nonstatutory stock option grant that vests at a rate
of 25% at the end of the first year, with the remaining balance
vesting monthly over the next three years. On the first business
day following the annual meeting of the Companys
stockholders, each outside director who is continuing board
service and who was not initially elected to the board at the
annual meeting will receive an additional nonstatutory stock
option grant, which will vest in full on the first anniversary
of the date of grant or, if earlier, immediately prior to the
next annual meeting of the Companys stockholders.
Nonstatutory stock options granted to outside directors must
have an exercise price equal to 100% of the fair market value of
the common stock on the date of grant. Nonstatutory stock
options terminate on the earlier of the day before the tenth
anniversary of the date of grant or the date twelve months after
termination of the outside directors service as a member
of the board of directors.
Restricted shares, stock units and stock appreciation rights
granted under the 2005 Plan are governed by agreements between
the Company and recipients of the awards. Terms of the
agreements are determined by the Compensation Committee.
2001
Stock Incentive Plan
The Companys 2001 Stock Incentive Plan (the 2001
Plan) was terminated upon completion of the Companys
initial public offering on October 4, 2005. No shares of
common stock are available under the 2001 Plan other than to
satisfy exercises of stock options granted under the 2001 Plan
prior to its termination. Under the 2001 Plan, incentive stock
options and nonstatutory stock options were granted to
employees, officers, and directors of, or consultants to, the
Company and its affiliates. Options granted under the 2001 Plan
expire no later than 10 years from the date of grant.
85
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
The following table summarizes option activity for the years
ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares Available
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life
|
|
|
Value
|
|
|
|
(Share amounts in thousands)
|
|
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2007
|
|
|
2,084
|
|
|
|
3,920
|
|
|
$
|
13.33
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,191
|
)
|
|
|
1,191
|
|
|
$
|
17.96
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(279
|
)
|
|
$
|
6.01
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
167
|
|
|
|
(167
|
)
|
|
$
|
18.61
|
|
|
|
|
|
|
|
|
|
2001 Plan shares expired
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
1,056
|
|
|
|
4,665
|
|
|
$
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in shares reserved for issuance under the 2005 Plan
|
|
|
3,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(348
|
)
|
|
|
348
|
|
|
$
|
19.82
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(220
|
)
|
|
$
|
7.90
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
109
|
|
|
|
(109
|
)
|
|
$
|
19.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
4,797
|
|
|
|
4,684
|
|
|
$
|
15.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,265
|
)
|
|
|
1,265
|
|
|
$
|
16.90
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(327
|
)
|
|
$
|
9.13
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
300
|
|
|
|
(300
|
)
|
|
$
|
19.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
3,832
|
|
|
|
5,322
|
|
|
$
|
15.88
|
|
|
|
6.9
|
|
|
$
|
30,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
|
|
|
|
3,313
|
|
|
$
|
14.67
|
|
|
|
5.8
|
|
|
$
|
23,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2010
|
|
|
|
|
|
|
5,120
|
|
|
$
|
15.81
|
|
|
|
6.8
|
|
|
$
|
29,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the
years ended December 31, 2010, 2009 and 2008 was
$2.9 million, $2.8 million and $4.1 million,
respectively. The total fair value of options vesting during the
years ended December 31, 2010, 2009 and 2008 was
$5.5 million, $10.2 million and $10.1 million,
respectively.
Employee
Stock-Based Compensation Expense
The Company values its stock option grants using the
Black-Scholes option valuation model. The Company recorded
employee stock-based compensation expense of $10.3 million,
$10.2 million and $9.1 million for the years ended
December 31, 2010, 2009 and 2008, respectively. Employee
stock-based compensation expense was calculated based on awards
ultimately expected to vest and has been reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Employee stock-based
compensation expense includes expense related to options granted
to
86
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outside directors of the Company. The following table presents
the impact of employee stock-based compensation expense on
selected statements of operations line items for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
342
|
|
|
$
|
364
|
|
|
$
|
491
|
|
Research and development
|
|
|
2,881
|
|
|
|
3,098
|
|
|
|
2,913
|
|
Selling and marketing
|
|
|
3,086
|
|
|
|
3,171
|
|
|
|
2,622
|
|
General and administrative
|
|
|
4,035
|
|
|
|
3,522
|
|
|
|
3,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,344
|
|
|
$
|
10,155
|
|
|
$
|
9,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, total unrecognized compensation
expense related to unvested stock options, net of estimated
forfeitures, was $14.4 million. The Company expects to
recognize this expense over a weighted-average period of
28 months.
