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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, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number: 000-51541
GENOMIC HEALTH, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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77-0552594
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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301 Penobscot Drive
Redwood City, California
(Address of principal
executive offices)
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94063
(Zip
Code)
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(650) 556-9300
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered:
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Common Stock
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The NASDAQ Stock Market
LLC
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Securities registered pursuant to Section 12(g) of the
Act and Title of Class:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
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, 2006, the aggregate market value of voting
and non-voting common stock held by non-affiliates of the
registrant was approximately $288.5 million, based on the
closing price of the common stock as reported on the NASDAQ
Global Market for that date.
There were 24,563,212 shares of the registrants
Common Stock issued and outstanding on February 28, 2007.
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 2007 Annual
Meeting of Stockholders to be held on June 12, 2007.
PART I
ITEM 1. Business.
This Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
When used in this Report, the words expects,
anticipates, intends,
estimates, plans, believes,
and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods
and include statements about our expectation that, for the
foreseeable future, substantially all of our revenues will be
derived from Oncotype DX; the factors we believe to be driving
demand for Oncotype DX and our ability to sustain such demand;
our expectation that our research and development expense levels
will remain high as we seek to enhance Oncotype DX and develop
new tests; our expectation that our general and administrative
and sales and marketing expenses will increase and our
anticipated uses of those funds; our expectations regarding
capital expenditures; the factors that may impact our financial
results; the extent and duration of our net losses; our ability
to comply with the requirements of being a public company; our
ability to attract and retain experienced personnel; the impact
changes in healthcare policy or regulation could have on our
business; the adequacy of our product liability insurance; our
ability to recognize revenues other than on a cash basis and
when we expect we will recognize a majority of revenues upon
providing tests; the level of investment in our sales force; the
capacity of our commercial laboratory to process tests and our
expected expanded capacity; our dependence on collaborative
relationships and the success of those relationships; whether
any tests will result from our collaborations; our belief that
clinical results support our development of a test for colon
cancer; the applicability of clinical results to actual
outcomes; our estimates and assumptions with respect to disease
incidence; the ability of our test to impact treatment
decisions; the economic benefits of our test to the healthcare
system, our compliance with federal, state and foreign
regulatory requirements; our expectation that product revenues
will increase; how we intend to spend our existing cash and cash
equivalents and how long we expect our existing cash to last;
our expected future sources of cash; our plans to borrow
additional amounts under existing or new financing arrangements;
the potential impact resulting from the regulation of Oncotype
DX by the U.S. Food and Drug Administration, or FDA, and
our belief that Oncotype DX is properly regulated under the
Clinical Laboratory Improvement Amendments of 1988, or CLIA; our
beliefs regarding reimbursement for Medicare inpatients; our
plans to pursue reimbursement on a
case-by-case
basis; our ability, and expectations as to the amount of time it
will take, to achieve successful reimbursement from third-party
payors and government insurance programs; our intent to enter
into additional foreign distribution arrangements; the factors
that we believe will drive the establishment of coverage
policies; the impact of changing interest rates; the amount of
future revenues that we may derive from Medicare patients or
categories of patients; increases in patient and physician
demand resulting from our direct sales approach; plans for
enhancements of Oncotype DX to address different patient
populations of breast cancer or to report single gene results;
plans for, and the timeframe for the development and commercial
launch of, future tests addressing multiple cancers; our
expectation regarding when we may move another potential test
into development; the outcome or success of clinical trials; our
intellectual property and our strategies regarding filing
additional patent applications to strengthen our intellectual
property rights; the impact of accounting pronouncements and our
critical accounting policies, estimates, models and assumptions
on our financial results; our anticipated cash needs and our
estimates regarding our capital requirements and our needs for
additional financing; and anticipated trends and challenges in
our business and the markets in which we operate.
Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those expected. These risks and uncertainties
include, but are not limited to, those risks discussed in
Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays
in research and development efforts; the risk that we may not
obtain reimbursement for our existing test and any future tests
we may develop; the risks and uncertainties associated with the
regulation of our test by FDA; the ability to compete against
third parties; our ability to obtain capital when needed; and
our history of operating losses. These forward-looking
statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to update to
any forward-looking statements contained herein to reflect any
change in the Companys expectations with regard thereto or
any change in events, conditions or circumstances on which any
such statement is based.
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This Annual Report contains statistical data that we obtained
from reports generated by the American Cancer Society and by
DaVinci Oncology Specialists, a division of The Mattson Jack
Group, Inc., or that we derived from information contained in
these reports. These reports generally indicate that they have
obtained their information from sources believed to be reliable
but do not guarantee the accuracy and completeness of their
information. Although we believe that the reports are reliable,
we have not independently verified their data.
All references to Genomic Health, we,
us, or our mean Genomic Health, Inc.
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, Inc. was formed as a Delaware corporation in
August 2000. We are a life science company focused on the
development and commercialization of genomic-based clinical
diagnostic tests for cancer that allow physicians and patients
to make individualized treatment decisions. In January 2004, we
launched our first test under the brand name Oncotype DX
for early stage breast cancer patients. We believe that
Oncotype DX is the first genomic test with clinical
evidence supporting its ability to predict the likelihood of
cancer recurrence, the likelihood of patient survival within
10 years of diagnosis and the likelihood of chemotherapy
benefit. Our initial test is focused on patients with early
stage, node negative, or N−, estrogen receptor positive,
or ER+, breast cancer who will be treated with tamoxifen, a
frequently used hormonal therapy. Of the 240,000 patients
who were expected to be diagnosed with breast cancer in the
United States in 2006, approximately half were predicted to be
early stage breast cancer patients that are N−and ER+.
Many of the diagnostic factors currently used in connection with
early stage breast cancer are subjective, have limited
capability to predict future cancer recurrence and are not
useful in predicting chemotherapy benefit. We believe that the
use of Oncotype DX can provide a deeper understanding of
each patients breast cancer and therefore should result in
better informed and more appropriate treatment decisions.
We developed Oncotype DX using a multi-step approach,
conducting clinical studies on tumor specimens from more than
2,600 breast cancer patients. Our technology provides
quantitative gene expression information for each patients
tumor, which we refer to as an oncotype. When an oncotype is
correlated with known clinical outcomes, it can be useful in
predicting the likelihood of an individual patients tumor
behavior. Oncotype DX for breast cancer utilizes a
21-gene panel whose composite gene expression profile can be
represented by a single quantitative score, which we call a
Recurrence Score. The higher the Recurrence Score, the more
aggressive the tumor and the more likely it is to recur. The
lower the Recurrence Score, the less aggressive the tumor and
the less likely it is to recur. Oncotype DX has been
clinically validated for N−, ER+, tamoxifen-treated breast
cancer patients by two large independent studies. Moreover, we
have demonstrated that the Recurrence Score correlates with
chemotherapy benefit, and we are undertaking further studies to
support this finding. Oncotype DX is commercially
available at a list price of $3,460 through our laboratory
located in Redwood City, California, which is accredited under
the Clinical Laboratory Improvement Amendments of 1988, or CLIA,
and by the College of American Pathologists, or CAP. Since the
commercial launch of Oncotype DX in 2004 through
December 31, 2006, over 21,500 tests had been delivered for
use in treatment planning by more than 5,000 physicians.
Substantially all of our tests to date have been delivered to
physicians in the United States. We believe that each year we
may experience decreased demand for our test in the summer
months of July and August, which may be attributed to
physicians, surgeons and patients scheduling vacations during
this time. One major customer accounted for approximately 47% of
our product revenue for the year ended December 31, 2006;
no revenue from this customer was recorded in 2005. Another
major customer accounted for approximately 4% and 11% of our
revenue in 2006 and 2005, respectively.
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
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2006, approximately 1.4 million people in the United States
were expected to be diagnosed with cancer. Common types of
cancer include breast, prostate, lung and colon. Cancers are
difficult to treat because each type responds differently to
treatments, depending upon the individual and the type and
location of the cancer.
To treat cancer effectively, physicians diagnose and gauge the
stage of a patients disease to determine the best course
of therapy. The most common practice used to diagnose cancer is
through pathologic evaluation of tumors under a microscope. For
solid tumors, tumor tissue is typically removed through surgery
or needle biopsy, fixed in a chemical preservative and embedded
in paraffin wax. A pathologist places thin sections of this
fixed paraffin embedded, or FPE, tissue onto glass slides so it
can be studied under a microscope. In many cases, pathologists
also use molecular staining techniques, including
protein-specific staining, to improve the quality of their
diagnosis. After visually examining the sample, the pathologist
judges whether the biopsy contains normal or cancerous cells.
The pathologist may also grade the tumor based on how aggressive
the cancer cells appear under the microscope.
Once a pathologist diagnoses cancer, the patients
physician determines the stage of the cancer based on further
analysis of the patients condition using a variety of
clinical measures, including the pathology grade, size of the
tumor, how deeply the tumor has invaded tissues at the site of
origin and the extent of any invasion into surrounding organs,
lymph nodes or distant sites. Patient history, physical signs,
symptoms and information obtained from existing tests are also
evaluated and considered.
Physicians currently rely primarily on tumor pathology grade and
stage when predicting whether a cancer will recur, which is the
key determinant in treatment decisions. Because tumor pathology
and staging are heavily dependent on visual assessment and human
interpretation, physicians and patients make treatment decisions
often using subjective and qualitative information that may not
reflect the molecular nature of the patients cancer. As a
result, many patients are misclassified as high risk when they
are low risk for recurrence or low risk when they are high risk
for recurrence, resulting in over-treatment for some and
under-treatment for others.
For many cancer patients, chemotherapy is commonly used as a
treatment. Chemotherapy involves the use of highly toxic drugs
to kill cancer cells. It is often given after surgery to kill
remaining cancer cells that could not be physically removed, to
reduce the risk of disease recurrence. Chemotherapy can take
months to complete and can dramatically impact a patients
quality of life. Patients usually experience a wide range of
acute toxicities, including infection, pain in the mouth and
throat, weight loss, fatigue, hair loss, rashes and injection
site reactions. In addition, long-term effects of chemotherapy
can include cognitive impairment, cardiac tissue damage,
infertility, disease of the central nervous system, chronic
fatigue, secondary malignancies and personality changes. Overall
benefits of chemotherapy vary significantly across cancer
populations, and the benefit of treatment may not always justify
the cost of the therapy or the physical and mental burden
patients endure.
Use of
Genomics to Understand Cancer
Genomics is the study of complex sets of genes, their expression
and their function in a particular organism. A gene is a set of
instructions or information that is embedded in the DNA of a
cell. For a gene to be turned on or expressed by a
cell, the cell must first transcribe a copy of its DNA sequence
into messenger RNA, which is then translated by the cell into
protein. Proteins are large molecules that control most
biological processes and make up molecular pathways, which cells
use to carry out their specific functions.
Genomics can also be used to understand diseases at the
molecular level. Diseases can occur when mutated or defective
genes inappropriately activate or block molecular pathways that
are important for normal biological function. Disease can result
from inheriting mutated genes or from developing mutations in
otherwise normal cells. Such mutations can be the cause of
cancer. The ability to detect a mutation or its functional
results and to understand the process by which the mutation
contributes to disease is crucial to understanding the molecular
mechanisms of a disease.
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.
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Advances in genomic technology have accelerated the rate and
lowered the cost of gene expression analysis, thus providing
unprecedented opportunity for clinical utility. We believe gene
expression technology has the potential to improve the quality
of diagnosis and treatment of disease by arming patients and
physicians with an understanding of disease at a molecular level
that is specific to each patient.
Cancer results from alterations in cells caused by the molecular
changes of mutated genes. The behavior of cancer is dependent on
many different genes and how they interact. Cancer is
complicated and it may not be possible to identify a single gene
that adequately signals a more aggressive or less aggressive
type of cancer. The ability to analyze multiple genes expressed
by the tumor provides more valuable information, which enables
individualized cancer assessment and treatment.
The key to utilizing genomics in cancer is identifying specific
sets of genes and gene interactions that are important for
diagnosing different subsets of cancers. Studies can be
performed which link response to therapy or the likelihood of
recurrence to the pattern of gene expression in tumors. These
results can then be used to develop tests that quantify gene
expression of an individuals tumor, allowing physicians to
better understand what treatments are most likely to work for an
individual patient or how likely a cancer is to recur.
Our
Solution
Our genomic-based diagnostic approach correlates gene expression
information to clinical outcomes and provides information
designed to improve treatment decisions for cancer patients. We
have optimized technology for quantitative gene expression on
FPE tissue by developing methods and processes for screening
hundreds of genes at a time using minimal amounts of tissue.
This technology allows us to analyze archived samples of tissue,
retained by hospitals for most cancer patients, to correlate
gene expression with known clinical outcomes. Once we have
established and validated a test, we can then analyze a
patients tumor and correlate the result to known clinical
outcomes. As a result, each tumors gene expression can be
quantified and correlated with responsiveness to therapy or the
likelihood of cancer recurrence or progression. Oncotype
DX, our first clinically validated product, uses this
quantitative molecular pathology approach to provide an
individualized analysis of each patients tumor.
We believe that our multi-gene analysis, as opposed to
single-gene analysis, provides a more powerful approach to
distinguish tumors as being more or less likely to recur or
progress. Furthermore, as shown in breast cancer, our approach
can be used to determine whether a cancer is more or less likely
to benefit from therapy. This information ultimately allows the
physician and patient to choose a course of treatment that is
individualized for each patient.
Our solution fits within current clinical practice and
therapeutic protocols, facilitating product adoption. We analyze
tissues as they are currently handled, processed and stored by
clinical pathology laboratories. Once a patient is diagnosed
with breast cancer and a physician orders Oncotype DX,
the pathology lab provides us with the tumor block or thin
sections from the biopsy specimen utilized for the diagnosis.
Because the specimens are chemically preserved and embedded in
paraffin wax, they require no special handling and can be sent
by overnight mail to our laboratory in California. We believe
this provides an advantage over tests using fresh or frozen
tissue that require special handling, such as shipping frozen
tissue on dry ice. We typically analyze the tissue and deliver
our results to the treating physician within 10 to 14 days
of receipt of the tissue sample. This is within the crucial
decision window after the tumor has been surgically removed and
before the patient and the treating physician discuss additional
treatment options.
We believe our solution provides information that has the
following benefits:
Improved Quality of Treatment Decisions. We
believe our approach to genomic-based cancer analysis improves
the quality of cancer treatment decisions by providing an
individualized analysis of each patients tumor that is
correlated to clinical outcome. Our approach represents a
substantial departure from existing approaches to treatment,
which often use subjective, anatomic and qualitative factors to
determine treatments. Oncotype DX has been shown in
clinical studies to classify many patients into recurrence risk
categories different from classifications based on current
guidelines. Thus, our solution enables patients and physicians
to make more informed decisions about treatment risk-benefit
considerations and, consequently, design an individualized
treatment plan.
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Improved Economics of Cancer Care. We believe
that improving the quality of treatment decisions can result in
significant economic benefits. In early stage breast cancer, our
data shows that many patients are misclassified as high or low
risk under existing treatment guidelines. Many low risk patients
misclassified as high risk receive toxic and expensive
chemotherapy treatment regimens. Chemotherapy and related costs
may exceed $20,000, as compared to Oncotype DXs
list price of $3,460. On the other hand, some high risk patients
misclassified as low risk are not provided chemotherapy
treatment, possibly necessitating future treatment costing up to
$50,000 or more if the cancer recurs.
Oncotype
DX
Oncotype DX uses quantitative molecular pathology to
improve cancer treatment decisions. We offer Oncotype DX
as a clinical laboratory test, where we analyze tumor tissue
samples in our laboratory and provide physicians with genomic
information specific to the patients tumor. Early stage
breast cancer is the first patient population where we have
commercialized a genomic test that has been shown clinically to
predict the likelihood of cancer recurrence, the likelihood of
patient survival within 10 years of diagnosis and the
likelihood of chemotherapy benefit.
Our technology provides quantitative gene expression information
for each patients tumor, which we refer to as an oncotype.
When an oncotype is correlated with known clinical outcomes, it
can be useful in predicting the likelihood of an individual
patients tumor behavior. This allows the physician and
patient to address key issues such as risk of disease recurrence
or progression, likelihood of long-term survival and potential
benefit from chemotherapy or other treatments. In breast cancer,
we developed our gene panel by narrowing the field of the
approximately 25,000 human genes down to 250 cancer-related
genes through review of existing research literature and
computer analysis of genomic databases. We evaluated the 250
genes in three independent clinical studies to identify a
21-gene panel whose composite gene expression profile can be
represented by a single quantitative score, which we call a
Recurrence Score. The higher the Recurrence Score, the more
aggressive the tumor and the more likely it is to recur. The
lower the Recurrence Score, the less aggressive the tumor and
the less likely it is to recur. Moreover, we have demonstrated
that the Recurrence Score also correlates with the likelihood of
chemotherapy benefit, and we are undertaking further studies to
support this finding.
Oncotype
DX for Breast Cancer
Approximately 240,000 new cases of breast cancer were diagnosed
in the United States in 2006. Following diagnosis, a physician
determines the stage of the breast cancer by examining the
following:
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the size of the tumor,
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node status, referred to as node positive, or N+, where the
tumor has spread to the lymph nodes, and node negative, or
N−, where the tumor has not spread to the lymph
nodes, and
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the extent to which the cancer has spread to other parts of the
body.
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Breast cancer tumors are classified as
stage I, II, III or IV. Stage I and II are
generally referred to as early stage breast cancer, and
stage III and IV are generally referred to as
late-stage breast cancer. Standard treatment guidelines weigh
the stage of the cancer and additional factors to predict cancer
recurrence and determine treatment protocol such as:
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the presence or absence of estrogen receptors, referred to as
estrogen receptor positive, or ER+, where estrogen receptors are
present, and estrogen receptor negative, or ER−, where
estrogen receptors are not present,
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the abundance of human epidermal growth factor
receptor-type 2, or HER2, genes or protein in the tumor,
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the age of the patient, and
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the histological type and grading of the tumor as reported by
the pathologist.
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Because these diagnostic factors have limited capability to
predict future recurrence and chemotherapy benefit, and some are
subjective, a large percentage of early stage breast cancer
patients are classified as high risk.
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As a consequence, the use of chemotherapy has become standard
practice in these patients even though the benefit to this
patient group as a whole is small. Most early stage breast
cancer patients have N−, ER+ tumors. These patients have
been demonstrated to respond well to hormonal therapy such as
tamoxifen. Identifying which of these patients will further
benefit from chemotherapy is a difficult decision under current
guidelines. A National Surgical Adjuvant Breast and Bowel
Project, or NSABP, study published in 2004 showed that after
12 years of
follow-up,
overall survival in N−, ER+ breast cancer patients using
tamoxifen hormonal therapy alone was approximately 83% and the
overall survival using tamoxifen hormonal therapy and
chemotherapy was 87%. Therefore, the incremental survival
benefit of chemotherapy in this study was only 4%. Our test is
designed to help identify those patients with aggressive tumors
who are most likely to benefit from chemotherapy and identify
those patients with less aggressive tumors who may receive
minimal clinical benefit from chemotherapy.
We believe that Oncotype DX is the first genomic test
that has clinical evidence supporting its ability to predict the
likelihood of cancer recurrence, the likelihood of patient
survival within 10 years of diagnosis and the likelihood of
chemotherapy benefit in early stage, N−, ER+ breast cancer
patients treated with tamoxifen. Oncotype DX is currently
available at a list price of $3,460. We accept orders from all
50 states through our commercial laboratory located in
Redwood City, California. Our laboratory is licensed under CLIA
and accredited by CAP.
When the treating physician places an order for Oncotype
DX, the local pathology laboratory sends the tumor sample to
our laboratory. Once we receive the tumor sample, it is logged
in and processed by our pathology department. Suitable samples
then undergo a process by which RNA is extracted and purified.
We then analyze the resulting material and produce a report,
typically within 10 to 14 days of the receipt of the sample
that shows a Recurrence Score on a continuum between 0-100. The
Recurrence Score, along with other data and tests that
physicians obtain, forms the basis for the treatment decision.
The Recurrence Score has been clinically validated to correlate
with an individuals likelihood of breast cancer recurrence
within 10 years of diagnosis. The lower the Recurrence
Score the less likely the tumor is to recur and the higher the
Recurrence Score the more likely the tumor is to recur. A
Recurrence Score range from 0 to 100 correlates to an actual
recurrence range from about 3% recurrence to over 30% recurrence
for patients in our validation study using the NSABP Study B-14
population. This continuous range of scores differentiates
Oncotype DX from other tests that predict only high or
low risk by providing an individualized level of risk. To
evaluate our clinical validation studies and compare Oncotype
DX to other methods of classifying risk, we defined
Recurrence Score ranges for low, intermediate and high risk
groups. A Recurrence Score below 18 correlates with a low
likelihood of recurrence; a Recurrence Score equal to or greater
than 18 but less than 31 correlates with an intermediate
likelihood of recurrence; and a Recurrence Score equal to or
greater than 31 correlates with a high likelihood of recurrence.
Within each risk category, Oncotype DX further quantifies
the risk for any given patient. For example, a low risk patient
may have as low as a 3% likelihood of recurrence of breast
cancer within 10 years or as high as an 11% likelihood of
recurrence, depending on the individual Recurrence Score. We
believe this represents a substantial improvement upon existing
methods for classifying patient risk.
Clinical
Development and Validation of Oncotype DX
Clinical
Development of the Oncotype DX Recurrence Score
We developed Oncotype DX using a multi-step approach,
conducting clinical studies on tumor specimens from more than
2,600 breast cancer patients. First, we developed methods, using
RT-PCR, to quantify the expression of hundreds of genes in RNA
isolated from fixed paraffin embedded tumor tissue. We then
selected 250 cancer-related genes using computer analysis of
genomic databases and our knowledge of cancer pathways. Third,
we performed three independent breast cancer clinical studies in
a total of 447 patients with known clinical outcomes to
test the relationship between the expression of the 250
cancer-related genes and recurrence. Two of these studies were
conducted at Providence Saint Joseph Medical Center and Rush
University Medical Center, using samples from patients with
N− and N+ tumors who received tamoxifen, chemotherapy
or both. A third study was conducted in our specific target
population of N−, ER+ patients treated with tamoxifen.
From these studies we selected a panel of 21 genes, comprised of
16 cancer-related genes and five reference genes, with which we
developed the Recurrence Score utilizing a number of statistical
approaches. The Recurrence
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Score is obtained by first normalizing the expression of the
cancer-related genes against the reference genes and then
applying the Recurrence Score formula to calculate a single
score scaled between 0 and 100.
Clinical
Validation of Prediction of Recurrence and Survival in N−,
ER+ Patients Treated with Tamoxifen
Our clinical validation studies were designed to answer two
questions about the utility of the Recurrence Score when
N−, ER+ breast cancer patients treated with tamoxifen make
additional treatment decisions. First, we wanted to test whether
Oncotype DX could differentiate patients with a high
likelihood of recurrence from patients with a low likelihood of
recurrence. Second, we wanted to expand these results with a
second study to demonstrate success in predicting breast cancer
survival in a community hospital setting.
Oncotype DX Predicts the Likelihood of
Recurrence. Our initial validation study was
performed in 2003 in collaboration with the NSABP to determine
whether Oncotype DX predicts the likelihood of breast
cancer recurrence. This study, which was reported at the
San Antonio Breast Cancer Conference in December 2003 and
published in The New England Journal of Medicine in
December 2004, evaluated the ability of Oncotype DX to
quantify the likelihood of breast cancer recurrence over
10 years. The study involved 668 patients who were
enrolled in the NSABP Study B-14 between 1982 and 1988. Each
patient sample was analyzed in a blinded fashion and the results
provided back to the NSABP through a neutral party at the
University of Pittsburgh for analysis. The Recurrence Score was
used to prospectively define the following three risk groups
based on our clinical development studies described above:
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a low risk group, with a Recurrence Score of less than 18,
classified 51% of patients with an average recurrence rate of
6.8%;
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an intermediate risk group, with a Recurrence Score equal to or
greater than 18 but less than 31, classified 22% of the
patients with an average recurrence rate of 14.3%; and
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a high risk group, with a Recurrence Score greater than 31,
which included 27% of the patients with an average recurrence
rate of 30.5%.
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The Recurrence Score was able to assign patients into high and
low risk groups (p<0.001) and, when the Recurrence Score was
examined together with age and tumor size in a multivariate
analysis, only the Recurrence Score remained a significant
predictor of patient outcome (p<0.001). A p-value indicates
the probability that the result obtained in a statistical test
is due to chance rather than a true relationship between
measures. A small p-value, generally less than 0.05, or
p<0.05, indicates that it is very unlikely that the results
were due to chance. In this study we also demonstrated that the
likelihood of distant recurrence at 10 years increased
continuously as the Recurrence Score increased, with a range
from about 3% recurrence for a Recurrence Score of zero to
greater than 30% recurrence for patients in the high Recurrence
Score category. In addition, in subgroup analysis of various
ages, tumor sizes and pathology grade, the Recurrence Score
remained a consistent predictor of distant recurrence.
Oncotype DX Predicts the Likelihood of Breast Cancer Survival
in a Community Hospital Setting. In collaboration
with Northern California Kaiser Permanente, we conducted a
large, case-control, epidemiological study of breast cancer
patients diagnosed from 1985 to 1994 at 14 Northern California
Kaiser hospitals. This study was initially reported at the
San Antonio Breast Cancer Conference in December 2004 and
further detailed results were presented at the annual meeting of
the American Society of Clinical Oncology, or ASCO, in May 2005
and published in the Journal of Clinical Oncology in May
2006. Patients who died of breast cancer, or the cases, were
matched with up to three controls based on each cases age,
race and ethnicity, tamoxifen treatment, facility and diagnosis
year. Controls had to be alive at the time of the corresponding
cases death in order to compare outcomes and availability
of follow-up
for those patients alive at time of each case death. To be
eligible, patients had to be N−, less than 75 years
old and not have received adjuvant chemotherapy. Among a
potentially eligible population of 4,964 patients, we
identified 220 eligible cases and 570 matched controls.
Approximately one-third of the study patients were treated with
tamoxifen. This study was performed to confirm that the
Recurrence Score predicts breast cancer survival at
10 years in ER+ patients treated with tamoxifen. The
likelihood of breast cancer survival at 10 years was more
than five fold higher for patients in the pre-defined low
Recurrence Score group when compared to patients in the
pre-defined high Recurrence Score group (p<0.003). With
respect to the group of ER+ patients
9
treated with tamoxifen, the absolute risk of breast cancer death
at 10 years in the pre-specified risk groups was 2.8% for
the low risk group, 10.7% for the intermediate risk group and
15.5% for the high risk group. Additionally, in the larger
population of ER+ patients untreated with tamoxifen, the
Recurrence Score was also statistically significantly associated
with breast cancer death at 10 years (p<0.025). This
study, conducted in a community hospital setting, demonstrates
that the Recurrence Score is independently associated with risk
of breast cancer death and is able to identify subgroups of
patients according to low, intermediate and high risk of death
at 10 years.
Additional
Questions Addressed by Further Studies
Additional studies were conducted to investigate three clinical
and scientific questions:
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How do patients in the different Recurrence Score risk groups
respond to tamoxifen plus chemotherapy versus tamoxifen alone?
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Does the Recurrence Score predict the likelihood of recurrence,
the benefit from tamoxifen or both?
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Does the Recurrence Score apply to untreated
ER− patients and untreated ER+ patients?
