e424b4
PROSPECTUS
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-126626
5,016,722 Shares
Common Stock
This is an initial public offering of shares of common stock by
Genomic Health, Inc. We are offering 5,016,722 shares of
our common stock. No public market currently exists for our
common stock.
Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol GHDX.
This investment involves risk. See Risk
Factors beginning on page 7.
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Per Share | |
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Total | |
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Initial Public Offering Price
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$ |
12.00 |
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$ |
60,200,664 |
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Underwriting Discount
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$ |
0.882 |
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$ |
4,424,749 |
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Proceeds to Genomic Health, Inc. (before expenses)
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$ |
11.118 |
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$ |
55,775,915 |
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We have granted the underwriters a 30-day option to purchase up
to an additional 752,508 shares from us on the same terms
and conditions as set forth above if the underwriters sell more
than 5,016,722 shares of common stock in this offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares on or about
October 4, 2005.
Joint Book-Running
Managers
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Piper Jaffray |
Thomas Weisel Partners LLC |
JMP
Securities
September 28, 2005
individualized
treatment decision physician orders test sample tracking pathology review RNA processing
automated multi-gene analysis quantitative readout patient report
reimbursement support |
TABLE OF CONTENTS
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F-1 |
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You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any person to provide you with different information.
This prospectus is not an offer to sell, nor is it an offer to
buy, these securities in any state where the offer or sale is
not permitted. The information in this prospectus is complete
and accurate as of the date on the front cover, but the
information may have changed since that date.
Without limitation to the other restrictions referred to herein,
this communication is directed only at (i) persons outside
the United Kingdom; (ii) persons having professional
experience in matters relating to investments who fall within
the definition of investment professionals in
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005; or (iii) high net
worth bodies corporate, unincorporated associations and
partnerships and trustees of high value trusts as described in
Article 49(2) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005. Without limitation to the
other restrictions referred to herein, any investment or
investment activity to which this communication relates is
available only to, and will be engaged in only with, the persons
referred to in (i)-(iii) above, and persons within the United
Kingdom who receive this communication (other than persons who
fall within (ii) or (iii) above) should not rely or
act upon this communication.
Until October 23, 2005 (25 days after the date of
this prospectus), all dealers that effect transactions in these
securities, whether or not participating in this offering, may
be required to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUMMARY
The items in the following summary are described in more
detail later in this prospectus. This summary provides an
overview of selected information and does not contain all of the
information you should consider. Therefore, you should also read
the more detailed information set out in this prospectus,
including the consolidated financial statements and related
notes appearing elsewhere in this prospectus, before investing
in our common stock. References in this prospectus to
we, us and our refer to
Genomic Health, Inc. unless the context requires otherwise.
GENOMIC HEALTH, INC.
Our Business
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 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. Our first commercial test is
focused on patients with early stage, node negative, or N-,
estrogen receptor positive, or ER+, breast cancer who will be
treated with hormonal therapy. Approximately half of the 230,000
patients expected to be diagnosed with breast cancer in the
United States in 2005 are predicted to be early stage cancer
patients that are N-, ER+, and it is customarily recommended
that those patients be treated with hormonal therapy.
Many of the diagnostic factors currently used in connection with
early stage breast cancer are subjective. We believe these
factors have limited capability to predict future cancer
recurrence. Under current treatment regimens, a large percentage
of early stage breast cancer patients receive chemotherapy.
According to a National Surgical Adjuvant Breast and Bowel
Project, or NSABP, study published in 2004, the overall survival
at 12 years in early stage breast cancer patients using
only the hormonal therapy tamoxifen 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%. 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. 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 and by the College of
American Pathologists. In 2004, over 500 tests were ordered by
treating physicians. In December 2004, our validation study was
published in The New England Journal of Medicine and the
results of additional clinical trials were presented at the San
Antonio Breast Cancer Conference. In the six months ended
June 30, 2005, over 3,000 tests were ordered by treating
physicians. As of June 30, 2005, Oncotype DX has
been ordered by over 1,400 physicians throughout the United
States.
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. 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 chemotherapy
benefit, and we are undertaking further studies to support this
finding.
1
Oncotype DX has been clinically validated for N-, ER+,
tamoxifen-treated breast cancer patients by two large
independent studies. The first study, conducted with the NSABP
and published in The New England Journal of Medicine in
December 2004, demonstrated that the Recurrence Score quantifies
the likelihood of cancer recurrence in early stage breast cancer
patients receiving tamoxifen therapy. Patients in a pre-defined
low Recurrence Score group were more than four times less likely
to have a recurrence of breast cancer than patients in a
pre-defined high Recurrence Score group (p-value<0.001, or
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. The second
study, conducted with Northern California Kaiser Permanente in a
community hospital setting and reported at the San Antonio
Breast Cancer Conference in December 2004, demonstrated that the
Recurrence Score correlates with breast cancer survival at
10 years. 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). An
additional study, which was conducted with the NSABP,
demonstrated that the Recurrence Score predicts the likelihood
of chemotherapy benefit. This study was 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 in May 2005.
We are using the clinical development platform that we created
in connection with Oncotype DX to build a product
pipeline. Our products under research and development include a
second generation product in N-, ER+ breast cancer, as well as
tests that can be utilized in N+ breast cancer patients and
tests that can be used to predict responsiveness to other
current treatments such as specific types of chemotherapies. We
are also conducting research on colon, prostate, renal cell and
lung cancers and melanoma. Over 550,000 treatment decisions are
expected to be made in the United States in 2005 for patients
diagnosed with early stages of breast cancer and these cancers.
In addition, we plan to develop additional tests in
collaboration with pharmaceutical partners for targeted
therapies. For example, 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.
Revenues for clinical laboratory testing services 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, and patients.
As a relatively new test, Oncotype DX may be considered
investigational by payors and not covered under their
reimbursement policies. Upon commercialization of Oncotype
DX, we began working with third-party payors to establish
reimbursement coverage policies. Currently, several regional
payors, including Harvard Pilgrim Health Care, Inc. and Highmark
Blue Cross Blue Shield, have issued policies supporting
reimbursement for our test. In addition, Kaiser Foundation
Health Plan, Inc. has entered into a national clinical
laboratory services agreement to reimburse us for
Oncotype DX tests performed for their patients. Where
policies are not in place, we pursue case-by-case reimbursement.
Through this process, as of June 30, 2005, over 180 payors
had reimbursed one or more Oncotype DX tests.
Our selling and marketing strategy targets the oncology
community, primarily medical and surgical oncologists. Our
direct sales approach focuses on the clinical and economic
benefits of Oncotype DX and the scientific validation
supporting our product. Our field staff has significant clinical
oncology selling and marketing experience from leading
biopharmaceutical, pharmaceutical and specialty reference
laboratory companies, and we promote our product through
marketing channels commonly used by the biopharmaceutical and
pharmaceutical industries, such as sponsored continuing medical
education, medical meeting participation and broad-based
publication of our scientific and economic data.
Our Solution
We believe that physicians and patients are currently making
crucial and expensive treatment decisions based on inadequate
and often subjective information with limited understanding of
the molecular profile of a
2
patients tumor. Our strategy is to identify treatment
decisions that can benefit from, and be guided by, each
patients individual genomic information.
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 methods and processes for screening hundreds of
genes at a time using minimal amounts of chemically preserved
tissue embedded in blocks of paraffin wax. 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
tumor recurrence or progression. 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 typically
analyze the tissue and deliver our results to the treating
physician within 10 to 14 days of receipt of the tissue
sample. This is within the crucial decision window after the
tumor has been surgically removed and before the patient and the
treating physician discuss additional treatment options.
We believe our solution provides information that has the
following benefits:
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Improved Quality of Treatment Decisions. We believe
our approach to genomic-based cancer analysis improves the
quality of cancer treatment decisions by providing an
individualized analysis of each patients tumor that is
correlated to clinical outcome. Our approach represents a
substantial departure from existing approaches to treatment,
which often use subjective, anatomic and qualitative factors to
determine treatments. Oncotype DX has been shown in
clinical studies to classify many patients into recurrence risk
categories different from classifications based on current
guidelines. Thus, our solution enables patients and physicians
to make more informed decisions about treatment risk-benefit
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 may cost in excess
of $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. |
Risks Associated With Our Business
Our business is subject to numerous risks, as more fully
described in the section entitled Risk Factors
immediately following this prospectus summary. We may be unable,
for many reasons, including those that are beyond our control,
to implement our current business strategy. Those reasons could
include failure to obtain reimbursement for Oncotype DX
from a sufficient number of third-party payors, regulation of
our test by the U.S. Food and Drug Administration, failure
to maintain and to protect our intellectual property assets, and
inability to maintain current collaborations or enter into new
collaborations with organizations in the cancer field.
We currently have only one product, which was first
commercialized in January 2004. We have incurred
$80.5 million in cumulative net losses from our inception
in 2000, and we expect losses to continue for the foreseeable
future. Our net loss for the six months ended June 30, 2005
was $15.7 million, and for the year ended December 31,
2004, was $25.0 million.
3
We do not anticipate commercializing another product for at
least several years, if at all. All of our product candidates
other than those for breast cancer are in the clinical research
phase. We are unable to predict the extent of future losses or
when we will become profitable, if at all. Even if we succeed in
developing and commercializing another product, we may never
generate sufficient product revenues to achieve and then sustain
profitability.
Private Share Sale to Incyte Corporation
Concurrent with the closing of this offering, we will exercise a
put right and cause Incyte Corporation to purchase from us in a
private sale $5.0 million of our common stock at a price
per share equal to the initial public offering price. At the
initial public offering price of $12.00 per share, Incyte will
purchase from us 416,666 shares of our common stock.
CORPORATE INFORMATION
We were incorporated in Delaware in August 2000. Our principal
executive offices are located at 301 Penobscot Drive, Redwood
City, California 94063, and our telephone number is
(650) 556-9300. Our website is
www.genomichealth.com. Information on our website is not
a part of this prospectus.
The Genomic Health logo and Oncotype are our registered
trademarks. We have applied to register our trademarks,
Oncotype DX and Recurrence Score, with the
U.S. Patent and Trademark Office. All other trademarks,
trade names and service marks appearing in this prospectus are
the property of their respective holders.
4
The Offering
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Common stock offered by us
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5,016,722 shares |
Common stock to be outstanding after this offering
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24,367,432 shares |
Initial public offering price per share
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$12.00 |
Use of proceeds
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We intend to use the net proceeds for general corporate
purposes, including working capital and capital expenditures.
See Use of Proceeds. |
Proposed Nasdaq symbol
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GHDX |
Unless otherwise stated, all information in this prospectus
assumes:
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a 1-for-3 reverse split of our common stock; |
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the automatic conversion of every three shares of our
convertible preferred stock into one share of common stock upon
the closing of this offering; |
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our distribution of 736,142 shares of our common stock
(based on shares outstanding as of August 31, 2005) as a
dividend to our stockholders prior to the date of this offering
and a proportional adjustment to options outstanding as of the
dividend distribution date to increase the aggregate number of
shares subject to exercise thereunder by
55,068 shares; and |
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no exercise of the over-allotment option granted to the
underwriters. |
The number of shares of common stock to be outstanding
immediately after this offering:
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includes 18,197,987 shares of common stock outstanding as
of August 31, 2005; |
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includes 736,142 shares of common stock issuable to our
stockholders of record prior to the date of this offering (based
on shares outstanding as of August 31, 2005), less an
aggregate of 85 shares for which cash will be paid in lieu
of fractional interests, in connection with the stock dividend
described above that we expect to make upon the closing of this
offering; |
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includes 416,666 shares that we will issue in a private sale to
Incyte Corporation concurrent with the closing of this offering
in connection with our exercise of a put right described
elsewhere in this prospectus; |
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excludes 1,416,206 shares of common stock issuable upon the
exercise of stock options outstanding as of August 31,
2005, at a weighted average exercise price of $1.91 per
share; and |
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excludes 5,000,000 shares of common stock available for
future issuance under our stock option plans following the date
of this offering. |
Several of our significant existing stockholders, including
funds affiliated with Julian C. Baker, Felix J. Baker and
Integral Capital Partners VI, L.P. or their affiliates, have
indicated an interest in purchasing up to an aggregate of
500,000 shares of our common stock in this offering, less any
shares sold to our employees pursuant to our directed share
program. However, because indications of interest are not
binding upon us or the prospective purchasers, these
stockholders may not acquire any shares in this offering.
5
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents our summary consolidated historical
financial information. You should read this information together
with the consolidated financial statements and related notes and
the information under Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this prospectus.
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Period from | |
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Six Months Ended | |
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August 22, 2000 | |
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Year Ended December 31, | |
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June 30, | |
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(inception) to | |
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Dec. 31, 2000 | |
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2001 | |
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2002 | |
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2003 | |
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2004 | |
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2004 | |
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2005 | |
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(In thousands, except share and per share data) | |
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(Unaudited) | |
Consolidated Statements of Operations Data:
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Revenues:
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Product revenues
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$ |
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$ |
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$ |
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$ |
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$ |
227 |
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$ |
33 |
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$ |
1,585 |
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Contract revenues
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125 |
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100 |
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|
100 |
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Total revenues
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125 |
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327 |
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33 |
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1,685 |
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Operating expenses(1):
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Cost of product revenues
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1,828 |
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931 |
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2,874 |
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Research and development
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|
169 |
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11,080 |
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7,053 |
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9,069 |
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10,040 |
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5,182 |
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4,630 |
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Selling and marketing
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117 |
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754 |
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2,805 |
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9,856 |
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4,449 |
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7,415 |
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General and administrative
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|
566 |
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2,844 |
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3,753 |
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3,686 |
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|
3,869 |
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|
1,832 |
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2,787 |
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|
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Total operating expenses
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|
735 |
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|
14,041 |
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11,560 |
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15,560 |
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25,593 |
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12,394 |
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17,706 |
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Interest and other income (expense), net
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1,267 |
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|
492 |
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|
185 |
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|
|
271 |
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|
98 |
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|
322 |
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Net loss
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$ |
(735 |
) |
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$ |
(12,774 |
) |
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$ |
(11,068 |
) |
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$ |
(15,250 |
) |
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$ |
(24,995 |
) |
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$ |
(12,263 |
) |
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$ |
(15,699 |
) |
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Basic and diluted net loss per share
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$ |
(10.10 |
) |
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$ |
(20.14 |
) |
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$ |
(11.95 |
) |
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$ |
(12.43 |
) |
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$ |
(14.38 |
) |
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$ |
(7.26 |
) |
|
$ |
(8.28 |
) |
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Shares used in computing basic and diluted net loss per share
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72,777 |
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|
634,415 |
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925,814 |
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|
|
1,226,444 |
|
|
|
1,737,652 |
|
|
|
1,687,964 |
|
|
|
1,895,625 |
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|
(1) |
Includes non-cash charges for stock-based compensation expense
of $191,000, $9,000 and $509,000 for the year ended
December 31, 2004 and the six months ended June 30,
2004 and 2005, respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
Pro Forma | |
|
As Adjusted | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
25,231 |
|
|
$ |
25,231 |
|
|
$ |
84,207 |
|
Working capital
|
|
|
23,306 |
|
|
|
23,306 |
|
|
|
82,282 |
|
Total assets
|
|
|
30,832 |
|
|
|
30,832 |
|
|
|
89,808 |
|
Capital leases, long-term
|
|
|
2,483 |
|
|
|
2,483 |
|
|
|
2,483 |
|
Convertible preferred stock
|
|
|
103,212 |
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(79,228 |
) |
|
|
23,984 |
|
|
|
82,960 |
|
The preceding table presents a summary of our unaudited
consolidated balance sheet data as of June 30, 2005:
|
|
|
|
|
on an actual basis; |
|
|
|
on a pro forma basis to give effect to the automatic conversion
of all outstanding shares of our convertible preferred stock
into common stock upon the closing of this offering; and |
|
|
|
on a pro forma as adjusted basis to give effect to the sale of
5,016,722 shares of our common stock in this offering at
the initial public offering price of $12.00 per share,
after deducting the underwriting discount and estimated offering
expenses payable by us, and the sale of 416,666 shares of
common stock to Incyte Corporation for cash proceeds of
$5.0 million in connection with our exercise of a put
right, at a purchase price equal to the initial public offering
price of $12.00 per share. |
6
RISK FACTORS
You should carefully consider the risks described below
before making a decision to buy our common stock. The risks and
uncertainties described below are not the only ones we face. If
any of the following risks actually occur, our business,
financial condition and results of operations could be harmed.
In that case, the trading price of our common stock could
decline and you might lose all or part of your investment in our
common stock. You should also refer to the other information set
forth in this prospectus, including our consolidated financial
statements and the related notes. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial may also impair our business operations.
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 years ended December 31, 2002, 2003 and 2004 and the
six months ended June 30, 2005, we had a net loss of
$11.1 million, $15.3 million, $25.0 million and
$15.7 million, respectively. From our inception in August
2000 through June 30, 2005, we had an accumulated deficit
of approximately $80.5 million. To date, we have generated
only minimal revenues, and we may never achieve revenues
sufficient to offset expenses. We expect to devote substantially
all of our resources to continue commercializing our existing
product, Oncotype DX, and to develop future products.
We expect to incur additional losses this year and 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 $7.1 million,
$9.1 million and $10.0 million for the years ended
December 31, 2002, 2003 and 2004, respectively, and
$4.6 million for the six months ended June 30, 2005.