Valuation
Assumptions
Option valuation models require the input of highly subjective
assumptions that can vary over time. The Companys
assumptions regarding expected volatility are based on the
historical volatility of the Companys common stock. The
expected life of options granted is estimated based on
historical option exercise data and assumptions related to
unsettled options. The risk-free interest rate is estimated
using published rates for U.S. Treasury securities with a
remaining term approximating the expected life of the options
granted. The Company uses a dividend yield of zero as it has
never paid cash dividends and does not anticipate paying cash
dividends in the foreseeable future. The weighted-average fair
values and assumptions used in calculating such values during
each fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Expected volatility
|
|
|
52
|
%
|
|
|
55
|
%
|
|
|
58
|
%
|
Risk-free interest rate
|
|
|
2.49
|
%
|
|
|
2.33
|
%
|
|
|
1.98
|
%
|
Expected life of options in years
|
|
|
5.77
|
|
|
|
5.80
|
|
|
|
5.84
|
|
Weighted-average fair value
|
|
$
|
8.61
|
|
|
$
|
10.44
|
|
|
$
|
9.79
|
|
Stock
Options Granted to Non-employees
The Company grants stock options to non-employee consultants
from time to time in exchange for services performed for the
Company. The Company did not grant any stock options to
non-employee consultants during the year ended December 31,
2010. During the years ended December 31, 2009 and 2008,
the Company granted options to purchase 5,000 and
14,400 shares, respectively, to non-employee consultants.
The fair value of these option grants was determined using the
Black-Scholes option pricing model. In general, the options vest
over the contractual period of the respective consulting
arrangements and, therefore, the Company revalues the options
periodically and records additional compensation expense related
to these options over the remaining vesting periods. During the
years ended December 31, 2010, 2009 and 2008, stock-based
compensation expense related to these options was $15,000,
$80,000 and $88,000, respectively.
The Company recorded an income tax benefit of $136,000 for the
year ended December 31, 2010, compared to income tax
expense of $560,000 for the year ended December 31, 2009
and an income tax benefit of $61,000 for the year ended
December 31, 2008.
87
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax benefit for the year ended December 31, 2010 was
principally comprised of the reversal of 2009 federal
alternative minimum tax and 2009 other state income taxes, net
of current year non-California state income taxes and foreign
income taxes. The reversal of 2009 federal alternative minimum
income tax resulted from the enactment of the Worker,
Homeownership and Business Assistance Act of 2009 that expanded
the use of net operating losses.
The difference in income tax expense between the provision at
the statutory rate of the Companys income before tax and
the provision actually recorded was primarily due to the
utilization of net operating loss carryforwards, non-deductible
stock-based compensation expense and the reversal of 2009
federal alternative minimum tax and 2009 other state income
taxes. The State of California suspended the utilization of net
operating loss carryforwards for the 2010, 2009 and 2008 tax
years, but allowed full utilization of business credit
carryforwards in 2010 and allowed 50% utilization in 2009 and
2008. Accordingly, the 2010 California tax provision was offset
by the California business credit carryforwards.
Income tax expense for the year ended December 31, 2009 was
principally comprised of California state income tax and, to a
lesser extent, federal alternative minimum tax and foreign
taxes. The difference in income tax expense between the
provision at the statutory rate of the Companys loss
before tax and provision actually recorded was primarily due to
the non-deductible stock based compensation expenses. For
federal tax purposes, the provision was offset by the net
operating loss carry-forwards that reduce the federal regular
tax expense to the alternative minimum tax amount.