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Oncotype DX Predicts the Likelihood of Chemotherapy
Benefit. We conducted a study in 2004 with the
NSABP to determine whether Oncotype DX is predictive of
the likelihood of chemotherapy benefit. This study, which was
reported initially at the San Antonio Breast Cancer
Conference in December 2004 and further detailed results were
presented at ASCOs annual meeting in May 2005, included
651 patients from the NSABP Study B-20 with N−, ER+
breast cancer enrolled from 1988 to 1993. Of these patients, 227
were treated with tamoxifen alone and 424 were treated with
tamoxifen plus chemotherapy. The results of this study
demonstrated that low risk patients, as defined by the
Recurrence Score, had a 96% recurrence-free survival rate at
10 years without chemotherapy compared with a 95% survival
rate with chemotherapy, and intermediate risk patients as
defined by the Recurrence Score had a 90% survival rate without
chemotherapy compared with an 89% rate with chemotherapy. High
risk patients as defined by the Recurrence Score had a 60%
survival rate without chemotherapy compared with an 88% rate
with chemotherapy (p<0.001). These results demonstrate that
Oncotype DX not only quantifies recurrence and survival
risk but also correlates with the likelihood of chemotherapy
benefit in early stage N−, ER+ breast cancer patients.
Oncotype DX Predicts Likelihood of Recurrence Because it
Predicts both Prognosis and Tamoxifen Benefit. In
2004, we conducted an expanded study with the NSABP Study B-14
population to determine whether Oncotype DX captures
information regarding likelihood of distant recurrence,
tamoxifen benefit, or both. This studys conclusions were
initially reported at the San Antonio Breast Cancer
Conference in December 2004. Further detailed results were
presented at ASCOs annual meeting in May 2005 and
published in the Journal of Clinical Oncology in May
2006. The study included 645 patients with N−, ER+
breast cancer enrolled from 1982 to 1988, 355 of whom were given
placebos and 290 of whom where treated with tamoxifen. The
results of this study demonstrated that Oncotype DX
predicts the likelihood of distant disease recurrence in
tamoxifen-treated patients with N−, ER+ breast cancer
because it captures both prognosis and tamoxifen benefit.
Furthermore, this study of Oncotype DX demonstrates that
low and intermediate risk patients as defined by the Recurrence
Score had the largest benefit of tamoxifen and high risk
patients as defined by the Recurrence Score had minimal benefit
of tamoxifen. The quantitative levels of ER, as defined by
Oncotype DX, varied by over two-hundred fold within the
ER+ population and increasing levels of quantitative ER gene
expression correlated with increasing tamoxifen benefit.
Finally, Oncotype DX was able to discriminate between
high and low risk patients in a subset of patients not treated
with tamoxifen.
Results Were Inconclusive as to Whether Oncotype DX Predicts
Likelihood of Recurrence in a Mixed Population of N−,
Untreated Patients. In 2003, we conducted a trial
with The M.D. Anderson Cancer Center to test the predictive
power of Oncotype DX in untreated breast cancer patients
who were either ER−or ER+. This study was first reported
at the San Antonio Breast Cancer Conference in December
2003 and published in Clinical Cancer Research in May
2005. Out of a pool of over 4,000 N− patient tissue
samples, only 149 patients were untreated and had a
sufficient tissue sample and RNA available to make them eligible
for the study. The study population differed significantly from
the NSABP Study B-14 treatment arm used for our initial
validation study in that none of the patients were treated with
tamoxifen, and the population included ER− and ER+
patients. This
10
study did not demonstrate a significant predictive power for
Oncotype DX in untreated N patients. Importantly, it also
did not demonstrate the expected predictive power for other
known predictive factors. For example, tumor grade inversely
correlated with expected outcomes. Subsequent evaluations of
Oncotype DX in the NSABP Study B-14 placebo arm using
samples from untreated ER+ patients and in the Kaiser Permanente
population-based study using samples from untreated ER+ and
ER− patients demonstrated a correlation between the
Recurrence Score and recurrence and survival. These results were
reported at the San Antonio Breast Cancer Conference in
December 2004 and ASCOs annual meeting in May 2005.
Health
Economic Benefits of Oncotype DX
We are sponsoring third-party studies conducted by researchers
affiliated with academic institutions to examine the health
economic implications of Oncotype DX. Two such studies,
one of which was published in The American Journal of Managed
Care in May 2005, analyzed data from patients in the NSABP
Study B-14 multi-center clinical trial to compare risk
classification based on guideline criteria from the National
Comprehensive Cancer Network, or NCCN, to risk classification by
Oncotype DX. Of the 668 patients in the NSABP study
population, NCCN guidelines classified 615, or 92%, as high risk
and 53, or 8%, as low risk. Of the 615 patients classified
as high risk by NCCN, Oncotype DX classified 49% as low
risk, 22% as intermediate risk and 29% as high risk. Of the
53 patients that NCCN classified as low risk, Oncotype
DX classified 6% as high risk, 22% as intermediate risk and
72% as low risk. In each case, Oncotype DX provided a
more accurate classification of risk than the NCCN guidelines as
measured by 10 year distant recurrence free survival.
Based on these results, a model was designed to forecast
quality-adjusted survival and expected costs, or the net present
value of all costs of treatment until death, if Oncotype
DX was used in patients classified as low risk or high risk
by NCCN guidelines. The model, when applied to a hypothetical
population of 100 patients with the demographic and disease
characteristics of the patients entered in the NSABP Study B-14,
demonstrated an increase to quality-adjusted survival in this
population of 8.6 years and a reduction in projected
aggregate costs of approximately $200,000. Furthermore, the
model showed that as the expected costs and anticipated toxicity
of chemotherapy regimens increase, the use of the Recurrence
Score to identify which patients would benefit from chemotherapy
should lead to larger reductions in projected overall costs.
According to this study, if all early stage breast cancer
patients and their physicians used Oncotype DX and acted
on the information provided by the Recurrence Score, there would
be significant economic benefit to the healthcare system.
New
Product Development
We developed Oncotype DX using the following multi-phased
clinical development platform that we intend to use in
developing future products for breast and other cancers:
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Early Development Phase. In this phase, we
establish a product definition and research plan. Our research
team initiates the clinical research program with computer-based
screening of the approximately 25,000 genes in the human genome
to select candidate genes. The gene selection process uses
genomic databases and knowledge of key cancer and drug related
pathways. We use internally developed software for optimization
and rapid selection of target DNA sequences in order to develop
quantitative molecular pathology assays for each gene. To date,
we have compiled a library of over 1,300 individual gene tests
for use in multiple product opportunities. We secure access to
archival tumor biopsy samples for feasibility studies as well as
archival tumor biopsy samples correlated with clinical data for
gene identification studies. The goal of these studies is to
identify genes that correlate with a specific clinical outcome
prior to moving the program into development.
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Development Phase. 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 to develop the
best quantitative correlation to the target clinical outcome.
With a gene panel and quantitative methodology established, we
then finalize all of the remaining assay parameters. For
example, for Oncotype DX we tested and verified protocols
for RNA extraction and amplification, automated chemistry and
reagent quality control and handling to establish a
reproducible, scaleable process. Once the genes, assay
chemistry, automation and analysis specifications are finalized,
tested and verified, we begin clinical validation.
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Validation Phase. 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. These studies are conducted with
a different set of archival patient specimens to verify that the
test correlates with the predicted clinical outcome in an
independent patient population. Since we control the quality and
reproducibility of our assays using FPE tissues, we are able to
conduct large validation studies with archived samples with
years of clinical outcomes. This allows validation studies to be
performed more rapidly than would be the case with techniques
that require fresh tissue, which must be newly collected and
need many years of follow up before study results can be
obtained.
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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.
Multiple clinical studies can also be useful for driving
adoption and reimbursement by physicians and payors. Such
studies may include prospective studies to verify that our test
is changing physician behavior as well as testing a commercial
product in new populations. The results of a study conducted by
oncologists at the Rocky Mountain Cancer, which were presented
at the 2005 San Antonio Breast Cancer Symposium, confirmed
that the Recurrence Score has an impact on treatment decisions
made by physicians in current clinical practices. Additional
studies to support the tests clinical utility and broaden
its use are currently ongoing.
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Our
Product Pipeline
Over 600,000 treatment decisions were expected to be made in the
United States in 2006 for patients diagnosed with early stages
of breast, colon, prostate, renal cell and lung cancers and
melanoma. Early stage cancers are often treated with adjuvant
treatments that are administered in conjunction with primary
therapy, such as surgery and radiation, intended to prevent the
recurrence of a particular cancer. The early stage patient
population is generally the larger treatment population for most
cancers. While our products under development focus on early
stage disease, we consider product opportunities in late-stage
disease when appropriate.
12
Product
Development Opportunities in Breast Cancer
The following table describes our current breast cancer product
and our product opportunities:
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2006 Estimated
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Treatment
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Decisions
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in the
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Anticipated
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Breast Cancer Products
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Breast Cancer Population
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United States
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Product Attributes
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Product Stage
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Oncotype DX
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N−, ER+
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130,000
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Recurrence
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Commercial
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Chemotherapy benefit
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Chemotherapy or other
therapeutic regimens benefit
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Product Expansion
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Single gene reporting N−, ER+
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130,000
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Chemotherapy or other
therapeutic regimens benefit
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Product Expansion
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N+
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70,000
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Recurrence
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Product Expansion
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Chemotherapy or other
therapeutic regimens benefit
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Single gene reporting N+
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70,000
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Chemotherapy or other
therapeutic regimens benefit
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Product Expansion
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Oncotype DX
Second Generation
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N−, ER+ and
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200,000
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(1)
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Enhanced recurrence
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Early Development
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N+
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Enhanced chemotherapy
benefit
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New Product Opportunities
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N−, ER−
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30,000
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Taxane benefit(2)
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Early Development
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Chemotherapy benefit
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Recurrence
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N+
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70,000
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(3)
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Taxane benefit
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Early Development
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Chemotherapy benefit
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N−, ER+
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130,000
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(4)
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Taxane benefit
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Early Development
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(1) |
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Represents the sum of the 130,000 estimated treatment decisions
in 2006 for N−, ER+ patients and 70,000 estimated
treatment decisions in 2006 for N+ breast cancer patients listed
above. |
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Taxanes are a class of chemotherapy drugs that are commonly used
for breast cancer. |
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This figure is the same as the 70,000 treatment decisions listed
above. |
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(4) |
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This figure is the same as the 130,000 treatment decisions
listed above. |
Oncotype
DX
We are conducting clinical studies with Oncotype DX with
the goals of expanding the applications in which it may be used
and improving certain product features. Approximately
70,000 patients were expected to be diagnosed in the United
States in 2006 with N+ breast cancer and many may not benefit
from chemotherapy or may have other health issues that increase
the risk of chemotherapy treatment. Our early clinical research
studies with Rush University Medical Center and Providence Saint
Joseph Medical Center support further investigation of
Oncotype
13
DX for prediction of recurrence in this patient population. Node
positive studies are ongoing with additional studies planned for
2007 which, if successful, may support the launch of a
commercial product in 2008. Additionally, we believe that gene
scores reported as individual gene scores in addition to the
Recurrence Score 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 studies of the NSABP
Study B-14 population. We are conducting additional studies to
evaluate the clinical utility of individual Oncotype DX
genes and, if successful, plan to provide single gene results
for ER and progesterone receptor, or PR, gene expression in test
results by the end of 2007.
Second
Generation Oncotype DX
We are in the early development phase of investigating
additional genes and gene combinations that may add to the
predictive power of Oncotype DX. A second generation
product, if successful, could further refine and improve the
classification of patients and result in better information for
treatment decisions. We have identified multiple genes through
research and development studies that, in varying combinations,
may provide improved prediction of recurrence risk and
likelihood of chemotherapy benefit.
Recurrence
and Benefit Test for N−, ER− Breast
Cancer
We are in the early development phase for a product to predict
the likelihood of recurrence and chemotherapy benefit in
N−, ER− breast cancer patients. This population
was expected to represent approximately 30,000 patients in
the United States in 2006. To date, we have conducted several
clinical research studies that included N−,
ER− breast cancer patients, and we plan to continue
to explore opportunities in this population, including tests to
better define ER− patients based on quantitative
molecular pathology.
Taxane
Benefit Test
We are also in the early development phase for a product to
predict the likelihood of taxane benefit. Taxanes are a class of
chemotherapy drugs that are used in addition to traditional
chemotherapy regimens in some patients but have side effects and
are most often used in patients with aggressive or later stage
tumors. The potential population for this product includes the
estimated 70,000 N+ breast cancer patients as well as N−,
ER− patients at high risk and N− patients
at high risk in the United States in 2006. We have developed a
number of hypotheses and selected a gene panel to investigate
this product opportunity further.
14
Product
Development Opportunities in Other Cancers
The following table describes our products in various stages of
development for cancers other than breast cancer:
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2006 Estimated
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Total Incidence
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2006 Estimated
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in the
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Addressable
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Anticipated Product
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Product Opportunity
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United States
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Population
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Attributes
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Product Stage
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Colon Cancer
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120,000
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65,000
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Recurrence
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Development
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Prediction of drug
response
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Prostate Cancer
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260,000
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200,000
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Progression
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Early Development
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Recurrence
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Renal Cell Cancer
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40,000
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25,000
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Recurrence
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Early Development
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Prediction of drug
response
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Non-small Cell Lung Cancer
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160,000
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45,000
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Recurrence
Prediction of drug response
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Early Development
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Melanoma
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70,000
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60,000
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Recurrence
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Early Development
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Prediction of drug
response
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Colon
Cancer Recurrence and Response Test
In January 2007 we moved a potential test to predict the
likelihood of recurrence and chemotherapy benefit in patients
with early stage colon cancer from early development to
development phase. Colon cancer was expected to affect
approximately 120,000 individuals in the United States in 2006,
of which approximately 65,000 early stage patients needed to
decide whether or not to use chemotherapy for their cancer, as
well as which chemotherapy to use. Only a small percentage of
colon cancer patients are expected to have a survival benefit
from additional treatment after surgery. We have developed an
investigational 758-gene panel for colon cancer and have
established a collaborative agreement with the NSABP, as well as
other academic groups, to access colon tissue samples that have
associated clinical outcome data. If successful, studies in 2007
may lead to a validation study in 2008, which could result in a
commercial launch in 2009.
Prostate
Cancer Progression and Recurrence Test
We are in the early development phase for a test to predict the
likelihood of progression and recurrence of prostate cancer in
early stage patients. Approximately 260,000 men were expected to
be diagnosed with prostate cancer in the United States in 2006,
approximately 200,000 of whom will need to make critical
decisions on whether or not to undergo local therapy, such as
surgery or radiation, and on whether or not to have additional
treatment after local therapy. Because the side effects of
surgery and local radiation therapy can be serious, a need
exists for a reliable test to determine the likelihood of
progression. There is also a need for a reliable test to
determine the likelihood of recurrence after local treatment,
because hormonal therapy and chemotherapy have significant side
effects as well. We are in the process of defining our prostate
cancer gene panel and we have completed initial feasibility
studies and gained access to clinical samples correlated with
outcome data in prostate cancer under a collaborative agreement
with an academic group.
Renal
Cell Cancer Recurrence and Response Test
We are in the early development phase for a test to predict the
likelihood of recurrence and response to therapy in renal cell
cancer. Approximately 40,000 individuals were expected to be
diagnosed with renal cell cancer in the United States in 2006.
Recently reported studies suggest that some of these patients
may respond to new treatments.
15
We have completed initial feasibility studies to extract RNA
from renal cell cancer specimens and are currently working to
define potential products for patients with renal cell cancer
under a collaborative agreement with an academic group that has
access to clinical samples correlated to outcome data.
Non-small
Cell Lung Cancer Recurrence and Response Test
We are in the early development phase for a test to predict the
likelihood of chemotherapy benefit in early stage, non-small
cell lung cancer. Approximately 160,000 individuals were
expected to be diagnosed with non-small cell lung cancer in the
United States in 2006, of which approximately 45,000 of those
patients were expected to be diagnosed before the cancer spreads
and will need to make chemotherapy treatment decisions. Recent
clinical studies suggest that at least some of those early stage
patients will benefit from chemotherapy. The use of chemotherapy
in early stage non-small cell lung cancer is relatively recent
and is likely to accelerate. We have completed initial
feasibility studies in lung tissues as a part of our EGFR
inhibitor program described below and are in the process of
defining our lung cancer gene panel. We have a collaborative
agreement with an academic group that has access to clinical
samples correlated to outcome data.
Melanoma
Recurrence and Response Test
We are in the early development phase for a test to predict the
likelihood of recurrence and response to therapy for patients
with melanoma. Approximately 70,000 individuals were expected to
be diagnosed with melanoma in the United States in 2006, of
which approximately 60,000 of those patients were expected to be
diagnosed before the cancer spreads and will need to make
chemotherapy decisions. Recently reported studies suggest that
some of these patients may respond to new treatments. We have
conducted initial feasibility studies to extract RNA from
melanoma cancer specimens and are currently working to define
potential products for melanoma under a collaborative agreement
with an academic group that has access to tissue samples that
have been correlated to outcome data.
Product
Development Opportunities for Targeted
Therapeutics
Both anti-cancer drugs recently approved by FDA and new
anti-cancer drugs in clinical development are designed to
provide more targeted treatment, which should improve efficacy
and reduce side effects. A need exists to identify those
patients who, based on the genomic profile of their tumors, are
most likely to benefit from these therapies. We believe our
individualized genomic analysis has the potential to 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. We have completed several studies with
different companies to evaluate our technology, and we have
discussed our clinical development platform with pharmaceutical
companies for exploratory clinical studies.
Epidermal
Growth Factor Receptor, or EGFR, Inhibitor Response
Test
We are in the early development phase to develop tests to
predict the likelihood of response to the EGFR inhibitor class
of drugs. The market opportunity for these tests will initially
be limited to metastatic disease in lung and colon cancer, with
an estimated 60,000 patients in the United States in 2006,
where such drugs are currently approved. We have conducted three
small clinical research studies in lung cancer, colon cancer and
head and neck cancer which allowed us to identify and file
patent applications on a number of genes which may predict the
response to EGFR inhibitors. Further clinical development may
require partnerships with pharmaceutical companies that have
access to appropriate clinical trial specimens.
In July 2005, we signed 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 carcinoma. Erbitux is a targeted therapy
currently approved for the treatment of metastatic colorectal
carcinoma. Consistent with terms we generally require in our
collaborative agreements, the agreement provides for research
funding support and milestone payments and provides us
commercial rights to diagnostic tests that result from the
collaboration.
16
Targeted
Therapies in Breast Cancer
We entered into collaborative agreements with Aventis, Inc., a
member of the sanofi-aventis group, and the Eastern Cooperative
Oncology Group to investigate the ability of gene expression in
fixed-paraffin-embedded tissues to predict the likelihood of
response to adjuvant chemotherapy, including Taxotere, in
patients with early breast cancer and zero to three involved
lymph nodes. The agreements provide us with commercial rights to
diagnostic tests that may result from the collaboration and were
effective as of December 1, 2005.
We cannot assure you that any of the above product opportunities
or products in development will ever be commercialized or, if
commercialized, will ever be successful.
Technology
We utilize existing technologies such as RT-PCR and information
technologies and optimize and integrate them into new processes.
We expect to continue to extend the capabilities of the various
components of our process to develop effective products. Our
technology allows us to:
Extract
RNA from FPE-tumor Biopsies
Our product development requires that we be able to quantify the
relative amounts of RNA in patients FPE tissue specimens.
We have developed proprietary technology, intellectual property
and know-how for optimized and automated methods for extraction
and analysis of RNA from FPE tissue. Although others can extract
RNA from FPE tissue, to our knowledge the process has not been
optimized and scaled up for high-throughput clinical testing and
large-scale clinical development studies involving large numbers
of genes. Our process uses commercially available reagents and
instruments with our own proprietary process and automation
protocols, which results in RNA extraction from the range of
tissues used in our clinical development studies and our
commercial laboratory test.
Amplify
and Detect Diminished Amounts of RNA Consistently
We use a well-established technology that we license from Roche
called RT-PCR as the basis for our quantitative molecular
pathology assays. This technology uses 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. Together with the
inherent amplification of PCR, our platform provides us with
sophisticated capabilities to quantify RNA levels from minimal
amounts of 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. Human tissues contain thousands
of different genes that are often highly related in sequence
content, making it challenging for genomic tests to specifically
identify molecules of interest. Our RT-PCR platform is highly
specific because it works only when three different test
reagents, called DNA probes and primers, independently match
each gene 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. Our
technology is also capable of quantifying non-coding RNA
sequences that are present in miniscule quantities within
tissues. The ability to utilize these sequences allows us to
design highly specific assays for closely related genes.
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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 laboratory to produce consistently
precise and accurate gene expression results. Our quality
control methods for our reagents and processes, along with
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our software for automation, sample tracking, data quality
control and statistical analysis, add to the reproducibility and
precision of our test.
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Dynamic Range. Because our RT-PCR platform can
amplify small amounts of RNA in proportion to the amount present
in the sample, we are able to measure RNA levels across as much
as a hundred thousand fold range of differing RNA expression.
Having a broad range of high resolution testing capability
increases the quality of our correlations with clinical outcomes
and therefore the predictive power of our tests.
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Analyze
Hundreds of Genes
Historically, RT-PCR has been used to screen one or, at most, a
few genes at a time. The methods and know-how we have developed
allow us to expand RT-PCR technology to a scale that enables
screening of hundreds of genes at a time while using minimal
amounts of tissue. During our initial years of operation, we
typically screened 48 to 96 genes from a standard FPE tissue
sample using RNA from three 10 micron sections of tissue. By
2003, we routinely screened 192 genes from each sample and, by
2004, we screened 384 genes per sample. Today, we have the
capability to screen up to 768 different genes per sample
without sacrificing the sensitivity, specificity and
reproducibility of RT-PCR. With continued investment in
miniaturization and automation, we believe that our technology
will be capable of continued increases in throughput.
Employ
Advanced Information Technology
We have developed computer programs to automate our RT-PCR assay
process. We have also developed a laboratory information
management system to track our gene-specific reagents,
instruments, assay processes and the data generated. Similarly,
we have automated data analysis, storage and process quality
control. We use statistical methods to optimize and monitor
assay performance and to analyze data from our early development
and development studies.
Competition
We believe that we compete primarily on the basis of:
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the value of the quantitative information Oncotype DX
provides;
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the clinical validation of Oncotype DXs ability to
predict recurrence and survival, and the demonstration of
Oncotype DXs ability to predict the likelihood of
chemotherapy benefit;
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our ability to perform clinical studies using archival tissue as
it is currently processed, handled and stored;
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our ability to screen hundreds of genes at a time;
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the speed with which our clinical development platform can
commercialize products;
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our clinical collaborations with clinical study groups;
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the level of customer service we provide, both to patients and
health care professionals; 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 Oncotype DX will not be introduced.
We believe that our continued success depends on our ability to:
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continue to innovate and maintain scientifically advanced
technology;
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enhance Oncotype DX for breast cancer to provide
information in response to additional indications;
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continue to validate our products, especially with respect to
chemotherapy benefit;
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continue to obtain positive reimbursement decisions from payors;
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expand Oncotype DX for use in other forms of cancer;
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attract and retain skilled scientific and sales personnel;
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obtain patents or other protection for our products;
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obtain and maintain our clinical laboratory accreditations and
licenses; and
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successfully market and sell Oncotype DX.
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Currently, our principal competition comes from existing
diagnostic methods utilized by pathologists and oncologists,
which generally involve assessing and evaluating the grade and
stage of cancerous tumors when determining risk of recurrence.
These methods, which have been used for many years and are
therefore difficult to change or supplement, are typically
accomplished in a short period of time without much expense. In
addition, companies offering capital equipment and inexpensive
kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like Oncotype DX that are performed
outside the pathology laboratory. Also, few diagnostic methods
are as expensive as Oncotype DX and others may develop
lower-priced, less complex tests that could be viewed as the
equivalent of ours.
We also face competition from many companies that offer products
or have conducted research to profile gene expression in breast
cancer, including Agendia B.V. and AviaraDX. Commercial
laboratories with strong distribution networks for diagnostic
tests, such as Genzyme Corporation, Laboratory Corporation of
America Holdings and Quest Diagnostics Incorporated, may become
competitors. Other potential competitors include companies that
develop diagnostic tests such as Bayer Healthcare LLC, Celera
Genomics, a division of Applera Corporation, Roche Diagnostics,
a division of F. Hoffmann-La Roche Ltd, and Veridex LLC, a
Johnson & Johnson company, other small companies and
academic and research institutions. In addition, in December
2005, the federal government allocated a significant amount of
funding to The Cancer Genome Atlas, a project aimed at
developing a comprehensive catalog of the genetic mutations and
other genomic changes that occur in cancers and maintaining the
information in a free public database. As more information
regarding cancer genomics becomes available to the public, we
anticipate that more products aimed at identifying targeted
treatment options will be developed and these products may
compete with ours.
Our test is currently considered relatively expensive for a
diagnostic test, and we expect to raise prices in the future.
Many of our present and potential competitors have widespread
brand recognition and substantially greater financial and
technical resources and development, production and marketing
capabilities than we do. Others may develop lower-priced, less
complex tests that could be viewed by physicians and payors as
functionally equivalent to our test. Some competitors have
developed tests cleared for marketing by FDA, and there may be a
marketing differentiation or a perception that an FDA-cleared
test is more desirable than Oncotype DX. Competition
among these entities to recruit and retain highly qualified
scientific, technical and professional personnel and consultants
is also intense. If we are unable to compete successfully
against current or future competitors, we may be unable to
increase market acceptance for and sales of our test, which
could prevent us from increasing or sustaining our revenues, or
achieving or sustaining profitability.
Reimbursement
Revenues for clinical laboratory tests may come from several
sources, including commercial third-party payors, such as
insurance companies and health maintenance organizations,
government payors, such as Medicare and Medicaid, patients and
in some cases, from hospitals or referring laboratories (who, in
turn bill third-party payors for testing).
To gain broad reimbursement coverage, we are focusing on
educating payors on the following Oncotype DX attributes:
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Test Performance. Oncotype DX provides
results that have been documented in clinical studies to be
reproducible, sensitive, accurate and specific to the
patients tumor. Patients may benefit from treatment
decisions based on prediction of the likelihood of recurrence,
survival and chemotherapy benefit.
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Clinical Utility. Patients are provided a
Recurrence Score on a risk continuum that may contribute to
decision making regarding the use of adjuvant chemotherapy. We
believe the large difference in risk of
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distant recurrence between tumors with low Recurrence Scores and
high Recurrence Scores is indicative of the clinical utility of
our test.
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Peer-reviewed Publication and Consistent Study
Outcomes. The 2003 NSABP validation study was
peer-reviewed and published in The New England Journal of
Medicine in December 2004. In May 2006, two peer-reviewed
articles were published supporting the clinical validity of
Oncotype DX and, therefore, the use and coverage of
Oncotype DX. The Journal of Cancer Oncology
published the results of the 2004 NSABP study supporting the
predictive value of Oncotype DX on the likelihood of
chemotherapy benefit. Breast Cancer Research published
the results of the Kaiser Permanente study showing a significant
correlation between the Oncotype DX recurrence score and
breast cancer survival. Physicians and payors often require one,
and many require two or more, peer-reviewed publications to
provide a basis for use and reimbursement decisions. The results
of the independent Kaiser Permanente study reinforce the
findings in the NSABP study. We believe that additional
publications, including our findings on the magnitude of
chemotherapy benefit, will increase usage and create a more
favorable reimbursement environment.
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Patient and Physician Demand. Increasing
awareness and demand in the cancer community for Oncotype
DX will be necessary for widespread payor adoption.
Increased usage of the test by physicians can influence payors
and facilitate the reimbursement decision process.
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Improved Economics. We are sponsoring
third-party studies and providing information to payors to
demonstrate the economic benefits that can result from the use
of Oncotype DX. A health economic analysis of Oncotype
DX was published in The American Journal of Managed Care
in May 2005.
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As a relatively new test, Oncotype DX may be considered
investigational by payors and not covered under their
reimbursement policies. Consequently, we have pursued
case-by-case
reimbursement and expect the 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 Oncotype
DX based upon clinical evidence showing the utility of the
test. As of February 2007, health plans covering nearly
100 million lives have approved our test for coverage.