We expect our research and development expense levels to remain
high for the foreseeable future as we seek to enhance our
existing product and develop new products. 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 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, 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. From commercialization of
Oncotype DX in January 2004 through June 30, 2005,
approximately 90% of our revenues derived from the sale of
Oncotype DX have been paid by third-party payors.
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. |
7
Since each payor makes its own decision as to whether to
establish a policy to reimburse for a test, seeking these
approvals is a time-consuming and costly process. To date, we
have secured policy-level reimbursement approval only from a
limited number of third-party payors and have not secured any
such approval from Medicare or any state Medicaid program. We
cannot assure you that coverage for Oncotype DX will be
provided in the future by any third-party payors.
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 did 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.
In addition, in December 2004, the Northern California Medicare
contractor with responsibility for processing and paying claims
submitted by us announced that it would not provide coverage for
Oncotype DX for Medicare beneficiaries. It also indicated
that there could be some questions concerning whether the
hospital must bill Medicare or we can bill Medicare directly.
Finally, it questioned which Medicare contractor has
jurisdiction to determine coverage for Medicare claims for our
test. Any determination that our test constitutes a hospital
service as opposed to an outpatient procedure could result in
lower payment rates in the event reimbursement is provided.
Insurers, including managed care organizations, as well as
government payors, such as Medicare, have increased their
efforts to control the cost, utilization and delivery of health
care services. From time to time, Congress has considered and
implemented changes in the Medicare fee schedules in conjunction
with budgetary legislation. Further reductions of reimbursement
for Medicare services may be implemented from time to time.
Reductions in the reimbursement rates of other third-party
payors have occurred and may occur in the future. These measures
have resulted in reduced prices, added costs and decreased test
utilization for the clinical laboratory industry. 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.
If the U.S. Food and Drug Administration, or FDA, were to
begin regulating our products, we could be forced to stop sales
of Oncotype DX, we could experience significant delays in
commercializing any future products, or we could incur
substantial costs and time delays associated with meeting
requirements for premarket approval.
Clinical laboratory services like Oncotype DX are
regulated under the Clinical Laboratory Improvement Amendments
of 1988, or CLIA, as administered through the Center for
Medicare/ Medicaid Services, as well as by applicable state
laws. Diagnostic kits that are sold and distributed as products
through interstate commerce are regulated as medical devices by
the FDA. Clinical laboratory tests that are developed and
validated by a laboratory for its own use are called home brew
tests. Most home brew tests currently are not subject to FDA
regulation, although reagents or software provided by third
parties and used to perform home brew tests may be subject to
regulation. We believe that Oncotype DX is not a
diagnostic kit and also believe that it is a home brew test. As
a result, we believe Oncotype DX is not subject to
regulation under current 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 premarket review by the
FDA.
In December 2004, the FDA, through the Office of In Vitro
Diagnostic Devices, or OIVD, initiated a dialogue with us
regarding the regulatory status of Oncotype DX. We
subsequently engaged in informal communications with the FDA
regarding the status of our test. In early 2005, OIVD indicated
that the FDA is considering whether our test may be subject to
premarket review. We have not heard from the FDA since this
communication. We cannot provide any assurance that the FDA will
agree with our view on whether Oncotype DX is subject to
regulation or that FDA regulation, including review by the FDA
before marketing, will not be required in the future for
Oncotype DX.
8
If review by the FDA before marketing is required, we might have
to stop selling our test until a review is completed and
approval or clearance to market is obtained. In this case, the
regulatory approval process could involve, among other things,
successfully completing additional clinical trials and
submitting a premarket clearance notice or filing a premarket
approval application with the FDA. There is no assurance that
the FDA would clear or approve our test. Ongoing compliance with
FDA regulations would increase the cost, time and complexity of
conducting our business. In addition, should any of the clinical
laboratory device reagents, software or the tumor sample
container used in or for our home brew test be affected by
future regulatory actions, we could experience increased costs
of testing or delays and limitations or unavailability of the
reagents or software necessary to perform testing. If we are
unable to obtain the reagents necessary to perform our test at
all or on commercially reasonable terms, we would need to revise
Oncotype DX so that it would not require those reagents.
Even if we were able to revise Oncotype DX so that it
would not require those reagents, we would then be required to
re-validate our test before using it, which would be
time-consuming and expensive.
If we were required to conduct additional clinical trials
prior to marketing our products, those trials could lead to
delays or failure to obtain necessary regulatory approvals and
harm our ability to become profitable.
If the FDA decides to regulate our tests, it would require
extensive premarket clinical testing prior to submitting a
regulatory application for commercial sales. If we are required
to conduct premarket clinical trials, whether using
prospectively acquired samples or archival samples, delays in
the commencement or completion of clinical testing could
significantly increase our product development costs and delay
product 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
approval for our products. 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 product, 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, 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, and we expect that we will be inspected within
the next nine months. 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
9
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. |
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 product,
Oncotype DX, and we will need to generate sufficient revenues
from this and other products to run our business.
For the foreseeable future, we expect to derive substantially
all of our revenues from sales of one product, Oncotype
DX. We have only been selling this test since January 2004.
We are in the early stages of research and development for other
products that we may offer as well as for enhancements to our
existing product. We are not currently able to estimate when we
may be able to commercialize products 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 products or product enhancements, our
revenues and our ability to achieve profitability would be
impaired, and the market price of our common stock could decline.
We may experience limits on our revenues if only a small
number of physicians decide to adopt 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,
based on our clinical trial results, that 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
10
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 only a small
number of patients decide 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 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, 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 tests to new treatments,
then sales of our tests 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 tests. In return for the use of a
third partys technology, we may agree to pay the licensor
royalties based on sales of our products. Royalties are a
component of cost of product revenues and impact the margin on
our tests. We may need to license other technology to
commercialize future products. Our business may suffer if these
licenses terminate, if the licensors fail to abide by the terms
of the license or fail to prevent infringement by third parties,
if the licensed patents or other rights are found to be invalid
or if we are unable to enter into necessary licenses on
acceptable terms.
Our competitive position depends on maintaining
intellectual property protection.
Our ability to compete and to achieve and maintain profitability
depends on our ability to protect our proprietary discoveries
and technologies. We currently rely on a combination of patent
applications, copyrights, trademarks, trade secret laws and
confidentiality agreements, material data transfer agreements,
license agreements and invention assignment agreements to
protect our intellectual property rights. We also rely upon
unpatented know-how and continuing technological innovation to
develop and maintain our competitive position.
We do not have any issued patents. Our pending patent
applications may not result in issued patents, and we cannot
assure you that 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
11
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.
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.
From time to time, we may receive notices of claims of
infringement, misappropriation or misuse of other parties
proprietary rights. 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 test or using technology that contains the allegedly
infringing intellectual property, which could harm our business.
One of the genes in the Oncotype DX 21-gene panel may be
the subject of a patent, the rights of which are exclusively
licensed by a subsidiary of Pfizer Inc. We have initiated
discussions with Pfizer regarding a license of the patent but
have not reached an agreement. If we are not able to negotiate a
license on acceptable terms, and if our test is determined to
infringe this patent, then we may be forced to develop an
alternate method for performing our test. Revising our test may
take more than a year and may require that we spend considerable
amounts of money to develop a non-infringing gene panel and to
validate our findings through a clinical study or studies. We
may be forced to pay Pfizer royalties, damages and costs, or we
may be prevented from selling our test altogether, which would
greatly damage our business and operating results. Also, we are
aware of other patents owned by Pfizer that relate to another
gene in the Oncotype DX 21-gene panel and are currently
investigating whether any of the claims warrant a license. In
addition, there are a number of patents and patent applications
that may constitute prior art in the field of genomic-based
diagnostics. We may be required to pay royalties, damages and
costs to firms who own the rights to these patents, or we might
be restricted from using any of the inventions claimed in those
patents.
If we are unable to compete successfully, we may be unable
to increase or sustain our revenues or achieve
profitability.
Our principal competition comes from existing diagnostic methods
used by pathologists and oncologists. These methods have been
used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment
and kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like Oncotype DX that are performed
outside the pathology laboratory. In addition, few diagnostic
methods are as expensive as Oncotype DX.
We also face competition from companies, such as Agendia B.V.,
that offer products or have conducted research to profile gene
expression in breast cancer using fresh or frozen tissue.
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
12
segment of Applera Corporation, Roche Diagnostics, a division of
F. Hoffmann-La Roche Ltd, and Veridex LLC, a
Johnson & Johnson company, as well as academic and
research institutions.
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. 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 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. For example we have held discussions with the
National Cancer Institute regarding conducting a large clinical
study utilizing Oncotype DX. 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
13
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 product development involves a lengthy and complex
process, and we may be unable to commercialize any of the
products we are currently developing.
We have multiple products under development and devote
considerable resources to research and development. For example,
we are currently conducting research on the application of our
technology to predict recurrence and the therapeutic benefit of
chemotherapy in colon, prostate, renal cell and lung cancers and
melanoma. There can be no assurance that our technologies will
be capable of reliably predicting the recurrence of cancers,
beyond breast cancer, 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. |
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. |
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. The
efforts of each of these persons will be critical to us as we
continue to develop our technologies and testing processes and
as we attempt to transition to a company with more than one
commercialized product. If we were to lose one or more of these
key employees, we may experience difficulties in competing
effectively, developing our technologies and implementing our
business strategies.
Our research and development programs and commercial laboratory
operations depend on our ability to attract and retain highly
skilled scientists and technicians, including geneticists,
licensed laboratory technicians, chemists 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
14
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. We maintain key-person life insurance only on Randal
Scott, our Chief Executive Officer, Joffre Baker, our Chief
Scientific Officer, and Steven Shak, our Chief Medical Officer.
We may discontinue this insurance in the future, it may not
continue to be available on commercially reasonable terms or, if
continued, it may prove inadequate to compensate us for the loss
of these individuals services.
If our sole laboratory facility becomes inoperable, we
will be unable to perform our tests and our business will be
harmed.
We do not have redundant laboratory facilities. We perform all
of our diagnostic services 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 1993, the U.S. Congress passed federal
self-referral prohibitions commonly known as the Stark Law,
significantly restricting, regulating and changing healthcare
companies relationships with physicians. We cannot predict
what changes, if any, will be proposed or adopted or the effect
that such proposals or adoption may have on our business,
financial condition and results of operations.
We rely on a sole supplier for some of our laboratory
instruments and may not be able to find replacements in the
event our sole 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
15
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.
If we are unable to support demand for our products, our
business may suffer.
Since we only began the commercialization of Oncotype DX
in January 2004, we have limited experience in processing our
test and even more limited experience in processing large
volumes of tests. If demand for Oncotype DX increases, we
will be required 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
product 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 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.
16
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 products
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
currently depend on one third-party distributor to sell
Oncotype DX in Israel. 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 products 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 additional capital to, among
other things:
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sustain commercialization of our initial product or enhancements
to that product; |
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increasing our selling and marketing efforts to drive market
adoption and address competitive developments; |
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expand our clinical laboratory operations; |
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expand our technologies into other areas of cancer; |
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fund our clinical validation study activities; |
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expand our research and development activities; |
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acquire or license technologies; and |
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finance capital expenditures and our general and administrative
expenses. |
Our present and future funding requirements will depend on many
factors, including:
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the level of research and development investment required to
maintain and improve our technology position; |
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costs of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; |
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our need or decision to acquire or license complementary
technologies or acquire complementary businesses; |
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changes in product development plans needed to address any
difficulties in commercialization; |
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competing technological and market developments; and |
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changes in regulatory policies or laws that affect our
operations. |
If we raise additional 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
additional 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 additional 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 will be 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
of the Sarbanes-Oxley Act and other requirements will increase
our costs and require additional management resources. We
recently have been upgrading 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
new reporting requirements. If we are unable to complete the
required Section 404 assessment as to the adequacy of our
internal control over financial reporting, if we fail to
maintain or implement adequate controls, 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 as of the date of our first
Form 10-K for which compliance is required, 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.
18
RISKS RELATED TO OUR COMMON STOCK
Our operating results may fluctuate, which could cause our
stock price to decrease.
Fluctuations in our operating results may lead to fluctuations,
including declines, in our share price. Our operating results
and our share price may fluctuate from period to period due to a
variety of factors, including:
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demand by physicians and patients for Oncotype DX; |
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reimbursement decisions by third-party payors and announcements
of those decisions; |
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clinical trial results and publication of results in
peer-reviewed journals or the presentation at medical
conferences; |
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the inclusion or exclusion of our products in large clinical
trials conducted by others; |
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new or less expensive products and services or new technology
introduced or offered by our competitors or us; |
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the level of our development activity conducted for new
products, and our success in commercializing these developments; |
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the level of our spending on Oncotype DX
commercialization efforts, licensing and acquisition
initiatives, clinical trials, and internal research and
development; |
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changes in the regulatory environment, including any
announcement from the FDA regarding its decisions in regulating
our activities; |
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the impact of seasonality on our business; |
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changes in recommendations of securities analysts or lack of
analyst coverage; |
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failure to meet analyst expectations regarding our operating
results; |
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additions or departures of key personnel; and |
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general market conditions. |
Variations in the timing of our future revenues and expenses
could also cause significant fluctuations in our operating
results from period to period and may result in unanticipated
earning shortfalls or losses. In addition, the Nasdaq National
Market in general, and the market for life science companies in
particular, have experienced significant price and volume
fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies.
If an active, liquid trading market for our common stock
does not develop, you may not be able to sell your shares
quickly or at or above the initial offering price.
Prior to this offering, there has not been a public market for
our common stock. An active and liquid trading market for our
common stock may not develop or be sustained following this
offering. You may not be able to sell your shares quickly or at
or above the initial offering price if trading in our stock is
not active. The initial public offering price may not be
indicative of prices that will prevail in the trading market.
See Underwriting for more information regarding the
factors that were considered in determining the initial public
offering price.
Purchasers in this offering will experience immediate and
substantial dilution in the book value of their
investment.
The initial public offering price of our common stock is
substantially higher than the pro forma net tangible book value
per share of our common stock immediately after this offering.
In other words, you are paying a price per share that
substantially exceeds the value of our assets after subtracting
our liabilities. At the initial public offering price of $12.00
per share and the pro forma net tangible book value of our
common stock at June 30, 2005, your shares will be worth
$8.59 less per share than you will pay in the offering.
19
Further, investors participating in this offering will
contribute approximately 35.6% of the total amount invested by
stockholders since our inception but will only own approximately
20.7% of the total shares outstanding immediately after this
offering. The exercise of outstanding options will result in
further dilution of your investment. In addition, if we raise
funds by issuing additional shares, the newly issued shares will
further dilute your ownership interest.
We may allocate net proceeds from this offering in ways
with which you may not agree.
Our management will have broad discretion in using the proceeds
from this offering and may use the proceeds in ways with which
you may disagree. Because we are not required to allocate the
net proceeds from this offering to any specific investment or
transaction, you cannot determine at this time the value or
propriety of our application of the proceeds. Moreover, you will
not have the opportunity to evaluate the economic, financial or
other information on which we base our decisions on how to use
our proceeds. We may use the proceeds for corporate purposes
that do not immediately enhance our prospects for the future or
increase the value of your investment. As a result, you and
other stockholders may not agree with our decisions.
Future sales of shares by our stockholders could cause the
market price of our common stock to drop significantly, even if
our business is doing well.
After this offering, we will have outstanding
24,367,432 shares of common stock based on the number of
shares outstanding at August 31, 2005. This includes the
5,016,722 shares we are selling in this offering, which may
be resold in the public market immediately, other than any
shares sold to participants in our directed share program, which
are subject to a 180-day lockup. The remaining
19,350,710 shares will become available for resale in the
public market as shown in the chart below.
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Number of Restricted |
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Shares/% of Total Shares |
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Outstanding Following |
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Date of Availability for Resale into the Public Market |
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3,560,462/14.6% |
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180 days (subject to extension in specified circumstances)
after the date of this prospectus due to the release of the
lock-up agreement these stockholders have with the underwriters |
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15,790,248/64.8% |
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At some point after 180 days (subject to extension in
specified circumstances) after the date of this prospectus,
subject to vesting requirements and the requirements of Rule 144
(subject, in some cases, to volume limitations), Rule 144(k) or
Rule 701 |
At any time and without public notice, the underwriters may in
their sole discretion release all or some of the securities
subject to the lock-up agreements. As restrictions on resale
end, the market price of our stock could drop significantly if
the holders of those shares sell them or are perceived by the
market as intending to sell them. In addition, six months after
this offering, the holders of 17,579,758 shares of common
stock issued upon the conversion of our preferred stock may
require us to file a registration statement covering those
shares, which may also cause our stock price to decline. These
declines in our stock price could occur even if our business is
otherwise doing well.
If our principal stockholders, executive officers and
directors choose to act together, they may be able to control
our management and operations, which may prevent us from taking
actions that may be favorable to you.