For the year ended December 31, 2008, the Company recorded
minimum state income taxes of $4,000 excluding the impact of a
$65,000 discrete item. The discrete item reflected the
Companys estimated refundable credit receivable as a
result of the enactment of the Housing and Economic Recovery Act
of 2008, under which corporations otherwise eligible for bonus
first-year depreciation may instead elect to claim a refund for
research and development tax credits generated prior to 2006.
The components of the Companys income (loss) before income
taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
4,019
|
|
|
$
|
(8,921
|
)
|
|
$
|
(16,150
|
)
|
Foreign
|
|
|
133
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before income taxes
|
|
$
|
4,152
|
|
|
$
|
(8,851
|
)
|
|
$
|
(16,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys income tax expense
(benefit) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(128
|
)
|
|
$
|
58
|
|
|
$
|
(65
|
)
|
State
|
|
|
(49
|
)
|
|
|
484
|
|
|
|
4
|
|
Foreign
|
|
|
41
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(136
|
)
|
|
$
|
560
|
|
|
$
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income tax expense (benefit) differed from the amounts
computed by applying the U.S. federal statutory income tax
rate of 35% for the year ended December 31, 2010 and 34%
for the years ended December 31, 2009 and 2008,
respectively, to income (loss) before income taxes as a result
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Federal tax at statutory rate
|
|
$
|
1,453
|
|
|
$
|
(3,009
|
)
|
|
$
|
(5,491
|
)
|
Stock-based compensation
|
|
|
2,427
|
|
|
|
2,859
|
|
|
|
1,927
|
|
Non-deductible meals and entertainment
|
|
|
450
|
|
|
|
504
|
|
|
|
472
|
|
Net operating losses not used (used)
|
|
|
(4,301
|
)
|
|
|
(165
|
)
|
|
|
3,093
|
|
Federal alternative minimum tax
|
|
|
(123
|
)
|
|
|
123
|
|
|
|
|
|
State tax, net of federal benefit
|
|
|
(32
|
)
|
|
|
320
|
|
|
|
3
|
|
Other
|
|
|
(10
|
)
|
|
|
(72
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(136
|
)
|
|
$
|
560
|
|
|
$
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is required to reduce its deferred tax assets by a
valuation allowance if it is more likely than not that some or
all of its deferred tax assets will not be realized. Management
must use judgment in assessing the potential need for a
valuation allowance, which requires an evaluation of both
negative and positive evidence. The weight given to the
potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively
verified. In determining the need for and amount of the
valuation allowance, if any, the Company assesses the likelihood
that it will be able to recover its deferred tax assets using
historical levels of income, estimates of future income and tax
planning strategies. As a result of historical cumulative
losses, the Company determined that, based on all available
evidence, there was substantial uncertainty as to whether it
will recover recorded net deferred taxes in future periods.
Accordingly, the Company recorded a valuation allowance against
all of its net deferred tax assets for the years ended
December 31, 2010 and 2009, respectively. The Company
intends to continue maintaining a full valuation allowance on
its deferred tax assets until there is sufficient evidence to
support the reversal of all or some portion of these allowances.
Should the actual timing differences differ from the
Companys estimates, the amount of its valuation allowance
could be materially impacted.
As of December 31, 2010 and 2009, the Company had deferred
tax assets of approximately $60.1 million and
$65.7 million, respectively, which have been fully offset
by a valuation allowance. The net valuation allowance decreased
by approximately $5.7 million and increased by
approximately $1.3 million during the years ended
December 31, 2010 and 2009, respectively. Deferred tax
assets primarily relate to net operating loss and tax credit
carryforwards.
89
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences and carryforwards that
gave rise to significant portions of deferred tax assets and
liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
46,084
|
|
|
$
|
49,917
|
|
Research tax credits
|
|
|
4,675
|
|
|
|
6,509
|
|
Fixed assets
|
|
|
3,404
|
|
|
|
3,278
|
|
Capitalized costs
|
|
|
928
|
|
|
|
1,196
|
|
Other
|
|
|
4,966
|
|
|
|
4,801
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
60,057
|
|
|
|
65,701
|
|
Valuation allowance
|
|
|
(60,057
|
)
|
|
|
(65,701
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
New California tax legislation enacted on February 20, 2009
provides for the election of a single sales apportionment
formula beginning in 2011. The Company anticipates it will elect
the single sales apportionment method. The use of this method
has been reflected in the carrying value of California deferred
tax assets reflected in the table above.