As of December 31, 2006, Aetna, Inc., Kaiser Foundation
Health Plan, Inc. and National Heritage Insurance Company, or
NHIC, the local Medicare carrier for California with
jurisdiction for claims submitted by us for Medicare patients,
had issued positive coverage determinations for Oncotype
DX. In January 2007, United HealthCare Insurance Company
entered into a national laboratory services agreement to support
reimbursement for our test. In addition, many regional payors
have issued policies supporting reimbursement for our test.
These regional payors include Harvard Pilgrim Health Care, Inc.,
Medical Mutual of Ohio, Humana, Healthnet, Premera Blue Cross,
Blue Cross/Blue Shield of Alabama, Blue Cross/Blue Shield of
Minnesota, Blue Cross/Blue Shield of South Carolina, Mountain
State Blue Cross, covering West Virginia, and CareFirst,
covering Blue Cross of Delaware, Maryland and District of
Columbia. The Federal Employees Health Benefits Program has also
made a positive coverage determination for beneficiaries who are
covered under their Blue Cross/Blue Shield plan option. Where
policies are not in place, we pursue
case-by-case
reimbursement. Through this process, as of December 31,
2006, more than 500 health insurance companies, third-party
administrators, provider networks and other health systems had
reimbursed one or more Oncotype DX tests. We believe that
it may take several years to achieve successful reimbursement
with a majority of payors. However, we cannot predict whether,
or under what circumstances, payors will reimburse for our
tests. Payment amounts can also vary across individual policies
and coverage and payment policies, when adopted, are generally
applied prospectively rather than retroactively. Denial of
coverage by payors, or payment at inadequate levels, would have
a material adverse impact on market acceptance of our products.
In early 2005, the Medical Advisory Panel of the Blue Cross and
Blue Shield Associations Technology Evaluation Center, or
BCBSA, a technology assessment group, concluded that the
existing clinical data in support of Oncotype DX does not
meet the panels technology criteria for clinical
effectiveness and appropriateness. This assessment is provided
for informational purposes to members of BCBSA and can be used
by third-party payors and health care providers such as Blue
Cross and Blue Shield, which provide healthcare coverage for
nearly one-third of all Americans, as grounds to deny coverage
for Oncotype DX. Other payors have determined that the
test is investigational or have issued negative
technology assessment reviews.
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Commercial Third-party Payors and Patient
Pay. Where there is a payor policy in place, we
bill the payor and the patient in accordance with the
established policy. Where there is no payor policy in place, we
pursue reimbursement on behalf of each patient on a
case-by-case
basis. We request that physicians have a billing conversation
with patients prior to a test being submitted to discuss the
patients responsibility should their policy not cover the
test. We also request that the physician inform the patient that
we will take on the primary responsibility for obtaining
third-party reimbursement on behalf of patients, including
appeals for initial denials, prior to billing a patient. With
this practice established, we believe that most patients
receiving the Oncotype DX test have agreed to the test
knowing that they may be responsible for all or some portion of
the cost of the test should their medical insurer deny or limit
coverage. Our efforts on behalf of patients take a substantial
amount of time, and bills may not be paid for many months, if at
all. Furthermore, if a third-party payor denies coverage after
final appeal, it may take a substantial amount of time to
collect from the patient, and we may not be successful.
Medicare and Medicaid. In determining whether
or not Medicare will pay for a test, the Centers for Medicare
and Medicaid Services, or CMS, which oversees Medicare, can
permit the contractors, who process and pay Medicare claims, to
make that determination or it can make a national coverage
determination, which will bind all Medicare contractors. To
date, CMS has not issued a national coverage determination on
Oncotype DX. As a result, whether or not Medicare will
cover the test when billed by us is the decision of NHIC, the
current local Medicare carrier for California and the contractor
with jurisdiction to process claims submitted by us. In January
2006, NHIC released a local coverage determination providing
coverage for the Oncotype DX test for female patients
with estrogen-receptor positive, node-negative carcinoma of the
breast when the ordering physician has determined, prior to
ordering the test, that the intention to treat or not treat with
adjuvant chemotherapy would be contingent, at least in part, on
the results of the test for the individual patient in question.
The local coverage determination was based upon a determination
by NHIC that the Oncotype DX test is safe and effective
and reasonable and necessary to contribute to breast cancer
diagnosis and major treatment decisions. The local coverage
determination indicated that
case-by-case
review may be performed, as needed, and the test will be covered
only when ordered by the treating physician, when necessary for
diagnosis or treatment decisions and when used in patient care.
The local coverage determination states that the Oncotype
DX test will be covered only when performed within six
months of diagnosis of breast cancer and that the test will not
be covered for male patients with breast cancer or for patients
with recurrent or metastatic breast cancer who have had a
previous Oncotype DX test. The local coverage
determination is effective for Oncotype DX tests provided
on or after February 27, 2006.
The local coverage determination explains that most or all
coverage decisions for Medicare beneficiaries related to the
Oncotype DX tests will be made by NHIC. Until recently,
there had been some question as to whether claims for
Oncotype DX tests performed on Medicare beneficiaries who
were hospital inpatients at the time the tumor tissue samples
were obtained may be billed by us to NHIC or must be
incorporated in the payment that the hospital receives for their
services related to the patients breast cancer. As of
December 31, 2006, the volume of patients who fell into
this category represented a very small portion (approximately
2%) of our total testing population.
Based on a final rule effective January 1, 2007, we are
permitted to submit claims to NHIC for the Oncotype DX
tests performed on Medicare beneficiaries who were hospital
inpatients or outpatients at the time the tumor tissue samples
were obtained, but only if the test was ordered at least
14 days following the date of the patients discharge
from the hospital and where other specified conditions are met.
We are in the process of making arrangements with hospitals for
payment of the test when performed for the small portion of
Medicare beneficiaries, representing approximately 3% of our
total testing population, who are hospital inpatients or
outpatients at the time specimens are collected and who do not
meet criteria under the final rule for billing by us. Finally,
we have been engaged in discussions with the Centers for
Medicare/Medicaid Services, or CMS, about the application of the
final rule to hospital outpatients. We believe the final rule
should not apply to the Oncotype DX tests performed on
tumor tissue samples obtained while the patient is a hospital
outpatient, and that the tests performed on tissue samples taken
from hospital outpatients are eligible to be billed by us under
the Medicare program, regardless of when the testing of such
tissue samples takes place. While we are continuing to pursue
this matter, at this point, CMS intends for the final rule to
apply to outpatients as well as inpatients, and we are notifying
hospitals accordingly.
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In addition, each state Medicaid program, which pays for
services furnished to the eligible medically indigent, will
usually make its own decision whether or not to cover
Oncotype DX. To date, we have a limited number of
approvals from state Medicaid programs.
Medicare currently contracts with a large number of fiscal
intermediaries and carriers that are responsible for processing
and paying claims. Within the next few years, Medicare is
expected to reduce this number to fifteen regional Medical
Administrative Contractors, or MACs. If NHIC is not selected as
one of these regional MACs, we cannot be certain that we will
obtain a positive local coverage determination from another
contractor.
Payment
Clinical laboratory testing services, when covered by
third-party payors, are paid under various methodologies,
including prospective payment systems and fee schedules. Under
Medicare, payment is generally made under the Clinical
Laboratory Fee Schedule with amounts assigned to specific
procedure billing codes. Each Medicare carrier jurisdiction has
a fee schedule that establishes the price for each specific
laboratory billing code. The Social Security Act establishes
that these fee schedule amounts are to be increased annually by
the percentage increase in the consumer price index, or CPI, for
the prior year. Congress has frequently legislated that the CPI
increase not be implemented. In the Medicare Prescription Drug,
Improvement and Modernization Act, or MMA, Congress eliminated
the CPI update through 2008. In addition, the National
Limitation Amount, or NLA, which acts as a ceiling on Medicare
reimbursement, is set at a percentage of the median of all the
carrier fee schedule amounts for each test code. In the past,
Congress has frequently lowered the percentage of the median
used to calculate the NLA in order to achieve budget savings.
Currently, the NLA ceiling is set at 74% of the medians for
established tests and 100% of the median for diagnostic tests
for which no limitation amount was established prior to 2001.
Thus, no carrier can pay more than the NLA amount for any
specific code.
At the present time, there is no specific Current Procedural
Terminology (CPT) procedure code to report Oncotype DX.
Therefore, the test generally must be reported under a
non-specific, unlisted procedure code, which is subject to
manual review of each claim. We have been informed by NHIC that,
under the local coverage determination, we may expect claims to
be paid consistent with the average allowed reimbursement rate
for Oncotype DX claims that were billed and processed to
completion as of September 30, 2005.
A Healthcare Common Procedure Coding System (HCPCS) code has
been issued effective January 1, 2006 that some private
third-party payors may accept on claims for the Oncotype
DX test. Medicare will not accept this HCPCS code, however.
In the future, we may move forward with plans to obtain specific
CPT procedure coding. If we do move forward with plans to obtain
specific CPT coding, there is no assurance that specific coding
will be adopted or that adequate payment will be assigned if and
when a specific procedure code is adopted.
Several provisions of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or MMA, may affect
future payments for clinical laboratory testing services,
including Oncotype DX. First, the Clinical Laboratory Fee
Schedule payments under Medicare are frozen through 2008 with
zero-percent annual adjustment. This would affect Medicare and
Medicaid payments for Oncotype DX if a specific procedure
code and Clinical Laboratory Fee Schedule payment are assigned
to the test. Second, Congress authorized the Medicare program to
conduct a demonstration project on applying competitive bidding
to certain clinical laboratory tests. It is not clear whether
competitive bidding will be applied more broadly to clinical
laboratory services under Medicare at some point in the future
and, if so, whether this would impact payment for Oncotype
DX, which is provided solely by us. Third, Medicare is
reforming the local contractor process to replace current
contracts with fiscal intermediaries, who are billed by
hospitals and other institutional providers, and carriers, which
are billed by physicians, independent laboratories and other
suppliers, with new contracts. These reforms may result in a
change in the contractors to whom we send Medicare claims, which
may affect coverage for Oncotype DX. Finally, on several
occasions, including in 2003 during the negotiations over the
MMA, Congress has considered imposing a 20% co-insurance amount
on clinical laboratory services, which would require
beneficiaries to pay a portion of the cost of their clinical
laboratory testing. Although that requirement has not been
enacted at this time, Congress could decide to impose such an
obligation at some point in the future. If so, it could make it
more difficult for us to collect payment for Oncotype DX.
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Regulation
Clinical
Laboratory Improvement Amendments of 1988
As a clinical laboratory, we are required to hold certain
federal, state and local licenses, certifications and permits to
conduct our business. Under CLIA, we are required to hold a
certificate applicable to the type of work we perform and to
comply with standards covering personnel, facilities
administration, quality systems and proficiency testing.
We have a certificate of accreditation under CLIA to perform
testing and are accredited by CAP. To renew our CLIA
certificate, we are subject to survey and inspection every two
years to assess compliance with program standards. The standards
applicable to the testing which we perform may change over time.
We cannot assure you that we will be able to operate profitably
should regulatory compliance requirements become substantially
more costly in the future.
If our laboratory is out of compliance with CLIA requirements,
we may be subject to sanctions such as suspension, limitation or
revocation of our CLIA certificate, as well as directed plan of
correction, state
on-site
monitoring, civil money penalties, civil injunctive suit or
criminal penalties. We must maintain CLIA compliance and
certification to be eligible to bill for services provided to
Medicare beneficiaries. If we were to be found out of compliance
with CLIA program requirements and subjected to sanction, our
business could be harmed.
Food
and Drug Administration
The U.S. Food and Drug Administration, or FDA, regulates
the sale or distribution, in interstate commerce, of medical
devices, including in vitro diagnostic test kits. Devices
subject to FDA regulation must undergo pre-market review prior
to commercialization unless the device is of a type exempted
from such review. In addition, manufacturers of medical devices
must comply with various regulatory requirements under the
Federal Food, Drug and Cosmetic Act and regulations promulgated
under that Act, including quality system review regulations,
unless exempted from those requirements for particular types of
devices. Entities that fail to comply with FDA requirements can
be liable for criminal or civil penalties, such as recalls,
detentions, orders to cease manufacturing and restrictions on
labeling and promotion.
Clinical laboratory services are not typically subject to FDA
regulation, but in vitro diagnostic test kits and reagents
and equipment used by these laboratories may be subject to FDA
regulation. Clinical laboratory tests that are developed and
validated by a laboratory for use in examinations the laboratory
performs itself are called laboratory development tests, or
LDTs. Most LDTs currently are not subject to pre-market review
by FDA although analyte-specific reagents or software provided
to clinical laboratories by third parties and used by clinical
laboratories to perform LDTs may be subject to review by FDA
prior to marketing. We believe that Oncotype DX is a type
of LDT. We believe that Oncotype DX is not subject to
regulation under current FDA policies and have communicated this
conclusion to FDA staff. We believe that the container we
provide for collection and transport of tumor samples from a
pathology laboratory to our laboratory is a medical device
subject to FDA regulation but exempt from pre-market review.
In January 2006, we received a letter from FDA regarding
Oncotype DX inviting us to meet with FDA to discuss the
nature and appropriate regulatory status of and the least
burdensome ways that we may fulfill any FDA pre-market review
requirements that may apply. In September 2006, FDA issued draft
guidance on a new class of tests called In Vitro
Diagnostic Multivariate Index Assays. This draft guidance,
which is intended for public comment, represents the first
public discussion surrounding FDAs position regarding the
regulation of certain laboratory-developed tests. Under this
draft guidance, Oncotype DX could be classified as either
a Class II or a Class III medical device, which may
require varying levels of FDA pre-market review depending upon
intended use and on the level of control necessary to assure the
safety and effectiveness of the test. FDA held a public meeting
on February 8, 2007 at which a number of interested parties
commented on the draft guidance. The draft guidance was open for
public comment until March 5, 2007.
We submitted formal comments in response to the draft guidance
and we intend to continue our ongoing dialogue with FDA with
respect to the regulatory status of the Oncotype DX
breast cancer tests. We have presented information regarding
Oncotype DX to FDA and continue to believe that our tests
are appropriately regulated under
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CLIA and should not require pre-market review by FDA. We cannot
provide any assurance that FDA regulation, including pre-market
review, will not be required in the future for Oncotype
DX, either through new enforcement policies adopted by FDA
or new legislation enacted by Congress. If pre-market review is
required, our business could be negatively impacted until such
review is completed and approval or clearance to market is
obtained, and FDA could require that we stop selling our test
pending pre-market approval. If our test is allowed to remain on
the market but there is uncertainty about our test or if it is
labeled investigational by FDA, orders or reimbursement may
decline. The regulatory approval process may involve, among
other things, successfully completing additional clinical trials
and submitting a pre-market clearance notice or filing a
pre-market approval application with FDA. If pre-market review
is required by FDA, there can be no assurance that our test will
be cleared or approved on a timely basis, if at all. Ongoing
compliance with FDA regulations would increase the cost of
conducting our business, subject us to inspection by FDA and to
the requirements of FDA and penalties for failure to comply with
these requirements. Notwithstanding the above, we may decide to
voluntarily pursue FDA pre-market approval of Oncotype DX
if we determine that doing so would be appropriate. Pursuing
voluntary market review may, for example, facilitate third-party
payor coverage for Oncotype DX test or serve to
differentiate claims about the intended use of Oncotype
DX from those of other tests.
Should any of the reagents obtained by us from vendors and used
in conducting our LDT be affected by future regulatory actions,
our business could be adversely affected by those actions,
including increasing 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, the U.S. Department
of Health and Human Services, or HHS, has issued regulations to
protect the privacy and security of protected health information
used or disclosed by health care providers, such as us. HIPAA
also regulates standardization of data content, codes and
formats used in health care transactions and standardization of
identifiers for health plans and providers. Penalties for
violations of HIPAA regulations include civil and criminal
penalties.
We developed policies and procedures to comply with these
regulations by the respective compliance enforcement dates. The
requirements under these regulations may change periodically and
could have an effect on our business operations if compliance
becomes substantially more costly than under current
requirements.
In addition to federal privacy regulations, there are a number
of state laws governing confidentiality of health information
that are applicable to our operations. New laws governing
privacy may be adopted in the future as well. We have taken
steps to comply with health information privacy requirements to
which we are aware that we are subject. However, we can provide
no assurance that we are or will remain in compliance with
diverse privacy requirements in all of the jurisdictions in
which we do business. Failure to comply with privacy
requirements could result in civil or criminal penalties, which
could have a materially adverse impact on our business.
Federal
and State Self-referral Prohibitions
We are subject to the federal 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 of
$75 million at the end of its most recent fiscal year or on
average during the previous three fiscal years, and which
satisfies certain other requirements. In addition, both the
Stark Law and PORA contain an exception for compensation paid to
a physician for personal services rendered by the physician. We
have compensation arrangements with a number of physicians for
personal services, such as speaking engagements and specimen
tissue preparation. We have structured these arrangements with
terms intended to comply with the requirements of the personal
services exception to Stark and PORA. However, we can not be
certain that regulators would find these arrangements to be in
compliance with Stark, PORA or similar state
24
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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exclusion from federal healthcare programs, including the
Medicare and Medicaid programs; and
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a civil penalty of up to $100,000 against parties that enter
into a scheme to circumvent the Stark Laws prohibition.
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These prohibitions apply regardless of the reasons for the
financial relationship and the referral. No finding of intent to
violate the Stark Law is required for a violation. In addition,
under an emerging legal theory, knowing violations of the Stark
Law may also serve as the basis for liability under the Federal
False Claims Act.
Further, a violation of PORA is a misdemeanor and could result
in civil penalties and criminal fines. Finally, other states
have self-referral restrictions with which we have to comply
that differ from those imposed by federal and California law.
While we have attempted to comply with the Stark Law, PORA and
similar laws of other states, it is possible that some of our
financial arrangements with physicians could be subject to
regulatory scrutiny at some point in the future, and we cannot
provide an assurance that we will be found to be in compliance
with these laws following any such regulatory review.
Federal
and State Anti-kickback Laws
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 the 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 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.
Californias anti-kickback statute, commonly referred to as
Section 650, has been interpreted by the California
Attorney General and California courts in substantially the same
way as the 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.
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.
25
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 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 applies to
discounts provided by providers and suppliers, including
laboratories, to clients with respect to Medicare, Medicaid,
private pay or HMO patients, where the referring physician or
institution bills the payor for the test, not when the service
provider 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.
California does not have a discount safe harbor. However,
certain licensees, such as hospitals or physicians, may only
mark-up
laboratory tests purchased by those licensees from a laboratory
if certain disclosures are made to patients and third-party
payors regarding the
mark-up.
Therefore, if and when we elect to offer discounts to California
customers, including any hospital or physician, such discounts
would not likely be viewed by regulators as prohibited under
Section 650 because the
mark-up
would be disclosed by the customer to its buyer under
Californias
mark-up
laws. In contrast, any such discounts provided by us to our
non-California customers would have to be analyzed under
Californias Section 650.
The personal services safe harbor to the Anti-kickback Law
provides that remuneration paid to a referral source for
personal services will not violate the Anti-kickback Law
provided all of the elements of that safe harbor are met. One
element is that, if the agreement is intended to provide for the
services of the physician on a periodic, sporadic or part-time
basis, rather than on a full-time basis for the term of the
agreement, the agreement specifies exactly the schedule of such
intervals, their precise length, and the exact charge for such
intervals. Our personal services arrangements with some
physicians did not meet the specific requirement of this safe
harbor that the agreement specify exactly the schedule of the
intervals of time to be spent on the services because the nature
of the services, for example, speaking engagements, does not
lend itself to exact scheduling and therefore meeting this
element of the personal services safe harbor is impractical.
Failure to meet the terms of the safe harbor does not render an
arrangement illegal. Rather, an arrangement would not have the
protections of the safe harbor if challenged by a regulator and,
if necessary, the parties might be required to demonstrate why
the arrangement does not violate the Anti-kickback Law.
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 Fraud and Abuse Laws
In addition to the requirements that are discussed above, there
are several other health care fraud and abuse laws that could
have an impact on our business. For example, provisions of the
Social Security Act permit Medicare and Medicaid to exclude an
entity that charges the federal health care programs
substantially in excess of its usual charges for its services.
The terms usual charge and substantially in
excess are ambiguous and subject to varying
interpretations.
Further, the Federal False Claims Act prohibits a person from
knowingly submitting a claim or making a false record or
statement in order to secure payment by the federal government.
In addition to actions initiated by the government itself, the
statute authorizes actions to be brought on behalf of the
federal government by a private party having knowledge of the
alleged fraud. Because the complaint is initially filed under
seal, the action may be pending for some time before the
defendant is even aware of the action. If the government is
ultimately successful in obtaining redress in the matter or if
the plaintiff succeeds in obtaining redress without the
governments involvement, then the plaintiff will receive a
percentage of the recovery. Finally, the Social Security Act
includes its own provisions that prohibit the filing of false
claims or submitting false statements in order to obtain
payment. Violation of these provisions may result in fines,
imprisonment or both, and possible exclusion from Medicare or
Medicaid.
26
California
Laboratory Licensing
In addition to federal certification requirements of
laboratories under CLIA, licensure is required and maintained
for our laboratory under California law. Such laws establish
standards for the
day-to-day
operation of a clinical laboratory, including the training and
skills required of personnel and quality control. In addition,
California laws mandate proficiency testing, which involves
testing of specimens that have been specifically prepared for
the laboratory.
If our laboratory is out of compliance with California
standards, the California Department of Health Services, or DHS,
may suspend, restrict or revoke our license to operate our
laboratory; assess substantial civil money penalties; or impose
specific corrective action plans. Any such actions could
materially affect our business. We maintain a current license in
good standing with DHS. However, we cannot provide assurance
that DHS will at all times in the future find us to be in
compliance with all such laws.
New
York Laboratory Licensing
Because we receive specimens from New York State, our clinical
laboratory is required to be licensed by New York. We
maintain such licensure for our laboratory under New York state
laws and regulations, which establish standards for:
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day-to-day
operation of a clinical laboratory, including training and skill
levels required of laboratory personnel;
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physical requirements of a facility;
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equipment; and
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quality control.
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New York law also mandates proficiency testing for laboratories
licensed under New York state law, regardless of whether or not
such laboratories are located in New York. If a laboratory is
out of compliance with New York statutory or regulatory
standards, the New York State Department of Health, or the DOH,
may suspend, restrict or revoke the laboratorys New York
license or assess civil money penalties. Statutory or regulatory
noncompliance may result in a laboratorys being found
guilty of a misdemeanor under New York law. Should we be found
out of compliance with New York laboratory requirements, we
could be subject to such sanctions, which could harm our
business. We maintain a current license in good standing with
the DOH. However, we cannot provide assurance that the 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.
Patents
and Proprietary Technology
In order to remain competitive, we must develop and maintain
protection on the proprietary aspects of our technologies. We
rely on a combination of patent applications, copyrights,
trademarks, trade secret laws and confidentiality, material data
transfer agreements, licenses and invention assignment
agreements to protect our intellectual property rights. We also
rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and
maintain our competitive position. We generally protect this
information with reasonable security measures.
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As December 31, 2006, we had two issued patents, one of
which was issued jointly to us and to the NSABP, and a number of
pending U.S. patent applications, including provisional and
non-provisional filings. Our issued patents expire in 2023 and
2024, respectively. Some of these U.S. patent applications
also have corresponding pending applications under the Patent
Cooperation Treaty in Canada, Europe, Japan and Australia. In
these patent applications, we have either sole or joint
ownership positions. In those cases where joint ownership
positions were created, we have negotiated contractual
provisions providing us with the opportunity to acquire
exclusive rights under the patent applications. Under three
patent applications, we have elected to allow exclusive options
to lapse without exercising the option. The joint ownership
agreements generally are in the form of material data transfer
agreements that were executed at the onset of our collaborations
with third parties.
Our patent applications relate to two main areas: gene
expression technology methods, and gene markers for cancer
recurrence and drug response in certain forms of cancer. We
intend to file additional patent applications in the United
States and abroad to strengthen our intellectual property
rights. Our patent applications may not result in issued
patents, and we cannot assure you that any patents that might
issue will protect our technology. Any patents issued to us in
the future may be challenged by third parties as being invalid
or unenforceable, or third parties may independently develop
similar or competing technology that are not covered by our
patents. We cannot be certain that the steps we have taken will
prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
We have received notices of claims of infringement,
misappropriation or misuse of other parties proprietary
rights and may from time to time receive additional notices.
Some of these claims may lead to litigation. We cannot assure
you that we will prevail in these actions, or that other actions
alleging misappropriation or misuse by us of third-party trade
secrets, infringement by us of third-party patents and
trademarks or the validity of patents issued to us in the
future, will not be asserted or prosecuted against us, or that
any assertions of misappropriation, infringement or misuse or
prosecutions seeking to establish the validity of our patents
will not materially or adversely affect our business, financial
condition and results of operations.
An adverse determination in litigation or interference
proceedings to which we may become a party relating to any
patents issued to us in the future or any patents owned by third
parties could subject us to significant liabilities to third
parties or require us to seek licenses from third parties.
Furthermore, if we are found to willfully infringe these
patents, we could, in addition to other penalties, be required
to pay treble damages. Although patent and intellectual property
disputes in this area have often been settled through licensing
or similar arrangements, costs associated with such arrangements
may be substantial and could include ongoing royalties. We may
be unable to obtain necessary licenses on satisfactory or
commercially feasible terms, if at all. If we do not obtain
necessary licenses, we may not be able to redesign
Oncotype DX or other of our tests to avoid infringement,
or such redesign may take considerable time, and force us to
reassess our business plans. Adverse determinations in a
judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and
selling Oncotype DX or other of our tests, which would
have a significant adverse impact on our business.
All employees and technical consultants working for us are
required to execute confidentiality agreements in connection
with their employment and consulting relationships with us.
Confidentiality agreements provide that all confidential
information developed or made known to others during the course
of the employment, consulting or business relationship shall be
kept confidential except in specified circumstances. Agreements
with employees provide that all inventions conceived by the
individual while employed by us are our exclusive property. We
cannot provide any assurance that employees and consultants will
abide by the confidentiality or assignment terms of these
agreements. Despite measures taken to protect our intellectual
property, unauthorized parties might copy aspects of our
technology or obtain and use information that we regard as
proprietary.
Roche
License Agreement
We have obtained from Roche Molecular Systems, Inc. a
non-exclusive license under a number of U.S. patents
claiming nucleic acid amplification processes known as
polymerase chain reaction, or PCR, homogeneous polymerase chain
reaction, and reverse transcription polymerase chain reaction,
or RT-PCR. We use these processes in our research and
development and in the processing of our tests. The Roche
license is limited to the performance of clinical laboratory
services within the United States and Puerto Rico, and does not
include the right to make or
28
sell products using the patented processes. The license
continues as long as the underlying patent rights are in effect,
but is subject to early termination by Roche under the following
circumstances:
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a change in our ownership;
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a declaration of bankruptcy or insolvency, the making of an
assignment for the benefit of our creditors, having a receiver
appointed, or losing the federal or state licenses necessary for
our operation;
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a change in our status to a non-profit entity or government
institution; or
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our breach of or default under a material term of the license.
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If the Roche license is terminated, we will be unable to use the
licensed processes to conduct research and development or to
perform our tests. As payment for the licenses granted to us, we
make royalty payments to Roche consisting of a specified
percentage of our net revenues.
Oxford
Finance Agreements
We have entered into a master security agreement and a number of
promissory notes with Oxford Finance Corporation to finance
equipment leases, computer and software leases and leasehold
improvements. Under the master security agreement, we granted a
security interest to Oxford in all of our goods, equipment,
instruments and investment property. Events that would
constitute a default by us under the master security agreement
include, among others, our failure to pay an obligation when
due, an attempt by us to sell, lease, transfer or encumber the
collateral, our failure to maintain liability insurance as
required by the agreement; our dissolving, becoming insolvent,
filing for bankruptcy or having a receiver appointed, a change
in our ownership or a material adverse change in our financial
condition, business or operations.