Our executive officers, directors and principal stockholders,
and entities affiliated with them, will beneficially own in the
aggregate approximately 46.1% of our common stock following this
offering. To the extent our existing stockholders purchase
additional shares, in this offering or otherwise, this ownership
concentration would increase. This significant concentration of
share ownership may adversely affect the trading price of our
common stock because investors often perceive disadvantages in
owning stock in companies with controlling stockholders. These
stockholders, acting together, will have the ability to exert
substantial influence over all matters requiring approval by our
stockholders, including the election and removal of directors
and any proposed merger, consolidation or sale of all or
substantially all of our assets. In addition, they could dictate
the management of our business and affairs. This concentration
of ownership
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could have the effect of delaying, deferring or preventing a
change in control of us or impeding a merger or consolidation,
takeover or other business combination that could be favorable
to you.
We do not expect to pay dividends in the foreseeable
future. As a result, you must rely on stock appreciation for any
return on your investment.
We do not anticipate paying cash dividends on our common stock
in the foreseeable future. Any payment of cash dividends will
also depend on our financial condition, results of operations,
capital requirements and other factors and will be at the
discretion of our board of directors. Accordingly, you will have
to rely on capital appreciation, if any, to earn a return on
your investment in our common stock. Furthermore, we may in the
future become subject to contractual restrictions on, or
prohibitions against, the payment of dividends.
Anti-takeover provisions in our charter, bylaws and
Delaware law may make it difficult for you to change our
management and may also make a takeover difficult.
Our corporate documents and Delaware law contain provisions that
limit the ability of stockholders to change our management and
may also enable our management to resist a takeover. These
provisions include limitations on persons authorized to call a
special meeting of stockholders and advance notice procedures
required for stockholders to make nominations of candidates for
election as directors or to bring matters before an annual
meeting of stockholders. These provisions might discourage,
delay or prevent a change of control or in our management. These
provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors and
cause us to take other corporate actions. In addition, the
existence of these provisions, together with Delaware law, might
hinder or delay an attempted takeover other than through
negotiations with our board of directors.
21
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
risks and uncertainties. The forward-looking statements are
contained principally in the sections entitled Prospectus
Summary, Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Business. These statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements
to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking
statements. Forward-looking statements include, but are not
limited to, statements about:
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our expectation that, for the foreseeable future, substantially
all of our revenues will be derived from Oncotype DX; |
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our expectation that our research and development expense levels
will remain high as we seek to enhance Oncotype DX and
develop new products; |
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our dependence on collaborative relationships; |
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our compliance with federal, state and foreign regulatory
requirements; |
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the regulation of Oncotype DX by the FDA; |
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our plans to pursue reimbursement on a case-by-case basis; |
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our ability, and expectations as to the amount of time it will
take, to achieve successful reimbursement from third-party
payors, such as insurance companies and health maintenance
organizations, and government insurance programs, such as
Medicare and Medicaid; |
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increases in patient and physician demand resulting from our
direct sales approach; |
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plans for enhancements of our existing test, Oncotype DX,
to address different patient populations of breast cancer; |
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plans for future products addressing multiple cancers, including
colon, prostate, renal cell and lung cancers and melanoma; |
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the outcome or success of clinical trials; |
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the ability of genomics to change the diagnosis and treatment of
diseases such as cancer and thereby provide significant economic
benefits to the healthcare system; |
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the capacity of our laboratory to process tests; |
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the ability of our technology to screen increasing numbers of
genes in tissue samples; |
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our intellectual property and our strategies regarding filing
additional patent applications to strengthen our intellectual
property rights; |
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our expected stock-based compensation expense in future periods; |
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our anticipated cash needs and our estimates regarding our
capital requirements and our needs for additional
financing; and |
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anticipated trends and challenges in our business and the
markets in which we operate. |
In some cases, you can identify forward-looking statements by
terms such as may, might,
will, objective, intend,
should, could, can,
would, expect, believe,
estimate, predict,
potential, plan, or the negative of
these terms, and similar expressions intended to identify
forward-
22
looking statements. These statements reflect our current views
with respect to future events and are based on assumptions and
subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking
statements. We discuss many of these risks in this prospectus in
greater detail under the heading Risk Factors. Also,
these forward-looking statements represent our estimates and
assumptions only as of the date of this prospectus. Unless
required by U.S. federal securities laws, we do not intend
to update any of these forward-looking statements to reflect
circumstances or events that occur after the statement is made.
You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect. We
qualify all of our forward-looking statements by these
cautionary statements.
This prospectus 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.
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.
23
USE OF PROCEEDS
We expect that the net proceeds we will receive from the sale of
the shares of common stock offered by us will be approximately
$54.0 million, based on the initial public offering price
of $12.00 per share, after deducting the underwriting
discount and estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, we
expect that our net proceeds will be approximately
$62.3 million. We also will receive $5.0 million from
our private sale of common stock to Incyte Corporation.
We currently expect to use our net proceeds from this offering
as follows:
|
|
|
|
|
approximately $25.0 million to build our commercial capabilities
in selling and marketing related to Oncotype DX; |
|
|
|
approximately $20.0 million to fund research and development
programs for Oncotype DX and in a variety of cancers; |
|
|
|
approximately $8.0 million for capital expenditures to expand
facilities and laboratory operations capacity and for
information systems infrastructure; and |
|
|
|
the balance for working capital and other general corporate
purposes. |
As of the date of this prospectus, we cannot predict with
certainty all of the particular uses for the proceeds of this
offering or the amounts that we will actually spend on the uses
set forth above. 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. Accordingly, our
management will have significant flexibility in applying the net
proceeds of this offering. A portion of the net proceeds may
also be used to acquire or invest in complementary businesses,
technologies, services or products. We have no current plans,
agreements or commitments with respect to any such acquisition
or investment, and we are not currently engaged in any
negotiations with respect to any such transaction.
Pending use of the net proceeds as described above, we intend to
invest the net proceeds of this offering in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
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.
On September 8, 2005, our board of directors declared a
conditional dividend of 791,210 shares of our common stock,
which will be distributed upon the closing of this offering on a
pro rata basis to all of our stockholders of record as of the
date of this prospectus because the initial public offering
price of our common stock is $11.40 or greater. This conditional
dividend would not have been distributed if the initial public
offering price of our common stock had been lower than $11.40.
Our outstanding shares and stock options will be proportionately
adjusted as a result of this dividend. Based on our outstanding
stock options as of August 31, 2005, we will issue
approximately 736,142 shares pursuant to this dividend, less an
aggregate of 85 shares for which cash will be paid in lieu
of fractional interests, and the number of shares underlying
outstanding stock options will be increased by approximately
55,068 shares. The sum of the total number of shares
issuable pursuant to the conditional dividend and the additional
shares issuable upon exercise of our outstanding stock options
as a result of the proportionate adjustments will equal 791,210
shares. See Description of Capital Stock
Preferred Stock.
24
CAPITALIZATION
The following table describes our cash, cash equivalents and
capitalization as of June 30, 2005:
|
|
|
|
|
on an actual basis; |
|
|
|
on a pro forma basis to give effect to the automatic conversion
of all outstanding shares of our convertible preferred stock
into common stock upon the closing of this offering, and to give
effect to the issuance of 791,210 shares of common stock
pursuant to the conditional dividend; and |
|
|
|
on a pro forma as adjusted basis to give effect to the sale of
5,016,722 shares of common stock in this offering at the
initial public offering price of $12.00 per share, after
deducting the underwriting discount and estimated offering
expenses payable by us, the sale of 416,666 shares of
common stock to Incyte Corporation for cash proceeds of
$5.0 million in connection with our exercise of a put
right, at a purchase price equal to the initial public offering
price of $12.00 per share. |
You should read this table together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the related notes appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
Pro Forma | |
|
As Adjusted | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per | |
|
|
share data) | |
|
|
(Unaudited) | |
Cash and cash equivalents
|
|
$ |
25,231 |
|
|
$ |
25,231 |
|
|
$ |
84,207 |
|
|
|
|
|
|
|
|
|
|
|
Capital leases, long-term
|
|
|
2,483 |
|
|
|
2,483 |
|
|
|
2,483 |
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value, issuable in
series; 101,216,958 shares authorized,
48,480,819 shares issued and outstanding, actual; aggregate
liquidation preference of $103,599 at June 30, 2005;
5,000,000 shares authorized, no shares issued or
outstanding, pro forma; 5,000,000 shares authorized, no
shares issued or outstanding, pro forma as adjusted
|
|
|
103,212 |
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 105,000,000 shares
authorized, 1,932,921 shares issued and outstanding,
actual; 100,000,000 shares authorized,
18,884,404 shares issued and outstanding, pro forma;
100,000,000 shares authorized, 24,317,792 shares
issued and outstanding, pro forma as adjusted
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
Additional paid-in capital
|
|
|
5,085 |
|
|
|
108,296 |
|
|
|
167,272 |
|
|
Deferred stock-based compensation
|
|
|
(3,793 |
) |
|
|
(3,793 |
) |
|
|
(3,793 |
) |
|
Accumulated deficit
|
|
|
(80,521 |
) |
|
|
(80,521 |
) |
|
|
(80,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(79,228 |
) |
|
|
23,984 |
|
|
|
82,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
26,467 |
|
|
$ |
26,467 |
|
|
$ |
85,443 |
|
|
|
|
|
|
|
|
|
|
|
The actual, pro forma and pro forma as adjusted information set
forth in the table:
|
|
|
|
|
excludes 1,424,393 shares of common stock issuable upon the
exercise of stock options outstanding as of June 30, 2005,
at a weighted average exercise price of $1.86 per share; and |
|
|
|
excludes 5,000,000 shares of common stock available for
future issuance under our stock option plans following the date
of this offering. |
25
DILUTION
Our pro forma net tangible book value as of June 30, 2005
was $24.0 million, or $1.27 per share of common stock.
Pro forma net tangible book value per share represents the
amount of our pro forma total tangible assets less total
liabilities, divided by the pro forma number of shares of common
stock outstanding, assuming the conversion of all shares of
convertible preferred stock outstanding as of June 30, 2005
into shares of our common stock and the issuance of
791,210 shares of common stock pursuant to the conditional
dividend. Pro forma net tangible book value dilution per share
represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the
pro forma net tangible book value per share of common stock
immediately after completion of this offering on a pro forma as
adjusted basis. After giving effect to the sale of the
5,016,722 shares of common stock by us at the initial
public offering price of $12.00 per share, and after
deducting the underwriting discount and estimated offering
expenses payable by us, and our sale of 416,666 shares of
common stock to Incyte Corporation for cash proceeds of
$5.0 million in connection with our exercise of a put
right, at a price per share equal to the initial public
offering price, our pro forma net tangible book value as of
June 30, 2005 would have been $83.0 million, or
$3.41 per share of common stock. This represents an
immediate increase in net tangible book value of $2.14 per
share of common stock to existing common stockholders and an
immediate dilution in pro forma net tangible book value of
$8.59 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates
this per share dilution:
|
|
|
|
|
|
|
|
|
|
Initial public offering price per share
|
|
|
|
|
|
$ |
12.00 |
|
|
Pro forma net tangible book value per share at June 30, 2005
|
|
$ |
1.27 |
|
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to new investors and the new investment by Incyte.
|
|
|
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after this offering
|
|
|
|
|
|
|
3.41 |
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new
investors
|
|
|
|
|
|
$ |
8.59 |
|
|
|
|
|
|
|
|
The following table summarizes as of June 30, 2005, on the
pro forma basis described above, the number of shares of common
stock purchased from us, the total consideration paid and the
average price per share paid by existing and new investors
purchasing shares of common stock in this offering, before
deducting the underwriting discount and estimated offering
expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased | |
|
Total Consideration | |
|
|
|
|
| |
|
| |
|
Average Price | |
|
|
Number | |
|
Percent | |
|
Amount | |
|
Percent | |
|
Per Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Existing stockholders
|
|
|
18,819,233 |
|
|
|
77.6 |
% |
|
$ |
104,027,660 |
|
|
|
61.5 |
% |
|
$ |
5.53 |
|
New investors in this offering
|
|
|
5,016,722 |
|
|
|
20.7 |
|
|
|
60,200,664 |
|
|
|
35.6 |
|
|
|
12.00 |
|
New investment by Incyte
|
|
|
416,666 |
|
|
|
1.7 |
|
|
|
4,999,992 |
|
|
|
2.9 |
|
|
|
12.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,252,621 |
|
|
|
100.0 |
% |
|
$ |
169,228,316 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above assumes no exercise of any outstanding stock
options. As of June 30, 2005, there were
1,424,393 shares of common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price
of $1.86 per share, and there were 5,000,000 shares of
common stock available for future issuance under our stock
option plans following the date of this offering. To the extent
that any of these options are exercised, there will be further
dilution to new investors.
26
SELECTED CONSOLIDATED 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 prospectus. The selected consolidated
balance sheet data at December 31, 2003 and 2004 and the
selected consolidated statements of operations data for each
year ended December 31, 2002, 2003 and 2004 have been
derived from our audited consolidated financial statements that
are included elsewhere in this prospectus. The selected
consolidated balance sheet data at December 31, 2000, 2001
and 2002 and the selected consolidated statements of operations
data for the period from August 22, 2000 (inception) to
December 31, 2000 and for the year ended December 31,
2001 have been derived from our audited consolidated financial
statements not included in this prospectus. The selected
consolidated balance sheet data at June 30, 2005 and the
selected consolidated statements of operations data for the six
months ended June 30, 2004 and 2005 are derived from our
unaudited consolidated financial statements included in this
prospectus. The unaudited consolidated financial statements
include, in the opinion of management, all adjustments that
management considers necessary for the fair presentation of the
financial information set forth in those statements. Historical
results are not necessarily indicative of the results to be
expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from | |
|
|
|
Six Months Ended | |
|
|
August 22, 2000 | |
|
Year Ended December 31, | |
|
June 30, | |
|
|
(inception) to | |
|
| |
|
| |
|
|
Dec. 31, 2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per share data) | |
|
|
|
|
(Unaudited) | |
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
227 |
|
|
$ |
33 |
|
|
$ |
1,585 |
|
|
Contract revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
100 |
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
327 |
|
|
|
33 |
|
|
|
1,685 |
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,828 |
|
|
|
931 |
|
|
|
2,874 |
|
|
Research and development
|
|
|
169 |
|
|
|
11,080 |
|
|
|
7,053 |
|
|
|
9,069 |
|
|
|
10,040 |
|
|
|
5,182 |
|
|
|
4,630 |
|
|
Selling and marketing
|
|
|
|
|
|
|
117 |
|
|
|
754 |
|
|
|
2,805 |
|
|
|
9,856 |
|
|
|
4,449 |
|
|
|
7,415 |
|
|
General and administrative
|
|
|
566 |
|
|
|
2,844 |
|
|
|
3,753 |
|
|
|
3,686 |
|
|
|
3,869 |
|
|
|
1,832 |
|
|
|
2,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
735 |
|
|
|
14,041 |
|
|
|
11,560 |
|
|
|
15,560 |
|
|
|
25,593 |
|
|
|
12,394 |
|
|
|
17,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(735 |
) |
|
|
(14,041 |
) |
|
|
(11,560 |
) |
|
|
(15,435 |
) |
|
|
(25,266 |
) |
|
|
(12,361 |
) |
|
|
(16,021 |
) |
Interest and other income (expense), net
|
|
|
|
|
|
|
1,267 |
|
|
|
492 |
|
|
|
185 |
|
|
|
271 |
|
|
|
98 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(735 |
) |
|
$ |
(12,774 |
) |
|
$ |
(11,068 |
) |
|
$ |
(15,250 |
) |
|
$ |
(24,995 |
) |
|
$ |
(12,263 |
) |
|
$ |
(15,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(10.10 |
) |
|
$ |
(20.14 |
) |
|
$ |
(11.95 |
) |
|
$ |
(12.43 |
) |
|
$ |
(14.38 |
) |
|
$ |
(7.26 |
) |
|
$ |
(8.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
72,777 |
|
|
|
634,415 |
|
|
|
925,814 |
|
|
|
1,226,444 |
|
|
|
1,737,652 |
|
|
|
1,687,964 |
|
|
|
1,895,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes non-cash charges for stock-based compensation expense
as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
Six Months Ended | |
|
|
August 22, 2000 |
|
Year Ended December 31, | |
|
June 30, | |
|
|
(inception) to |
|
| |
|
| |
|
|
Dec. 31, 2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
|
(Unaudited) | |
Cost of product revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
21 |
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
6 |
|
|
|
166 |
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
1 |
|
|
|
210 |
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
1 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
191 |
|
|
$ |
9 |
|
|
$ |
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, | |
|
|
|
|
| |
|
At June 30, | |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
|
(Unaudited) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
7,503 |
|
|
$ |
28,678 |
|
|
$ |
25,318 |
|
|
$ |
11,062 |
|
|
$ |
38,275 |
|
|
$ |
25,231 |
|
Working capital
|
|
|
7,173 |
|
|
|
26,724 |
|
|
|
25,165 |
|
|
|
10,046 |
|
|
|
36,771 |
|
|
|
23,306 |
|
Total assets
|
|
|
7,617 |
|
|
|
30,408 |
|
|
|
27,376 |
|
|
|
13,096 |
|
|
|
41,538 |
|
|
|
30,832 |
|
Capital leases, short-term
|
|
|
|
|
|
|
|
|
|
|
163 |
|
|
|
161 |
|
|
|
|
|
|
|
777 |
|
Capital leases, long-term
|
|
|
|
|
|
|
|
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
2,483 |
|
Convertible preferred stock
|
|
|
7,917 |
|
|
|
41,783 |
|
|
|
51,073 |
|
|
|
51,064 |
|
|
|
103,212 |
|
|
|
103,212 |
|
Accumulated deficit
|
|
|
(735 |
) |
|
|
(13,509 |
) |
|
|
(24,577 |
) |
|
|
(39,827 |
) |
|
|
(64,822 |
) |
|
|
(80,521 |
) |
Total stockholders equity (deficit)
|
|
|
(731 |
) |
|
|
(13,482 |
) |
|
|
(24,502 |
) |
|
|
(39,547 |
) |
|
|
(64,154 |
) |
|
|
(79,228 |
) |
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read together with our
consolidated financial statements and related notes included
elsewhere in this prospectus. This discussion contains
forward-looking statements based upon current expectations that
involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these
forward-looking statements as a result of various factors,
including those set forth under Risk Factors,
Information Regarding Forward-looking Statements and
elsewhere in this prospectus.