As of December 31, 2010, the Company had federal and state
net operating loss carryforwards of approximately
$115.0 million and $130.0 million, respectively, and
federal and state research and development tax credit
carryforwards of approximately $4.0 million and
$2.3 million, respectively. The federal and state net
operating loss and federal tax credit carryforwards will expire
at various dates beginning in 2016 if not utilized. The state
tax credit carryforwards have no expiration date.
The Company tracks a portion of its deferred tax assets
attributable to stock option benefits in a separate memorandum
account. Therefore, these amounts are no longer included in the
Companys gross or net deferred tax assets. The benefit of
these stock options will not be recorded in equity unless it
reduces taxes payable. As of December 31, 2010, the portion
of the federal and state net operating loss related to stock
option benefits was approximately $4.3 million.
Utilization of the net operating loss and tax credit
carryforwards may be subject to a substantial annual limitation
due to ownership change limitations as defined under
Sections 382 and 383 of the Internal Revenue Code of 1986,
as amended, and similar state provisions. The annual limitation
may result in the expiration of net operating losses and credits
before utilization.
The Company had $768,000, $685,000 and $575,000 of unrecognized
tax benefits as of December 31, 2010, 2009 and 2008,
respectively. The following table summarizes the activity
related to unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
685
|
|
|
$
|
575
|
|
|
$
|
413
|
|
Increase (decrease) related to prior year tax positions
|
|
|
19
|
|
|
|
(35
|
)
|
|
|
9
|
|
Increase related to current year tax positions
|
|
|
64
|
|
|
|
145
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
768
|
|
|
$
|
685
|
|
|
$
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company does not anticipate a material change to its
unrecognized tax benefits over the next twelve months.
Unrecognized tax benefits may change during the next twelve
months for items that arise in the ordinary course of business.
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits in as part of its income tax provision
in its consolidated statements of operations. For the year ended
December 31, 2010, the Company recognized $11,000 in
interest related to unrecognized tax benefits. The Company did
not recognize any interest or tax related penalties for the
years ended December 31, 2009 and 2008, respectively. All
tax years from 2001 forward remain subject to future examination
by federal, state and foreign tax authorities.
|
|
Note 11.
|
Selected
Quarterly Financial Data
(Unaudited)
|
The following table contains selected unaudited consolidated
statements of operations information for each of the fiscal
quarters in 2010 and 2009. The Company believes that the
following information reflects all adjustments, consisting of
only normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented. The
operating results for any quarter are not necessarily indicative
of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(In thousands, except per share data)
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
41,229
|
|
|
$
|
43,439
|
|
|
$
|
46,317
|
|
|
$
|
47,116
|
|
Product revenues
|
|
|
40,266
|
|
|
|
42,514
|
|
|
|
45,773
|
|
|
|
46,317
|
|
Cost of product revenues
|
|
|
8,966
|
|
|
|
8,107
|
|
|
|
8,853
|
|
|
|
8,707
|
|
Net income (loss)
|
|
|
(1,932
|
)
|
|
|
865
|
|
|
|
3,670
|
|
|
|
1,685
|
|
Basic net income (loss) per common share
|
|
$
|
(0.07
|
)
|
|
$
|
0.03
|
|
|
$
|
0.13
|
|
|
$
|
0.06
|
|
Diluted net income (loss) per common share
|
|
$
|
(0.07
|
)
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
|
$
|
0.06
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
33,896
|
|
|
$
|
36,552
|
|
|
$
|
39,517
|
|
|
$
|
39,583
|
|
Product revenues
|
|
|
33,427
|
|
|
|
35,191
|
|
|
|
38,910
|
|
|
|
39,053
|
|
Cost of product revenues
|
|
|
7,827
|
|
|
|
7,891
|
|
|
|
8,301
|
|
|
|
8,543
|
|
Net loss
|
|
|
(4,625
|
)
|
|
|
(3,943
|
)
|
|
|
(502
|
)
|
|
|
(341
|
)
|
Basic net loss per common share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
Diluted net loss per common share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
The quarterly increases in product revenues during 2010 and 2009
and cost of product revenues during 2009 were primarily
attributable to increased adoption of the Oncotype DX
breast cancer test by physicians and increased reimbursement for
this test by third-party payors. The decrease in cost of product
revenues during 2010 reflected cost efficiencies and the
discontinuance of payments under an existing license fee
agreement due to the abandonment of a patent by the licensor.