If we default under the master security agreement, Oxford may
declare all of our indebtedness under the promissory notes to be
immediately due and payable.
The promissory notes provide that amounts borrowed will be
repaid in periodic installments. Principal underlying promissory
notes to finance equipment leases must be paid in 45 to
48 monthly installments, and principal underlying
promissory notes to finance computer and software leases and
leasehold improvements must be paid in 36 monthly
installments. Prepayment of indebtedness under a promissory note
is subject to a prepayment penalty and is allowed only after the
first anniversary of the note. As of December 31, 2006, the
outstanding principal amount under these promissory notes was
$7.3 million.
Research
and Development Expenses
Research and development expenses were $12.8 million,
$9.5 million and $10.0 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Employees
As of December 31, 2006, we had 191 employees. None of our
employees are covered by collective bargaining arrangements, and
our management considers its relationships with employees to be
good.
Available
Information
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.
29
RISKS
RELATED TO OUR COMPANY
We are
an early stage company with a history of losses, and we expect
to incur net losses for the foreseeable future.
We have incurred substantial net losses since our inception. For
the year ended December 31, 2006, we incurred a net loss of
$28.9 million. From our inception in August 2000 through
December 31, 2006, we had an accumulated deficit of
approximately $125.1 million. To date, we have not, and we
may never, achieve revenues sufficient to offset expenses. We
expect to devote substantially all of our resources to continue
commercializing our existing test, Oncotype DX, and to
develop future tests.
We expect to incur additional losses in future years, and we may
never achieve profitability. In addition, we have only recently
begun to commercialize Oncotype DX and do not expect our
losses to be substantially mitigated by revenues from
Oncotype DX or future products, if any, for a number of
years.
We
expect to continue to incur significant research and development
expenses, which may make it difficult for us to achieve
profitability.
In recent years, we have incurred significant costs in
connection with the development of Oncotype DX. Our
research and development expenses were $12.8 million for
the year ended December 31, 2006. We expect our research
and development expense levels to remain high for the
foreseeable future as we seek to enhance our existing test and
develop new tests. As a result, we will need to generate
significant revenues in order to achieve profitability. Our
failure to achieve profitability in the future could cause the
market price of our common stock to decline.
If
third-party payors, including managed care organizations and
Medicare, do not provide reimbursement or rescind their
reimbursement policies for Oncotype DX, its commercial success
could be compromised.
Oncotype DX has a list price of $3,460. Physicians and
patients may decide not to order Oncotype DX unless
third-party payors, such as managed care organizations as well
as government payors such as Medicare and Medicaid, pay a
substantial portion of the tests price. There is
significant uncertainty concerning third-party reimbursement of
any test incorporating new technology, including Oncotype
DX. 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, and
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supported by peer-reviewed publications.
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Since each payor makes its own decision as to whether to
establish a policy to reimburse, seeking these approvals is a
time-consuming and costly process. To date, we have secured
policy-level reimbursement approval from only a limited number
of third-party payors and have a limited number of approvals for
state Medicaid programs. We cannot be certain that coverage for
Oncotype DX will be provided in the future by any
third-party payors.
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 such
as Blue Cross and Blue Shield, which provide healthcare coverage
for nearly one-third of all Americans, as grounds to deny
coverage for a test or procedure. Oncotype DX has
received negative assessments and may receive additional
negative assessments in the future. For example, in early 2005,
the Medical Advisory Panel of the Blue Cross and Blue Shield
Associations Technology Evaluation Center, a technology
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assessment group, concluded that the existing clinical data in
support of Oncotype DX did not meet the panels
technology criteria for clinical effectiveness and
appropriateness.
In January 2006, NHIC, the California Medicare contractor with
responsibility for processing and paying claims submitted by us,
released a local coverage determination providing coverage for
Oncotype DX when used in accordance with the terms of the
determination. The local coverage determination is effective for
Oncotype DX tests provided on or after February 27,
2006. Until recently, there had been some question as to whether
claims for Oncotype DX tests performed on Medicare
beneficiaries who were hospital inpatients at the time the tumor
tissue samples were obtained may be billed by us to NHIC or must
be incorporated in the payment that the hospital receives for
their services related to the patients breast cancer. As
of December 31, 2006, the volume of patients who fell into
this category represented a very small portion (approximately
2%) of our total testing population.
Based on a final rule effective January 1, 2007, we are
permitted to submit claims to NHIC for the Oncotype DX
tests performed on Medicare beneficiaries who were hospital
inpatients or outpatients at the time the tumor tissue samples
were obtained, but only if the test was ordered at least
14 days following the date of the patients discharge
from the hospital and where other specified conditions are met.
We are in the process of making arrangements with hospitals for
payment of the test when performed for the small portion of
Medicare beneficiaries, representing approximately 3% of our
total testing population, who are hospital inpatients or
outpatients at the time specimens are collected and who do not
meet criteria under the final rule for billing by us. Finally,
we have been engaged in discussions with the Centers for
Medicare/Medicaid Services, or CMS, about the application of the
final rule to hospital outpatients. We believe the final rule
should not apply to the Oncotype DX tests performed on
tumor tissue samples obtained while the patient is a hospital
outpatient, and that the tests performed on tissue samples taken
from hospital outpatients are reimbursable under the Medicare
program, regardless of when the testing of such tissue samples
takes place. While we are continuing to pursue this matter, at
this point, CMS intends for the final rule to apply to
outpatients as well as inpatients, and we are notifying
hospitals accordingly.
Insurers, including managed care organizations as well as
government payors such as Medicare, have increased their efforts
to control the cost, utilization and delivery of health care
services. From time to time, Congress has considered and
implemented changes in the Medicare fee schedules in conjunction
with budgetary legislation, most recently in February 2006.
Further reductions of reimbursement for Medicare services may be
implemented from time to time. Reductions in the reimbursement
rates of other third- party payors have occurred and may occur
in the future. These measures have resulted in reduced prices,
added costs and decreased test utilization for the clinical
laboratory industry.
Medicare currently contracts with a large number of fiscal
intermediaries and carriers that are responsible for processing
and paying claims. Within the next few years, Medicare is
expected to reduce this number to fifteen regional Medical
Administrative Contractors, or MACs. If NHIC is not selected as
one of these regional MACs, we cannot be certain that we will
obtain a positive local coverage determination from another
contractor.
If we are unable to obtain reimbursement approval from private
payors and Medicare and Medicaid programs for Oncotype
DX, or if the amount reimbursed is inadequate, our ability
to generate revenues from Oncotype DX could be limited.
Even if we are being reimbursed, insurers may cancel their
contracts with us at any time or stop paying for our test which
would reduce our revenue.
If the
U.S. Food and Drug Administration, or FDA, were to begin
regulating our test, we could be forced to stop sales of
Oncotype DX, we could experience significant delays in
commercializing any future products, we could incur substantial
costs and time delays associated with meeting requirements for
pre-market approval or we could experience decreased demand for
or reimbursement of our test.
Clinical laboratory tests like Oncotype DX are regulated
under the Clinical Laboratory Improvement Amendments of 1988, or
CLIA, as administered through the CMS, as well as by applicable
state laws. Diagnostic kits that are sold and distributed
through interstate commerce are regulated as medical devices by
FDA. Clinical laboratory tests that are developed and validated
by a laboratory for its own use are called laboratory
development tests, or LDTs. Most LDTs currently are not subject
to FDA regulation, although reagents or software provided by
third parties and used to perform LDTs may be subject to
regulation. We believe that Oncotype DX is not a
diagnostic kit and also believe that it is an LDT. As a result,
we believe Oncotype DX should not be subject to
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regulation under established FDA policies. The container we
provide for collection and transport of tumor samples from a
pathology laboratory to our laboratory is a medical device
subject to FDA regulation but is currently exempt from
pre-market review by FDA.
In January 2006, we received a letter from FDA regarding
Oncotype DX inviting us to meet with FDA to discuss the
nature and appropriate regulatory status of and the least
burdensome ways that we may fulfill any FDA pre-market review
requirements that may apply. In September 2006, FDA issued draft
guidance on a new class of tests called In Vitro
Diagnostic Multivariate Index Assays. This draft guidance,
which is intended for public comment, represents the first
public discussion surrounding FDAs position regarding the
regulation of certain laboratory-developed tests. Under this
draft guidance, Oncotype DX could be classified as either
a Class II or a Class III medical device, which may
require varying levels of FDA pre-market review depending upon
intended use and on the level of control necessary to assure the
safety and effectiveness of the test. The draft guidance was
open for public comment until March 5, 2007, during which
time we and others had the opportunity to comment on their
proposed guidelines. In addition, FDA held a public meeting on
February 8, 2007 at which several interested parties
commented on the draft guidance.
We cannot provide any assurance that FDA regulation, including
pre-market review, will not be required in the future for
Oncotype DX, either through new enforcement policies
adopted by FDA or new legislation enacted by Congress. If
pre-market review is required, our business could be negatively
impacted until such review is completed and approval or
clearance to market is obtained, and FDA could require that we
stop selling our test pending pre-market approval. If our test
is allowed to remain on the market but there is uncertainty
about our test or if it is labeled investigational by FDA,
orders or reimbursement may decline. The regulatory approval
process may involve, among other things, successfully completing
additional clinical trials and submitting a pre-market clearance
notice or filing a pre-market approval application with FDA. If
pre-market review is required by FDA, there can be no assurance
that our test will be cleared or approved on a timely basis, if
at all. Ongoing compliance with FDA regulations would increase
the cost of conducting our business, and subject us to
inspection by FDA and to the requirements of FDA and penalties
for failure to comply with these requirements. Notwithstanding
the above, we may decide voluntarily to pursue FDA pre-market
review of Oncotype DX if we determine that doing so would
be appropriate.
Should any of the reagents obtained by us from vendors and used
in conducting our LDT be affected by future regulatory actions,
our business could be adversely affected by those actions,
including increasing 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
marketing our test, those trials could lead to delays or failure
to obtain necessary regulatory approvals and harm our ability to
become profitable.
If FDA decides to regulate our test, it may require extensive
pre-market clinical testing prior to submitting a regulatory
application for commercial sales. If we are required to conduct
pre-market clinical trials, whether using prospectively acquired
samples or archival samples, delays in the commencement or
completion of clinical testing could significantly increase our
test development costs and delay commercialization. Many of the
factors that may cause or lead to a delay in the commencement or
completion of clinical trials may also ultimately lead to delay
or denial of regulatory 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
32
approval for our test. In addition, we may not be able to
establish or maintain relationships with these parties on
favorable terms, if at all. Each of these outcomes would harm
our ability to market our test, or to become profitable.
Complying
with numerous regulations pertaining to our business is an
expensive and time-consuming process, and any failure to comply
could result in substantial penalties.
We are subject to CLIA, a federal law that regulates clinical
laboratories that perform testing on specimens derived from
humans for the purpose of providing information for the
diagnosis, prevention or treatment of disease. CLIA is intended
to ensure the quality and reliability of clinical laboratories
in the United States by mandating specific standards in the
areas of personnel qualifications, administration, and
participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. We have a
current certificate of accreditation under CLIA to perform
testing. To renew this certificate, we are subject to survey and
inspection every two years. Moreover, CLIA inspectors may make
random inspections of our laboratory.
We are also required to maintain a license to conduct testing in
California. California laws establish standards for
day-to-day
operation of our clinical laboratory, including the training and
skills required of personnel and quality control. Moreover,
several states require that we hold licenses to test specimens
from patients residing in those states. Other states have
similar requirements or may adopt similar requirements in the
future. Finally, we may be subject to regulation in foreign
jurisdictions as we seek to expand international distribution of
our test.
If we were to lose our CLIA accreditation or California license,
whether as a result of a revocation, suspension or limitation,
we would no longer be able to sell Oncotype DX, which
would limit our revenues and harm our business. If we were to
lose our license in other states where we are required to hold
licenses, we would not be able to test specimens from those
states.
We are subject to other regulation by both the federal
government and the states in which we conduct our business,
including:
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Medicare billing and payment regulations applicable to clinical
laboratories;
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the federal Medicare and Medicaid Anti-kickback Law and state
anti-kickback prohibitions;
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the federal physician self-referral prohibition, commonly known
as the Stark Law, and the state equivalents;
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the federal Health Insurance Portability and Accountability Act
of 1996;
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the Medicare civil money penalty and exclusion
requirements; and
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the federal civil and criminal False Claims Act.
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The risk of our being found in violation of these laws and
regulations is increased by the fact that many of them have not
been fully interpreted by the regulatory authorities or the
courts, and their provisions are open to a variety of
interpretations. Any action brought against us for violation of
these laws or regulations, even if we successfully defend
against it, could cause us to incur significant legal expenses
and divert our managements attention from the operation of
our business. If our operations are found to be in violation of
any of these laws and regulations, we may be subject to any
applicable penalty associated with the violation, including
civil and criminal penalties, damages, fines, we could be
required to refund payments received by us, and we could be
required to curtail or cease our operations. Any of the
foregoing consequences could seriously harm our business and our
financial results.
Our
financial results depend on sales of one test, Oncotype DX, and
we will need to generate sufficient revenues from this and other
tests to run our business.
For the foreseeable future, we expect to derive substantially
all of our revenues from sales of one test, Oncotype DX.
We have been selling this test since January 2004. We are in
various stages of research and development for other tests that
we may offer as well as for enhancements to our existing test.
We do not currently expect to commercialize tests for colon
cancer until 2009, and we are not currently able to estimate
when we may be able to commercialize tests for other cancers or
whether we will be successful in doing so. If we are unable to
increase sales of Oncotype DX or to successfully develop
and commercialize other tests or enhancements, our revenues and
our ability to achieve profitability would be impaired, and the
market price of our common stock could decline.
33
We may
experience limits on our revenues if physicians decide not to
order our test.
If medical practitioners do not order Oncotype DX or any
future tests developed by us, we will likely not be able to
create demand for our products in sufficient volume for us to
become profitable. To generate demand, we will need to continue
to make oncologists, surgeons and pathologists aware of the
benefits of Oncotype DX and any products we may develop
in the future through published papers, presentations at
scientific conferences and
one-on-one
education by our sales force. In addition, we will need to
demonstrate our ability to obtain adequate reimbursement
coverage from third-party payors.
Existing guidelines and practices regarding the treatment of
breast cancer recommend that chemotherapy be considered in most
cases, including many cases in which our test may indicate that,
based on our clinical trial results, chemotherapy is of little
or no benefit. Accordingly, physicians may be reluctant to order
a test that may suggest recommending against chemotherapy in
treating breast cancer where current guidelines recommend
consideration of such treatment. 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 order or support our test. These facts may make it
difficult for us to convince medical practitioners to order
Oncotype DX for their patients, which could limit our
ability to generate revenues and our ability to achieve
profitability.
We may
experience limits on our revenues if patients decide not to use
our test.
Some patients may decide not to order our test due to its list
price of $3,460, part or all of which may be payable directly by
the patient if the applicable payor denies reimbursement in full
or in part. Even if medical practitioners recommend that their
patients use our test, patients may still decide not to use
Oncotype DX, either because they do not want to be made
aware of the likelihood of recurrence or they wish to pursue a
particular course of therapy regardless of test results. If only
a small portion of the patient population decides to use our
test, we will experience limits on our revenues and our ability
to achieve profitability.
If we
are unable to develop products to keep pace with rapid
technological, medical and scientific change, our operating
results and competitive position would be harmed.
In recent years, there have been numerous advances in
technologies relating to the diagnosis and treatment of cancer.
For example, technologies in addition to ours now reportedly
permit measurement of gene expression in fixed, paraffin
embedded tissue specimens. Also, new hormonal therapies such as
aromatase inhibitors are viewed by physicians as promising
therapies for breast cancer with more tolerable side effects
than those associated with tamoxifen, the hormonal therapy
commonly used today in treatment. For advanced cancer, new
chemotherapeutic strategies are being developed that may
increase survival time and reduce toxic side effects. These
advances require us continuously to develop new products and
enhance existing products to keep pace with evolving standards
of care. Our test could become obsolete unless we continually
innovate and expand our product to demonstrate recurrence and
treatment benefit in patients treated with new therapies. New
treatment therapies typically have only a few years of clinical
data associated with them, which limits our ability to perform
clinical studies and correlate sets of genes to a new
treatments effectiveness. If we are unable to demonstrate
the applicability of our test to new treatments, then sales of
our test could decline, which would harm our revenues.
Our
rights to use technologies licensed from third parties are not
within our control, and we may not be able to sell our products
if we lose our existing rights or cannot obtain new rights on
reasonable terms.
We license from third parties technology necessary to develop
our products. For example, we license technology from Roche
Molecular Systems, Inc. that we use to analyze genes for
possible inclusion in our tests and that we use in our
laboratory to conduct our test. In return for the use of a third
partys technology, we may agree to pay the licensor
royalties based on sales of our products. Royalties are a
component of cost of product revenues and impact the margin on
our test. We may need to license other technology to
commercialize future products. Our business may suffer if these
licenses terminate, if the licensors fail to abide by the terms
of the license or fail to prevent infringement by third parties,
if the licensed patents or other rights are found to be invalid
or if we are unable to enter into necessary licenses on
acceptable terms.
34
Our
competitive position depends on maintaining intellectual
property protection.
Our ability to compete and to achieve and maintain profitability
depends on our ability to protect our proprietary discoveries
and technologies. We currently rely on a combination of patent
applications, copyrights, trademarks, trade secret laws and
confidentiality agreements, material data transfer agreements,
license agreements and invention assignment agreements to
protect our intellectual property rights. We also rely upon
unpatented know-how and continuing technological innovation to
develop and maintain our competitive position. Patents may be
granted to us jointly with other organizations, and while we may
have a right of first refusal, we cannot guarantee that a joint
owner will not license rights to another party.
As December 31, 2006, we had two issued patents, one of
which was issued jointly to us and to the NSABP. Our pending
patent applications may not result in issued patents, and we
cannot assure you that our issued patent or any patents that
might ultimately be issued by the U.S. Patent and Trademark
Office will protect our technology. Any patents that may be
issued to us might be challenged by third parties as being
invalid or unenforceable, or third parties may independently
develop similar or competing technology that avoids our patents.
We cannot be certain that the steps we have taken will prevent
the misappropriation and use of our intellectual property,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
From time to time, the United States Supreme Court, other
federal courts, U.S. Congress or the U.S. Patent and
Trademark Office may change the standards of patentability and
any such changes could have a negative impact on our business.
We may
face intellectual property infringement claims that could be
time-consuming and costly to defend and could result in our loss
of significant rights and the assessment of treble
damages.
We have received notices of claims of infringement,
misappropriation or misuse of other parties proprietary
rights 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 our patents, will not be asserted
or prosecuted against us. We may also initiate claims to defend
our intellectual property. Intellectual property litigation,
regardless of outcome, is expensive and time-consuming, could
divert managements attention from our business and have a
material negative effect on our business, operating results or
financial condition. If there is a successful claim of
infringement against us, we may be required to pay substantial
damages (including treble damages if we were to be found to have
willfully infringed a third partys patent) to the party
claiming infringement, develop non-infringing technology, stop
selling our test or using technology that contains the allegedly
infringing intellectual property or enter into royalty or
license agreements that may not be available on acceptable or
commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on
a timely basis could harm our business. In addition, revising
our test to include the non-infringing technologies would
require us to re-validate our test, which would be costly and
time consuming. Also, we may be unaware of pending patent
applications that relate to our test. Parties making
infringement claims on future issued patents may be able to
obtain an injunction that would prevent us from selling our or
using technology that contains the allegedly infringing
intellectual property, which could harm our business.
There are a number of patents and patent applications that may
constitute prior art in the field of genomic-based diagnostics.
We may be required to pay royalties, damages and costs to firms
who own the rights to these patents, or we might be restricted
from using any of the inventions claimed in those patents.
If we
are unable to compete successfully, we may be unable to increase
or sustain our revenues or achieve profitability.
Our principal competition comes from existing diagnostic methods
used by pathologists and oncologists. These methods have been
used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment
and kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like Oncotype DX that are performed
outside the pathology laboratory. In addition, few diagnostic
methods are as expensive as Oncotype DX.
35
We also face competition from many from companies that offer
products or have conducted research to profile gene expression
in breast cancer, including Agendia B.V. and AviaraDX.
Commercial laboratories with strong distribution networks for
diagnostic tests, such as Genzyme Corporation, Laboratory
Corporation of America Holdings and Quest Diagnostics
Incorporated, may become competitors. Other potential
competitors include companies that develop diagnostic tests such
as Bayer Healthcare LLC, Celera Genomics, a business segment of
Applera Corporation, Roche Diagnostics, a division of F.
Hoffmann-La Roche Ltd, and Veridex LLC, a
Johnson & Johnson company, other small companies and
academic and research institutions. Our competitors may invent
and commercialize technology platforms that compete with ours.
In addition, in December 2005, the federal government allocated
a significant amount funding to The Cancer Genome Atlas, a
project aimed at developing a comprehensive catalog of the
genetic mutations and other genomic changes that occur in
cancers and maintaining the information in a free public
database. As more information regarding cancer genomics becomes
available to the public, we anticipate that more products aimed
at identifying targeted treatment options will be developed and
these products may compete with ours.
Our test is currently considered relatively expensive for a
diagnostic test, and we expect to raise prices in the future.
This could impact reimbursement of and demand for Oncotype
DX. Many of our present and potential competitors have
widespread brand recognition and substantially greater financial
and technical resources and development, production and
marketing capabilities than we do. Others may develop
lower-priced, less complex tests that could be viewed by
physicians and payors as functionally equivalent to our test,
which could force us to lower the list price of our test and
impact our operating margins and our ability to achieve
profitability. Some competitors have developed tests cleared for
marketing by FDA. There may be a marketing differentiation or
perception that an FDA-cleared test is more desirable than
Oncotype DX, and that may discourage adoption and
reimbursement. If we are unable to compete successfully against
current or future competitors, we may be unable to increase
market acceptance for and sales of our test, which could prevent
us from increasing or sustaining our revenues or achieving or
sustaining profitability and could cause the market price of our
common stock to decline.
Our
research and development efforts will be hindered if we are not
able to contract with third parties for access to archival
tissue samples.
Under standard clinical practice in the United States, tumor
biopsies removed from patients are chemically preserved and
embedded in paraffin wax and stored. Our clinical development
relies on our ability to secure access to these archived tumor
biopsy samples, as well as information pertaining to their
associated clinical outcomes. Others have demonstrated their
ability to study archival samples and often compete with us for
access. Additionally, the process of negotiating access to
archived samples is lengthy since it typically involves numerous
parties and approval levels to resolve complex issues such as
usage rights, institutional review board approval, privacy
rights, publication rights, intellectual property ownership and
research parameters. If we are not able to negotiate access to
archival tumor tissue samples with hospitals and collaborators,
or if other laboratories or our competitors secure access to
these samples before us, our ability to research, develop and
commercialize future products will be limited or delayed.
If we
cannot maintain our current clinical collaborations and enter
into new collaborations, our product development could be
delayed.
We rely on and expect to continue to rely on clinical
collaborators to perform a substantial portion of our clinical
trial functions. If any of our collaborators were to breach or
terminate its agreement with us or otherwise fail to conduct its
collaborative activities successfully and in a timely manner,
the research, development or commercialization of the products
contemplated by the collaboration could be delayed or
terminated. If any of our collaboration agreements is
terminated, or if we are unable to renew those collaborations on
acceptable terms, we would be required to seek alternative
collaborations. We may not be able to negotiate additional
collaborations on acceptable terms, if at all, and these
collaborations may not be successful.
In the past, we have entered into clinical trial collaborations
with highly regarded organizations in the cancer field,
including the National Surgical Adjuvant Breast and Bowel
Project, or NSABP, and Northern California Kaiser Permanente.
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
36
collaborations with many companies at once, which can extend the
time it takes to develop, negotiate and implement a
collaboration. Additionally, organizations often insist on
retaining the rights to publish the clinical data resulting from
the collaboration. The publication of clinical data in
peer-reviewed journals is a crucial step in commercializing and
obtaining reimbursement for a test such as ours, and our
inability to control when, if ever, results are published may
delay or limit our ability to derive sufficient revenues from
any product that may result from a collaboration.
From time to time we expect to engage in discussions with
potential clinical collaborators which may or may not lead to
collaborations. However, we cannot guarantee that any
discussions will result in clinical collaborations or that any
clinical studies which may result will be enrolled or completed
in a reasonable time frame or with successful outcomes. Once
news of discussions regarding possible collaborations are known
in the medical community, regardless of whether the news is
accurate, failure to announce a collaborative agreement or the
entitys announcement of a collaboration with an entity
other than us may result in adverse speculation about us, our
product or our technology, resulting in harm to our reputation
and our business.
New
test development involves a lengthy and complex process, and we
may be unable to commercialize any of the tests we are currently
developing.
We have multiple tests in various stages of development and
devote considerable resources to research and development. For
example, we are currently in the development stage of the
application of our technology to predict recurrence and the
therapeutic benefit of chemotherapy in colon cancer, and we are
conducting early development studies in N+ prostate, renal cell
and lung cancers and melanoma. Our N+ breast cancer program is
being considered for a move to the validation phase with
Oncotype DX during 2007. There can be no assurance that
our technologies will be capable of reliably predicting the
recurrence of other cancers, such as colon and those cancers,
with the sensitivity and specificity necessary to be clinically
and commercially useful for the treatment of other cancers, or
that we can develop those technologies at all. In addition,
before we can develop diagnostic tests for new cancers and
commercialize any new products, we will need to:
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conduct substantial research and development;
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conduct validation studies;
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expend significant funds; and
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develop and
scale-up our
laboratory processes.
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This process involves a high degree of risk and takes several
years. Our product development efforts may fail for many
reasons, including:
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failure of the product at the research or development stage;
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difficulty in accessing archival tissue samples, especially
tissue samples with known clinical results; or
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lack of clinical validation data to support the effectiveness of
the product.
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Few research and development projects result in commercial
products, and success in early clinical trials often is not
replicated in later studies. At any point, we may abandon
development of a product candidate or we may be required to
expend considerable resources repeating clinical trials, which
would adversely impact the timing for generating potential
revenues from those product candidates. In addition, as we
develop products, we will have to make significant investments
in product development, marketing and selling resources. If a
clinical validation study fails to demonstrate the prospectively
defined endpoints of the study, we would likely abandon the
development of the product or product feature that was the
subject of the clinical trial, which could harm our business.
The
loss of key members of our senior management team or our
inability to retain highly skilled scientists, clinicians and
salespeople could adversely affect our business.
Our success depends largely on the skills, experience and
performance of key members of our executive management team and
others in key management positions. The efforts of each of these
persons together will be critical to us as we continue to
develop our technologies and testing processes and as we attempt
to transition to a
37
company with more than one commercialized product. If we were to
lose one or more of these key employees, we may experience
difficulties in competing effectively, developing our
technologies and implementing our business strategies.
Our research and development programs and commercial laboratory
operations depend on our ability to attract and retain highly
skilled scientists and technicians, including geneticists,
licensed laboratory technicians, chemists, biostatisticians and
engineers. We may not be able to attract or retain qualified
scientists and technicians in the future due to the intense
competition for qualified personnel among life science
businesses, particularly in the San Francisco Bay Area. We
also face competition from universities and public and private
research institutions in recruiting and retaining highly
qualified scientific personnel. In addition, our success depends
on our ability to attract and retain salespeople with extensive
experience in oncology and close relationships with medical
oncologists, surgeons, pathologists and other hospital
personnel. We may have difficulties locating, recruiting or
retaining qualified salespeople, which could cause a delay or
decline in the rate of adoption of our products. If we are not
able to attract and retain the necessary personnel to accomplish
our business objectives, we may experience constraints that will
adversely affect our ability to support our discovery,
development and sales programs. All of our employees are at-will
employees, which means that either we or the employee may
terminate their employment at any time.