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 within 10 years of diagnosis 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. As of June 30, 2005,
Oncotype DX has been ordered by over
1,400 physicians throughout the United States. 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 2005, we have experienced a
significant increase in demand for Oncotype DX. In
the year ended December 31, 2004 and the six months ended
June 30, 2005, 500 and 3,000 tests, respectively, were
ordered by treating physicians. We believe this increase in
demand resulted from the publication of our validation study in
The New England Journal of Medicine and the presentation
of an additional study at the San Antonio Breast Cancer
Symposium, both of which occurred in December 2004. However,
this increased demand for our product is not necessarily
indicative of future growth rates, and we cannot assure you that
this level of increased demand can be sustained. Moreover, we
believe that each year we may experience decreased demand for
our tests in the summer months of July and August, which may be
attributed to physicians, surgeons and patients scheduling
vacations during this time. As of June 30, 2005, our
laboratory had the capacity to process up to 2,500 tests per
quarter, and our current expansion plan contemplates that we
will have capacity to process up to 4,000 tests per quarter by
the end of 2005.
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 testing services, when covered, are
paid under various methodologies, including prospective payment
systems and fee schedules. Reimbursement from payors depends
upon whether a service is covered under the patients
policy and if payment practices for the service 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 an insurer on contract terms or establish a policy for
payment of Oncotype DX, we expect to 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 August 2005, several regional payors,
including Harvard Pilgrim Health Care, Inc. and Highmark Blue
Cross Blue Shield, had issued policies supporting reimbursement
for our test. In addition, Kaiser Foundation Health Plan, Inc.
has entered into a national clinical laboratory services
agreement to reimburse us for Oncotype DX tests performed
for their patients. Where policies are not in place, we pursue
case-by-case reimbursement. We believe that as much as 20% of
our future revenues may be derived from tests billed to
Medicare. We are working with many payors, including Medicare,
to establish policy-level reimbursement which, if in place, will
allow us to recognize revenues upon submitting an invoice. We do
not expect to recognize the majority of revenues in this manner
until 2007, at the earliest.
29
Since our inception, we have generated significant net losses.
As of June 30, 2005, we had an accumulated deficit of
$80.5 million. We incurred net losses of
$11.1 million, $15.3 million and $25.0 million in
the years ended December 31, 2002, 2003 and 2004,
respectively, and $15.7 million in the six months ended
June 30, 2005. We expect our net losses to continue for at
least the next several years. We anticipate that a substantial
portion of our capital resources and efforts will be focused on
research and development, both to develop additional tests for
breast cancer and to develop products for other cancers, scale
up our commercial organization, and 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 processed and reports delivered, we are likely to
continue reporting net losses.
Financial Operations Overview
We derive our revenues from product sales and contract research
arrangements and operate in one industry segment. Our product
revenues are derived solely from the sale of
Oncotype DX. Payors are generally 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. All product
revenues recognized to date reflect cash collections. Contract
revenues are derived from studies conducted with
biopharmaceutical and pharmaceutical companies and are recorded
on an accrual basis upon completion of the contractual
obligation.
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. On the other hand, 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 from our inception in August
2000 through December 31, 2003 were $27.4 million, and
substantially all of these expenses were focused on the research
and development of Oncotype DX, which we launched in
January 2004. During this time, Oncotype DX was the only
product under development. Research and development expenses
represent costs incurred both to develop our technology and to
carry out our clinical studies to validate our multi-gene tests.
Most of the costs incurred prior to 2003 were to develop our
technology. During the years ended December 31, 2003 and
2004 and the six months ended June 30, 2005:
|
|
|
|
|
costs incurred for salaries and benefits were $4.2 million,
$4.7 million and $2.7 million; |
|
|
|
costs paid to third party clinical collaborators, including
contract services, were $890,000, $1.8 million and $34,000; |
|
|
|
costs allocated to overhead and facilities were
$1.3 million, $990,000 and $679,000; |
|
|
|
depreciation costs for equipment were $576,000, $413,000 and
$181,000; |
|
|
|
costs for materials to conduct gene assays in clinical research
and development studies were $918,000, $964,000 and $639,000; |
|
|
|
license and technology rights were $991,000, $1.0 million
and $328,000; and |
|
|
|
all other costs were $167,000, $143,000 and $72,000. |
We charge all research and development expenses to operations as
they are incurred. All potential future product programs outside
of breast cancer are in the clinical research phase, and the
earliest we expect
30
another cancer program to reach the development stage is 2006.
However, the expected time frame that a product related to one
of these other cancers can be brought to market is uncertain
given the technical challenges and clinical variables that exist
between different types of cancers.
We do not record or maintain information regarding costs
incurred in research and development on a program or project
specific basis. 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.
Our significant accounting policies are described in Note 1
to our consolidated financial statements included elsewhere in
this prospectus. We believe the following critical accounting
policies reflect our more significant estimates and assumptions
used in the preparation of our financial statements.
We have generated limited revenues since our inception. Product
revenues for our first product, Oncotype DX, were
minimal from the commercial launch in January 2004 through
June 30, 2005, and were recognized on a cash basis. To
date, we have recognized all of our product revenues on a cash
basis because we have limited collection experience and a
limited number of contracts. In accordance with our policy,
revenues for tests performed will be recognized on an accrual
basis when the related costs are incurred, provided there is a
contract or coverage policy in place and the following criteria
are met:
|
|
|
|
|
persuasive evidence that an arrangement exists; |
|
|
|
delivery has occurred or services rendered; |
|
|
|
the fee is fixed and determinable; and |
|
|
|
collectibility is reasonably assured. |
Determination of the last two criteria will be based on
managements judgments regarding the nature of the fee
charged for products or services delivered and the
collectibility of those fees.
31
We generally bill third-party payors for Oncotype DX
upon generation and delivery of a Recurrence Score report to the
physician. As such, we take assignment of benefits and the risk
of collection with the third-party payor. We usually bill the
patient directly for amounts owed after multiple requests for
payment have been denied or only partially paid by the insurance
carrier. As a relatively new test, Oncotype DX may
be considered investigational by 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.
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.
|
|
|
Deferred Stock-based Compensation Expense |
Stock-based compensation expense, which is a non-cash charge,
results from stock option grants at exercise prices that, for
financial reporting purposes, are deemed to be below the fair
value of the underlying common stock. We recognize stock-based
compensation expense on a straight-line basis over the vesting
period of the underlying option, which is generally four years.
The amount of stock-based compensation expense expected to be
amortized in future periods may decrease if unvested options for
which deferred stock-based compensation expense has been
recorded are subsequently cancelled or may increase if future
option grants are made with exercise prices below the deemed
fair value of the common stock on the date of measurement.
During the period from January 1, 2004 through
June 30, 2005, we granted options to employees to purchase
a total of 1,066,565 shares of common stock at exercise
prices ranging from $1.38 per share to $3.30 per share. We did
not obtain contemporaneous valuations from an independent
valuation specialist in connection with these grants. Instead,
we relied on our board of directors, the members of which we
believe have extensive experience in the life science industry
and a majority of which is comprised of non-employee directors,
to determine a reasonable estimate of the then-current value of
our common stock. Given the absence of an active market for our
common stock and resulting lack of liquidity in 2004 and the six
months ended June 30, 2005, our board of directors
determined the estimated fair value of our common stock on the
date of grant based on several factors, including the sales
prices and liquidation preferences of our preferred stock,
progress and milestones achieved in our business, our financial
condition, equity market conditions, trading ranges of
comparable public companies and the likelihood of achieving a
liquidity event such as an initial public offering or a sale of
the company given prevailing market conditions.
In connection with our proposed initial public offering, we have
reassessed the fair value of our common stock. In determining
the reassessed fair value per share of the common stock as of
each grant date, the factors identified in the preceding
paragraph were taken into account. We also considered other
material factors and business developments, including the
following:
|
|
|
|
|
we commercially launched Oncotype DX in January 2004; |
|
|
|
we conducted studies in 2004 with the NSABP to test additional
attributes of Oncotype DX; |
|
|
|
in the summer of 2004 and later in September 2004, the results
of these studies demonstrated that Oncotype DX predicts
the likelihood of breast cancer recurrence and chemotherapy
benefit; |
|
|
|
in October 2004, The New England Journal of Medicine
accepted our validation study for publication and published
an online version of the results in December 2004; |
|
|
|
the results of several of our studies were presented at the
annual San Antonio Breast Cancer Conference in December 2004; |
|
|
|
in December 2004, the FDA, through the Office of In Vitro
Diagnostic Devices, initiated a dialogue with us regarding the
regulatory status of Oncotype DX; |
32
|
|
|
|
|
in December 2004, the local Medicare contractor in Northern
California indicated that it would not provide coverage for
OncotypeDX; |
|
|
|
in early 2005, the Medical Advisory Panel of the Blue Cross and
Blue Shield Association concluded that Oncotype DX did
not meet the panels technology criteria for clinical
effectiveness and appropriateness; |
|
|
|
beginning in early 2005, we began entering into contracts or
establishing policies with third-party payors to reimburse us
for our tests; |
|
|
|
in the first quarter of 2005, our board of directors authorized
us to initiate the process of preparing for an initial public
offering; and |
|
|
|
the market for new public offerings made by life science
companies in 2005 and the six months ended June 30, 2005
was highly volatile. |
In reassessing the value of our common stock, we used a
straight-line approach because we determined that no single
event supported incremental movement in underlying value.
Further, we believe this approach is consistent with valuation
methodologies applied by other similar life science companies
pursuing an initial public offering. Based upon the reassessment
process, we determined that the reassessed fair value of the
options granted from January 1, 2004 through June 30,
2005 ranged from $1.95 to $11.25 per share. Accordingly,
deferred stock-based compensation of $3.6 million was
recorded during the year ended December 31, 2004 and
$846,000 was recorded during the six months ended June 30,
2005 in accordance with Accounting Principles Board, or APB,
Opinion No. 25. The deferred stock-based compensation will
be amortized on a straight-line basis over the vesting period of
the related awards, which is generally four years. For the year
ended December 31, 2004, we recorded employee stock-based
compensation expense of $191,000, $5,000 of which was allocated
to cost of product revenues and $186,000 of which was allocated
to other operating expenses. We expect deferred stock-based
compensation expense under APB Opinion No. 25 to be
$372,000, $1.1 million, $1.1 million and
$1.0 million for the last four months of 2005 and for the
years ending December 31, 2006, 2007 and 2008 (and
thereafter), respectively, before consideration of the impact of
the recent changes in accounting pronouncements for stock
options.
The information regarding net loss as required by Statement of
Financial Accounting Standards, or SFAS, No. 123, presented
in Note 1 to our consolidated financial statements, has
been determined as if we had accounted for our employee stock
options under the fair value method. The resulting effect on net
loss pursuant to SFAS No. 123 is not likely to be
representative of the effects on net loss pursuant to
SFAS No. 123 in future years, since future years are
likely to include additional grants and the impact of future
years vesting.
|
|
|
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. All clinical collaborators enter into agreements
with us which specify work content and payment terms.
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 in which the
relevant payment is made. However, either party may terminate
the agreement upon 30 days prior written notice. If
this collaborative arrangement were not cancelable, a liability
for the entire stream of remaining payments of $2.5 million
would be recorded, payments would be made annually and expense
would be recognized ratably through 2011.
Results of Operations
|
|
|
Six Months Ended June 30, 2005 and 2004 |
Revenues. Revenues were $1.7 million for the six
months ended June 30, 2005, as compared to $33,000 for the
comparable period in 2004. All revenues in 2004 were product
revenues from our first product, Oncotype DX, which was
launched in January 2004. During 2005, product revenues were $1.6
33
million and contract revenues were $100,000. First cash
collections for Oncotype DX were received during the
second quarter of 2004. These revenues were recognized upon cash
receipt.
Cost of Product Revenues. For the six months ended
June 30, 2005, cost of product revenues was
$2.9 million, consisting of tissue sample processing costs
of $2.6 million for tests performed during the period and
license fees of $292,000. For the six months ended June 30,
2004, cost of product revenues was $931,000, consisting of
tissue sample processing costs of $571,000 and license fees of
$360,000. All costs for tissue sample processing were recorded
in the period in which the test was processed, regardless of
whether revenue was recognized with respect to that test.
Recorded costs for Oncotype DX include direct material
costs, direct labor costs, equipment costs and other
infrastructure costs. License fees were recorded in cost of
product revenues for contractual obligations and royalties due
on product revenues. The decrease in license fees resulted from
non-recurring payments owing due to the commercialization of our
test in January 2004. Costs of product revenues will increase as
an absolute number as the volume of tests processed increases.
Research and Development Expenses. Research and
development expenses were $4.6 million for the six months
ended June 30, 2005, a decrease from $5.2 million for
the comparable period of 2004. This decrease is a result of
spending $1.1 million less on clinical programs in 2005 as
compared to 2004 and a $192,000 reduction in license agreement
costs. These decreases were partially offset by higher personnel
costs in research and development of $521,000 and increases in
laboratory supplies of $163,000. We expect research and
development expenses to increase as we work to develop
additional tests for breast cancer and for other cancers.
Selling and Marketing Expenses. Selling and marketing
expenses increased to $7.4 million for the six months ended
June 30, 2005, from $4.4 million for the comparable
period in 2004. The increase was due in part to personnel costs
of $1.8 million and travel and entertainment costs of
$532,000 associated with the growth of the commercial field
sales team compared to limited spending in this area in the
first half of 2004 when Oncotype DX was launched.
Additionally, promotional spending for Oncotype DX was
$505,000 higher for the six months ended June 30, 2005 than
for the comparable period in 2004. We expect selling and
marketing expenses to increase as a result of continued growth
in our sales infrastructure to support growth in our product
revenues and billings and as we incur a full year of costs for
the field sales personnel hired in late 2004 and as we hire
additional sales personnel.
General and Administrative Expenses. General and
administrative expenses totaled $2.8 million for the six
months ended June 30, 2005, as compared to
$1.8 million for the comparable period in 2004. This
increase was due in part to increases in personnel costs of
$596,000, legal costs of $157,000 and billing and collections
costs of $160,000. We expect general and administrative expenses
to increase after this offering as a result of the need to hire
additional administrative personnel and due to higher legal,
accounting and related expenses associated with being a public
company.
Interest Income and Other Income/ Expense. Interest
income was $393,000 for the six months ended June 30, 2005,
compared with $121,000 in the comparable period in 2004. This
increase was due to higher average cash balances from preferred
stock financings and higher interest rates during the six months
ended June 30, 2005. Other income during the six months
ended June 30, 2005 was $1,000 as compared to $20,000 of
expense in the comparable period of 2004.
Interest Expense. Interest expense was $72,000 in the six
months ended June 30, 2005, compared with $3,000 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
period. We expect interest expense to increase as we make
interest payments on borrowings under our equipment loan and
make further draws throughout the remainder of 2005.
|
|
|
Years Ended December 31, 2004 and 2003 |
Revenues. Revenues were $327,000 for the year ended
December 31, 2004, as compared to $125,000 for the
comparable period in 2003. Product revenues for the year ended
December 31, 2004 were $227,000, as
34
compared to zero in the comparable period in 2003. Product
revenues were all recognized upon cash receipt. Contract
revenues were $100,000 for the year ended December 31,
2004, down from $125,000 in the comparable period in 2003.
Contract revenues in both periods were for studies assessing our
gene expression technology.
Cost of Product Revenues. 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 related to the launch of
Oncotype DX and license fees of $477,000. During the
year ended December 31, 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 that
year 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.
No cost of product revenues were recorded in the year ended
December 31, 2003 because we had not commercialized
Oncotype DX.
Research and Development Expenses. Research and
development expenses increased to $10.0 million for the
year ended December 31, 2004, from $9.1 million for
the comparable period in 2003. The increase in research and
development expenses is primarily due to $944,000 in increased
costs for clinical development programs studying distant
survival and chemotherapy benefits in early stage breast cancer
patients and increased personnel costs of $476,000, partially
offset by a decrease of $518,000 in facilities, depreciation and
other general expenses.
Selling and Marketing Expenses. Selling and
marketing expenses increased to $9.9 million for the year
ended December 31, 2004, from $2.8 million for the
comparable period in 2003. The $7.1 million increase
primarily reflects an increase of $2.6 million for higher
promotional, education and tradeshow expenses, an increase of
$2.8 million in personnel related costs, mostly to
establish a domestic field sales organization, and $831,000 in
higher travel expenses associated with field sales personnel, as
well as costs of $405,000 for patient advocacy programs. For the
year ended December 31, 2003, selling and marketing
expenses were primarily for personnel related costs and market
research.