Per share amounts for the quarters and full year have been
calculated separately. Accordingly, quarterly amounts may not
add to the annual amount because of differences in the
weighted-average common shares outstanding during each period,
due primarily to the effect of the Companys issuing shares
of its common stock during the year.
For all quarters presented in 2009 and for the quarter ended
March 31, 2010, basic and diluted net income (loss) per
common share are identical as common equivalent shares are
excluded from the calculation because their effect is
anti-dilutive.
91
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosures.
|
Not applicable.
|
|
ITEM 9A.
|
Controls and
Procedures.
|
(a) Evaluation of disclosure controls and
procedures. We maintain disclosure controls
and procedures, as such term is defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act,
that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Our disclosure controls and procedures have been designed to
meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily
was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions.
Based on their evaluation as of the end of the period covered by
this Annual Report on
Form 10-K,
our Chief Executive Officer and Chief Financial Officer have
concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
(b) Managements Annual Report on Internal Control
over Financial Reporting. Our management is
responsible for establishing and maintaining internal control
over our financial reporting. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation
of the effectiveness of internal control to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2010. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway
Commission, or COSO, in Internal Control-Integrated
Framework. Based on the assessment using those criteria, our
management concluded that, as of December 31, 2010, our
internal control over financial reporting was effective. Our
independent registered public accounting firm, Ernst &
Young LLP, audited the effectiveness of our internal control
over financial reporting. Their report appears below:
92
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Genomic Health, Inc.
We have audited Genomic Health, Inc.s internal control
over financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Genomic Health,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Genomic Health, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Genomic Health, Inc. as of
December 31, 2010 and 2009, and the related statements of
operations, stockholders equity and cash flows for each of
the three years in the period ended December 31, 2010 and
our report dated March 11, 2011 expressed an unqualified
opinion thereon.
Palo Alto, California
March 11, 2011
93
(c) Changes in internal controls. There
was no change in our internal control over financial reporting
(as defined in
Rule 13a-15(f)
under the Exchange Act) identified in connection with the
evaluation described in Item 9A(a) above that occurred
during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
Other
Information.
|
None.
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The information required by this item with respect to directors
is incorporated by reference from the information under the
caption Election of Directors contained in our Proxy
Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for
our 2011 Annual Meeting of Stockholders to be held on
June 9, 2011, or Proxy Statement. Certain information
required by this item concerning executive officers is set forth
in Part I of this Report under the caption Executive
Officers of the Registrant and is incorporated herein by
reference.
Item 405 of
Regulation S-K
calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16(a) of the
Exchange Act. This disclosure is contained in the section
entitled Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement and is incorporated
herein by reference.
We have adopted a Code of Business Conduct and Ethics that
applies to all of our officers and employees, including our
President and Chief Executive Officer, our Chief Financial
Officer and other employees who perform financial or accounting
functions. The Code of Business Conduct and Ethics sets forth
the basic principles that guide the business conduct of our
employees. We have also adopted a Senior Financial
Officers Code of Ethics that specifically applies to our
our President and Chief Executive Officer, our Chief Financial
Officer, and key management employees. Stockholders may request
a free copy of our Code of Business Conduct and Ethics and our
Senior Financial Officers Code of Ethics by contacting
Genomic Health, Inc., Attention: Chief Financial Officer, 301
Penobscot Drive, Redwood City, California 94063.