If our
sole laboratory facility becomes inoperable, we will be unable
to perform our test and our business will be
harmed.
We do not have redundant laboratory facilities. We perform all
of our diagnostic testing in our laboratory located in Redwood
City, California. Redwood City is situated on or near earthquake
fault lines. Our facility and the equipment we use to perform
our tests would be costly to replace and could require
substantial lead time to repair or replace. The facility may be
harmed or rendered inoperable by natural or man-made disasters,
including earthquakes, flooding and power outages, which may
render it difficult or impossible for us to perform our tests
for some period of time. The inability to perform our tests may
result in the loss of customers or harm our reputation, and we
may be unable to regain those customers in the future. Although
we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient
to cover all of our potential losses and may not continue to be
available to us on acceptable terms, or at all.
In order to rely on a third party to perform our tests, we could
only use another facility with established state licensure and
CLIA accreditation under the scope of which Oncotype DX
could be performed following validation and other required
procedures. We cannot assure you that we would be able to find
another CLIA-certified facility willing to adopt Oncotype
DX and comply with the required procedures, or that this
laboratory would be willing to perform the tests for us on
commercially reasonable terms. In order to establish a redundant
laboratory facility, we would have to spend considerable time
and money securing adequate space, constructing the facility,
recruiting and training employees, and establishing the
additional operational and administrative infrastructure
necessary to support a second facility. Additionally, any new
clinical laboratory facility opened by us would be subject to
certification under CLIA and licensed by several states,
including California and New York, which can take a significant
amount of time and result in delays in our ability to begin
operations.
Changes
in healthcare policy could subject us to additional regulatory
requirements that may interrupt commercialization of Oncotype DX
and increase our costs.
Healthcare policy has been a subject of extensive discussion in
the executive and legislative branches of the federal and many
state governments. We developed our commercialization strategy
for Oncotype DX based on existing healthcare policies.
Changes in healthcare policy, such as the creation of broad
limits for diagnostic products in general or requirements that
Medicare patients pay for portions of tests or services
received, could substantially interrupt the sales of Oncotype
DX, increase costs and divert managements attention.
For example, in 1989, the U.S. Congress passed federal
self-referral prohibitions commonly known as the Stark Law,
significantly restricting, regulating and changing
laboratories relationships with physicians. We cannot
predict what changes, if any, will be proposed or adopted or the
effect that such proposals or adoption may have on our business,
financial condition and results of operations.
38
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
supplier no longer supplies that equipment.
We rely solely on Applied Biosystems, a division of Applera
Corporation, to supply some of the laboratory equipment on which
we perform our tests. We periodically forecast our needs for
laboratory equipment and enter into standard purchase orders
with Applied Biosystems based on these forecasts. We believe
that there are relatively few equipment manufacturers other than
Applied Biosystems that are currently capable of supplying the
equipment necessary for Oncotype DX. Even if we were to
identify other suppliers, there can be no assurance that we will
be able to enter into agreements with such suppliers on a timely
basis on acceptable terms, if at all. If we should encounter
delays or difficulties in securing from Applied Biosystems the
quality and quantity of equipment we require for Oncotype
DX, we may need to reconfigure our test process, which would
result in delays in commercialization or an interruption in
sales. If any of these events occur, our business and operating
results could be harmed. Additionally, if Applied Biosystems
deems us to have become uncreditworthy, it has the right to
require alternative payment terms from us, including payment in
advance. We are also required to indemnify Applied Biosystems
against any damages caused by any legal action or proceeding
brought by a third party against Applied Biosystems for damages
caused by our failure to obtain required approval with any
regulatory agency.
We also rely on a 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
can not be certain that these strategies will be effective. If
we should encounter delays or difficulties in securing these
laboratory materials, delays in commercialization or an
interruption in sales could occur.
If we
are unable to support demand for our test, our business may
suffer.
We have limited experience in processing our test and even more
limited experience in processing large volumes of tests. We
recently completed the expansion of our clinical laboratory
facilities and have ramped up our testing capacity. We have
begun to implement increases in scale and related processing,
customer service, billing and systems process improvements, and
to expand our internal quality assurance program to support
testing on a larger scale. We will also need additional
certified laboratory scientists and other scientific and
technical personnel to process 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. 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.
Since we have limited experience handling large volumes of
Oncotype DX tests, there can be no assurance that we will
be able to perform tests on a timely basis at a level consistent
with demand. If we encounter difficulty meeting market demand
for Oncotype DX, our reputation could be harmed and our
future prospects and our business could suffer.
We may
be unable to manage our future growth effectively, which would
make it difficult to execute our business
strategy.
Future growth will impose significant added responsibilities on
management, including the need to identify, recruit, train and
integrate additional employees. In addition, rapid and
significant growth will place strain on our administrative and
operational infrastructure, including customer service and our
clinical laboratory. Our ability to manage our operations and
growth will require us to continue to improve our operational,
financial and management controls, reporting systems and
procedures. If we are unable to manage our growth effectively,
it may be difficult for us to execute our business strategy.
If we
were sued for product liability, we could face substantial
liabilities that exceed our resources.
The marketing, sale and use of our test could lead to the filing
of product liability claims if someone were to allege that our
test failed to perform as it was designed. We may also be
subject to liability for errors in the information we provide to
customers or for a misunderstanding of, or inappropriate
reliance upon, the information we provide. A product liability
claim could result in substantial damages and be costly and time
consuming for us to defend. Although we believe that our
existing product liability insurance is adequate, we cannot
assure you that our insurance would fully protect us from the
financial impact of defending against product liability claims.
Any
39
product liability claim brought against us, with or without
merit, could increase our insurance rates or prevent us from
securing insurance coverage in the future. Additionally, any
product liability lawsuit could cause injury to our reputation,
result in the recall of our products, or cause current
collaborators to terminate existing agreements and potential
collaborators to seek other partners, any of which could impact
our results of operations.
If we
use biological and hazardous materials in a manner that causes
injury, we could be liable for damages.
Our activities currently require the controlled use of
potentially harmful biological materials, hazardous materials
and chemicals and may in the future require the use of
radioactive compounds. We cannot eliminate the risk of
accidental contamination or injury to employees or third parties
from the use, storage, handling or disposal of these materials.
In the event of contamination or injury, we could be held liable
for any resulting damages, and any liability could exceed our
resources or any applicable insurance coverage we may have.
Additionally, we are subject on an ongoing basis to federal,
state and local laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste
products. The cost of compliance with these laws and regulations
might be significant and could negatively affect our operating
results.
Our
dependence on distributors for foreign sales of Oncotype DX
could limit or prevent us from selling our test in foreign
markets and from realizing long-term international revenue
growth.
International sales as a percentage of net revenues are expected
to remain minimal in the near term as we focus our efforts on
the sale of Oncotype DX in the United States. We have
established an exclusive distribution network to sell
Oncotype DX in Israel and may enter into other similar
arrangements in other countries in the future. Over the long
term, we intend to grow our business internationally, and to do
so we will need to attract additional distributors to expand the
territories in which we sell Oncotype DX. Distributors
may not commit the necessary resources to market and sell
Oncotype DX to the level of our expectations. If current
or future distributors do not perform adequately, or we are
unable to locate distributors in particular geographic areas, we
may not realize long-term international revenue growth.
We may
acquire other businesses or form joint ventures that could harm
our operating results, dilute your ownership of us, increase our
debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of
complementary businesses and assets, as well as technology
licensing arrangements. We also may pursue strategic alliances
that leverage our core technology and industry experience to
expand our product offerings or distribution. We have no
experience with respect to acquiring other companies and limited
experience with respect to the formation of collaborations,
strategic alliances and joint ventures. If we make any
acquisitions, we may not be able to integrate these acquisitions
successfully into our existing business, and we could assume
unknown or contingent liabilities. Any future acquisitions by us
also could result in significant write-offs or the incurrence of
debt and contingent liabilities, any of which could harm our
operating results. Integration of an acquired company also may
require management resources that otherwise would be available
for ongoing development of our existing business. We may not
identify or complete these transactions in a timely manner, on a
cost-effective basis, or at all, and we may not realize the
anticipated benefits of any acquisition, technology license,
strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of
our common stock as consideration, which would dilute your
interest in us. 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
inability to raise additional capital on acceptable terms in the
future may limit our ability to develop and commercialize new
tests and technologies.
We expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure,
commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other
things:
|
|
|
|
|
sustain commercialization of our initial test or enhancements to
that test;
|
40
|
|
|
|
|
increase our selling and marketing efforts to drive market
adoption and address competitive developments;
|
|
|
|
further expand our clinical laboratory operations;
|
|
|
|
expand our technologies into other areas of cancer;
|
|
|
|
fund our clinical validation study activities;
|
|
|
|
expand our research and development activities;
|
|
|
|
acquire or license technologies; and
|
|
|
|
finance capital expenditures and our general and administrative
expenses.
|
Our present and future funding requirements will depend on many
factors, including:
|
|
|
|
|
the level of research and development investment required to
maintain and improve our technology position;
|
|
|
|
costs of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
|
|
|
|
our need or decision to acquire or license complementary
technologies or acquire complementary businesses;
|
|
|
|
changes in product development plans needed to address any
difficulties in commercialization;
|
|
|
|
changes in the regulatory environment, including any decision by
FDA to regulate our activities;
|
|
|
|
competing technological and market developments;
|
|
|
|
the rate of progress in establishing reimbursement arrangements
with third-party payors; and
|
|
|
|
changes in regulatory policies or laws that affect our
operations.
|
If we raise funds by issuing equity securities, dilution to our
stockholders could result. Any equity securities issued also may
provide for rights, preferences or privileges senior to those of
holders of our common stock. If we raise funds by issuing debt
securities, these debt securities would have rights, preferences
and privileges senior to those of holders of our common stock,
and the terms of the debt securities issued could impose
significant restrictions on our operations. If we raise funds
through collaborations and licensing arrangements, we might be
required to relinquish significant rights to our technologies or
products, or grant licenses on terms that are not favorable to
us. If adequate funds are not available, we may have to scale
back our operations or limit our research and development
activities.
We
must implement additional and expensive finance and accounting
systems, procedures and controls as we grow our business and
organization and to satisfy new 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, including
expanded disclosures and accelerated reporting requirements and
more complex accounting rules. Compliance with Section 404
and other requirements has increased our costs and required
additional management resources. We have upgraded our finance
and accounting systems, procedures and controls and 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.
|
|
ITEM 1B.
|
Unresolved
Staff
Comments.
|
None.
41
At December 31, 2006, we occupied approximately
48,000 square feet of laboratory and office space. On
January 3, 2007, we entered into a lease agreement for an
additional 48,000 square feet of office space, which we
intend to occupy in March 2007. 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.
|
|
ITEM 3.
|
Legal
Proceedings.
|
We were not a party to any legal proceedings other than in the
ordinary course of our business at December 31, 2006, or at
the date of this report.
|
|
ITEM 4.
|
Submission
of Matters to a Vote of Security Holders.
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
Executive
Officers
The names of our executive officers and their ages as of
March 1, 2007, are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
Randal W. Scott, Ph.D.
|
|
|
49
|
|
|
Chief Executive Officer and
Chairman of the Board
|
Kimberly J. Popovits
|
|
|
48
|
|
|
President, Chief Operating Officer
and Director
|
Joffre B. Baker, Ph.D.
|
|
|
59
|
|
|
Chief Scientific Officer
|
Steven Shak, M.D.
|
|
|
56
|
|
|
Chief Medical Officer
|
G. Bradley Cole
|
|
|
51
|
|
|
Executive Vice President, Chief
Financial Officer and Secretary
|
Randal W. Scott, Ph.D., has served as our Chairman
of the Board and Chief Executive Officer since our inception in
August 2000 and served as President from August 2000 until
February 2002, Chief Financial Officer from December 2000 until
April 2004, and Secretary from August 2000 until December 2000
and from May 2003 until February 2005. Dr. Scott was a
founder of Incyte Corporation, a genomic information company,
and served Incyte in various roles, including Chairman of the
Board from August 2000 to December 2001, President from January
1997 to August 2000, and Chief Scientific Officer from March
1995 to August 2000. Dr. Scott holds a B.S. in Chemistry
from Emporia State University and a Ph.D. in Biochemistry from
the University of Kansas.
Kimberly J. Popovits has served as our President and
Chief Operating Officer since February 2002 and as a director
since March 2002. From November 1987 to February 2002,
Ms. Popovits served in various roles at Genentech, Inc., a
biotechnology company, most recently serving as Senior Vice
President, Marketing and Sales from February 2001 to February
2002, and as Vice President, Sales from October 1994 to February
2001. Prior to joining Genentech, she served as
Division Manager, Southeast Region, for American Critical
Care, a Division of American Hospital Supply, a supplier of
health care products to hospitals. Ms. Popovits is a
director of Nuvelo, Inc., a biotechnology company.
Ms. Popovits holds a B.A. in Business from Michigan State
University.
Joffre B. Baker, Ph.D., has served as our Chief
Scientific Officer since December 2000. From March 1997 to
October 2000, Dr. Baker served as the Vice President for
Research Discovery at Genentech. From March 1993 to October
2000, Dr. Baker oversaw Research Discovery at Genentech,
which includes 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.
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
42
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.
G. Bradley Cole has served as our Executive Vice
President and Chief Financial Officer since July 2004 and our
Secretary from February 2005. From December 1997 to May 2004, he
served in various positions at Guidant Corporation, a medical
device company, most recently serving as Vice President, Finance
and Business Development for the Endovascular Solutions Group
from January 2001 until May 2004. From July 1994 to December
1997, Mr. Cole was Vice President, Finance and Chief
Financial Officer of Endovascular Technologies, Inc., a medical
device company that was acquired by Guidant Corporation. From
December 1988 to February 1994, he served as Vice President,
Finance and Chief Financial Officer of Applied Biosystems
Incorporated, a life sciences systems company. Mr. Cole
holds a B.S. in Business from Biola University and an M.B.A.
from San Jose State University.
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
(a) Our common stock is traded on the NASDAQ Global Market
under the symbol GHDX and has been trading since our
initial public offering on September 29, 2005. The
following table sets forth the range of high and low sale prices
for our common stock, based on the last daily sale, in each of
the quarters since our stock began trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Stock price high
|
|
$
|
16.70
|
|
|
$
|
11.77
|
|
|
$
|
14.64
|
|
|
$
|
23.89
|
|
Stock price low
|
|
$
|
9.11
|
|
|
$
|
9.92
|
|
|
$
|
10.86
|
|
|
$
|
13.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter(1)
|
|
|
Quarter
|
|
|
Stock price high
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
11.75
|
|
|
$
|
11.69
|
|
Stock price low
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
11.55
|
|
|
$
|
8.81
|
|
|
|
|
(1) |
|
From September 29, 2005 |
According to the records of our transfer agent, we had 156
stockholders of record as of March 1, 2007.
We have never declared or paid any cash dividends on our capital
stock, and we do not currently intend to pay any cash dividends
on our common stock in the foreseeable future. We expect to
retain future earnings, if any, to fund the development and
growth of our business. Our board of directors will determine
future cash dividends, if any. There are currently no
contractual restrictions on our ability to pay dividends.
(b) On September 28, 2005, a Registration Statement on
Form S-1
(File
No. 333-126626)
relating to our initial public offering was declared effective
by the SEC. The closing was on October 4, 2005 and the net
offering proceeds to us were approximately $53.5 million.
Through December 31, 2006, $29.1 million of the net
proceeds were used to build our commercial capabilities in
selling and marketing related to Oncotype DX,
$15.3 million were used to fund research and development
programs for Oncotype DX and in other cancers, and
$6.8 million were used to expand facilities and laboratory
operations capacity and for information systems infrastructure
and no funds were used for working capital and general corporate
purposes. A portion of the net proceeds may also be used for
working capital and general corporate purposes and to acquire or
invest in complementary businesses, technologies, services or
products. Pending use for these or other purposes, net proceeds
have been invested in interest bearing, investment grade
securities.
43
Stock
Performance Graph
The following information is not deemed to be soliciting
material or to be filed with the Securities
and Exchange Commission or subject to Regulation 14A or 14C
under the Securities Exchange Act of 1934 or to the liabilities
of Section 18 of the Securities Exchange Act of 1934, and
will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent we specifically
incorporate it by reference into such a filing.
Set forth below is a line graph showing the cumulative total
stockholder return (change in stock price plus reinvested
dividends) assuming the investment of $100 on September 29,
2005 (the day of our initial public offering) in each of our
common stock, the NASDAQ Market Index and the NASDAQ
Biotechnology Index for the period commencing on
September 29, 2005 and ending on December 31, 2006.
The comparisons in the table are required by the Securities and
Exchange Commission and are not intended to forecast or be
indicative of future performance of our common stock.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG GENOMIC HEALTH INC.,
NASDAQ MARKET AND NASDAQ BIOTECH INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2005
|
|
|
December 31, 2005
|
|
|
December 31, 2006
|
Genomic Health, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
77.53
|
|
|
|
$
|
158.30
|
|
NASDAQ Market Index
|
|
|
$
|
100.00
|
|
|
|
$
|
102.81
|
|
|
|
$
|
101.72
|
|
NASDAQ Biotechnology Index
|
|
|
$
|
100.00
|
|
|
|
$
|
102.67
|
|
|
|
$
|
113.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
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 sheet data at December 31, 2006 and 2005 and the
selected consolidated statements of operations data for each
year ended December 31, 2006, 2005 and 2004 have been
derived from our audited consolidated financial statements that
are included elsewhere in this report. The selected consolidated
balance sheet data at December 31, 2004, 2003 and 2002 and
the selected consolidated statements of operations data for each
year ended December 31, 2003 and 2002 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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
27,006
|
|
|
$
|
4,823
|
|
|
$
|
227
|
|
|
$
|
|
|
|
$
|
|
|
Contract revenues
|
|
|
2,168
|
|
|
|
379
|
|
|
|
100
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
29,174
|
|
|
|
5,202
|
|
|
|
327
|
|
|
|
125
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
9,908
|
|
|
|
6,249
|
|
|
|
1,828
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,841
|
|
|
|
9,465
|
|
|
|
10,040
|
|
|
|
9,069
|
|
|
|
7,053
|
|
Selling and marketing
|
|
|
24,625
|
|
|
|
15,348
|
|
|
|
9,856
|
|
|
|
2,805
|
|
|
|
754
|
|
General and administrative
|
|
|
12,765
|
|
|
|
6,485
|
|
|
|
3,869
|
|
|
|
3,686
|
|
|
|
3,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60,139
|
|
|
|
37,547
|
|
|
|
25,593
|
|
|
|
15,560
|
|
|
|
11,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(30,965
|
)
|
|
|
(32,345
|
)
|
|
|
(25,266
|
)
|
|
|
(15,435
|
)
|
|
|
(11,560
|
)
|
Interest and other income
(expense), net
|
|
|
2,045
|
|
|
|
984
|
|
|
|
271
|
|
|
|
185
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
|
$
|
(15,250
|
)
|
|
$
|
(11,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
$
|
(13.82
|
)
|
|
$
|
(12.43
|
)
|
|
$
|
(11.95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
1,808,022
|
|
|
|
1,226,444
|
|
|
|
925,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes non-cash charges for stock-based compensation expense
as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
167
|
|
|
$
|
53
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
|
|
Research and development
|
|
|
821
|
|
|
|
323
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
779
|
|
|
|
274
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,137
|
|
|
|
426
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,904
|
|
|
$
|
1,076
|
|
|
$
|
191
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2006, we adopted Statement of Financial
Accounting Standard No. 123R, Share-based Payment,
using the modified prospective method. Prior to 2006,
stock-based compensation was recognized in accordance with
Accounting Principles Board Opinion No. 25.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheets
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,926
|
|
|
$
|
18,839
|
|
|
$
|
38,275
|
|
|
$
|
11,062
|
|
|
$
|
25,318
|
|
Short-term investments
|
|
|
29,289
|
|
|
|
50,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
37,535
|
|
|
|
65,801
|
|
|
|
36,771
|
|
|
|
10,046
|
|
|
|
25,165
|
|
Total assets
|
|
|
58,024
|
|
|
|
75,799
|
|
|
|
41,538
|
|
|
|
13,096
|
|
|
|
27,376
|
|
Notes payable, short-term
|
|
|
2,547
|
|
|
|
1,052
|
|
|
|
|
|
|
|
161
|
|
|
|
163
|
|
Notes payable, long-term
|
|
|
4,726
|
|
|
|
2,621
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
103,212
|
|
|
|
51,064
|
|
|
|
51,073
|
|
Accumulated deficit
|
|
|
(125,103
|
)
|
|
|
(96,183
|
)
|
|
|
(64,822
|
)
|
|
|
(39,827
|
)
|
|
|
(24,577
|
)
|
Total stockholders equity
(deficit)
|
|
|
41,829
|
|
|
|
67,517
|
|
|
|
(64,154
|
)
|
|
|
(39,547
|
)
|
|
|
(24,502
|
)
|
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation
|
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 for this Annual Report on
Form 10-K.
Historical results are not necessarily indicative of future
results.
Business
Overview
We are a life science company focused on the development and
commercialization of genomic-based clinical diagnostic tests for
cancer that allow physicians and patients to make individualized
treatment decisions. Our first test, Oncotype DX, is used
for early stage breast cancer patients to predict the likelihood
of cancer recurrence, the likelihood of patient survival and the
likelihood of chemotherapy benefit. All tumor samples are sent
to our laboratory in Redwood City, California for analysis. Upon
generation and delivery of a Recurrence Score report to the
physician, we generally bill third-party payors for Oncotype
DX. The list price of our test is $3,460.
We launched Oncotype DX in January 2004 and initially
made sales to a select number of physicians in a few markets in
the United States through a small direct sales force. Late in
2004 and continuing into 2006, we experienced a significant
increase in demand for Oncotype DX. For the year ended
December 31, 2006, more than 14,500 tests were delivered
for use in treatment planning, compared to more than 7,000 and
more than 500 tests delivered for the years ended
December 31, 2005 and 2004, respectively. Since the
commercial launch of Oncotype DX more than 21,500 tests
have been delivered for use in treatment planning by more than
5,000 physicians. We believe increased demand in 2005 resulted
from the publication of our validation study in The New
England Journal of Medicine and the presentation of our
chemotherapy benefit study at the San Antonio Breast Cancer
Symposium, both of which occurred in December 2004. We also
experienced increased demand in 2006 following clinical
presentations at major symposia in December 2005 and February
2006, as well as the May 2006 publication of two peer-reviewed
articles supporting the use and reimbursement of Oncotype
DX. The expansion of our domestic field sales organization
in July 2006 also increased demand for our test. However, this
increased demand is not necessarily indicative of future growth
rates, and we cannot assure you that this level of increased
demand can be sustained or that future appearances or
presentations at medical conferences or publication of articles
will have similar impact on demand for Oncotype DX.
Moreover, we believe that each year we may experience decreased
demand for our test in the summer months of July and August,
which may be attributed to physicians, surgeons and patients
scheduling vacations during this time. As of December 31,
2006, our laboratory had the capacity to process up to 7,000
tests per fiscal quarter.
We believe the key factors that will drive broader adoption of
Oncotype DX will be acceptance by healthcare providers of
its clinical benefits, demonstration of the cost-effectiveness
of using our test, expanded reimbursement by third-party payors,
expansion of our sales force and increased marketing efforts.
Reimbursement of Oncotype DX by third-party payors is
essential to our commercial success. In general, clinical
laboratory services, when covered, are paid under various
methodologies, including prospective payment systems and fee
schedules.
46
Reimbursement from payors depends upon whether a test covered
under the patients policy and if payment practices for the
test have been established. As a relatively new test,
Oncotype DX may be considered investigational by payors
and not covered under current reimbursement policies. Until we
reach agreement with a payor on contract terms or a payor
establishes a policy for payment of Oncotype DX, we
recognize revenue on a cash basis.
Upon commercialization of Oncotype DX, we began working
with third-party payors to establish reimbursement coverage
policies. As of December 31, 2006, Aetna, Inc., Kaiser
Foundation Health Plan, Inc. and National Heritage Insurance
Company (NHIC), the local Medicare carrier for California with
jurisdiction for claims submitted by us for Medicare patients,
had issued positive coverage determinations for Oncotype
DX. In January 2007, United HealthCare Insurance Company
entered into a national laboratory services agreement to
supporting reimbursement for our test. In addition, many
regional payors had issued policies supporting reimbursement for
our test. Where contracts or policies are not in place, we
pursue
case-by-case
reimbursement. We believe that as much as 20% of our future test
volume may be derived from Medicare patients. We are working
with many payors to establish policy-level reimbursement which,
if in place, should allow us to recognize revenues upon
completing our test and submitting an invoice. We do not expect
to recognize the majority of revenues in this manner until late
2007, at the earliest.
In early February 2006, we obtained our first reimbursement
coverage outside of the United States. Clalit Health Care, the
largest government payor in Israel, covering 60% of the
population, established a reimbursement coverage policy for
Oncotype DX for their patients. Oncotype DX is
currently offered for sale in Israel under a testing and
services agreement with a third party. Tests ordered in Israel
are processed in our Redwood City, California central reference
laboratory.
Effective December 2005, we entered into collaborative
agreements with Aventis, Inc., a member of the sanofi-aventis
group, and the Eastern Cooperative Oncology Group to investigate
the ability of gene expression in fixed-paraffin-embedded
tissues to predict the likelihood of response to adjuvant
chemotherapy, including Taxotere, in patients with early breast
cancer and zero to three involved lymph nodes. The agreements
provide Genomic Health with commercial rights to diagnostic
tests that may result from the collaboration and were effective
as of December 1, 2005. We began to recognize revenue under
these agreements in the first quarter of 2006.
We are continuing to work on extending Oncotype DX for
breast cancer into N+ and ER- populations. During 2007, we may
introduce single gene information for ER and PR genes into the
Oncotype DX patient report to provide better information
for improved treatment decision making. Also during 2007, we
plan to conduct further studies using Oncotype DX in N+
patients which, if successful, could result in a product
offering sometime in 2008.
In July 2005 we signed a collaborative agreement with National
Surgical Adjuvant Breast and Bowel Project, or NSABP, to begin
work in colon cancer using our clinical development platform.
This is the same group with which we conducted our successful
clinical validation studies in breast cancer which led to our
development of Oncotype DX. The agreement requires
certain payments to be made by us during the research and
development period. If the collaboration results in a commercial
product, we will be required to make additional payments upon
first commercial sale and during commercialization of the
product. At the American Society of Clinical Oncology meeting in
June 2006, a study conducted with the NSABP was presented
demonstrating correlation between gene expression and colon
cancer recurrence in patients with stage II and III
colon cancer treated with surgery. These data support additional
studies and development of an Oncotype DX test for colon
cancer. During 2006, we entered into additional agreements with
NSABP and other academic institutions to further our clinical
studies in colon cancer, including arrangements for a clinical
validation study.
In July 2005 we signed a collaborative agreement with
Bristol-Myers Squibb Company and ImClone Systems Incorporated to
develop a genomic test to predict the likelihood of response to
Erbitux in colorectal cancer. Erbitux is a targeted therapy
currently approved for the treatment of metastatic colorectal
cancer. The agreement provides for research funding support and
milestone payments and gives us commercial rights to diagnostic
tests that may result from the collaboration.
In December 2006, we finalized a collaborative agreement to
sponsor a research project to validate a pre-specified gene
panel and algorithm that will be used to predict clinical
outcomes for stage II colon cancer patients treated either
with surgery alone or surgery plus chemotherapy. The agreement
requires certain payments to be
47
made by us during the research and development period. If the
collaboration results in a commercial product, we will be
required to make additional payments upon first commercial sale
and during commercialization of the product.