General and Administrative Expenses. General and
administrative expenses of $3.9 million for the year ended
December 31, 2004 were slightly higher than the
$3.7 million for the comparable period in 2003. The
increase in general and administrative expenses reflects an
increase of $352,000 in recruiting and relocation costs, an
increase of $250,000 in legal costs and miscellaneous increases
in personnel and consulting related costs. These higher costs
are offset in part by a $493,000 decrease in costs related to
information technology support.
Interest Income and Other Income/Expense. Interest
income was $295,000 for the year ended December 31, 2004,
compared with $199,000 in the comparable period in 2003. This
$96,000 increase was due to higher average cash balances from
preferred stock financings and higher interest rates during the
year ended December 31, 2004. Other expense was $20,000 for
the year ended December 31, 2004, and was zero for the
comparable period in 2003.
Interest Expense. Interest expense is comprised of
the interest on deferral of contractual payments under a
collaboration agreement. Interest expense decreased to $4,000
for the year ended December 31, 2004, from $14,000 in the
comparable period in 2003 due to completing payments under the
payment schedule. The final payment under this agreement was
made in October 2004.
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Years Ended December 31, 2003 and 2002 |
Revenues. Contract revenues of $125,000 were
recorded for the year ended December 31, 2003, related to
two studies assessing our gene expression technology, both of
which were completed in 2003. There were no revenues for the
year ended December 31, 2002.
Research and Development Expenses. Research and
development expenses were $9.1 million for the year ended
December 31, 2003, up from $7.1 million for the
comparable period in 2002. The increase of $2.0 million was
primarily due to $850,000 of higher personnel related costs, an
increase in the general
35
overhead allocation to our research and development department
of $755,000 and $699,000 in higher costs associated with our
clinical development programs. These increases in 2003 were
partially offset by a reduction of $496,000 in payments to
clinical collaborators.
Selling and Marketing Expenses. Selling and
marketing expenses were $2.8 million for the year ended
December 31, 2003, up from $754,000 for the comparable
period in 2002. The increase of $2.0 million reflects
primarily increased costs of $1.0 million for market
research, promotion and tradeshow costs in preparation for the
January 2004 launch of Oncotype DX and other patient
advocacy programs and increases of $742,000 in personnel related
costs as we began to establish our domestic field sales
organization. Selling and marketing expenses for the year ended
December 31, 2002, were primarily related to personnel,
consulting and market research services.
General and Administrative Expenses. General and
administrative expenses decreased to $3.7 million for the
year ended December 31, 2003, from $3.8 million for
the comparable period in 2002.
Interest Income. Interest income decreased to
$199,000 for the year ended December 31, 2003, from
$502,000 for the comparable period in 2002. This decrease was
due to significantly lower average cash and investment balances
as well as lower interest rates in calendar year 2003 as
compared to calendar year 2002.
Interest Expense. Interest expense was $14,000 for
the year ended December 31, 2003, as compared to $13,000
for the year ended December 31, 2002. All interest expense
amounts related to deferred contractual payments under a
collaboration agreement.
Liquidity and Capital Resources
Since our inception in August 2000, we have incurred significant
losses and, as of June 30, 2005, we had an accumulated
deficit of approximately $80.5 million. We have not yet
achieved profitability and anticipate that we will continue to
incur net losses for the foreseeable future. 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.
Since our inception, substantially all of our operations have
been financed through the sale of our preferred stock. Through
June 30, 2005, we had received net proceeds of
$103.2 million from the sale of preferred stock and
$425,000 from the issuance of common stock to employees,
consultants and directors in connection with the exercise of
stock options. We also financed our operations, purchases of
equipment and leasehold improvements through loans. As of
December 31, 2004, we had cash and cash equivalents of
$38.3 million and no debt, and, at June 30, 2005, we
had cash and cash equivalents of $25.2 million and debt
under our equipment loan of $3.3 million.
As of June 30, 2005, we had $25.2 million in cash and
cash equivalents, compared to $38.3 million at
December 31, 2004. This decrease was due primarily to cash
used in operating activities of $14.8 million, initial
public offering costs of $1.1 million and purchases of property
and equipment of $1.6 million, offset partially by proceeds
from our equipment loan of $3.3 million and the issuance of
common stock of $58,000.
Net cash used in operating activities was $14.8 million for
the six months ended June 30, 2005, compared to
$11.4 million for the six months ended June 30, 2004.
The increase in cash used of $3.4 million was primarily due
to an increase in selling and marketing expenses of
$3.0 million and higher lab processing costs of
$1.9 million, offset by cash collected from customers of
$1.6 million.
Net cash used in operating activities was $23.1 million,
$13.5 million and $12.3 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Net cash
used in operating activities for these periods consisted
primarily of our net loss, partially offset by depreciation of
property and equipment.
36
Net cash used in investing activities was $1.6 million for
the six months ended June 30, 2005, compared to $797,000
for the six months ended June 30, 2004. This cash was used
to acquire property and equipment and for leasehold improvements.
Net cash used in investing activities was $1.8 million,
$739,000 and $631,000 for the years ended December 31,
2004, 2003 and 2002, respectively. Our investing activities for
these periods consisted primarily of purchases of property and
equipment. We expect amounts used in investing activities to
increase in 2005 and beyond as we expand research and
development activities and capacity in our commercial laboratory.
Net cash provided by financing activities during the six months
ended June 30, 2005 was $3.3 million, compared to
$29.9 million for the six months ended June 30, 2004.
Substantially all amounts in the 2004 period represented
proceeds from our sale of series E preferred stock. Amounts
in the six months ended June 30, 2005 consisted of proceeds
from our equipment loan of $3.3 million and the issuance of
$58,000 of common stock.
Net cash provided by financing activities was
$52.1 million, $27,000 and $9.6 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
Financing activities consisted primarily of the sale of our
preferred stock for the years ended December 31, 2002 and
2004 and the sale of our common stock in the year ended
December 31, 2003.
Contractual
Obligations
As of December 31, 2004, we had the following contractual
commitments:
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Operating lease obligations
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944 |
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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. A payment of $150,000 was made in 2005. We
are required to make additional payments of $300,000 in each of
2006 and 2007, and $475,000 in each of 2008 through 2011.
However, either party may terminate the agreement upon 30
days prior written notice.
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 cannot prepay any amounts owed until 2006, at which
point we can 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 August 31, 2005, borrowings under this
arrangement were $3.7 million at an annual interest rate of
10.23%, 10.30%, 10.49%, 10.56% or 10.65%, depending on the
applicable note. As of August 31, 2005, we are required to
make payments under this arrangement of $417,000 in 2005,
$1.3 million in 2006, $1.3 million in 2007,
$1.1 million in 2008 and $275,000 in 2009. We expect to
request to borrow additional amounts under this arrangement.
We currently sublease approximately 25,000 square feet of
laboratory and office space under a sublease that expires in
February 2006. In September 2005, we entered into a lease
directly with the facility owner that has a term of six years.
When our existing sublease expires in February 2006, the new
lease will apply to the existing 25,000 square feet of
laboratory and office space we currently occupy. Under the new
lease, we also lease approximately 23,000 square feet of
additional space which we expect to first occupy in March 2006.
If we first occupy space under this new lease in March 2006, we
will be required to make aggregate rent payments of $460,000 in
2006, $730,000 in 2007, $753,000 in 2008, $779,000 in 2009,
$799,000 in 2010, $827,000 in 2011 and $139,000 in 2012.
37
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, which we expect to fund in
part with the proceeds of this offering. It may take several
years to move any one of a number of product candidates in
clinical research through the development phase and validation
phase to commercialization. We expect that the remainder of the
net proceeds and our existing 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 the processing of tests
outside the United States or reduction of debt obligations. A
portion of the net proceeds may also be used to acquire or
invest in complementary businesses, technologies, services or
products. We have no current plans, agreements or commitments
with respect to any such acquisition or investment, and we are
not currently engaged in any negotiations with respect to any
such transaction.
The amount and timing of actual expenditures may vary
significantly depending upon a number of factors, such as the
progress of our product development, regulatory requirements,
commercialization efforts, the amount of cash used by operations
and progress in reimbursement. We expect that we will receive
limited payments for Oncotype DX test 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 test
billings.
We currently anticipate that our cash and cash equivalents,
together with proceeds from this offering, collections for
Oncotype DX and amounts available under our equipment
credit facility, will be sufficient to fund our operations 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:
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the rate of progress in establishing reimbursement arrangements
with third-party payors; |
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the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts; |
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the rate of progress and cost of research and development
activities associated with expansion of Oncotype DX
products for breast cancer; |
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the rate of progress and cost of research and development
activities associated with products in the research phase
focused on cancer, other than breast cancer; |
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the cost of acquiring or achieving access to tissue samples and
technologies; |
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the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights; |
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the effect of competing technological and market developments; |
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the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our
products; and |
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the economic and other terms and timing of any collaborations,
licensing or other arrangements into which we may enter. |
Until we can generate a sufficient amount of product revenues to
finance our cash requirements, which we may never do, we expect
to finance future cash needs primarily through public or private
equity offerings, debt financings, borrowings or strategic
collaborations. The issuance of equity securities may result in
dilution to stockholders. 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
38
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.
Income Taxes
Since inception, we have incurred operating losses and,
accordingly, have not recorded a provision for income taxes for
any of the periods presented. As of December 31, 2004, we
had net operating loss carryforwards for federal and state
income tax purposes of $60.2 million and
$57.8 million, respectively. We also had federal and state
research and development tax credit carryforwards of $855,000
and $569,000, respectively. If not utilized, the federal net
operating loss and tax credit carryforwards will expire
beginning in 2021. Utilization of net operating loss and credit
carryforwards may be subject to a substantial annual limitation
due to restrictions contained in the Internal Revenue Code that
are applicable if we experience an ownership change
that may occur, for example, as a result of this offering being
aggregated with certain other sales of our stock before or after
this offering. If not utilized, the state net operating loss
carryforward will expire beginning in 2013. The annual
limitation may result in the expiration of our net operating
loss and tax credit carryforwards before they can be used.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123(R),
Share-Based Payment, which is a revision of
SFAS 123, Accounting for Stock-Based Compensation.
SFAS 123(R) is effective for public companies for the
first interim or annual period beginning after June 15,
2005, supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FAS 95,
Statement of Cash Flows. Generally, the approach in
SFAS 123(R) is similar to the approach described in
FAS 123. However, SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
The new standard will be effective for us beginning
January 1, 2006. Under SFAS 123(R), we must determine
the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation
cost and the transition method to be used at the date of
adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive adoption
option, prior periods may be restated either as of the beginning
of the year of adoption or for all periods presented. The
prospective method requires that compensation expense be
recorded for all unvested stock options at the beginning of the
first quarter of adoption of SFAS 123(R), while the
retroactive method would record compensation expense for all
unvested stock options beginning with the first period restated.
Management is evaluating the requirements of SFAS 123(R)
and expects that its adoption may have a material impact on our
consolidated results of operations and earnings per share.
Management has not yet determined the method of adoption or the
effect of adopting SFAS 123(R), and has not determined
whether the adoption will result in amounts that are similar to
the current pro forma disclosures under SFAS 123.
Qualitative and Quantitative Disclosures About Market Risk
The primary objective of our investment activities is to
preserve our capital for the purpose of funding operations while
at the same time maximizing the income we receive from our
investments without significantly increasing risk. To achieve
these objectives, our investment policy allows us to maintain a
portfolio of cash equivalents and short-term investments through
a variety of securities, including commercial paper, money
market funds and corporate debt securities. Our cash and cash
equivalents through December 31, 2004, included liquid
money market accounts.
39
BUSINESS
Company 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. 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.
Approximately half of the 230,000 patients expected to be
diagnosed with breast cancer in the United States in 2005 are
predicted to be early stage 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 response to chemotherapy. 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. In 2004,
over 500 tests were ordered by treating physicians. In December
2004, our validation study was published in The New England
Journal of Medicine and the results of additional clinical
trials were presented at the San Antonio Breast Cancer
Conference. In the six months ended June 30, 2005, over
3,000 tests were ordered by treating physicians. As of
June 30, 2005, Oncotype DX has been ordered by over
1,400 physicians throughout the United States.
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 2005, approximately 1.4 million
people in the United States are 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
40
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 truly 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.
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.
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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 respond to 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:
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Improved Quality of Treatment Decisions. We believe our
approach to genomic-based cancer analysis improves the quality
of cancer treatment decisions by providing an individualized
analysis of each patients tumor that is correlated to
clinical outcome. Our approach represents a substantial
departure from existing approaches to treatment, which often use
subjective, anatomic and qualitative factors to determine
treatments. Oncotype DX has been shown in clinical
studies to classify many patients into recurrence risk
categories different from classifications based on current
guidelines. Thus, our solution enables patients and physicians
to make more informed decisions about treatment risk-benefit
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 |
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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 may cost in excess of $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. |
Business Strategy
Our goal is to improve the quality of treatment decisions for
cancer patients by providing individualized information to
patients and their physicians through the genomic analysis of
tumor biopsies. Key elements of our strategy include:
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Deliver High-value Genomic-based Diagnostics. We believe
that treatment decisions are currently being made with little
understanding of the molecular profile of each tumor and that
economic inefficiencies result in the healthcare system when
crucial and expensive treatment decisions are made based on
inadequate and often subjective information. Our strategy is to
identify treatment decisions that can benefit from, and be
guided by, the patients individual genomic information. We
are focused on developing high-value tests that address these
treatment decisions, with the goal of making our genomic-based
tests a standard of care. Our value lies in our ability to
deliver individualized information during the crucial period of
time after diagnosis but prior to the decision to undergo a
specific cancer treatment. |
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Achieve Broad-based Adoption and Reimbursement. We intend
to continue to build a strong sales, marketing and reimbursement
effort by interacting directly with medical and surgical
oncologists, pathologists and payors. Because oncology is a
concentrated specialty, we believe that a focused marketing
organization and specialized sales force can effectively serve
the oncology community and provide us with a competitive
advantage. We believe our direct sales approach, coupled with
our plans to conduct multiple clinical studies with results
published in peer-reviewed journals, will increase patient and
physician demand and increase the number of favorable
reimbursement coverage decisions by payors. |
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Enhance Existing Products and Technologies. Our goal is
to enhance our marketed products by validating additional
individualized patient information to improve treatment
planning. We also intend to deliver added value by expanding the
clinical categories of patients we can address within a cancer
population. For example, we plan to expand our breast cancer
product to address late-stage breast cancer patients as well as
questions about the responsiveness of an individual tumor to
therapeutic agents such as aromatase inhibitors and taxanes. We
believe that continuous innovation can sustain a competitive
advantage by delivering more information to physicians in
comparison with new competitive products entering the market. |
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Apply Our Clinical Development Platform to Other Cancers.
We intend to use our clinical development platform to address
multiple cancers for which quantitative molecular pathology
could improve the assessment of the risk of disease progression
and the prediction of response to therapy. In the next several
years, we plan to expand our focus beyond breast cancer,
potentially including colon, prostate, renal cell and lung
cancers and melanoma. We designed our clinical development
platform to enable us to conduct clinical studies with clinical
study groups and opinion leaders using archived biopsy specimens
with years of associated patient data to correlate genomic
information to clinical outcomes. This approach allowed us to
research, develop, validate and commercialize Oncotype DX
in three years. |
Our Product: Oncotype DX
Oncotype DX uses quantitative molecular pathology to
improve cancer treatment decisions. We offer Oncotype DX
as a clinical laboratory service, 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
43
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
response to 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 chemotherapy
benefit, and we are undertaking further studies to support this
finding.
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Oncotype DX for Breast Cancer |
Approximately 230,000 new cases of breast cancer are expected to
be diagnosed in the United States in 2005. 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. |
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. |
Because these diagnostic factors have limited capability to
predict future recurrence and response to chemotherapy and some
are subjective, a large percentage of early stage breast cancer
patients are classified as high risk. As a consequence, the use
of chemotherapy has become standard practice in 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.
44
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 accredited under
CLIA and 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 0-100 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 a 11% likelihood of
recurrence, depending on the individual Recurrence Score. We
believe this represents a substantial improvement upon existing
methods for classifying patient risk.
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Clinical Development and Validation of Oncotype DX |
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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 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 0-100.
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
45
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%. |
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
46
2004 and further detailed results were presented at the annual
meeting of the American Society of Clinical Oncology, or ASCO,
in May 2005. 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 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.
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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? |
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
47
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, response
to tamoxifen, or both. This studys conclusions were
reported at the San Antonio Breast Cancer Conference in
December 2004 and further detailed results were presented at
ASCOs annual meeting in May 2005. 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 response to
tamoxifen. 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 response to
tamoxifen. 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 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
48
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.
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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. One such study,
which was published in The American Journal of Managed
Care, 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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Clinical Research 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 1,000 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 |
49
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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. 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. Multiple clinical studies are also useful for
driving adoption and reimbursement by physicians and payors. |
Over 550,000 treatment decisions are expected to be made in the
United States in 2005 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.