To date, there have been no waivers under our Code of Business
Conduct and Ethics or Senior Financial Officers Code of
Ethics. We intend to disclose future amendments to certain
provisions of our Code of Business Conduct and Ethics or Senior
Financial Officers Code of Ethics or any waivers, if and
when granted, of our Code of Business Conduct and Ethics or
Senior Financial Officers Code of Ethics on our website at
http://www.genomichealth.com
within four business days following the date of such amendment
or waiver.
Our Board of Directors has appointed an Audit Committee,
comprised of Mr. Randall S. Livingston, as Chairman,
Dr. Fred E. Cohen and Ms. Ginger L. Graham. The Board
of Directors has determined that Mr. Livingston qualifies
as an Audit Committee Financial Expert under the definition
outlined by the Securities and Exchange Commission. In addition,
each of the members of the Audit Committee qualifies as an
independent director under the current rules of The
NASDAQ Stock Market and Securities and Exchange Commission rules
and regulations.
|
|
ITEM 11.
|
Executive
Compensation.
|
The information required by this item is incorporated by
reference from the information under the captions Election
of Directors Director Compensation and
Executive Compensation contained in the
Proxy Statement.
94
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item is incorporated by
reference from the information under the captions Security
Ownership of Certain Beneficial Owners and Management and
Executive Compensation Equity Compensation
Plan Information contained in the Proxy Statement.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is incorporated by
reference from the information under the caption Election
of Directors Certain Relationships and Related
Transactions contained in the Proxy Statement.
|
|
ITEM 14.
|
Principal
Accounting Fees and
Services.
|
The information required by this item is incorporated by
reference from the information under the caption
Ratification of the Appointment of Independent Registered
Public Accounting Firm Principal Accountant Fees and
Services contained in the Proxy Statement.
PART IV
|
|
ITEM 15.
|
Exhibits and Financial Statement Schedules.
|
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial
Statements of Genomic Health under Item 8 of Part II
hereof.
(2) Financial Statement Schedules
The following schedule is filed as part of this
Form 10-K:
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 2010, 2009, and 2008.
All other financial statement schedules have been omitted
because they are not applicable or not required or because the
information is included elsewhere in the Consolidated Financial
Statements or the Notes thereto.
(3) Exhibits
See Item 15(b) below. Each management contract or
compensatory plan or arrangement required to be filed has been
identified.
(b) Exhibits
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
3(i)
|
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.3 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
3(ii)
|
|
|
Amended and Restated Bylaws of the Company, as amended and
restated January 8, 2009 (incorporated by reference to
exhibit 3.1 to the Companys Current Report on
Form 8-K
filed on January 9, 2009).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
the exhibit of the same number filed with Registration Statement
on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
95
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
4
|
.2
|
|
Amended and Restated Investors Rights Agreement, dated
February 9, 2004 between the Company and certain of its
stockholders (incorporated by reference to the exhibit of the
same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.1#
|
|
Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.2#
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.3#
|
|
2005 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.1
|
|
Sublease Agreement dated June 1, 2001 between the Company
and Corixa Corporation (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.2
|
|
First Amendment to Sublease Agreement dated October 29,
2003 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.3
|
|
Second Amendment to Sublease Agreement dated January 31,
2005 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.5
|
|
PCR Patent License Agreement dated February 21, 2005
between the Company and Roche Molecular Systems, Inc.
(incorporated by reference to exhibit 10.8 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.1
|
|
Master Security Agreement dated March 30, 2005 between the
Company and Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.1 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.2
|
|
Form of Promissory Note (Equipment) issued by the Company in
favor of Oxford Finance Corporation (incorporated by reference
to exhibit 10.9.2 filed with Registration Statement on
Form S-1
(File No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.3
|
|
Form of Promissory Note (Computers and Software) issued by the
Company in favor of Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.3 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.4
|
|
Schedule of Promissory Notes issued by the Company in favor of
Oxford Finance Corporation (incorporated by reference to
exhibit 10.6.4 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
|
10
|
.7
|
|
Lease dated September 23, 2005 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.10 filed with Registration Statement on
Form S-1
(File No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.8
|
|
Lease dated January 2, 2007 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.8 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
|
10
|
.9#
|
|
Form of Non U.S. Employee/Consultant Stock Option Agreement
under the Companys 2005 Stock Incentive Plan (incorporated
by reference to exhibit 10.1 filed with the Companys
Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2008).