We are continuing to conduct research and early development
studies in a variety of cancers other than breast cancer and in
January 2007 announced the decision to move our colon program
for Stage I and Stage II cancer patients into full scale
development.
Since our inception, we have generated significant net losses.
As of December 31, 2006, we had an accumulated deficit of
$125.1 million. We incurred net losses of
$28.9 million, $31.4 million and $25.0 million
for the years ended December 31, 2006, 2005, and 2004,
respectively. We expect our net losses to continue for at least
the next two years. We anticipate that a substantial portion of
our capital resources and efforts over the next several years
will be focused on research and development, both to develop
additional tests for breast cancer and to develop tests for
other cancers, to scale up our commercial organization, and for
other general corporate purposes. Our financial results will be
limited by a number of factors, including establishment of
coverage policies by third-party insurers and government payors,
our ability in the short term to collect from payors often
requiring a
case-by-case
manual appeals process, and our ability to recognize revenues
other than from cash collections on tests billed until such time
as reimbursement policies or contracts are in effect. Until we
receive routine reimbursement and are able to record revenues as
tests are performed and reports delivered, we are likely to
continue reporting net losses.
Financial
Operations Overview
Revenues
We derive our revenues from product sales and contract research
arrangements. We operate in one industry segment. Our product
revenues are derived solely from the sale of our Oncotype
DX test. Payors are billed upon generation and delivery of a
Recurrence Score report to the physician. Product revenues are
recorded on a cash basis unless a contract or policy is in place
with the payor at the time of billing and collectibility is
reasonably assured. Contract revenues are derived from studies
conducted with biopharmaceutical and pharmaceutical companies
and are recorded on an accrual basis as contractual obligations
are completed.
Cost
of Product Revenues
Cost of product revenues represents the cost of materials,
direct labor, costs associated with processing tissue samples
including histopathology, anatomical pathology, paraffin
extraction, reverse transcription polymerase chain reaction, or
RT-PCR, and quality control analyses, license fees and delivery
charges necessary to render an individualized test result. Costs
associated with performing our test are recorded as tests are
processed. License fees are recorded at the time product
revenues are recognized or in accordance with other contractual
obligations. License fees represent a significant component of
our cost of product revenues and are expected to remain so for
the foreseeable future.
Research
and Development Expenses
Research and development expenses represent costs incurred to
develop our technology and to carry out our clinical studies to
validate our multi-gene tests and include salaries and benefits,
allocated overhead and facility occupancy costs, contract
services and other outside costs, and costs to acquire
in-process research and development projects and technologies
that have no alternative future use. Research and development
expenses also include costs related to activities performed
under contracts with biopharmaceutical and pharmaceutical
companies.
We charge all research and development expenses to operations as
they are incurred. All potential future product programs outside
of breast and colon cancer are in the early development phase.
The expected time frame in which a test for one of these other
cancers can be brought to market is uncertain given the
technical challenges and clinical variables that exist between
different types of cancers.
48
We do not record or maintain information regarding costs
incurred in research and development on a program or project
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. We believe that allocating costs on the
basis of time incurred by our employees does not accurately
reflect the actual costs of a project.
As a result of the uncertainties discussed above, 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.
Selling
and Marketing Expenses
Our selling and marketing expenses consist primarily of
personnel costs and education and promotional expenses
associated with Oncotype DX. These expenses include the
costs of educating physicians, laboratory personnel and other
healthcare professionals regarding our genomic technologies, how
our Oncotype DX test was developed and validated and the
value of the quantitative information that Oncotype DX
provides. Selling and marketing expenses also include the costs
of sponsoring continuing medical education, medical meeting
participation and dissemination of our scientific and economic
publications related to Oncotype DX.
General
and Administrative Expenses
Our general and administrative expenses consist primarily of
personnel related costs, legal costs, including intellectual
property, accounting costs and other professional and
administrative costs.
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
U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and the disclosure of
contingent assets and liabilities at the date of the financial
statements, as well as revenues and expenses during the
reporting periods. We evaluate our estimates and judgments on an
ongoing basis. We base our estimates on historical experience
and on various other factors we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results
could therefore differ materially from those estimates under
different assumptions or conditions.
We believe the following critical accounting policies reflect
our more significant estimates and assumptions used in the
preparation of our financial statements.
Revenue
Recognition
Product revenues for our first product, Oncotype DX, from
the commercial launch in January 2004 through December 31,
2006, have largely been recognized on a cash basis because we
have limited collection experience and a limited number of
contracts. Beginning in the fourth quarter of 2005 and
continuing through 2006, we recognized some product revenue from
private payors on an accrual basis. For the year ended
December 31, 2006, a portion of Medicare related product
revenue was recognized on an accrual basis.
Our product revenues for tests performed are recognized when the
following criteria of revenue recognition are met:
(1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Criterion
(2) is satisfied we perform the test and generate and
deliver a report to the physician. Determination of criteria
(3) and (4) is based on managements judgments
regarding the nature of the fee charged for products or services
delivered and the collectibility of those fees. Product revenues
where all criteria set forth above are not met are recognized on
a cash basis when cash is received.
We generally bill third-party payors for Oncotype DX upon
generation and delivery of a Recurrence Score report to the
physician. As such, we take assignment of benefits and the risk
of collection with the third-party payor.
49
We usually bill the patient directly for amounts owed after
multiple requests for payment have been denied or only partially
paid by the insurance carrier. As a relatively new test,
Oncotype DX may be considered investigational by payors
and not covered under their reimbursement policies.
Consequently, we pursue
case-by-case
reimbursement where policies are not in place or payment history
has not been established.
In 2006 we began accruing an allowance for bad debt against our
accounts receivable consistent with historical payment
experience. Bad debt expense is included in general and
administrative expense on our consolidated statements of
operations. As of December 31, 2006, our allowance for bad
debt was $510,000. No write-offs for bad debt were recorded
against the allowance during the year ended December 31,
2006. Bad debt expense was $510,000 was for the year ended
December 31, 2006. No bad debt expense was recorded for the
years ended December 31, 2005 and 2004 because the vast
majority revenue was recorded on a cash basis. Accounts
receivable over 90 days will be written off 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.
Contract revenues are derived from studies conducted with
biopharmaceutical and pharmaceutical companies and are
recognized on a contract specific basis. Under certain
contracts, our input, measured in terms of full-time equivalent
level of effort or running a set of assays through our
laboratory under a contractual protocol, triggers payment
obligations and revenues are recognized as costs are incurred or
assays are processed. Certain contracts have payment obligations
that are triggered as milestones are complete, such as
completion of a successful set of experiments. In these cases,
revenues are recognized when the milestones are achieved.
Stock-based
Compensation Expense
Through December 31, 2005, we accounted for stock-based
payment transactions under Accounting Principles Board Opinion
No. 25, or APB 25. On January 1, 2006, we adopted
Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment, or
SFAS 123R. SFAS 123R, which addresses the
accounting for stock-based payment transactions whereby an
entity receives employee services in exchange for equity
instruments, including stock options. SFAS 123R eliminates
the ability to account for stock-based compensation transactions
using the intrinsic value method under APB 25, and instead
requires that such transactions be accounted for using a
fair-value based method. SFAS 123R is a complex accounting
standard, the application of which requires significant judgment
and the use of estimates, particularly surrounding assumptions
used in determining fair value. We use the Black-Scholes
valuation method, which requires the use of estimates such as
stock price volatility and expected options lives, as well as
expected option forfeiture rates, to value equity-based
compensation. There is little historical evidence or guidance
available with respect to developing these assumptions and
models. Expected volatility is based on comparable peer data as
well as historical volatility of our stock. The expected life of
options granted is estimated based on historical option exercise
and employee termination experience and peer group data.
We have elected the modified prospective transition method as
permitted under SFAS 123R and, accordingly, prior periods
have not been restated to reflect the impact of SFAS 123R.
The modified prospective transition method requires that
stock-based compensation expense be recorded for all new and
unvested stock options that are ultimately expected to vest as
the requisite service is rendered beginning on January 1,
2006. Stock-based compensation expense resulting from the
adoption of SFAS 123R represents expense related to stock
options granted during the year ended December 31, 2006, as
well as stock options granted prior to, but not yet vested as of
January 1, 2006. As of December 31, 2006, total
compensation expense related to non-vested stock options not yet
recognized was $14.3 million, which is expected to be
recognized over a period of 39 months.
Equity instruments granted to non-employees are valued using the
Black-Scholes method and accounted for as prescribed by
SFAS 123R and Emerging Issues Task Force, or EITF,
Consensus
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, and will be subject to periodic
revaluation over their vesting terms.
Clinical
Collaborator Costs
We enter into collaboration and clinical trial agreements with
clinical collaborators and record these costs as research and
development expenses. We record accruals for estimated study
costs comprised of work performed by our collaborators under
contract terms.
50
In addition to costs for research and development, under one of
our collaboration agreements, we make annual payments resulting
from the commercial launch of Oncotype DX. These payments
are recorded in cost of product revenues as a license payment.
Expense is recorded ratably over the year before the relevant
payment is made. However, either party may terminate the
agreement upon 30 days prior written notice. If this
collaborative agreement were not cancelable, a liability for the
entire stream of remaining payments of $2.2 million would
be recorded and expense would be recognized ratably through 2011.
Results
of Operations
Years
Ended December 31, 2006 and 2005
Revenues. Total revenues were
$29.2 million for the year ended December 31, 2006
compared to $5.2 million for the year ended
December 31, 2005. Product revenues from Oncotype DX
were $27.0 million for the year ended December 31,
2006 compared to $4.8 million for the comparable period in
2005. Approximately 40% of product revenue for the year ended
December 31, 2006 was recorded on an accrual basis compared
to 7% for the comparable period in 2005. The balance of product
revenue was recognized upon cash collection. Product revenue
from Medicare was $12.7 million, representing 47% of total
product revenue for the year ended December 31, 2006; we
had no product revenue from Medicare in 2005. This increase was
a result of the February 27, 2006 effective coverage date
for Medicare patients and the receipt of payments for tests
provided to Medicare patients prior to the effective coverage
date.
Contract revenues were $2.2 million for the year ended
December 31, 2006 compared to $379,000 for the comparable
period in 2005. 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 reflected the initiation of
the collaboration with Aventis, Inc., and the Eastern
Cooperative Oncology Group as well as ongoing work with
Bristol-Myers Squibb and ImClone Systems.
Cost of Product Revenues. For the year ended
December 31, 2006, cost of product revenues was
$9.9 million for Oncotype DX, consisting of tissue
sample processing costs of $7.7 million and license fees of
$2.2 million. For the year ended December 31, 2005,
cost of product revenues was $6.2 million, consisting of
tissue sample processing costs of $5.5 million and license
fees of $786,000. Test volume for the year ended
December 31, 2006 more than doubled over the prior year,
resulting in a decrease in the cost per test delivered. During
the years ended December 31, 2006 and 2005, we recorded
tissue sample processing costs for Oncotype DX that
included direct material costs, direct labor costs, equipment
costs, shipping costs and other infrastructure costs. All costs
recorded for tissue sample processing in those periods represent
the cost of all the tests processed regardless of whether
revenue was recognized with respect to that test. License fees
were recorded in cost of product revenues for contractual
obligations and royalties due on product revenues.
Research and Development Expenses. Research
and development expenses increased to $12.8 million for the
year ended December 31, 2006 from $9.5 million for the
comparable period in 2005. The increase in research and
development expenses was primarily due to a $1.7 million
increase in personnel and related costs, a $1.2 million
increase in collaboration expense and a $595,000 increase in
infrastructure-related expense. We expect that our research and
development expenses will increase as our investment in
developing tests for cancers, including cancers other than
breast cancer, continues.
Selling and Marketing Expenses. Selling and
marketing expenses increased to $24.6 million for the year
ended December 31, 2006 from $15.3 million for the
comparable period in 2005. The $9.3 million increase in
selling and marketing expenses was primarily due a
$4.9 million increase in personnel related costs, mostly to
expand our domestic field sales organization, a
$2.7 million increase in promotional field and marketing
expense, $900,000 in higher travel-related expenses associated
with field personnel and a $698,000 increase in
infrastructure-related expense. We expanded our domestic field
sales force to support Oncotype DX in the second half of
2006 and we expect that selling and marketing expenses will
continue to increase in future periods as we continue to expand
our sales force and conduct additional physician and patient
education.
General and Administrative Expenses. General
and administrative expenses increased to $12.8 million for
the year ended December 31, 2006 from $6.5 million for
the comparable period in 2005. The $6.3 million increase
51
in general and administrative expenses included a
$2.6 million increase in personnel costs, $1.2 million
in higher billing and collection fees paid to third-party
billing and collection vendors, an increase of $1.1 million
in legal and accounting fees, an increase of $510,000 in expense
to establish a bad debt reserve against accounts receivable, an
increase of $335,000 in insurance related costs and an increase
of $292,000 in costs for third-party service providers related
to being a public company, including investor relations. We
expect general and administrative expenses to continue to
increase as we spend more on fees for billing and collections
due to revenue growth and continue to incur costs associated
with regulatory matters and other expenses associated with the
growth of our business.
Interest Income. Interest income was
$2.5 million for the year ended December 31, 2006
compared to $1.2 million for the comparable period in 2005,
reflecting higher average cash balances and higher market yields.
Interest Expense. Interest expense was
$446,000 for the year ended December 31, 2006 compared to
$258,000 for the comparable period in 2005, reflecting interest
expense incurred on our equipment financing line established at
the end of March 2005 under which draws have been made and
interest expense has been incurred.
Years
Ended December 31, 2005 and 2004
Revenues. Product revenues were
$5.2 million for the year ended December 31, 2005, as
compared to $327,000 for the year ended December 31, 2004.
Product revenues for the year ended December 31, 2005 were
$4.8 million, as compared to $227,000 in the comparable
period in 2004. Product revenues were primarily recognized upon
cash receipt. A portion of product revenue was recorded on an
accrual basis for the first time in the fourth quarter of 2005.
Contract revenues were $379,000 for the year ended
December 31, 2005, up from $100,000 in the comparable
period in 2004. Contract revenues were for studies assessing our
gene expression technology and initial collaborative work in
gene selection with our pharmaceutical partners.
Cost of Product Revenues. For the year ended
December 31, 2005, cost of product revenues was
$6.2 million for Oncotype DX, consisting of tissue
sample processing costs of $5.5 million and license fees of
$786,000. For the year ended December 31, 2004, cost of
product revenues was $1.8 million, consisting of tissue
sample processing costs of $1.3 million and license fees of
$477,000. During the years ended December 31, 2005 and
2004, we recorded costs for Oncotype DX that included
direct material costs, direct labor costs, equipment costs and
other infrastructure costs. All costs recorded for tissue sample
processing in those years represent the cost of all the tests
processed regardless of whether revenue was recognized with
respect to that test. License fees were recorded in cost of
product revenues for contractual obligations and royalties due
on product revenues.
Research and Development Expenses. Research
and development expenses decreased to $9.5 million for the
year ended December 31, 2005, from $10.0 million for
the comparable period in 2004. The decrease in research and
development expenses was primarily due to $1.5 million in
decreased costs for clinical development programs studying
distant survival and chemotherapy benefits in early stage breast
cancer patients and decreased license fees of $645,000 partially
offset by increased personnel costs of $1.4 million and an
increase of $217,000 in facilities, depreciation and other
general expenses.
Selling and Marketing Expenses. Selling and
marketing expenses increased to $15.3 million for the year
ended December 31, 2005, from $9.9 million for the
comparable period in 2004. The $5.4 million increase
primarily reflected an increase of $3.1 million in
personnel related costs, mostly to establish a domestic field
sales organization, and $985,000 in higher travel expenses
associated with field sales personnel, an increase of $903,000
in field promotional and marketing expenses and an increase of
$458,000 in facilities, depreciation and other general expenses.
General and Administrative Expenses. General
and administrative expenses increased to $6.5 million for
the year ended December 31, 2005 from $3.9 million for
the comparable period in 2004. The increase in general and
administrative expenses reflected an increase of
$1.2 million in personnel costs, stock-based compensation
and consulting costs, an increase of $626,000 in billing and
collections fees paid to third-party billing and collection
vendors and a $178,000 increase in insurance-related costs.
These higher costs were offset in part by a $383,000 decrease in
costs related to infrastructure support.
52
Interest Income and Other
Income/Expense. Interest income was
$1.2 million for the year ended December 31, 2005,
compared with $295,000 in the comparable period in 2004. This
$946,000 increase was due to higher average cash balances from
our December 2004 preferred stock financing, our September 2005
public offering and higher interest rates during the year ended
December 31, 2005. Other expense was $1,000 for the year
ended December 31, 2005, compared with $20,000 for the
comparable period in 2004.
Interest Expense. Interest expense was
comprised of the interest on deferral of contractual payments
under a collaboration agreement and interest indebtedness.
Interest expense increased to $258,000 for the year ended
December 31, 2005, from $4,000 in the comparable period in
2004. The increase resulted from the initiation of an equipment
financing line established in March 2005 under which draws have
been made and interest expense has been incurred. No such
arrangement existed in the prior year.
Liquidity
and Capital Resources
Since our inception in August 2000, we have incurred significant
losses and, as of December 31, 2006, we had an accumulated
deficit of approximately $125.1 million. We have not yet
achieved profitability and anticipate that we will continue to
incur net losses for at least the next two years. We expect that
our research and development, selling and marketing and general
and administrative expenses will continue to grow and, as a
result, we will need to generate significant product revenues to
achieve profitability. We may never achieve profitability.
Sources
of Liquidity
Since our inception through December 31, 2006, we have
received net proceeds of $103.2 million from the sale of
preferred stock and $575,000 from the issuance of common stock
to employees, consultants and directors in connection with the
exercise of stock options. In October 2005, we completed an
initial public offering and a concurrent private placement of
our common stock, resulting in net proceeds of
$58.5 million. Purchases of equipment and leasehold
improvements have been partially financed through loans. At
December 31, 2006, we had cash, cash equivalents and
short-term investments of $44.2 million and debt under our
equipment loan of $7.3 million. At December 31, 2005,
we had cash, cash equivalents and short-term investments of
$69.5 million and debt under our equipment loan of
$3.7 million.
Cash
Flows
As of December 31, 2006, we had $44.2 million in cash,
cash equivalents and short-term investments, compared to
$69.5 million at December 31, 2005. This decrease of
$25.3 million was due primarily to cash used in operating
activities of $20.8 million and purchases of property,
equipment and leasehold improvements of $8.4 million,
partially offset by net proceeds from our equipment loans of
$3.6 million.
Net cash used in operating activities was $20.8 million for
the year ended December 31, 2006, compared to
$27.6 million for the year ended December 31, 2005.
The decrease in cash used in operating activities of
$6.8 million was primarily due to a decrease in net loss,
excluding non-cash adjustments, of $5.4 million, a decrease
in prepaid expenses and other assets of $599,000 and an increase
in accounts payable and accrued liabilities of $584,000. The
decrease in net loss resulted from a $22.2 million increase
in revenues for Oncotype DX, a $1.8 million increase
in revenue from pharmaceutical collaborators, and a
$1.2 million increase in interest income, partially offset
by a $22.6 million increase in operating expenses.
Net cash provided by investing activities was $13.1 million
for the year ended December 31, 2006, compared to net cash
used in investing activities of $54.2 million for the year
ended December 31, 2005. This increase of
$67.3 million was due to a decrease of $72.1 million
in short-term investments offset by a $5.4 million increase
in cash used to acquire property, equipment and leasehold
improvements.
Net cash provided by financing activities during the year ended
December 31, 2006 was $3.8 million, compared to
$62.4 million for the year ended December 31, 2005.
Amounts for 2006 represented $3.6 million of net proceeds
from our equipment loan and $179,000 of net proceeds from
issuance of common stock related to stock option exercises.
Amounts in the year ended December 31, 2005 included net
proceeds from our initial public
53
offering of $53.5 million, proceeds from our private
placement with Incyte of $5.0 million and net proceeds from
our equipment loan of $3.7 million.
Off-Balance
Sheet Activities
As of December 31, 2006, we have not engaged in any
off-balance sheet activities.
Contractual
Obligations
As of December 31, 2006, we had the following contractual
commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
Than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Notes payable obligations
|
|
$
|
8,468
|
|
|
$
|
3,223
|
|
|
$
|
5,007
|
|
|
$
|
238
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
4,026
|
|
|
|
730
|
|
|
|
1,531
|
|
|
|
1,626
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,494
|
|
|
$
|
3,953
|
|
|
$
|
6,538
|
|
|
$
|
1,864
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2005, we entered into an arrangement to finance the
acquisition of laboratory equipment, computer hardware and
software, leasehold improvements and office equipment. In
connection with this arrangement, we granted the lender a
security interest in the assets purchased with the borrowed
amounts. We could not prepay any amounts owed until April 2006,
at which point we could prepay all, but not part, of the amounts
owing under the arrangement so long as we also pay a 6% premium
on the remaining payments. This premium is reduced to 5% in 2007
and 4% in 2008. As of December 31, 2006, borrowings under
this arrangement were $7.3 million at an annual interest
rate of 10.23%, 10.30%, 10.49%, 10.56%, 10.65%, 11.01%, 11.18%
or 11.30%, depending upon the applicable note.
As December 31, 2006, we leased approximately
48,000 square feet of laboratory and office space under a
lease we entered into in September 2005. The lease has a term of
six years. As of December 31, 2006, we are required to make
aggregate rent payments of $730,000 in 2007, $753,000 in 2008,
$778,000 in 2009, $799,000 in 2010 and $966,000 in 2011 and
thereafter, all of which are included in the table above.
In January 2007, we executed an agreement to lease approximately
48,000 square feet of additional laboratory and office
space near the location we currently occupy. The lease has a
term of six years. Under the new lease, we are required to make
aggregate rent payments of $375,000 in 2007, $595,000 in 2008,
$741,000 in 2009, $835,000 in 2010 and $1.0 million in 2011
and thereafter, which are not included in the table above.
In addition to the above, we are required to make a series of
annual payments under one of our collaboration agreements
beginning on the date that we commercially launched Oncotype
DX. The initial payment of $150,000 was made in January
2004. For a period of seven years on each anniversary of this
first payment, we are required to make additional payments in
increasing amounts. Payments of $150,000 and $300,000 were made
in January 2005 and January 2006, respectively. We are required
to make additional payments of $300,000 in 2007 and $475,000 in
each of 2008 through 2011. However, either party may terminate
the agreement upon 30 days prior written notice.
Operating
Capital and Capital Expenditure Requirements
We expect to continue to incur substantial operating losses in
the future and to make capital expenditures to keep pace with
the expansion of our research and development programs and to
scale up our commercial operations. It may take several years to
move any one of a number of product candidates in early
development through the development phase and validation phase
to commercialization. We expect that our cash and cash
equivalents will be used to fund working capital and for capital
expenditures and other general corporate purposes, such as
licensing technology rights, partnering arrangements for our
tests outside the United States or reduction of debt
obligations. We have spent approximately $6.8 million
through December 31, 2006 for facility expansion and
improvements and are considering an additional approximately
$1.0 million in further facility improvements.
54
The amount and timing of actual expenditures may vary
significantly depending upon a number of factors, such as the
progress of our product development, regulatory requirements,
commercialization efforts, the amount of cash used by operations
and progress in reimbursement. We expect that we will receive
limited payments for Oncotype DX billings in the
foreseeable future. As reimbursement contracts with third-party
payors are put into place, we expect an increase in the number
and level of payments received for Oncotype DX billings.
We currently anticipate that our cash, cash equivalents and
short-term investments, together with collections from
Oncotype DX and amounts available under our equipment
credit facility, will be sufficient to fund our operations and
facility expansion plans for at least the next 12 months.
We cannot be certain that any of our reimbursement contract
programs or development of future products will be successful or
that we will be able to raise sufficient additional funds to see
these programs through to a successful result.
Our future funding requirements will depend on many factors,
including the following:
|
|
|
|
|
the rate of progress in establishing reimbursement arrangements
with third-party payors;
|
|
|
|
the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts;
|
|
|
|
the rate of progress and cost of research and development
activities associated with expansion of Oncotype DX for
breast cancer;
|
|
|
|
the rate of progress and cost of research and development
activities associated with products in the research phase
focused on cancers other than breast cancer;
|
|
|
|
the cost of acquiring or achieving access to tissue samples and
technologies;
|
|
|
|
the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
|
|
|
|
the effect of competing technological and market developments;
|
|
|
|
the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our
products; and
|
|
|
|
the economic and other terms and timing of any collaborations,
licensing or other arrangements into which we may enter.
|
We may also use cash to acquire or invest in complementary
businesses, technologies, services or products. Until we can
generate a sufficient amount of product revenues to finance our
cash requirements, which we may never do, we expect to finance
future cash needs primarily through public or private equity
offerings, debt financings, borrowings or strategic
collaborations. The issuance of equity securities may result in
dilution to stockholders, and debt financing may involve
restrictive covenants. We do not know whether additional funding
will be available on acceptable terms, or at all. If we are not
able to secure additional funding when needed, we may have to
delay, reduce the scope of or eliminate one or more research and
development programs or selling and marketing initiatives. In
addition, we may have to work with a partner on one or more of
our product development programs or market development programs,
which would lower the economic value of those programs to our
company.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements, or SFAS 157.
This pronouncement defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair
value measurements. This Statement is effective for fiscal years
beginning after November 15, 2007. We are currently
evaluating the effect that the adoption of SFAS 157 will
have on our financial condition, results of operations and cash
flows.
55
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or
FIN 48. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS 109,
Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We plan to adopt FIN 48 as of
January 1, 2007 and are currently evaluating the effect
that the adoption of FIN 48 will have on our financial
condition, results of operations and cash flows.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
We are exposed to interest rate risk primarily through our
investment portfolio. Our marketable securities consist of
high-quality debt securities with maturities beyond 90 days
at the date of acquisition, which mature within one year or
less. Our long-term investments consist of high-quality debt
securities with maturities beyond one year. As of
December 31, 2006, we had cash, cash equivalents and
short-term investments totaling $44.2 million. Our
investment policy calls for investments in short term, low risk,
investment-grade instruments. Based on our portfolio content and
our ability to hold investments to maturity, we believe that, if
market interest rates were to increase immediately and uniformly
by 10% from levels at December 31, 2006, the decline in
fair value would not be material.
56
|
|
ITEM 8.
|
Financial
Statements and Supplementary
Data.
|
Genomic
Health, Inc.
Index
to consolidated financial statements
57
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Genomic Health, Inc.
We have audited the accompanying consolidated balance sheets of
Genomic Health, Inc. as of December 31, 2006 and 2005, and
the related consolidated statements of operations, convertible
preferred stock and stockholders equity (deficit), and
cash flows for each of the three years in the period ended
December 31, 2006. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the auditing
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Genomic Health, Inc. at
December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial
statements, under the heading Stock-Based Compensation, the
Company adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, effective
January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Genomic Health, Inc.s internal control
over financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 14, 2007
expressed an unqualified opinion thereon.
Palo Alto, California
March 14, 2007
58
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Genomic Health, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that Genomic Health, Inc. maintained
effective internal control over financial reporting as of
December 31, 2006, 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. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of Genomic Health Inc.s
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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, 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, managements assessment that Genomic
Health, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Genomic Health, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, 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, 2006 and 2005, and the related consolidated
statements of operations, convertible preferred stock and
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2006 and
our report dated March 14, 2007 expressed an unqualified
opinion thereon.