50
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Product Development Opportunities in Breast Cancer |
The following table describes our current breast cancer product
and our product opportunities:
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2005 Estimated |
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Treatment |
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Decisions |
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Breast Cancer |
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in the |
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Anticipated |
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Product |
Breast Cancer Products |
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Population |
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United States |
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Product Attributes |
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Stage |
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Oncotype DX
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N-, ER+ |
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125,000 |
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Recurrence |
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Commercial |
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Response to chemotherapy |
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Response to chemotherapy or other
therapeutic regimens |
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Product
Expansion |
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N+ |
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65,000 |
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Recurrence |
|
Product |
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Response to chemotherapy or other
therapeutic regimens |
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Expansion |
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Oncotype DX
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N-, ER+ and |
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190,000 |
(1) |
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Enhanced recurrence |
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Clinical |
Second Generation
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N+ |
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Enhanced response to chemotherapy |
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Research |
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New Products
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N-, ER- |
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30,000 |
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Response to taxanes
(2) |
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Clinical |
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Response to chemotherapy |
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Research |
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Recurrence |
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N+ |
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65,000 |
(3) |
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Response to taxanes |
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Clinical |
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Response to chemotherapy |
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Research |
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N-, ER+ |
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125,000 |
(4) |
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Response to taxanes |
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Clinical
Research |
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(1) |
Represents the sum of the 125,000 estimated treatment decisions
in 2005 for N-, ER+ patients and the 65,000 estimated treatment
decisions in 2005 for N+ breast cancer patients listed above. |
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(2) |
Taxanes are a class of chemotherapy drugs that are commonly used
for breast cancer. |
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(3) |
This figure is the same as the 65,000 treatment decisions listed
above. |
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(4) |
This figure is the same as the 125,000 treatment decisions
listed above. |
Oncotype
DX
We are conducting clinical studies with Oncotype DX to
expand the market and improve certain product features.
Approximately 65,000 patients are expected to be diagnosed in
the United States in 2005 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 DX for this patient population.
Additional studies are in the planning stage to investigate
whether Oncotype DX predicts the likelihood of recurrence
in patients who use other hormonal therapies instead of
tamoxifen. Additionally, we believe that individual gene scores
which contribute 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 response to tamoxifen based on
our studies of the NSABP Study B-14 population.
Second
Generation Oncotype DX
We are in the clinical research phase to investigate 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
51
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 response to chemotherapy.
Recurrence
and Response Test for N-, ER- Breast Cancer
We are in the clinical research phase to develop a product to
predict the likelihood of recurrence and response to
chemotherapy in N-, ER- breast cancer patients. This population
is expected to represent approximately 30,000 patients in
the United States in 2005. 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
Response Test
We are also in the clinical research phase to develop a product
to predict the response of patients to taxanes. 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 65,000 N+ breast cancer patients as well
as N-, ER-patients at high risk and N- patients at high risk in
the United States in 2005. We have developed a number of
hypotheses and selected a gene panel to investigate this product
opportunity further.
52
Product
Development Opportunities in Other Cancers
The following table describes our new products in development
for cancers other than breast cancer:
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2005 Estimated |
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Total Incidence |
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2005 Estimated |
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in the |
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Addressable |
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Product Opportunity |
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United States |
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Population |
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Anticipated Product 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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Clinical |
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Prediction of drug response |
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Research |
Prostate Cancer
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250,000 |
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|
|
195,000 |
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Progression |
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Clinical |
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|
|
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|
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|
|
|
|
Recurrence |
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Research |
Renal Cell Cancer
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40,000 |
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25,000 |
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Recurrence |
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Clinical |
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Prediction of drug response |
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Research |
Non-small Cell Lung Cancer
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155,000 |
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25,000 |
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Recurrence
Prediction of drug response |
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Clinical
Research |
Melanoma
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70,000 |
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25,000 |
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Recurrence |
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Clinical |
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Prediction of drug response |
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Research |
Colon
Cancer Recurrence and Response Test
We are in the clinical research phase of developing a test to
predict the likelihood of recurrence and response to
chemotherapy in patients with early stage colon cancer. Colon
cancer is expected to affect approximately 120,000 individuals
in the United States in 2005, of which approximately 65,000
early stage patients will need 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.
Prostate
Cancer Progression and Recurrence Test
We are in the clinical research phase of developing a test to
predict the likelihood of progression and recurrence of prostate
cancer in early stage patients. Approximately 250,000 men are
expected to be diagnosed with prostate cancer in the United
States in 2005, approximately 195,000 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 have established a collaborative agreement
with an academic group to conduct initial feasibility studies
and to access clinical samples correlated with outcome data in
prostate cancer.
Renal
Cell Cancer Recurrence and Response Test
We are in the clinical research phase of developing a test to
predict the likelihood of recurrence and response to therapy in
renal cell cancer. Approximately 40,000 individuals are expected
to be diagnosed with renal cell cancer in the United States in
2005. Recently reported studies suggest that some of these
patients may respond to new treatments. We have conducted
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 clinical research phase of developing a test to
predict the likelihood of response to chemotherapy in early
stage, non-small cell lung cancer. Approximately 155,000
individuals are expected to be diagnosed with non-small cell
lung cancer in the United States in 2005, of which approximately
25,000 of those patients are 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
53
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 research phase of developing a test to predict the
likelihood of recurrence and response to therapy for patients
with melanoma. Approximately 70,000 individuals are expected to
be diagnosed with melanoma in the United States in 2005.
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
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 are
marketing our clinical development platform to pharmaceutical
companies for exploratory clinical studies.
Epidermal
Growth Factor Receptor, or EGFR, Inhibitor Response Test
We are in the clinical research 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 2005,
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.
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.
Research
and Development Expenses
Our research and development expenses were $7.1 million,
$9.1 million and $10.0 million for the years ended
December 31, 2002, 2003 and 2004, respectively, and
$4.6 million for the six months ended June 30, 2005.
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
54
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. 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 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. |
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
55
use statistical methods to optimize and monitor assay
performance and to analyze data from our clinical research and
development studies.
Reimbursement
Revenues for clinical laboratory testing services 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, and patients.
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 are reproducible, sensitive, accurate and specific
to the patients tumor. Patients may benefit from treatment
decisions based on prediction of recurrence, survival and
chemotherapy benefit. |
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Clinical Utility. Patients are provided a Recurrence
Score on a risk continuum that may change decision making
regarding the use of adjuvant chemotherapy, which may increase
the benefits of treatment while reducing its risks and costs. We
believe the large difference in risk of 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. 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 chemotherapy
response, 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. |
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 August 2005, several regional payors,
including Harvard Pilgrim Health Care, Inc. and Highmark Blue
Cross Blue Shield, had issued policies supporting reimbursement
for our test. In addition, Kaiser Foundation Health Plan, Inc.
has entered into a national clinical laboratory services
agreement to reimburse us for Oncotype DX tests performed
for their patients. Where policies are not in place, we pursue
case-by-case reimbursement. Through this process, as of
June 30, 2005, over 180 payors had reimbursed one or more
Oncotype DX tests. We believe that it may take one or
more years to achieve successful reimbursement with a majority
of payors. However, we cannot predict whether, or under what
circumstances, payors will reimburse our products. Payment
amounts can also vary across individual policies. Denial of
coverage by payors, or reimbursement at inadequate levels, would
have a material adverse impact on market acceptance of our
products. The current situation with our primary payors is as
follows:
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
56
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 will take a substantial amount of time, and bills may
not be paid for many months, if at all. Furthermore, if a
third-party payor denies coverage after final appeal, it may
take a substantial amount of time to collect from the patient,
and we may not be successful.
In 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.
Medicare and Medicaid. In December 2004, the
Northern California Medicare contractor with responsibility for
processing and paying claims submitted by us announced that it
would not provide coverage for Oncotype DX for Medicare
beneficiaries. It also indicated that there could be some
questions concerning whether the hospital must bill Medicare or
we can bill Medicare directly. Finally, it questioned which
Medicare contractor has jurisdiction to determine coverage for
Medicare claims for our test. To date, there is no national
coverage determination on Oncotype DX by Medicare, which
means coverage is left to the discretion of the local Medicare
contractor. Since the local Medicare contractor responsible for
processing claims submitted by us has announced that it would
not provide coverage for Oncotype DX, this has resulted
in the denial of Medicare claims. We are appealing these denials
through established processes and working with Medicare to
establish coverage for our test. During this time, we are not
billing Medicare patients directly. However, if we are not
successful in establishing coverage through Medicare, we may
change this policy and bill future Medicare patients directly,
subject to obtaining from patients their advance written
consent. We believe that as much as 20% of our future market for
Oncotype DX may be derived from patients covered by
Medicare.
Selling and Marketing
Our selling and marketing strategy targets the oncology
community, primarily medical and surgical oncologists. Our
direct sales approach focuses on the clinical and economic
benefits of Oncotype DX and the scientific validation
supporting our product. As of August 31, 2005, our selling
and marketing team consisted of 40 employees. Our field
staff has significant clinical oncology selling and marketing
experience from leading biopharmaceutical, pharmaceutical and
specialty reference laboratory companies.
Our marketing strategy focuses on educating physicians,
laboratory personnel and other healthcare professionals
regarding the development of new genomic technologies and the
value of the quantitative information Oncotype DX
provides. We also work closely with national and regional
patient advocacy organizations that are focused on breast cancer
care. Our customer service representatives are trained to handle
inquiries from physicians, patients and other
healthcare-providers. We also utilize the Internet for
communicating with external constituencies, and our web site
contains clinical information for healthcare professionals and
educational information for breast cancer patients.
We promote our product through marketing channels commonly used
by the biopharmaceutical and pharmaceutical industries, such as
sponsored continuing medical education, medical meeting
participation and broad-based publication of our scientific and
economic data.
57
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; and |
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the level of customer service we provide, both to patients and
health care professionals. |
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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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. |
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. In addition, 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 companies such as Agendia B.V.
which offer products or have conducted research to profile gene
expression in breast cancer using fresh or frozen tissue.
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, as well as academic and
research institutions.
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. Competition among these entities to
recruit and retain highly qualified scientific, technical and
professional
58
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.
Regulation
Medicare
and Medicaid Coverage
In determining whether or not Medicare will pay for a service,
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 is the decision of NHIC California,
the current local Medicare carrier for California and the
contractor with jurisdiction to process claims submitted by us.
In December 2004, NHIC published an article on its website
stating that it would not provide coverage for Oncotype
DX for Medicare beneficiaries and that there could be some
questions concerning which provider must bill Medicare for the
test and which contractor had jurisdiction to determine coverage
for Medicare claims for our test.
In addition, in February 2005, CMS issued a notice that would
affect how the date of service for a laboratory service is
determined. Based on this notice, CMS could determine that the
date of service for the test is the date on which the
patients initial surgery was performed. As a result,
Oncotype DX could be considered a hospital service, which
would mean that we would be required to bill and be paid by the
hospital and that the hospital would be required to bill
Medicare for the test as part of its prospective payment for the
admission or encounter during which the surgery was performed.
This could also result in lower reimbursement rates in the event
coverage is provided.
We intend to work with Medicare to establish coverage for
Medicare beneficiaries, and we are also working with NHIC
California and CMS to resolve the issue concerning which entity
is required to bill Medicare for our tests. In the meantime, we
intend to appeal denials received on a case-by-case basis. We
cannot provide any assurance, however, that coverage will be
provided in the future by Medicare, that our appeals will
ultimately be successful or that other issues will be favorably
resolved. 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, no state Medicaid program has
decided to pay for the test.
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 code to report
Oncotype DX. Therefore, the test must be reported under a
non-specific unlisted procedure code, which is subject to manual
review of each claim. Furthermore, because there is no specific
code for this test, there is also no set Medicare payment amount.
59
We are moving forward with plans to obtain procedure coding, but
there is no assurance that a specific procedure code will be
adopted or that adequate payment will be assigned if and when a
code is adopted.
Several provisions of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 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, which 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.
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 the 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 premarket 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 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
60
called home brew tests. Most home brew tests
currently are not subject to premarket review by FDA although
analyte-specific reagents or software provided to us by third
parties and used by us to perform home brew tests may be subject
to review by the FDA prior to marketing. We believe that
Oncotype DX is a type of home brew test. 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 premarket review. At this time, we believe the FDA
is reviewing the regulatory status of Oncotype DX. We
cannot provide any assurance that FDA regulation, including
premarket review, will not be required in the future for
Oncotype DX. If premarket review is required, this would
adversely affect our business until such review is completed and
approval or clearance to market is obtained. If premarket review
is required by the 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 the FDA
and to the requirements of the FDA and penalties for failure to
comply with the requirements of the FDA. Should any of the
clinical laboratory device reagents obtained by us from vendors
and used in conducting our home brew test be affected by future
regulatory actions, we could be adversely affected by those
actions, including increased cost of testing or delay,
limitation or prohibition on 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 have 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.
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We have structured these arrangements with terms intended to
comply with the requirements of the personal services exception
to Stark and PORA. However, we can not be certain that
regulators would find these arrangements to be in compliance
with Stark, PORA or similar state laws. We would be required to
refund any payments we receive pursuant to a referral prohibited
by these laws to the patient, the payor or the Medicare program,
as applicable.
Sanctions for a violation of the Stark Law include the following:
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denial of payment for the services provided in violation of the
prohibition; |
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refunds of amounts collected by an entity in violation of the
Stark Law; |
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a civil penalty of up to $15,000 for each service arising out of
the prohibited referral; |
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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. |
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
62
have taken a broad interpretation of the scope of the
Anti-kickback Law, holding that the statute may be violated if
merely one purpose of a payment arrangement is to induce future
referrals.
In addition to statutory exceptions to the Anti-kickback Law,
regulations provide for a number of safe harbors. If an
arrangement meets the provisions of a safe harbor, it is deemed
not to violate the Anti-kickback Law. An arrangement must fully
comply with each element of an applicable safe harbor in order
to qualify for protection. There are no 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 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 claims 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
63
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.
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. |
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
New Jersey may require out-of-state laboratories which accept
specimens from New Jersey to be licensed in New Jersey. We have
spoken with regulators at the New Jersey Department of Health
and Senior Services, Clinical Laboratory Improvement Services,
and are following their instructions with respect to compliance
with New Jersey law. In addition, 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.
64
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 patents, copyrights, trademarks, trade
secret laws and confidentiality, material data transfer
agreements, licenses and invention assignment agreements to
protect our intellectual property rights. We also rely upon
unpatented trade secrets and improvements, unpatented know-how
and continuing technological innovation to develop and maintain
our competitive position. We generally protect this information
with reasonable security measures.
As of August 31, 2005, we had 16 pending U.S. patent
applications, including provisional and non-provisional filings.
Ten of these U.S. patent applications also have
corresponding pending applications under the Patent Cooperation
Treaty. We have filed one of our patent applications nationally
in Canada, Europe and Japan, three of our patent applications in
Canada, Australia, Europe and Japan, and an additional patent
application in Canada, Australia and Japan.
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.
From time to time, we may receive, notices of claims of
infringement, misappropriation or misuse of other parties
proprietary rights. 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
OncotypeDX 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
65
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
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 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. |
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.
Incyte Agreements
In connection with the sale of series C convertible
preferred stock to Incyte Corporation in March 2001, we entered
into three agreements with Incyte: a LifeSeq collaborative
agreement, a patent license agreement and a collaboration and
technology transfer agreement. We also entered into a Proteome
BioKnowledge Library license agreement with Proteome, Inc., a
then wholly owned subsidiary of Incyte.
Under the LifeSeq collaborative agreement, we obtained access to
Incytes genomic database products and received the right
to non-exclusively license certain of Incytes patent
rights and know-how relating to the database information. Under
the agreement, we paid database access fees to Incyte of
$2.0 million in 2002 and $1.0 million in each of 2003
and 2004, or an aggregate of $4.0 million from 2002 to
2004. Upon commercialization of Oncotype DX, we were
required to make a one-time milestone payment of $100,000 and
are obligated to pay royalties to Incyte each quarter based on
net sales of Oncotype DX. There are no remaining access
fees or milestone payments owing under this agreement. The
LifeSeq collaborative agreement continues in perpetuity until
terminated. The agreement may be terminated by us or Incyte if
the other party materially fails to comply with its obligations
under the agreement. If the agreement is terminated, we must pay
Incyte an annual fee in order to retain any license we obtained
under the agreement. We must continue to pay this fee until the
license is terminated or until we make a milestone payment for
the license, after which the license will continue in perpetuity.
Under the patent license agreement, we license various classes
of patents from Incyte pertaining to the manipulation of genes,
the detection of pathological conditions, comparative gene
analysis, methods for fabricating tests of biological samples
and the use of proteins as markers for cancers. In 2001, we paid
Incyte an aggregate of $5.0 million in non-refundable
license fees for all classes of patents that we license under
this agreement. The non-refundable license fees were one-time
payments and no future licensing fees are owing under this
agreement. We are also obligated to pay Incyte continuing
royalties based on a percentage of our net sales of products
which incorporate each class of licensed patents. The patent
license agreement continues
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until the underlying patent rights expire, unless it is
terminated earlier. Incyte may terminate the patent license
agreement if we fail to satisfy our obligations under the
agreement or otherwise materially breach the agreement. We have
the right to terminate the agreement on a patent by patent basis
for any reason. If we terminate the agreement early, all of our
patent rights under the agreement will expire, but we must
continue to pay royalty obligations that we accrued prior to
termination. In March 2004, we terminated our rights to some of
these patents.