|
|
10
|
.10#
|
|
Amended and Restated Genomic Health, Inc. 2005 Stock Incentive
Plan (incorporated by reference to exhibit 10.1 filed with
the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2009).
|
|
10
|
.11#
|
|
Form of Stock Option Agreement (incorporated by reference to
exhibit 10.2 filed with the Companys Quarterly Report
on
Form 10-Q
for the quarterly period ended June 30, 2009).
|
96
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
10
|
.12
|
|
Lease dated October 1, 2009 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.1 filed with the Companys Quarterly
Report on
Form 10-Q
for the quarterly period ended September 30, 2009).
|
|
10
|
.13*
|
|
First Amendment to Lease dated November 30, 2010 between
the Company and Metropolitan Life Insurance Company.
|
|
10
|
.14*
|
|
Second Amendment to Lease dated November 30, 2010 between
the Company and Metropolitan Life Insurance Company.
|
|
10
|
.15*#
|
|
Form of Global Restricted Stock Unit Agreement under the
Companys 2005 Stock Incentive Plan.
|
|
12
|
.1*
|
|
Statement Regarding Computation of Ratios.
|
|
21
|
.1*
|
|
List of Subsidiaries.
|
|
23
|
.1*
|
|
Consent of independent registered public accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (see page 99 of this
Form 10-K).
|
|
31
|
.1*
|
|
Rule 13a 14(a) Certification of Chief Executive
Officer.
|
|
31
|
.2*
|
|
Rule 13a 14(a) Certification of the Chief
Financial Officer.
|
|
32
|
.1**
|
|
Statement of the Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
32
|
.2**
|
|
Statement of the Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release
No. 34-47986,
the certifications furnished in Exhibits 32.1 and 32.2
hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements. |
|
# |
|
Indicates management contract or compensatory plan or
arrangement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.
(c) Financial Statements and Schedules
Reference is made to Item 15(a)(2) above.
97
SCHEDULE II
GENOMIC
HEALTH, INC.
VALUATION
AND QUALIFYING ACCOUNTS
Years
Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
|
|
|
|
|
|
End of
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
$
|
545
|
|
|
$
|
2,231
|
|
|
$
|
2,096
|
|
|
$
|
680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
$
|
881
|
|
|
$
|
1,441
|
|
|
$
|
1,777
|
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
133
|
|
|
$
|
1,343
|
|
|
$
|
595
|
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GENOMIC HEALTH, INC.
|
|
|
|
By:
|
/s/ Kimberly
J. Popovits
|
Kimberly J. Popovits
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 11, 2011
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Randal W.
Scott, Kimberly J. Popovits and G. Bradley Cole, and each of
them, his true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities,
to sign any amendments to this report on
Form 10-K
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact or their substitute or substitutes may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Kimberly