Palo Alto, California
March 14, 2007
59
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,926
|
|
|
$
|
18,839
|
|
Short-term investments
|
|
|
29,289
|
|
|
|
50,688
|
|
Accounts receivable (net of
allowance for bad debt; 2006-$510,
2005-$0)
|
|
|
1,862
|
|
|
|
314
|
|
Prepaid expenses and other current
assets
|
|
|
1,609
|
|
|
|
1,584
|
|
Employee note receivable
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
47,686
|
|
|
|
71,462
|
|
Property and equipment, net
|
|
|
9,421
|
|
|
|
3,597
|
|
Restricted cash
|
|
|
500
|
|
|
|
500
|
|
Other assets
|
|
|
417
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
58,024
|
|
|
$
|
75,799
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,523
|
|
|
$
|
1,393
|
|
Accrued compensation
|
|
|
1,868
|
|
|
|
955
|
|
Accrued expenses and other current
liabilities
|
|
|
1,474
|
|
|
|
1,364
|
|
Accrued license fees
|
|
|
907
|
|
|
|
585
|
|
Notes payable current
portion
|
|
|
2,547
|
|
|
|
1,052
|
|
Deferred revenues
current portion
|
|
|
710
|
|
|
|
238
|
|
Lease incentive
obligations current portion
|
|
|
122
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,151
|
|
|
|
5,661
|
|
Notes payable
long-term portion
|
|
|
4,726
|
|
|
|
2,621
|
|
Deferred revenues
long-term portion
|
|
|
137
|
|
|
|
|
|
Lease incentive
obligations long-term portion
|
|
|
761
|
|
|
|
|
|
Other liabilities
|
|
|
420
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par
value, 5,000,000 and none authorized, no shares issued and
outstanding at December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par
value; 100,000,000 shares authorized, 24,548,060 and
24,470,981 shares issued and outstanding at
December 31, 2006 and 2005, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
166,922
|
|
|
|
167,053
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
(3,297
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
8
|
|
|
|
(58
|
)
|
Accumulated deficit
|
|
|
(125,103
|
)
|
|
|
(96,183
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
41,829
|
|
|
|
67,517
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
58,024
|
|
|
$
|
75,799
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
60
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
27,006
|
|
|
$
|
4,823
|
|
|
$
|
227
|
|
Contract revenues
|
|
|
2,168
|
|
|
|
379
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
29,174
|
|
|
|
5,202
|
|
|
|
327
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
9,908
|
|
|
|
6,249
|
|
|
|
1,828
|
|
Research and development
|
|
|
12,841
|
|
|
|
9,465
|
|
|
|
10,040
|
|
Selling and marketing
|
|
|
24,625
|
|
|
|
15,348
|
|
|
|
9,856
|
|
General and administrative
|
|
|
12,765
|
|
|
|
6,485
|
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60,139
|
|
|
|
37,547
|
|
|
|
25,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(30,965
|
)
|
|
|
(32,345
|
)
|
|
|
(25,266
|
)
|
Interest income
|
|
|
2,480
|
|
|
|
1,241
|
|
|
|
295
|
|
Interest expense
|
|
|
(446
|
)
|
|
|
(258
|
)
|
|
|
(4
|
)
|
Other income (expense), net
|
|
|
11
|
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
$
|
(13.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
1,808,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
61
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock-based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Balance at December 31, 2003
|
|
|
29,936,839
|
|
|
$
|
51,064
|
|
|
|
1,741,684
|
|
|
$
|
|
|
|
$
|
280
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(39,827
|
)
|
|
$
|
(39,547
|
)
|
Issuance of common stock to
employees upon exercise of stock options at $0.66 to
$1.38 per share for cash
|
|
|
|
|
|
|
|
|
|
|
222,531
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
Issuance of common stock to
consultants upon exercise of stock options at $0.66 to
$1.38 per share for cash
|
|
|
|
|
|
|
|
|
|
|
1,169
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Repurchase of common stock issued
to founders
|
|
|
|
|
|
|
|
|
|
|
(14,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series E
convertible preferred stock at $2.82 per share for cash
(net of issuance costs of $146)
|
|
|
18,543,980
|
|
|
|
52,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,647
|
|
|
|
(3,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
Stock-based compensation related to
consultant options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,995
|
)
|
|
|
(24,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
48,480,819
|
|
|
|
103,212
|
|
|
|
1,951,161
|
|
|
|
|
|
|
|
4,124
|
|
|
|
(3,456
|
)
|
|
|
|
|
|
|
(64,822
|
)
|
|
|
(64,154
|
)
|
Issuance of common stock to
employees upon exercise of stock options at $0.58 to
$2.88 per share for cash
|
|
|
|
|
|
|
|
|
|
|
266,916
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
Issuance of common stock to
consultants upon exercise of stock options at $0.66 to
$2.88 per share for cash
|
|
|
|
|
|
|
|
|
|
|
5,197
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Issuance of common stock at
$12.00 per share, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
5,016,722
|
|
|
|
|
|
|
|
53,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,458
|
|
Issuance of common stock to Incyte
at $12.00 per share
|
|
|
|
|
|
|
|
|
|
|
416,666
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Conversion of preferred stock into
common stock
|
|
|
(48,480,819
|
)
|
|
|
(103,212
|
)
|
|
|
16,814,319
|
|
|
|
2
|
|
|
|
103,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,212
|
|
Stock-based compensation related to
consultant options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
|
|
(917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
1,076
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,361
|
)
|
|
|
(31,361
|
)
|
Change in unrealized loss on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
24,470,981
|
|
|
|
2
|
|
|
|
167,053
|
|
|
$
|
(3,297
|
)
|
|
|
(58
|
)
|
|
|
(96,183
|
)
|
|
|
67,517
|
|
Deferred compensation reclassified
upon adoption of SFAS 123R on January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,297
|
)
|
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to
employees upon exercise of stock options at $0.63 to
$9.39 per share for cash
|
|
|
|
|
|
|
|
|
|
|
74,826
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
Issuance of common stock to
consultants upon exercise of stock options at $2.88 per share
for cash
|
|
|
|
|
|
|
|
|
|
|
2,253
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Stock-based compensation related to
employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,904
|
|
Stock-based compensation related to
consultant stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,920
|
)
|
|
|
(28,920
|
)
|
Change in unrealized loss on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
24,548,060
|
|
|
$
|
2
|
|
|
$
|
166,922
|
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
(125,103
|
)
|
|
$
|
41,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
62
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,579
|
|
|
|
1,522
|
|
|
|
1,008
|
|
Employee stock-based compensation
|
|
|
2,904
|
|
|
|
1,076
|
|
|
|
191
|
|
Non-employee stock-based
compensation
|
|
|
83
|
|
|
|
92
|
|
|
|
53
|
|
Gain or loss on disposal of
property and equipment
|
|
|
3
|
|
|
|
(31
|
)
|
|
|
20
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,548
|
)
|
|
|
(314
|
)
|
|
|
|
|
Employee note receivable
|
|
|
37
|
|
|
|
76
|
|
|
|
(113
|
)
|
Prepaid expenses and other current
assets
|
|
|
(25
|
)
|
|
|
(683
|
)
|
|
|
(338
|
)
|
Other assets
|
|
|
216
|
|
|
|
(107
|
)
|
|
|
|
|
Accounts payable
|
|
|
1,130
|
|
|
|
292
|
|
|
|
274
|
|
Accrued expenses and other
liabilities
|
|
|
432
|
|
|
|
1,247
|
|
|
|
527
|
|
Accrued compensation
|
|
|
913
|
|
|
|
352
|
|
|
|
261
|
|
Deferred revenues
|
|
|
609
|
|
|
|
238
|
|
|
|
|
|
Lease incentive obligations
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(20,778
|
)
|
|
|
(27,601
|
)
|
|
|
(23,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(8,379
|
)
|
|
|
(2,972
|
)
|
|
|
(1,856
|
)
|
Purchase of short-term investments
|
|
|
(40,068
|
)
|
|
|
(50,688
|
)
|
|
|
|
|
Maturities of short-term
investments
|
|
|
61,467
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on
investment securities
|
|
|
66
|
|
|
|
(58
|
)
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
(500
|
)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
13,086
|
|
|
|
(54,218
|
)
|
|
|
(1,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
4,912
|
|
|
|
4,090
|
|
|
|
|
|
Principal payments of notes payable
|
|
|
(1,312
|
)
|
|
|
(417
|
)
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
|
179
|
|
|
|
58,710
|
|
|
|
144
|
|
Net proceeds from issuance of
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
52,148
|
|
Repayment of long-term debt due to
related party
|
|
|
|
|
|
|
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
3,779
|
|
|
|
62,383
|
|
|
|
52,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(3,913
|
)
|
|
|
(19,436
|
)
|
|
|
27,213
|
|
Cash and cash equivalents at the
beginning of period
|
|
|
18,839
|
|
|
|
38,275
|
|
|
|
11,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the
end of period
|
|
$
|
14,926
|
|
|
$
|
18,839
|
|
|
$
|
38,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
446
|
|
|
$
|
258
|
|
|
$
|
4
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock converted to
common upon initial public offering
|
|
|
|
|
|
|
103,212
|
|
|
|
|
|
See accompanying notes.
63
GENOMIC
HEALTH, INC.
December 31, 2006
|
|
Note 1.
|
Organization
and Summary of Significant Accounting Policies
|
The
Company
Genomic Health, Inc., or the Company, was incorporated in
Delaware in August 2000. The Company was organized to deliver
individualized genomic information to patients and their
physicians to improve the quality of treatment decisions for
patients with cancer. The Companys first test, Oncotype
DX, was launched in 2004 and is used for early stage breast
cancer patients to predict the likelihood of cancer recurrence,
the likelihood of patient survival within 10 years of
diagnosis and the likelihood of chemotherapy benefit. The
Company has incurred significant losses and expects to incur
additional losses for at least the next two years as commercial
and development efforts continue.
Initial
Public Offering
On October 4, 2005, the Company closed an initial public
offering of 5,016,722 shares of its common stock at
$12.00 per share. Net proceeds from the offering after
deducting underwriting discounts, commissions and expenses were
$53.5 million. On the closing of the Companys initial
public offering, all of the convertible preferred stock
outstanding automatically converted into 16,160,273 shares
of common stock.
An additional $5.0 million was raised on October 4,
2005, through the private sale of 416,666 shares common
stock to Incyte Corporation, a related party. As of
December 31, 2006, to the Companys knowledge, Incyte
Corporation had divested its holdings in the Companys
common stock. See Note 10 to the Companys
consolidated financial statements for further information on
related parties.
Principles
of Consolidation
The consolidated financial statements include all the accounts
of the Company and all wholly owned subsidiaries. The Company
has one wholly-owned subsidiary, Oncotype Laboratories, Inc.,
which was established in 2003 and is inactive.
Basis
of Presentation and Use of Estimates
The accompanying consolidated financial statements as of
December 31, 2006 and 2005 and for the years ended
December 31, 2006, 2005 and 2004 have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make judgments, assumptions and estimates
that affect the amounts reported in the Companys
consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Cash
Equivalents and Short-term Investments
The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash
equivalents. The Company invests in money market securities
through a major U.S. bank and is exposed to credit risk in
the event of default by the financial institution to the extent
of amounts recorded on the balance sheets.
The Company invests in short-term and long-term marketable
securities, primarily corporate notes, government agencies,
asset-backed securities and municipal bonds. The Company
considers all investments with a maturity date less than one
year as of the balance sheet date to be short-term investments.
These securities are carried at estimated fair value with
unrealized gains and losses included in stockholders
equity. Those investments with a maturity date greater than one
year as of the balance sheet date are considered to be long-term
investments. All investments are available for sale.
64
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Realized gains and losses and declines in value, if any, judged
to be other than temporary on
available-for-sale
securities are reported in other income or expense. When
securities are sold, any associated unrealized gain or loss
recorded as a separate component of stockholders equity is
reclassified out of stockholders equity on a
specific-identification basis and recorded in earnings for the
period.
Restricted
Cash
In September 2005, the Company entered into a non-cancelable
facilities lease with the facility owner that has a term of six
years. In connection with this lease, the Company was required
to secure a letter of credit, which totaled $500,000 and is
classified as restricted cash on the balance sheet.
Fair
Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, short-term
investments, trade receivables, accounts payable, approximate
fair value due to their short maturities. Based on borrowing
rates currently available to the Company for loans and capital
lease obligations with similar terms, the carrying value of the
Companys debt obligations approximates fair value.
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 term of the lease, whichever is shorter.
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 as
deferred rent and are recognized as reductions to rental expense
on a straight-line basis over the term of the lease.
Intangible
assets
Intangible assets with definite useful lives are recorded at
cost, less accumulated amortization. Amortization is recognized
over their estimated useful lives.
Impairment
of Long-lived Assets
The Company reviews long-lived assets, which include property
and equipment and intangible assets, for impairment whenever
events or changes in business circumstances indicate that the
carrying amounts of the assets may not be fully recoverable. An
impairment loss would be recognized when estimated discounted
future cash flows expected to result from the use of the asset
and its eventual disposition is less then its carrying amount.
Impairment, if any, is assessed using discounted cash flows.
Through December 31, 2006, there have been no such losses.
Research
and Development
Research and development expenses comprise the following types
of costs incurred in performing research and development
activities: salaries and benefits, allocated overhead and
facility occupancy costs, contract services and other outside
costs, and costs to acquire in-process research and development
projects and technologies that have no alternative future use.
Research and development expenses also include costs related to
activities performed under
65
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
contracts with biopharmaceutical and pharmaceutical companies.
Research and development costs are expensed as incurred.
Concentration
of Risk
Cash, cash equivalents, short-term investments and accounts
receivable are financial instruments which potentially subject
the Company to concentrations of credit risk. The Company
invests in debt instruments and in money market funds, and by
policy, limits the amount in any one type of investment, other
than securities issued or guaranteed by the
U.S. Government. Through December 31, 2006, no
material losses had been incurred. One major customer accounted
for approximately 47% of the Companys product revenue for
the year ended December 31, 2006; no revenue from this
customer was recorded in 2005. This customer represented 59% of
the Companys net accounts receivable balance as of
December 31, 2006. Another major customer accounted for
approximately 4% and 11% of the Companys revenue in 2006
and 2005, respectively. This customer represented 17% and 70% of
the Companys accounts receivable balance as of
December 31, 2006 and 2005, respectively.
Comprehensive
Loss
The Company displays comprehensive loss and its components as
part of the statements of stockholders equity. Other
comprehensive loss consists entirely of unrealized gains and
losses on investments.
Internal
Use Software
The Company accounts for software developed or obtained for
internal use in accordance with Statement of Position
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. The statement requires
capitalization of certain costs incurred in the development of
internal-use software, including external direct material and
service costs and employee payroll and payroll-related costs.
Capitalized software costs, which are included in property and
equipment, are depreciated over three to five years.
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, 2006 and 2005.
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.
Stock-based
Compensation
Through December 31, 2005, the Company accounted for
stock-based payment transactions under Accounting Principles
Board Opinion No. 25, or APB 25. On January 1,
2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share-Based
Payment, or SFAS 123R. SFAS 123R, which addresses
the accounting for stock-based payment transactions whereby an
entity receives employee services in exchange for equity
instruments, including stock options. SFAS 123R eliminates
the ability to account for stock-based compensation transactions
using the intrinsic value method under APB 25, and instead
requires that such transactions be
66
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accounted for using a fair-value based method. SFAS 123R is
a complex accounting standard, the application of which requires
significant judgment and the use of estimates, particularly
surrounding assumptions used in determining fair value. The
Company uses the Black-Scholes valuation method, which requires
the use of estimates such as stock price volatility and expected
options lives, as well as expected option forfeiture rates, to
value equity-based compensation. There is little historical
evidence or guidance available with respect to developing these
assumptions and models. Expected volatility is based on
comparable peer data as well as historical volatility of the
Companys stock. The expected life of options granted is
estimated based on historical option exercise and employee
termination experience and peer group data.
The Company has elected the modified prospective transition
method as permitted under SFAS 123R and, accordingly, prior
periods have not been restated to reflect the impact of
SFAS 123R. The modified prospective transition method
requires that stock-based compensation expense be recorded for
all new and unvested stock options that are ultimately expected
to vest as the requisite service is rendered beginning on
January 1, 2006. Stock-based compensation expense resulting
from the adoption of SFAS 123R represents expense related
to stock options granted during the year ended December 31,
2006, as well as stock options granted prior to, but not yet
vested as of, January 1, 2006. As of December 31,
2006, total compensation expense related to non-vested stock
options not yet recognized was $14.3 million, which is
expected to be recognized over a period of 39 months.
Equity instruments granted to non-employees are valued using the
Black-Scholes method and accounted for as prescribed by
SFAS 123R and Emerging Issues Task Force, or EITF,
Consensus
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, and will be subject to periodic
revaluation over their vesting terms.
Revenue
Recognition
The Company derives its revenues from product sales and contract
research arrangements. The Company operates in one industry
segment. Product revenues are derived solely from the sale of
the Oncotype DX test. Third-party payors are billed upon
generation and delivery of a Recurrence Score report to the
physician.
The Companys product revenues for tests performed are
recognized when the following criteria of revenue recognition
are met: (1) persuasive evidence that an arrangement
exists; (2) delivery has occurred or services rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Criterion
(2) is satisfied when the Company performs the test and
generates and delivers a report to the physician. Determination
of criteria (3) and (4) is based on managements
judgments regarding the nature of the fee charged for products
or services delivered and the collectibility of those fees.
Product revenues where all criteria set forth above are not met
are recognized on a cash basis when cash is received.
The Company generally bills third-party payors for Oncotype
DX upon generation and delivery of a Recurrence Score report
to the physician. As such, the Company takes assignment of
benefits and the risk of collection with the third-party payor.
The Company usually bills the patient directly for amounts owed
after multiple requests for payment have been denied or only
partially paid by the insurance carrier. As a relatively new
test, Oncotype DX may be considered investigational by
payors and not covered under their reimbursement policies.
Consequently, the Company pursues
case-by-case
reimbursement where policies are not in place or payment history
has not been established. As a result, at the time of delivery
of the Recurrence Score to the physician, and in the absence of
a reimbursement contract or sufficient payment history,
collectibility cannot reasonably be assured and revenues are
therefore only recognized at the time cash is collected.
In 2006 the Company began accruing an allowance for bad debt
against its accounts receivable consistent with historical
payment experience. Bad debt expense is included in general and
administrative expense on the Companys consolidated
statements of operations. As of December 31, 2006, the
Companys allowance for bad debt was $510,000. No
write-offs for bad debt were recorded against the allowance
during the year ended December 31, 2006. Bad debt expense
was $510,000 was for the year ended December 31, 2006. No
bad debt
67
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense was recorded for the years ended December 31, 2005
and 2004 because the vast majority of revenues were recorded on
a cash basis. Accounts receivable over 90 days will be
written off 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.
Contract revenues are derived from studies conducted with
biopharmaceutical and pharmaceutical companies and are
recognized on a contract specific basis. Contract revenues are
recorded on an accrual basis as the contractual obligations are
completed. Under certain contracts, the Companys input,
measured in terms of full-time equivalent level of effort or
running a set of assays through its laboratory under a
contractual protocol, triggers payment obligations and revenues
are recognized as costs are incurred or assays are processed.
Certain contracts have payment obligations that are triggered as
milestones are complete, such as completion of a successful set
of experiments. In these cases, revenues are recognized when the
milestones are achieved.
Recently
Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or
FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements, or SFAS 157.
This pronouncement defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair
value measurements. This Statement is effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the effect that the adoption of SFAS 157 will
have on its financial condition, results of operations and cash
flows.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or
FIN 48. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS 109,
Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company will adopt FIN 48 as of
January 1, 2007 and is currently evaluating the effect that
the adoption of FIN 48 will have on its financial condition,
results of operations and cash flows.
|
|
Note 2.
|
Net Loss
Per Share
|
Basic net loss per share is calculated by dividing the net loss
by the weighted-average number of common shares outstanding for
the period without consideration for potential common shares.
Diluted net loss per share is computed by dividing the loss by
the weighted-average number of common shares outstanding for the
period less the weighted-average unvested common shares subject
to repurchase and dilutive potential common shares for the
period determined using the treasury-stock method. For purposes
of this calculation, preferred stock and options to purchase
stock are considered to be potential common shares and are only
included in the calculation of diluted loss per share when their
effect is dilutive.
68
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss applicable to common
stockholders
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
1,808,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
$
|
(13.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding dilutive
securities not included in diluted net loss per share
calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
16,160,273
|
|
Options to purchase common stock
|
|
|
2,940,803
|
|
|
|
2,021,276
|
|
|
|
1,423,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,940,803
|
|
|
|
2,021,276
|
|
|
|
17,583,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Collaboration
and Specimen Transfer Agreements
|
The Company has entered into a variety of specimen transfer and
collaboration agreements relating to its development efforts.
The Company recorded collaboration expenses of
$1.5 million, $333,000 and $1.1 million for the years
ended December 31, 2006, 2005 and 2004, respectively,
relating to services provided in connection with these
agreements. In addition to these expenses, certain agreements
contain provisions for royalties from inventions resulting from
these collaborations.
At December 31, 2006, future milestone payments, exclusive
of royalty payments, relating to the launch and
commercialization of Oncotype DX total approximately
$2.2 million and are payable as follows (in thousands):
|
|
|
|
|
|
|
Milestone
|
|
|
|
Payments
|
|
|
January 2007
|
|
$
|
300
|
|
January 2008
|
|
|
475
|
|
January 2009
|
|
|
475
|
|
January 2010
|
|
|
475
|
|
January 2011
|
|
|
475
|
|
|
|
|
|
|
Total
|
|
$
|
2,200
|
|
|
|
|
|
|
If at any time the Company discontinues the sale of commercial
products or services resulting from the collaboration, no future
milestone payments will be payable and the Company will have no
further obligation under the agreement. If the Companys
cash balance is less than $5.0 million on the due date of
any the milestone payments, the Company may be able to defer any
current milestone payment due for a period of up to
12 months.
In addition, the Company has secured certain options and rights
relating to any joint inventions arising out of the
collaborations.
|
|
Note 4.
|
Commercial
Technology Licensing Agreements
|
The Company is a party to various agreements under which it
licenses technology on a nonexclusive basis in the field of
human diagnostics. Access to these licenses enables the Company
to process its laboratory tests for
69
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Oncotype DX. Payments under these agreements for the
years ended December 31, 2006, 2005 and 2004 were
$2.2 million, $786,000 and $477,000, respectively, and were
included in cost of product revenues.
|
|
Note 5.
|
Short-term
Investments
|
The following tables illustrate the Companys
available-for-sale
securities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of
U.S. government agencies
|
|
$
|
9,082
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
9,085
|
|
Corporate debt securities
|
|
|
20,199
|
|
|
|
5
|
|
|
|
|
|
|
|
20,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,281
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
29,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of
U.S. government agencies
|
|
$
|
14,625
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
14,617
|
|
Corporate debt securities
|
|
|
31,326
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
31,283
|
|
Asset-backed securities
|
|
|
4,795
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
4,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,746
|
|
|
$
|
|
|
|
$
|
(58
|
)
|
|
$
|
50,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of
available-for-sale
securities by contractual maturity at December 31, 2006 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Cost
|
|
|
Market Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
29,281
|
|
|
$
|
29,289
|
|
|
|
Note 6.
|
Property
and Equipment
|
The following table summarizes the Companys property and
equipment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Computer equipment and software
|
|
$
|
1,264
|
|
|
$
|
1,137
|
|
Lab equipment
|
|
|
7,016
|
|
|
|
5,467
|
|
Furniture and fixtures
|
|
|
280
|
|
|
|
205
|
|
Leasehold improvements
|
|
|
7,296
|
|
|
|
343
|
|
Construction in progress
|
|
|
122
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,978
|
|
|
|
7,602
|
|
Less accumulated depreciation and
amortization
|
|
|
(6,557
|
)
|
|
|
(4,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,421
|
|
|
$
|
3,597
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005 and 2004, the
Company recorded depreciation and amortization expense of
$2.6 million, $1.5 million and $1.0 million,
respectively.
70
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes Payable
In March 2005, the Company entered into an arrangement to
finance the acquisition of laboratory equipment, computer
hardware and software, leasehold improvements and office
equipment. In connection with this arrangement, the Company
granted the lender a security interest in the assets purchased
with the borrowed amounts. The Company could not prepay any
amounts owed until April 2006, at which point the Company could
prepay all, but not part, of the amounts owing under the
arrangement so long as it also pay a 6% premium on the remaining
payments. This premium is reduced to 5% in 2007 and 4% in 2008.
As of December 31, 2006, borrowings under this arrangement
were $7.3 million at an annual interest rate of 10.23%,
10.30%, 10.49%, 10.56%, 10.65%, 11.01%, 11.18% or 11.30%,
depending on the applicable note. According to the terms of the
arrangement the Company is required to notify the lender if
there is a material adverse change. The Company complied with
all the material covenants of the finance arrangement during the
years ended December 31, 2006 and 2005.
As of December 31, 2006, the Companys aggregate
commitments under its financing arrangement were as follows (in
thousands):
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
Years Ending December 31,
|
|
|
|
|
2007
|
|
$
|
3,223
|
|
2008
|
|
|
3,073
|
|
2009
|
|
|
1,934
|
|
2010
|
|
|
238
|
|
|
|
|
|
|
Total minimum payments
|
|
|
8,468
|
|
Less: interest portion
|
|
|
(1,195
|
)
|
|
|
|
|
|
Present value of net minimum
payments
|
|
|
7,273
|
|
Less: current portion of
obligations
|
|
|
(2,547
|
)
|
|
|
|
|
|
Long-term obligations
|
|
$
|
4,726
|
|
|
|
|
|
|
Leases
During 2003, the Company entered into an agreement to extend its
then existing sublease through May 31, 2005, wherein
monthly rent beginning October 1, 2003, was modified to be
$75,000 per month. During 2005, the Company entered into an
additional agreement to extend the original four-year term of
the sublease agreement through February 28, 2006, wherein
monthly rent beginning June 1, 2005 was modified to
$40,000 per month. As part of this 2005 agreement, the
Company agreed to sublease additional adjacent premises
effective February 8, 2005 through February 28, 2006
at a rate of $14,000 per month, with first and last monthly
payments of $10,000 and $14,000, respectively. In September
2005, the Company entered into a non-cancelable lease directly
with the facility owner for the entire 48,000 square feet
of laboratory and office space that the Company currently
occupies. The lease has a term of six years and included lease
incentive obligations of $960,000, which are being amortized on
a straight-line basis over the life of the lease.
Rent expense under all operating leases amounted to $810,000,
$838,000 and $911,000 for the years ended December 31,
2006, 2005 and 2004, respectively.
71
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future non-cancelable commitments under operating leases at
December 31, 2006, were as follows (in thousands):
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
Years Ending December 31,
|
|
|
|
|
2007
|
|
$
|
730
|
|
2008
|
|
|
753
|
|
2009
|
|
|
778
|
|
2010
|
|
|
799
|
|
2011
|
|
|
827
|
|
Thereafter
|
|
|
139
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
4,026
|
|
|
|
|
|
|
|
|
Note 8.
|
Convertible
Preferred Stock and Stockholders Equity
(Deficit)
|
Convertible
Preferred Stock
In November 2000, January 2001, March 2001, March through
November 2002, and February through December 2004 the Company
completed private placements for the sale of 7,935,000,
15,675,674, 2,252,252, 4,073,913 and 18,543,980 shares of
Series A, B, C, D and E convertible preferred stock,
respectively, resulting in gross proceeds of $7.9 million,
$29.0 million, $5.0 million, $9.4 million and
$52.3 million, respectively.
On October 4, 2005, the Company completed its initial
public offering of 5,016,722 shares of common stock at a
price to the public of $12.00 per share. Upon consummation
of the offering, all 48,480,819 outstanding shares of preferred
stock converted into 16,160,273 of shares of common stock and a
dividend of 654,046 common shares was distributed to the
stockholders on conversion.