Under the collaboration and technology transfer agreement, we
agreed to collaborate on a project with Incyte relating to
developing technology for the recovery and extraction of RNA
from tissues embedded in paraffin. Under this agreement, Incyte
agreed to provide us access to Incytes technology
regarding paraffin extraction for a period of 15 months
ending in June 2002. We also agreed to pay Incyte continuing
royalties based on the sales of products commercialized using
the technology provided by Incyte under this agreement. The
collaboration and technology transfer agreement expires on
March 30, 2006, but may be terminated earlier if we and
Incyte mutually agree in writing. The agreement may also be
terminated by us or Incyte if the other party:
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materially breaches or defaults under the agreement; |
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is subject to bankruptcy, insolvency, or dissolution proceedings
or makes an assignment for the benefit of creditors; or |
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if substantially all of the assets of the other party are seized
or attached. |
All of our rights and obligations under the agreement will
terminate when the agreement is terminated, except that
termination of the agreement will not release us from any
liabilities that accrued prior to termination.
Under the Proteome BioKnowledge Library license agreement, we
licensed certain software and were provided access to certain
biological databases from Proteome, Inc. This agreement expired
in March 2002.
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 and computer and software leases. Under the
master security agreement, we granted a security interest to
Oxford in all of our goods, equipment, instruments and
investment property. The following events would constitute a
default by us under the master security agreement:
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our failure to pay an obligation when due; |
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an attempt by us to sell, lease, transfer or encumber the
collateral; |
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our failure to maintain liability insurance as required by the
agreement; |
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any of the collateral being subject to attachment or levy; |
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our dissolving, becoming insolvent, filing for bankruptcy or
having a receiver appointed; |
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a change in our ownership; |
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a material impairment of Oxfords security interest in the
collateral; or |
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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 monthly installments, and principal underlying
promissory notes to finance computer and software leases 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
August 31, 2005, the outstanding principal amount under
these promissory notes was $3.7 million.
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Employees
As of August 31, 2005, we had 117 full-time employees
and two part-time employees, including 19 in research and
development, 18 in commercial operations, 14 in medical, three
in regulatory, 40 in selling and marketing, 13 in information
technology and 12 in administrative functions. None of our
employees are covered by collective bargaining arrangements, and
our management considers its relationships with our employees to
be good.
Properties
We currently sublease approximately 25,000 square feet of
laboratory and office space in Redwood City, California under a
sublease that expires in February 2006. From June 30, 2005
to the end of its term, the monthly rent under this sublease is
$54,000. In September 2005, we entered into a lease directly
with the facility owner that has a term of six years. When our
existing sublease expires in February 2006, the new lease will
apply to the existing 25,000 square feet of laboratory and
office space we currently occupy. Under the new lease, we also
lease approximately 23,000 square feet of additional space which
we expect to first occupy in March 2006. If we first occupy
space under this new lease in March 2006, we will be required to
make aggregate rent payments of $460,000 in 2006, $730,000 in
2007, $753,000 in 2008, $779,000 in 2009, $799,000 in 2010,
$827,000 in 2011 and $139,000 in 2012.
Legal Proceedings
From time to time, we may be party to lawsuits in the ordinary
course of business. We are currently not a party to any legal
matters.
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MANAGEMENT
Executive Officers and Directors
The following table shows information about our executive
officers and directors:
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Name |
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Age |
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Position(s) |
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Randal W. Scott, Ph.D.
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47 |
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Chairman of the Board and Chief Executive Officer |
Kimberly J. Popovits
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46 |
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President, Chief Operating Officer and Director |
Joffre B. Baker, Ph.D.
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57 |
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Chief Scientific Officer |
Steven Shak, M.D.
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55 |
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Chief Medical Officer |
G. Bradley Cole
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49 |
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Executive Vice President, Chief Financial Officer and Secretary |
Julian C. Baker
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39 |
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Director |
Brook H. Byers(1)
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60 |
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Director |
Fred E. Cohen, M.D., Ph.D.(1)(2)
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49 |
|
Director |
Samuel D. Colella(1)(2)(3)
|
|
65 |
|
Director |
Michael D. Goldberg(2)(3)
|
|
47 |
|
Director |
Randall S. Livingston(3)
|
|
52 |
|
Director |
|
|
(1) |
Member of the Compensation Committee. |
|
(2) |
Member of the Nominating and Corporate Governance Committee. |
|
(3) |
Member of the Audit Committee. |
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
69
Discovery Research at Genentech, where he was responsible for
Pulmonary Research, Immunology, and Pathology. Prior to joining
Genentech, Dr. Shak was an Assistant Professor of Medicine
and Pharmacology at the New York University School of Medicine.
Dr. Shak holds a B.A. in Chemistry from Amherst College and
an M.D. from the New York University School of Medicine, and
completed his post-doctoral training at the University of
California, San Francisco.
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, and serving as Vice President
and General Manager of the Vascular Surgery Business Unit from
December 1998 until December 2000 and as Vice President, Finance
and IT Systems of the Cardiac and Vascular Surgery Group from
December 1997 until November 1998. 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.
Julian C. Baker has served as a director of Genomic
Health since January 2001. Mr. Baker is a Managing Member
of Baker Bros. Advisors, LLC, which he and his brother, Felix
Baker, Ph.D., founded in 2000. Mr. Bakers firm
manages Baker Brothers Investments, a family of long-term
investment funds for major university endowments and
foundations, which are focused on publicly traded life sciences
companies. Mr. Bakers career as a fund-manager began
in 1994 when he co-founded a biotechnology investing partnership
with the Tisch Family, which led to the establishment in 2000 of
Baker/ Tisch Advisors, LLC. Mr. Baker is currently a
Managing Member of Baker/ Tisch Advisors. Previously,
Mr. Baker was employed from 1988 to 1993 by the private
equity investment arm of Credit Suisse First Boston Corporation.
He is also a director of Incyte Corporation, Neurogen
Corporation, Theravance, Inc. and Trimeris, Inc. Mr. Baker
holds an A.B. in Social Studies from Harvard University.
Brook H. Byers has served as a director of Genomic Health
since January 2001. Mr. Byers is a general partner of
Kleiner Perkins Caufield & Byers, a venture capital
firm which he joined in 1977. He was the founding president and
chairman of four life science companies: Hybritech Inc., IDEC
Pharmaceuticals Corporation, InSite Vision Inc. and Ligand
Pharmaceuticals Inc. Mr. Byers currently serves as a
director of a number of privately held technology, healthcare
and biotechnology companies. Mr. Byers holds a B.S. in
Electrical Engineering from the Georgia Institute of Technology
and an M.B.A. from the Stanford Graduate School of Business.
Fred E. Cohen, M.D., Ph.D., has served as a
director of Genomic Health since April 2002. In 2001,
Dr. Cohen joined TPG Ventures, a venture capital firm, as a
Managing Director. Dr. Cohen is also a Professor of
Medicine and Pharmacology at the University of California,
San Francisco, where he has taught since July 1988.
Dr. Cohen is a director of Matrix Laboratories Limited and
a number of privately held companies. Dr. Cohen holds a
B.S. in Molecular Biophysics and Biochemistry from Yale
University, a Ph.D. in Molecular Biophysics from Oxford
University, and an M.D. from Stanford University.
Samuel D. Colella has served as a director of Genomic
Health since January 2001. In 1999, Mr. Colella co-founded
Versant Ventures, a healthcare and biotechnology venture capital
firm. From 1984 to 1999, Mr. Colella was a general partner
of Institutional Venture Partners, a venture capital firm.
Mr. Colella currently serves as a director of Symyx
Technologies, Inc. and a number of privately held technology and
biotechnology companies. Mr. Colella has a B.S. in Business
and Engineering from the University of Pittsburgh and an M.B.A.
from the Stanford Graduate School of Business.
Michael D. Goldberg has served as a director of Genomic
Health since October 2001. In January 2005, Mr. Goldberg
joined Mohr Davidow Ventures, a venture capital firm, as a
general partner. From October 2000 to December 2004,
Mr. Goldberg served as the Managing Director of Jasper
Capital, a management and financial consultancy business. In
1995, Mr. Goldberg founded OnCare, Inc., an oncology
practice management company, and served as Chairman until August
2001 and as Chief Executive Officer until March
70
1999. Previously, Mr. Goldberg was the founder, President
and Chief Executive Officer of Axion Inc., a cancer-focused
health care service company. Prior to Axion, Mr. Goldberg
was a partner at the venture capital firm Sevin Rosen Funds, and
was director of Corporate Development and a member of the
Operating Committee at Cetus Corporation. He is also a director
of several privately held companies. Mr. Goldberg holds a
B.A. in Philosophy from Brandeis University and an M.B.A. from
the Stanford Graduate School of Business.
Randall S. Livingston has served as a director of Genomic
Health since October 2004. In 2001, Mr. Livingston was
appointed Vice President for Business Affairs and Chief
Financial Officer of Stanford University. From 1999 to 2001,
Mr. Livingston served as Executive Vice President and Chief
Financial Officer of OpenTV Corp., a provider of interactive
television services. From 1996 until 1999, Mr. Livingston
served as a consultant and part-time executive for several
Silicon Valley technology companies. Prior to 1996,
Mr. Livingston worked for Heartport, Inc., Taligent, Apple
Computer, Ingres Corporation and McKinsey & Company.
Mr. Livingston holds a B.S. in Mechanical Engineering from
Stanford University and an M.B.A. from the Stanford Graduate
School of Business.
Board of Directors
Our board of directors currently consists of eight members. Each
of Messrs. Baker, Byers, Cohen, Colella, Goldberg and
Livingston is an independent director as defined by The Nasdaq
Stock Market, Inc. listing standards set forth in
Rule 4200(a)(15) adopted by the National Association of
Securities Dealers.
Our directors are elected annually to serve until the next
annual meeting of stockholders, until their successors are duly
elected and qualified or until their earlier death, resignation,
disqualification or removal. With limited exceptions, our board
of directors is required to have a majority of independent
directors at all times. The authorized number of directors may
be changed by resolution of the board. Vacancies on the board
can be filled by resolution of the board of directors.
Board Committees
Our board of directors has an audit committee, a compensation
committee and a nominating and corporate governance committee,
each of which has the composition and responsibilities described
below:
Audit Committee. The audit committee consists of
Messrs. Colella, Goldberg and Livingston, with
Mr. Livingston serving as the chairman of the committee.
The audit committee provides assistance to the board of
directors in fulfilling its legal and fiduciary obligations in
matters involving our accounting, auditing, financial reporting,
internal control and legal compliance functions by approving the
services performed by our independent accountants and reviewing
their reports regarding our accounting practices and systems of
internal accounting controls. The audit committee is responsible
for the appointment, compensation, retention and oversight of
the independent accountants and takes those actions as it deems
necessary to satisfy itself that the accountants are independent
of management. Mr. Livingston is our audit committee
financial expert as currently defined under the rules of the
Securities and Exchange Commission. We believe that our audit
committee complies with the requirements of the Sarbanes Oxley
Act of 2002, the current rules of The Nasdaq Stock Market and
Securities and Exchange Commission rules and regulations.
Compensation Committee. The compensation committee
determines our general compensation policies and the
compensation provided to our directors and officers. The
compensation committee also reviews and determines bonuses for
our officers and other employees. In addition, the compensation
committee reviews and determines equity-based compensation for
our directors, officers, employees and consultants and
administers our stock option plans. The current members of the
compensation committee are Messrs. Byers, Cohen and
Colella, each of whom is a non-management member of our board of
directors, with Mr. Colella serving as the chairman of the
committee. We believe that our compensation committee complies
with the applicable requirements of the Sarbanes-Oxley Act of
2002, the current rules of The Nasdaq Stock Market and
Securities and Exchange Commission rules and regulations.
71
Nominating and Corporate Governance Committee. The
nominating and corporate governance committee is responsible for
making recommendations to the board of directors regarding
candidates for directorships and the size and composition of the
board. In addition, the nominating and corporate governance
committee is responsible for overseeing our corporate governance
guidelines and reporting and making recommendations to the board
concerning corporate governance matters. The current members of
the nominating and governance committee are Messrs. Cohen,
Colella and Goldberg, with Mr. Cohen serving as the
chairman of the committee. We believe that our nominating and
governance committee complies with the applicable requirements
of the Sarbanes-Oxley Act of 2002, the current rules of The
Nasdaq Stock Market and Securities and Exchange Commission rules
and regulations.
Director Compensation
Directors who are employees do not receive any additional
compensation for their service on the board. Our non-employee
directors are reimbursed for reasonable out-of-pocket expenses
incurred in connection with attending board and committee
meetings. We currently pay Mr. Goldberg and
Mr. Livingston an annual cash retainer of $20,000 each for
their services as members of our board of directors. After the
closing of this offering, we will pay each non-employee director
an annual cash retainer of $20,000 and the chairman of our audit
committee of the board of directors an annual cash retainer of
$30,000.
During the year ended December 31, 2004 and the three
months ended March 31, 2005, we paid Mr. Goldberg
$20,000 and $5,000, respectively, for consulting services
separate from his services as a member of our board of
directors. This consulting agreement was terminated effective as
of March 31, 2005.
In October 2001, we granted Mr. Goldberg an option to
purchase 25,000 shares of our common stock when he joined
our board of directors. The option had an exercise price per
share of $0.66 and became fully vested in October 2004. In
October 2004, we granted Mr. Livingston an option to
purchase 17,340 shares of our common stock when he joined
our board of directors. The option has an exercise price per
share of $1.33 and vests ratably over a four-year period ending
in October 2008. After the closing of this offering, each new
non-employee director will receive an initial stock option grant
to purchase 16,500 shares of our common stock and each
non-employee director will receive an option to purchase
8,250 shares of common stock following each annual meeting
of stockholders. See Employee Benefit Plans
2005 Stock Incentive Plan.
Compensation Committee Interlocks and Insider
Participation
None of the members of our compensation committee at any time
has been one of our officers or employees. There are no familial
relationships among any of our directors or officers. No
interlocking relationship exists between our board of directors
or compensation committee and the board of directors or
compensation committee of any other entity, nor has any
interlocking relationship existed in the past.
72
Executive Compensation
The following table summarizes all compensation paid to our
Chief Executive Officer and to our four other most highly
compensated executive officers whose total annual salary and
bonus exceeded $100,000, for services rendered in all capacities
to us during the year ended December 31, 2004.
Summary Compensation Table
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Annual | |
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Long-Term Compensation | |
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Compensation | |
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| |
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| |
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Restricted | |
|
Shares | |
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All Other | |
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Salary | |
|
Bonus | |
|
Stock Awards | |
|
Underlying | |
|
Compensation | |
Name and Position(s) |
|
Year | |
|
($) | |
|
($) | |
|
($) | |
|
Options | |
|
($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Randal W. Scott, Ph.D.
|
|
|
2004 |
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
|
69,362 |
|
|
|
|
|
|
Chief Executive Officer and Chairman |
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kimberly J. Popovits
|
|
|
2004 |
|
|
|
275,000 |
|
|
|
|
|
|
|
|
|
|
|
69,361 |
|
|
|
|
|
|
President and Chief Operating Officer |
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|
|
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|
|
|
|
|
|
Joffre B. Baker, Ph.D.
|
|
|
2004 |
|
|
|
275,000 |
|
|
|
|
|
|
|
|
|
|
|
69,362 |
|
|
|
|
|
|
Chief Scientific Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Shak, M.D.
|
|
|
2004 |
|
|
|
275,000 |
|
|
|
|
|
|
|
|
|
|
|
69,362 |
|
|
|
|
|
|
Chief Medical Officer |
|
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|
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
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G. Bradley Cole(1)
|
|
|
2004 |
|
|
|
120,311 |
|
|
|
|
|
|
|
|
|
|
|
173,407 |
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
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|
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|
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|
|
|
(1) |
Mr. Cole became our Executive Vice President and Chief
Financial Officer in July 2004 and his annual salary is $250,000. |
Stock option grants to our executive officers have been made in
the discretion of our board of directors. Beginning in 2005,
stock options grants to our executive officers will be made by
the independent members of our board of directors, after
considering the recommendations of the compensation committee of
the board. The board considered a variety of factors in
determining stock option awards, including our business and
financial results, the executives performance, competitive
market data for similar positions at comparable companies, and
the executives overall total compensation.
73
Stock Options
The following tables set forth certain information for the year
ended December 31, 2004 with respect to stock options
granted to and exercised by the individuals named in the Summary
Compensation Table above. The percentage of total options
granted is based on an aggregate of 942,751 shares
underlying options granted in 2004.
Option Grants in Last Fiscal Year
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|
Individual Grants |
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|
|
Potential Realizable Value at |
|
|
Number of |
|
% of Total |
|
|
|
|
|
Assumed Annual Rates of Stock |
|
|
Securities |
|
Options |
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|
|
|
|
Price Appreciation for Option |
|
|
Underlying |
|
Granted to |
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Term(3) |
|
|
Options |
|
Employees in |
|
Exercise Price |
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Expiration |
|
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Name |
|
Granted |
|
Fiscal Year |
|
Per Share(1) |
|
Date(2) |
|
5%($) |
|
10%($) |
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|
|
Randal W. Scott, Ph.D.