J. Popovits
Kimberly
J. Popovits
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Dean
L. Schorno
Dean
L. Schorno
|
|
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Randal
W. Scott, Ph.D.
Randal
W. Scott, Ph.D.
|
|
Executive Chairman of the Board of Directors
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Julian
C. Baker
Julian
C. Baker
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Brook
H. Byers
Brook
H. Byers
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Fred
E. Cohen, M.D., D. Phil.
Fred
E. Cohen, M.D., D. Phil.
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Samuel
D. Colella
Samuel
D. Colella
|
|
Director
|
|
March 11, 2011
|
99
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Ginger
L. Graham
Ginger
L. Graham
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Randall
S. Livingston
Randall
S. Livingston
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Woodrow
A. Myers Jr., M.D.
Woodrow
A. Myers Jr., M.D.
|
|
Director
|
|
March 11, 2011
|
100
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
3(i)
|
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.3 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
3(ii)
|
|
|
Amended and Restated Bylaws of the Company, as amended and
restated January 8, 2009 (incorporated by reference to
exhibit 3.1 to the Companys Current Report on
Form 8-K
filed on January 9, 2009).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
the exhibit of the same number filed with Registration Statement
on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
4
|
.2
|
|
Amended and Restated Investors Rights Agreement, dated
February 9, 2004 between the Company and certain of its
stockholders (incorporated by reference to the exhibit of the
same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.1#
|
|
Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.2#
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.3#
|
|
2005 Stock Incentive Plan and forms of agreements thereunder
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.1
|
|
Sublease Agreement dated June 1, 2001 between the Company
and Corixa Corporation (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.2
|
|
First Amendment to Sublease Agreement dated October 29,
2003 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.3
|
|
Second Amendment to Sublease Agreement dated January 31,
2005 between the Company and Corixa Corporation (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.5
|
|
PCR Patent License Agreement dated February 21, 2005
between the Company and Roche Molecular Systems, Inc.
(incorporated by reference to exhibit 10.8 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.1
|
|
Master Security Agreement dated March 30, 2005 between the
Company and Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.1 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.2
|
|
Form of Promissory Note (Equipment) issued by the Company in
favor of Oxford Finance Corporation (incorporated by reference
to exhibit 10.9.2 filed with Registration Statement on
Form S-1
(File No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.3
|
|
Form of Promissory Note (Computers and Software) issued by the
Company in favor of Oxford Finance Corporation (incorporated by
reference to exhibit 10.9.3 filed with Registration
Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.4
|
|
Schedule of Promissory Notes issued by the Company in favor of
Oxford Finance Corporation (incorporated by reference to
exhibit 10.6.4 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
|
10
|
.7
|
|
Lease dated September 23, 2005 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.10 filed with Registration Statement on
Form S-1
(File No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.8
|
|
Lease dated January 2, 2007 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.8 filed with the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2006).
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
10
|
.9#
|
|
Form of Non U.S. Employee/Consultant Stock Option Agreement
under the Companys 2005 Stock Incentive Plan (incorporated
by reference to exhibit 10.1 filed with the Companys
Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2008).
|
|
10
|
.10#
|
|
Amended and Restated Genomic Health, Inc. 2005 Stock Incentive
Plan (incorporated by reference to exhibit 10.1 filed with
the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2009).
|
|
10
|
.11#
|
|
Form of Stock Option Agreement (incorporated by reference to
exhibit 10.2 filed with the Companys Quarterly Report
on
Form 10-Q
for the quarterly period ended June 30, 2009).
|
|
10
|
.12
|
|
Lease dated October 1, 2009 between the Company and
Metropolitan Life Insurance Company (incorporated by reference
to exhibit 10.1 filed with the Companys Quarterly
Report on
Form 10-Q
for the quarterly period ended September 30, 2009).
|
|
10
|
.13*
|
|
First Amendment to Lease dated November 30, 2010 between
the Company and Metropolitan Life Insurance Company.
|
|
10
|
.14*
|
|
Second Amendment to Lease dated November 30, 2010 between
the Company and Metropolitan Life Insurance Company.
|
|
10
|
.15*#
|
|
Form of Global Restricted Stock Unit Agreement under the
Companys 2005 Stock Incentive Plan.
|
|
12
|
.1*
|
|
Statement Regarding Computation of Ratios.
|
|
21
|
.1*
|
|
List of Subsidiaries.
|
|
23
|
.1*
|
|
Consent of independent registered public accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (see page 99 this
Form 10-K).
|
|
31
|
.1*
|
|
Rule 13a 14(a) Certification of Chief Executive
Officer.
|
|
31
|
.2*
|
|
Rule 13a 14(a) Certification of the Chief
Financial Officer.
|
|
32
|
.1**
|
|
Statement of the Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
32
|
.2**
|
|
Statement of the Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release
No. 34-47986,
the certifications furnished in Exhibits 32.1 and 32.2
hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements. |
|
# |
|
Indicates management contract or compensatory plan or
arrangement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.