Note 9. Common
Stock and Equity Plans
Common
Stock
As of December 31, 2006, the Company had
24,548,060 shares of common stock outstanding. Common stock
reserved for issuance as of December 31, 2006 is as follows:
|
|
|
|
|
Options outstanding
|
|
|
2,940,803
|
|
Future option grants
|
|
|
3,258,436
|
|
Dividend
On September 8, 2005, the board of directors of the Company
declared a conditional dividend of 791,210 shares of common
stock, which was allocated upon the closing of the
Companys initial public offering on a pro rata basis to
all of the Companys stockholders and option holders of
record as of September 28, 2005. The Company issued
740,030 shares to its stockholders pursuant to this
dividend at the closing of the initial public offering on
October 4, 2005, less an aggregate of 86 shares for
which cash was paid in lieu of fractional interests, and the
number of shares underlying outstanding stock options were
increased by approximately 51,080 shares, less any
fractional shares resulting from such adjustment. The dividend
has been given retroactive effect in the accompanying
consolidated financial statements.
72
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reverse
Stock Split
On September 23, 2005, the Company effected a
1-for-3
reverse stock split of its common stock. All share and per share
amounts have been retroactively restated in the accompanying
consolidated financial statements and notes for all periods
presented.
2005
Stock Incentive Plan
On September 8, 2005, the Board of Directors approved the
2005 Stock Incentive Plan, or 2005 Plan, that was later approved
by the Companys stockholders. The Company has reserved
5,000,000 shares of the Companys common stock for
issuance under the 2005 Plan. The 2005 Plan became effective
upon the closing of the Companys initial public offering
on October 4, 2005. Pursuant to the 2005 Plan, stock
options, restricted shares, stock units, and stock appreciation
rights may be granted to employees, consultants, and outside
directors of the Company. Options granted may be either
incentive stock options or nonstatutory stock options.
Stock options are governed by stock option agreements between
the Company and recipients of stock options. Incentive stock
options may be granted under the 2005 Plan at an exercise price
of not less than 100% of the fair market value of the common
stock on the date of grant, determined by the Compensation
Committee of the Board of Directors. Nonstatutory stock options
may be granted under the 2005 Plan at an exercise price of not
less than 80% of the fair market value of the common stock on
the date of grant, determined by the Compensation Committee of
the Board of Directors. Options become exercisable and expire as
determined by the Compensation Committee, provided that the term
of incentive stock options may not exceed 10 years from the
date of grant. Stock option agreements may provide for
accelerated exercisability in the event of an optionees
death, disability, or retirement or other events.
Under the 2005 Plan, each outside director who joins the board
after the effective date of the 2005 Plan will receive an
automatic nonstatutory stock option grant that vests at a rate
of 25% at the end of the first year, with the remaining balance
vesting monthly over the next three years. On the first business
day following the annual meeting of the Companys
stockholders, each outside director who is continuing board
service and who was not initially elected to the board at the
annual meeting will receive an additional nonstatutory stock
option grant, which will vest in full immediately prior to the
next annual meeting of the Companys stockholders.
Nonstatutory stock options granted to outside directors must
have an exercise price equal to 100% of the fair market value of
the common stock on the date of grant. Nonstatutory stock
options terminate on the earlier of the day before the tenth
anniversary of the date of grant or the date twelve months after
termination of the outside directors service as a member
of the board of directors.
Restricted shares, stock appreciation rights, and stock units
granted under the 2005 Plan are governed by restricted stock
agreements, SAR agreements, and stock unit agreements between
the Company and recipients of the awards. Terms of the
agreements are determined by the Compensation Committee.
2001
Stock Incentive Plan
The Companys 2001 Stock Incentive Plan, or 2001 Plan, was
terminated upon completion of the Companys initial public
offering in October 2005. No shares of common stock are
available under the 2001 Plan other than to satisfy exercises of
stock options granted under the 2001 Plan prior to its
termination. Under the 2001 Plan, incentive stock options and
nonstatutory stock options were granted to employees, officers,
and directors of, or consultants to, the Company and its
affiliates. Options granted under the 2001 Plan expire no later
than 10 years from the date of grant.
Adoption
of SFAS 123R
Until December 31, 2005, the Company followed APB 25
to account for employee stock options using the intrinsic value
method. Under APB 25, no compensation expense is
recognized when the exercise price of the
73
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys employee stock options equals the market price of
the underlying stock on the date of grant. On January 1,
2006, the Company adopted SFAS 123R, which addresses the
accounting for stock-based payment transactions whereby an
entity receives employee services in exchange for equity
instruments, including stock options. SFAS 123R eliminates
the ability to account for stock-based compensation transactions
using the intrinsic value method under APB 25, and instead
requires that such transactions be accounted for using a
fair-value based method. The Company uses the Black-Scholes
option valuation model to value stock options under
SFAS 123R.
On November 10, 2005, the FASB issued FASB Staff Position No.
FAS 123(R)-3, Transition Election Related to Accounting
for Tax Effects of Share-Based Payment Awards. The
Company has elected to adopt the alternative transition method
provided in the FASB Staff Position for calculating the tax
effects (if any) of stock-based compensation expense pursuant to
SFAS 123R. The alternative transition method includes simplified
methods to establish the beginning balance of the additional
paid-in capital pool, or APIC pool, related to the tax effects
of employee stock-based compensation, and to determine the
subsequent impact to the APIC pool and the consolidated
statements of operations and cash flows of the tax effects (if
any) of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123R.
Employee stock-based compensation expense recognized for the
year ended December 31, 2006 was calculated based on awards
ultimately expected to vest and has been reduced for estimated
forfeitures. SFAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The
Company recorded employee stock-based compensation expense of
$2.9 million for the year ended December 31, 2006 as a
result of the adoption of SFAS 123R. The following table
presents the impact of the adoption of SFAS 123R on
selected statements of operations line items for the year ended
December 31, 2006:
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
167
|
|
Research and development
|
|
|
821
|
|
Selling and marketing
|
|
|
779
|
|
General and administrative
|
|
|
1,137
|
|
|
|
|
|
|
Total
|
|
$
|
2,904
|
|
|
|
|
|
|
As a result of adopting SFAS 123R on January 1, 2006,
the Companys net loss for year ended December 31,
2006 was $1.8 million higher than if it had continued to
account for stock-based compensation under APB 25. Basic
and diluted net loss per share for the year ended
December 31, 2006 was $0.07 higher than if the Company had
continued to account for stock-based compensation under
APB 25.
Stock-based compensation expense resulting from the adoption of
SFAS 123R represents expense related to stock options
granted during the year ended December 31, 2006, as well as
stock options granted prior to, but not yet vested as of,
January 1, 2006. As of December 31, 2006, total
compensation expense related to non-vested stock options not yet
recognized was $14.3 million, which is expected to be
allocated to expenses over a remaining vesting period of
39 months.
74
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro
Forma Information for Period Prior to Adoption of
SFAS 123R
The following pro forma net loss and loss per share were
determined as if the Company had accounted for employee
stock-based compensation for its employee stock option plans
under the fair value method prescribed by SFAS 123:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net loss as reported
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
Add: Total stock-based employee
compensation expense included in net loss
|
|
|
1,076
|
|
|
|
191
|
|
Deduct: Total stock-based employee
compensation expense determined under the fair-value based
method for all awards
|
|
|
(1,482
|
)
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
Net loss, pro forma
|
|
$
|
(31,767
|
)
|
|
$
|
(25,124
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted, pro forma
|
|
$
|
(4.20
|
)
|
|
$
|
(13.90
|
)
|
|
|
|
|
|
|
|
|
|
Valuation
Assumptions
The employee stock-based compensation expense recognized under
SFAS 123R and presented in the pro forma disclosure
required under SFAS 123 was determined using the
Black-Scholes option valuation model. Option valuation models
require the input of highly subjective assumptions and these
assumptions can vary over time. Expected volatility is based on
comparable peer data as well as the historical volatility of the
Companys stock. The expected life of options granted is
estimated based on historical option exercise and employee
termination experience and comparable peer data. The risk-free
interest rate is estimated using rates available on
U.S. Treasury securities with a remaining term
approximating the expected life of the options. 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 the assumptions
used in calculating such values during each fiscal period are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Volatility factor
|
|
|
68
|
%
|
|
|
77
|
%
|
|
|
80
|
%
|
Risk-free interest rate
|
|
|
4.76
|
%
|
|
|
4.00
|
%
|
|
|
2.80
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life of options
|
|
|
5.5 years
|
|
|
|
4.8 years
|
|
|
|
4.0 years
|
|
Weighted-average fair value
|
|
$
|
10.27
|
|
|
$
|
6.39
|
|
|
|
4.98
|
|
Stock
Options Granted to Non-employees
The Company grants options to consultants from time to time in
exchange for services performed for the Company. During the
years ended December 31, 2006, 2005 and 2004, the Company
granted options to purchase
75
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2,850, 10,172 and 8,333 shares, respectively, of common
stock to consultants. The fair value of these option grants was
determined using the Black-Scholes option pricing model using
the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Volatility factor
|
|
|
70
|
%
|
|
|
75
|
%
|
|
|
80
|
%
|
Risk-free interest rate
|
|
|
4.80
|
%
|
|
|
4.00
|
%
|
|
|
2.40
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life of options
|
|
|
10 years
|
|
|
|
10 years
|
|
|
|
10 years
|
|
In general, the options vest over the contractual period of the
consulting arrangement and, therefore, the Company will revalue
the options periodically and record additional compensation
expense related to these options over the remaining vesting
period. During the years ended December 31, 2006, 2005 and
2004, compensation expense related to these options was $83,000,
$92,000 and $53,000, respectively.
Stock
Option Activity
The following is a summary of option activity for the years
ended December 31 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Shares Available
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Balance at December 31, 2003
|
|
|
1,541,248
|
|
|
|
710,470
|
|
|
$
|
0.74
|
|
Options granted
|
|
|
(942,453
|
)
|
|
|
942,453
|
|
|
$
|
2.18
|
|
Options exercised
|
|
|
|
|
|
|
(223,700
|
)
|
|
$
|
0.64
|
|
Options cancelled
|
|
|
5,715
|
|
|
|
(5,715
|
)
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
604,510
|
|
|
|
1,423,508
|
|
|
$
|
1.71
|
|
Options authorized
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(877,606
|
)
|
|
|
877,606
|
|
|
$
|
8.48
|
|
Options exercised
|
|
|
|
|
|
|
(272,113
|
)
|
|
$
|
0.93
|
|
2001 Plan shares expired
|
|
|
(443,998
|
)
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
7,725
|
|
|
|
(7,725
|
)
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,290,631
|
|
|
|
2,021,276
|
|
|
$
|
4.75
|
|
Options granted
|
|
|
(1,068,105
|
)
|
|
|
1,068,105
|
|
|
$
|
16.59
|
|
Options exercised
|
|
|
|
|
|
|
(77,079
|
)
|
|
$
|
2.36
|
|
2001 Plan shares expired
|
|
|
(35,589
|
)
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
71,499
|
|
|
|
(71,499
|
)
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
3,258,436
|
|
|
|
2,940,803
|
|
|
$
|
9.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of stock options exercised during 2006, 2005
and 2004 was $948,000 $942,000 and $160,000 respectively. The
estimated fair value of options vesting in 2006, 2005 and 2004
was $2.7 million, $1.6 million and $436,000,
respectively.
76
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information concerning
outstanding and exercisable options under the 2001 and 2005
Plans as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Options Exercisable
|
|
Exercise
|
|
Number
|
|
|
Years Remaining
|
|
|
Weighted-Average
|
|
|
Number
|
|
|
Weighted-Average
|
|
Price Range
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$0.58 - $1.33
|
|
|
582,609
|
|
|
|
6.61
|
|
|
$
|
1.10
|
|
|
|
403,319
|
|
|
$
|
1.01
|
|
$2.88 - $2.88
|
|
|
516,773
|
|
|
|
8.02
|
|
|
$
|
2.88
|
|
|
|
239,007
|
|
|
$
|
2.88
|
|
$3.17 - $3.17
|
|
|
69,348
|
|
|
|
2.92
|
|
|
$
|
3.17
|
|
|
|
34,674
|
|
|
$
|
3.17
|
|
$9.39 - $9.39
|
|
|
610,209
|
|
|
|
8.92
|
|
|
$
|
9.39
|
|
|
|
148,059
|
|
|
$
|
9.39
|
|
$9.55 - $17.24
|
|
|
487,409
|
|
|
|
8.85
|
|
|
$
|
12.14
|
|
|
|
35,429
|
|
|
$
|
10.51
|
|
$18.89 - $22.45
|
|
|
674,455
|
|
|
|
9.92
|
|
|
$
|
18.93
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,940,803
|
|
|
|
|
|
|
|
|
|
|
|
860,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the aggregate intrinsic value of the
outstanding options was $28.2 million and the aggregate
intrinsic value of the exercisable options was
$13.1 million. The weighted-average remaining contractual
life for exercisable options was 7.11 years.
Deferred
Stock-based Compensation
During 2004, stock options were granted with exercise prices
that were equal to the estimated fair value of the common stock
on the date of grant as determined by the Board of Directors.
Subsequent to the commencement of the initial public offering
process, the Company reassessed the fair value of its common
stock and determined that options granted from January 2004
through September 2005 were granted at exercise prices that were
below the reassessed fair value of the common stock on the date
of grant. Accordingly, deferred stock-based compensation of
$3.6 million was recorded during 2004 in accordance with
APB 25 and presented as a separate component of
stockholders equity. In the year ended December 31,
2005, an additional $917,000 of deferred stock-based
compensation was recorded. The Company recorded stock-based
compensation expense of $1.1 million and $191,000, for the
years ended December 31, 2005 and 2004, respectively.
In accordance with the provisions of SFAS 123R, on
January 1, 2006 the Company reversed the balance in
deferred compensation to additional paid-in capital on its
balance sheet.
|
|
Note 10.
|
Related
Party Transactions
|
During 2000 and 2001 Incyte Corporation purchased shares of the
Companys Series A Preferred Stock and Series C
Preferred Stock for an aggregate purchase price of
$6.0 million. The Company has two active agreements with
Incyte that were entered into in March 2001 in connection with
the sale of convertible preferred stock to Incyte; a LifeSeq
collaborative agreement and a patent license agreement. The
Company also entered into a collaboration and technology
transfer agreement with Incyte and a Proteome BioKnowledge
Library license agreement with Proteome, Inc., a then wholly
owned subsidiary of Incyte, both of which have been terminated.
Under these agreements, the Company paid Incyte database access
fees of $1.0 million in 2004 and incurred royalties expense
of $2,000, $48,000 and $270,000 in 2004, 2005 and 2006,
respectively.
In connection with the completion of the Companys initial
public offering on October 4, 2005, Incytes shares of
the Companys preferred stock were converted into common
stock. Additionally, in connection with its initial public
offering, the Company exercised an election under which Incyte
was required to acquire an additional $5.0 million of the
Companys common stock. One of the Companys directors
is also director of Incyte and holds shares, directly or
beneficially, of both companies. As of December 31, 2006,
Incyte had completely divested its holdings in the
Companys common stock.
77
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has not recognized a provision for income taxes for
any of the periods presented because the Company has incurred
operating losses to date.
As of December 31, 2006 and 2005, the Company had deferred
tax assets of approximately $50.7 million and
$39.4 million, respectively. Realization of the deferred
tax assets is dependent upon future taxable income, if any, the
amount and timing of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation
allowance. The net valuation allowance increased by
approximately $11.3 million, $12.3 million and
$10.1 million during the years ended December 31,
2006, 2005 and 2004, respectively. Deferred tax assets primarily
relate to net operating loss and tax credit carryforwards.
The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
45,503
|
|
|
$
|
36,157
|
|
Capitalized costs
|
|
|
1,310
|
|
|
|
1,428
|
|
Research tax credits
|
|
|
2,684
|
|
|
|
1,871
|
|
Other
|
|
|
1,170
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
50,667
|
|
|
|
39,360
|
|
Valuation allowance
|
|
|
(50,667
|
)
|
|
|
(39,360
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company had federal and state
net operating loss carryforwards of approximately
$114.2 million and $111.1 million, respectively, and
federal and state research and development tax credit
carryforwards of approximately $1.6 million and
$1.6 million, respectively. The net operating loss and tax
credit carryforwards will expire at various dates beginning in
2013 if not utilized.
Utilization of the net operating loss and tax credit
carryforwards may be subject to a substantial annual limitation
due to ownership change limitations defined by the Internal
Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net
operating losses and credits before utilization.
|
|
Note 12.
|
Subsequent
Events
|
In January 2007, the Company entered into a non-cancelable lease
for an additional 48,000 square feet of laboratory and
office space near the location the Company currently occupies.
The lease has a term of six years and includes lease incentive
obligations of $420,000, which are being amortized on a
straight-line basis over the life of the lease. Under the new
lease, the Company is required to make aggregate rent payments
of $375,000 in 2007, $595,000 in 2008, $741,000 in 2009,
$835,000 in 2010 and $1.0 million in 2011 and thereafter.
In connection with this lease, the Company paid a cash security
deposit of $151,000.
78
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table contains selected unaudited statement of
operations information for each of the quarters in 2006 and
2005. 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)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue(1)
|
|
$
|
5,060
|
|
|
$
|
8,379
|
|
|
$
|
7,119
|
|
|
$
|
8,616
|
|
Net loss
|
|
|
(6,830
|
)
|
|
|
(4,915
|
)
|
|
|
(8,180
|
)
|
|
|
(8,995
|
)
|
Basic and diluted net loss per
common share
|
|
$
|
(0.28
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.37
|
)
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
442
|
|
|
$
|
1,243
|
|
|
$
|
1,592
|
|
|
$
|
1,925
|
|
Net loss
|
|
|
(7,586
|
)
|
|
|
(8,113
|
)
|
|
|
(7,445
|
)
|
|
|
(8,217
|
)
|
Basic and diluted net loss per
common share
|
|
$
|
(3.85
|
)
|
|
$
|
(4.07
|
)
|
|
$
|
(3.42
|
)
|
|
$
|
(0.34
|
)
|
The increases in revenue in first and second quarters of 2006
were attributable to increased demand for Oncotype DX
following clinical presentations at major symposia in December
2005 and February 2006, as well as the May 2006 publication of
two peer-reviewed articles supporting the use and reimbursement
of Oncotype DX. In addition, several third-party payors,
including National Heritage Insurance Company (NHIC), the local
Medicare carrier for California with jurisdiction for claims
submitted by the Company for Medicare patients, issued positive
coverage determinations for the test.
Per share amounts for the quarters and full year have been
calculated separately. Accordingly quarterly amounts may not add
to the annual amount because of differences in the
weighted-average common shares outstanding during each period
principally due to the effect of the Companys issuing
shares of its common stock during the year. Basic and diluted
net loss per share decreased significantly from the third
quarter of 2005 to the fourth quarter of 2005 due to the
increase in outstanding common stock resulting from the
Companys initial public offering on September 28,
2005.
Basic and diluted net loss per common share are identical as
common equivalent shares are excluded from the calculation
because their effect is anti-dilutive.
79
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosure.
|
Not applicable.
|
|
ITEM 9A.
|
Controls
and
Procedures.
|
(a) Evaluation of disclosure controls and
procedures. We maintain disclosure controls
and procedures, as such term is defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act,
that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is
accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Our disclosure controls and procedures have been designed to
meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily
was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions.
Based on their evaluation as of the end of the period covered by
this Annual Report on
Form 10-K,
our chief executive officer and chief financial officer have
concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
(b) Managements Annual Report on Internal Control
over Financial Reporting. Our management is
responsible for establishing and maintaining internal control
over our financial reporting. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation
of the effectiveness of internal control to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2006. In making this
assessment, 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,
management concluded that, as of December 31, 2006, our
internal control over financial reporting was effective. Our
independent registered public accounting firm, Ernst &
Young LLP, audited the consolidated financial statements
included in this Annual Report on
Form 10-K
and have issued an audit report on managements assessment
of our internal control over financial reporting as well as on
the effectiveness our internal control over financial reporting.
The report on the audit of internal control over financial
reporting appears on page 59.
(b) 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
80
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 2007 Annual Meeting of Stockholders to be held on
June 12, 2007, or Proxy Statement. Certain information
required by this item concerning executive officers is set forth
in Part I of this Report under the caption Executive
Officers of the Registrant and is incorporated herein by
reference.
Item 405 of
Regulation S-K
calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16(a) of the
Exchange Act. This disclosure is contained in the section
entitled Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement and is incorporated
herein by reference.
We have adopted a Code of Business Conduct that applies to all
of our officers and employees, including our Chief Executive
Officer, President and Chief Operating Officer, Chief Financial
Officer and other employees who perform financial or accounting
functions. The Code of Business Conduct sets forth the basic
principles that guide the business conduct of our employees. We
have also adopted a Senior Financial Officers Code of
Ethics that specifically applies to our Chief Executive Officer,
President and Chief Operating Officer, Chief Financial Officer,
and key management employees. Stockholders may request a free
copy of our Code of Business Conduct and Ethics and our Senior
Financial Officers Code of Ethics by contacting Genomic
Health, Inc., Attention: CFO, 301 Penobscot Drive, Redwood City,
California 94063.
To date, there have been no waivers under our Code of Business
Conduct and Ethics or Senior Financial Officers Code of
Ethics. We intend to disclose future amendments to certain
provisions of our Code of Business Conduct and Ethics or Senior
Financial Officers Code of Ethics or any waivers, if and
when granted, of our Code of Business Conduct and Ethics or
Senior Financial Officers Code of Ethics on our website at
http://www.genomichealth.com within four business
days following the date of such amendment or waiver.
Our Board of Directors has appointed an Audit Committee,
comprised of Mr. Randall S. Livingston, as Chairman,
Mr. Samuel D. Colella and Mr. Michael D. Goldberg. The
Board of Directors has determined that Mr. Livingston
qualifies as an Audit Committee Financial Expert under the
definition outlined by the Securities and Exchange Commission.
In addition, each of the members of the Audit Committee
qualifies as an independent director under the
current rules of the NASDAQ Global Market and Securities and
Exchange Commission rules and regulations.
|
|
ITEM 11.
|
Executive
Compensation.
|
The information required by this item is incorporated by
reference from the information under the captions Election
of Directors Compensation of Directors and
Executive Compensation contained in the Proxy
Statement.
|
|
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 caption Security
Ownership of Certain Beneficial Owners and Management
contained in the Proxy Statement.
Information about securities authorized for issuance under our
equity compensation plans appears under the caption Equity
Compensation Plan Information in the Proxy Statement. That
portion of the Proxy Statement is incorporated by reference into
this report.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is incorporated by
reference from the information under the caption Certain
Relationships and Related Transactions contained in the
Proxy Statement.
81
|
|
ITEM 14.
|
Principal
Accounting Fees and
Services.
|
The information required by this item is incorporated by
reference from the information under the caption Principal
Accountant Fees and Services contained in the Proxy
Statement.
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules.
|
|
|
(a)
|
Documents
filed as part of this report:
|
(1) Financial Statements
Reference is made to the Index to Consolidated Financial
Statements of Genomic Health under Item 8 of Part II
hereof.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they
are not applicable or not required or because the information is
included elsewhere in the Consolidated Financial Statements or
the Notes thereto.
(3) Exhibits
See Item 15(b) below. Each management contract or
compensatory plan or arrangement required to be filed has been
identified.
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
3(i)
|
|
|
Restated Certificate of
Incorporation of the Company (incorporated by reference to
exhibit 3.3 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
3(ii)
|
|
|
Amended and Restated Bylaws of the
Company, as amended April 27, 2006 (incorporated by
reference to exhibit 3(ii) to the Companys Current
Report on
Form 8-K
filed on May 2, 2006.
|
|
4.1
|
|
|
Specimen Common Stock Certificate
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
4.2
|
|
|
Amended and Restated
Investors Rights Agreement, dated February 9, 2004
between the Company and certain of its stockholders
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.1#
|
|
|
Form of Indemnification Agreement
between the Company and its officers and directors (incorporated
by reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.2#
|
|
|
2001 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1
(File No.
333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.3#
|
|
|
2005 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1
(File
333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.4.1
|
|
|
Sublease Agreement dated
June 1, 2001 between the Company and Corixa Corporation
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.4.2
|
|
|
First Amendment to Sublease
Agreement dated October 29, 2003 between the Company and
Corixa Corporation (incorporated by reference to the exhibit of
the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
82
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
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.
|
|
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.
|
|
21.1
|
|
|
List of Subsidiaries (incorporated
by reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
23.1*
|
|
|
Consent of Ernst & Young
LLP, independent registered public accounting firm.
|
|
24.1*
|
|
|
Power of Attorney (see
page 84 of this
Form 10-K).
|
|
31.1*
|
|
|
Rule 13a 14(a)
Certification of Chief Executive Officer.
|
|
31.2*
|
|
|
Rule 13a 14(a)
Certification of the Chief Financial Officer.
|
|
32.1**
|
|
|
Statement of the Chief Executive
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
32.2**
|
|
|
Statement of the Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release Nos.
33-8238 and
34-47986,
Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing
under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by
reference. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements. |
|
# |
|
Indicates management contract or compensatory plan or
arrangement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.
|
|
(c)
|
Financial
Statements and Schedules
|
Reference is made to Item 15(a)(2) above.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GENOMIC HEALTH, INC.
Randal W. Scott, Ph.D.
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: March 16, 2007
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Randal W.
Scott, Kimberly J. Popovits and G. Bradley Cole, and each of
them, his true and lawful
attorneys-in-fact,
each with full power of substitution, for him or her in any and
all capacities, to sign any amendments to this report on
Form 10-K
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said
attorneys-in-fact
or their substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Randal
W. Scott
Randal
W. Scott, Ph.D.
|
|
Chief Executive Officer and
Chairman of the Board (Principal Executive Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ G.
Bradley Cole
G.
Bradley Cole
|
|
Executive Vice President and Chief
Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Kimberly
J. Popovits
Kimberly
J. Popovits
|
|
President, Chief Operating Officer
and Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Julian
C. Baker
Julian
C. Baker
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Brook
H. Byers
Brook
H. Byers
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Fred
E. Cohen
Fred
E. Cohen, MD., Ph.D.
|
|
Director
|
|
March 15, 2007
|
84
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Samuel
D. Colella
Samuel
D. Colella
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Michael
D. Goldberg
Michael
D. Goldberg
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Randall
S. Livingston
Randall
S. Livingston
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Woodrow
A. Myers
Woodrow
A. Myers Jr., MD
|
|
Director
|
|
March 15, 2007
|
85
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
3
|
(i)
|
|
Restated Certificate of
Incorporation of the Company (incorporated by reference to
exhibit 3.3 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
3
|
(ii)
|
|
Amended and Restated Bylaws of the
Company, as amended April 27, 2006 (incorporated by
reference to exhibit 3(ii) to the Companys Current
Report on
Form 8-K
filed on May 2, 2006).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
4
|
.2
|
|
Amended and Restated
Investors Rights Agreement, dated February 9, 2004
between the Company and certain of its stockholders
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.1#
|
|
Form of Indemnification Agreement
between the Company and its officers and directors (incorporated
by reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(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.
|
|
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.
|
|
21
|
.1
|
|
List of Subsidiaries (incorporated
by reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
23
|
.1*
|
|
Consent of Ernst & Young
LLP, independent registered public accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (see
page 84 of this
Form 10-K).
|
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
31
|
.1*
|
|
Rule 13a 14(a)
Certification of Chief Executive Officer.
|
|
31
|
.2*
|
|
Rule 13a 14(a)
Certification of the Chief Financial Officer.
|
|
32
|
.1**
|
|
Statement of the Chief Executive
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
32
|
.2**
|
|
Statement of the Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release Nos.
33-8238 and
34-47986,
Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing
under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by
reference. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements. |
|
# |
|
Indicates management contract or compensatory plan or
arrangement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.