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|
69,362 |
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7.4 |
% |
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$3.17 |
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12/2/2009 |
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842,308 |
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1,120,501 |
|
Kimberly J. Popovits
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69,361 |
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7.4 |
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2.88 |
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12/2/2014 |
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1,155,783 |
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|
1,958,857 |
|
Joffre B. Baker, Ph.D.
|
|
|
69,362 |
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7.4 |
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|
2.88 |
|
|
|
12/2/2014 |
|
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1,155,803 |
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|
|
1,958,888 |
|
Steven Shak, M.D.
|
|
|
69,362 |
|
|
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7.4 |
|
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2.88 |
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|
|
12/2/2014 |
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1,155,803 |
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1,958,888 |
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G. Bradley Cole
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|
|
17,340 |
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|
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1.8 |
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2.88 |
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12/2/2014 |
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288,942 |
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489,708 |
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G. Bradley Cole
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156,067 |
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16.6 |
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1.33 |
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6/10/2014 |
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2,843,600 |
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4,650,571 |
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(1) |
Except for the grant to Dr. Scott, the exercise price for
each grant is equal to 100% of the fair market value of our
common stock on the date of grant. The exercise price of
Dr. Scotts grant is equal to 110% of the fair market
value of our common stock on the date of grant. |
|
(2) |
The options have a term of 10 years, unless issued to a 10%
or greater stockholder, in which case they have a term of five
years. All options are subject to termination in certain events
related to termination of employment. The options vest as to 25%
of the shares one year after the date of grant and as to
1/48th
of the shares each month thereafter. |
|
(3) |
Potential realizable values are calculated by: |
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|
|
|
multiplying the number of shares of our common stock subject to
a given option by the initial public offering price of
$12.00 per share; |
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|
assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rates shown in the
table for the entire five-year or ten-year term of the option,
as applicable; and |
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|
subtracting from that result the total option exercise price. |
The 5% and 10% assumed rates of appreciation are suggested by
the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of the future common stock
price. There can be no assurance that any of the values
reflected in the table will be achieved.
Aggregated Option Exercises and Fiscal Year-End Option
Value
The following table assumes a fair market value of
$12.00 per share, the initial public offering price.
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Value of Unexercised |
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Shares |
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Number of Unexercised |
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In-the-Money Options at |
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Acquired on |
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Value |
|
Options at Fiscal Year-End(#) |
|
Fiscal Year-End($) |
Name |
|
Exercise(#) |
|
Realized($) |
|
Exercisable/Unexercisable |
|
Exercisable/Unexercisable |
|
|
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|
|
|
Randal W. Scott, Ph.D.
|
|
|
|
|
|
/ 69,362 |
|
/ 612,346 |
Kimberly J. Popovits
|
|
100,000 |
|
1,234,000 |
|
8,670 / 190,747 |
|
98,540 / 2,012,202 |
Joffre B. Baker, Ph.D.
|
|
|
|
|
|
/ 69,362 |
|
/ 632,581 |
Steven Shak, M.D.
|
|
|
|
|
|
/ 69,362 |
|
/ 632,581 |
G. Bradley Cole
|
|
|
|
|
|
/ 173,407 |
|
/ 1,823,376 |
74
Employee Benefit Plans
2001 Stock Incentive Plan
General. Our 2001 stock incentive plan was adopted
by our board of directors in January 2001 and was subsequently
approved by our stockholders.
Administration. The 2001 stock incentive plan
provided for the granting of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees, officers and employee directors
and the granting of nonstatutory stock options and stock
purchase rights to employees, officers, directors (including
non-employee directors) and consultants. The administrator
determined the term of options, which was prohibited from
exceeding 10 years (five years in the case of an incentive
stock option granted to a stockholder holding more than 10% of
the voting shares of our company). To the extent an optionee
would have the right in any calendar year to exercise for the
first time one or more incentive stock options for shares having
an aggregate fair market value in excess of $100,000, any such
excess options would be treated as nonstatutory stock options.
Authorized Shares. As of August 31, 2005,
459,011 shares of common stock remained available for
future issuance under our 2001 stock incentive plan. As of
August 31, 2005, options to purchase a total of
1,416,206 shares of common stock were outstanding under the
2001 stock incentive plan at a weighted average exercise price
of $1.91 per share. Following the completion of this
offering, no shares of our common stock will remain available
for future issuance under the 2001 stock incentive plan. Shares
that are subject to options that expire, terminate, or are
cancelled or as to which options have not been granted under the
2001 stock incentive plan will not be available for option
grants or share issuances under our 2005 stock incentive plan
after this offering is completed.
Plan Features. Options granted under the 2001 stock
incentive plan generally vest at the rate of
1/4
of the total number of shares subject to the options
12 months after the vesting commencement date, and
1/48
of the total number of shares subject to the options each month
thereafter. No option may be transferred by the optionee other
than by will or the laws of descent or distribution. Each option
may be exercised during the lifetime of the optionee only by
such optionee. The 2001 stock incentive plan provides that in
the event of a recapitalization, stock split or similar capital
transaction, we will make appropriate adjustments in order to
preserve the benefits of options outstanding under the plan. If
we are involved in a merger or consolidation, options granted
under the 2001 stock incentive plan may be terminated
immediately prior to the effective date of such transaction,
unless the surviving or acquiring company assumes them.
|
|
|
2005 Stock Incentive Plan |
General. The 2005 stock incentive plan was adopted
by our board of directors on September 8, 2005,
subject to stockholder approval, and will become effective upon
the completion of this offering.
Administration. The 2005 stock incentive plan will
be administered by our compensation committee. The 2005 stock
incentive plan provides for the grant of options to purchase
shares of common stock, restricted stock, stock appreciation
rights and stock units. Incentive stock options may be granted
only to employees. Nonstatutory stock options and other
stock-based awards may be granted to employees, non-employee
directors, advisors and consultants. The board of directors will
be able to amend or modify the 2005 stock incentive plan at any
time, with stockholder approval, if required.
Authorized Shares. 5,000,000 shares of common
stock have been authorized for issuance under the 2005 stock
incentive plan. Shares subject to awards that expire unexercised
or are forfeited or terminated will again become available for
issuance under the 2005 stock incentive plan. No participant in
the 2005 stock incentive plan can receive option grants,
restricted shares, stock appreciation rights or stock units for
more than 1,650,000 shares total in any calendar year.
Plan Features. Under the 2005 stock incentive plan:
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Nondiscretionary, automatic grants of nonstatutory stock options
will be made to outside directors. An outside director joining
our board of directors after this offering will be granted
automatically an initial option to purchase 16,500 shares
upon first becoming a member of our board. The initial option |
75
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will vest and become exercisable over four years, with the first
25% of the shares subject to the initial option vesting on the
first anniversary of the date of grant date and the remainder
vesting monthly thereafter. Immediately after each of our
regularly scheduled annual meetings of stockholders, each
outside director will be automatically granted a nonstatutory
option to purchase 8,250 shares of our common stock,
provided the director has served on our board for at least six
months. Each annual option will be fully vested and exercisable
on the first anniversary of the date of grant or, if earlier,
the date of our next annual meeting of stockholders. The options
granted to outside directors will have a per share exercise
price equal to 100% of the fair market value of the underlying
shares on the date of grant, and will become fully vested if we
are subject to a change of control. |
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Generally, if we merge with or into another corporation, we may
accelerate the vesting or exercisability of outstanding options
and terminate any unexercised options unless they are assumed or
substituted for by any surviving entity or a parent or
subsidiary of the surviving entity. |
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The plan terminates ten years after its initial adoption, unless
terminated earlier by the board. The board of directors may
amend or terminate the plan at any time, subject to stockholder
approval where required by applicable law. Any amendment or
termination may not impair the rights of holders of outstanding
awards without their consent. |
We have established a tax-qualified employee savings and
retirement plan for which our employees are generally eligible.
Under our 401(k) plan, employees may elect to reduce their
compensation and have the amount of this reduction contributed
to the 401(k) plan. We do not make matching contributions.
The 401(k) plan is intended to qualify under
Section 401 of the Internal Revenue Code, so that
contributions to the 401(k) plan, and income earned on plan
contributions, are not taxable to employees until withdrawn from
the plan, and so that contributions by us, if any, will be
deductible by us when made.
Indemnification Agreements
We enter into agreements to indemnify our directors and
executive officers. We believe that these provisions and
agreements are necessary to attract and retain qualified persons
as directors and executive officers. Our certificate of
incorporation and our bylaws contain provisions that limit the
liability of our directors. A description of these provisions is
contained under the heading Description of Capital
Stock Limitation of Liability and Indemnification
Matters.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
persons controlling us pursuant to the foregoing provisions, we
have been informed that in the opinion of the Securities and
Exchange Commission, this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
76
RELATED PARTY TRANSACTIONS
Transactions with Officers, Directors and 5% Stockholders
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Founders Stock Purchase Agreements |
In October 2000, in connection with our formation, we issued an
aggregate of 1,200,000 shares of restricted common stock at
a price per share of $0.003 to the following executive officers
pursuant to separate founders stock purchase agreements:
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Number of Shares of | |
|
Aggregate Purchase | |
Name |
|
Date of Sale |
|
Common Stock | |
|
Price | |
|
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|
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| |
|
| |
Randal W. Scott, Ph.D.
|
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October 16, 2000 |
|
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600,000 |
|
|
$ |
1,800 |
|
Joffre B. Baker, Ph.D.
|
|
October 16, 2000 |
|
|
300,000 |
|
|
|
900 |
|
Steven Shak, M.D.
|
|
October 16, 2000 |
|
|
300,000 |
|
|
|
900 |
|
Under each founders stock purchase agreement, we were
granted a right to repurchase the shares of common stock sold.
Our repurchase right lapsed as to 25% of the shares on
October 16, 2001, and lapsed with respect to the balance of
the shares in 36 equal monthly installments thereafter ending
October 16, 2004.
Since January 1, 2002, we sold shares of preferred stock in
private financings as follows:
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In March 2002, May 2002 and November 2002, we sold
4,073,913 shares of series D preferred stock at a
price of $2.30 per share for aggregate consideration of
approximately $9.4 million to 11 investors. |
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In February 2004, March 2004, April 2004 and December 2004, we
sold 18,543,980 shares of series E preferred stock at a
price of $2.82 per share for aggregate consideration of
approximately $52.3 million to 75 investors. |
The series D preferred stock and series E preferred
stock will convert into one share of common stock for every
three shares held upon the closing of this offering. The
purchasers of the series D preferred stock and
series E preferred stock include the following directors,
officers, holders of 5% or more of our securities, and their
affiliated entities:
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|
Number of Shares of | |
|
Number of Shares of | |
|
|
Series D Preferred | |
|
Series E Preferred | |
Investor |
|
Stock | |
|
Stock | |
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| |
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| |
5% Stockholders:
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Kleiner Perkins Caufield & Byers Affiliated Entities
|
|
|
|
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|
|
1,418,440 |
|
Versant Ventures Affiliated Entities
|
|
|
|
|
|
|
1,418,440 |
|
TPG Ventures Affiliated Entities
|
|
|
3,043,479 |
|
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|
2,464,539 |
|
Andrew H., Daniel R., James S. and Thomas J. Tisch
|
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|
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851,064 |
|
Julian C. Baker and Felix J. Baker
|
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1,737,589 |
|
J.P. Morgan Direct Venture Capital Affiliated Entities
|
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|
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2,739,362 |
|
Directors and Executive Officers:
|
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|
Joffre B. Baker, Ph.D.
|
|
|
|
|
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35,460 |
|
G. Bradley Cole
|
|
|
|
|
|
|
35,460 |
|
Michael D. Goldberg
|
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|
|
|
|
|
35,460 |
|
Randall S. Livingston
|
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|
|
|
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17,730 |
|
Kimberly J. Popovits
|
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|
|
|
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35,460 |
|
Randal W. Scott, Ph.D.
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35,460 |
|
Steven Shak, M.D.
|
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|
|
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35,460 |
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Agreements with Incyte Corporation |
In March 2001, we sold 2,252,252 shares of series C
preferred stock to Incyte Corporation for aggregate
consideration of $5.0 million. Every three shares of
series C preferred stock will convert into one share
of common stock upon closing of this offering.
The conversion price of the series C preferred stock is
subject to adjustment to prevent dilution in the event that we
issue additional shares of preferred stock, common stock or
common stock equivalents at a purchase price less than the
then-effective conversion price. If our board of directors
declares any dividends on our capital stock, holders of
series C preferred stock and our other outstanding
preferred stock will be entitled to receive dividends before
holders of our common stock receive any dividends.
77
In the event of our liquidation, dissolution or winding up,
holders of series C preferred stock are entitled, on a
basis equal to that of our other outstanding preferred stock, to
a liquidation preference prior to payment to holders of common
stock of $2.22 per share plus any declared but unpaid dividends.
Series C preferred stockholders are entitled to the number
of votes they would have upon conversion of their preferred
stock into common stock on the record date.
At the time of the series C sale to Incyte, we entered into
the following agreements with Incyte and one of its
subsidiaries: a LifeSeq collaborative agreement, a patent
license agreement, a collaboration and technology transfer
agreement and a Proteome BioKnowledge Library license agreement.
At that time, Incyte provided genomic information products and
services. From January 1, 2002 to December 31, 2004,
we paid Incyte an aggregate of $5.4 million under these
agreements.
Under the LifeSeq Collaborative Agreement, we license certain of
Incytes patent rights and know-how regarding cloning, DNA
sequencing, and data analysis technologies. We use this license
to conduct research and develop our clinical diagnostic
products. Under the Patent License Agreement, we license various
classes of patents from Incyte pertaining to the manipulation of
genes, the detection of pathological conditions, comparative
gene analysis, methods for fabricating tests of biological
samples and the use proteins as markers for cancers. Under the
Collaboration and Technology Transfer Agreement, we received
access to certain of Incytes technology regarding paraffin
extraction until June 2002. Under the Proteome BioKnowledge
Library license agreement, which expired in March 2002, we
licensed certain software and were provided access to certain
biological databases.
Under the series C preferred stock purchase agreement,
Incyte granted us a right, which may be exercised only once, to
cause Incyte to purchase an aggregate of $5.0 million of
shares of our common stock upon closing this offering at the
initial public offering price. We will exercise this right in
connection with this offering and sell to Incyte
416,666 shares of common stock at the public offering price
per share of $12.00.
As of August 31, 2005, Incyte owned approximately 6.0% of
our outstanding capital stock, and will own approximately
6.3% of our outstanding common stock after this
offering when we exercise our put right. Randal W. Scott, our
Chairman and Chief Executive Officer, was a founder of Incyte
and served as a member of its board of directors until December
2001. In addition, Julian C. Baker, one of our directors, is
also a member of Incytes board of directors, and holds
shares, directly or beneficially, of both companies.
Registration Rights
We have entered into an investors rights agreement with
each of the purchasers of preferred stock listed above. Under
this agreement, these and other stockholders will be entitled to
registration rights with respect to their shares of common stock
issuable upon the automatic conversion of their convertible
preferred stock upon the closing this offering. For additional
information, see Description of Capital Stock
Registration Rights.
Insider Participation in the Offering
Several of our significant existing stockholders, including
funds affiliated with Julian C. Baker, Felix J. Baker and
Integral Capital Partners VI, L.P. or their affiliates, have
indicated an interest in purchasing up to an aggregate of
500,000 shares of our common stock in this offering, less any
shares sold to our employees pursuant to our directed share
program. However, because indications of interest are not
binding upon us or the prospective purchasers, these
stockholders may not acquire any shares in this offering.
Indemnification Agreements
We have entered into indemnification agreements with each of our
current directors and executive officers. These agreements will
require us to indemnify these individuals to the fullest extent
permitted under Delaware law against liabilities that may arise
by reason of their service to us, and to advance expenses
incurred as a result of any proceeding against them as to which
they could be indemnified. We also intend to enter into
indemnification agreements with our future directors and
executive officers.
78
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial
ownership of our common stock as of August 31, 2005, and as
adjusted to reflect the shares of common stock to be issued and
sold in the offering assuming no exercise of the
underwriters over-allotment option, by:
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each person or group of affiliated persons known by us to be the
beneficial owner of more than 5% of our common stock; |
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each of our directors; |
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each of our named executive officers; and |
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all of our executive officers and directors as a group. |
Unless otherwise noted below, the address of each person listed
on the table is c/o Genomic Health, Inc., 301 Penobscot
Drive, Redwood City, California 94063.
We have determined beneficial ownership in accordance with the
rules of the Securities Exchange Commission. Except as indicated
by the footnotes below, we believe, based on the information
furnished to us, that the persons and entities named in the
table below have sole voting and investment power with respect
to the shares of common stock that they beneficially own,
subject to applicable community property laws.
Applicable percentage ownership is based on
18,934,044 shares of common stock outstanding on
August 31, 2005, which gives effect to the conversion of
our preferred stock into an equal number of shares of common
stock before the closing of this offering and the dividend we
will distribute to our stockholders of record prior to this
offering. For the purposes of the table below, we have assumed
that 24,367,432 shares of common stock will be outstanding
upon completion of this offering, which includes
416,666 shares that we will sell to Incyte Corporation in a
concurrent private sale at the initial public offering price of
$12.00 per share. The percentage ownership information
assumes no exercise of the underwriters over-allotment
option and does not reflect the purchase of up to an aggregate
of 500,000 shares of our common stock that several of our
significant existing stockholders have indicated an interest in
purchasing in this offering. In computing the number of shares
of common stock beneficially owned by a person and the
percentage ownership of that person, we deemed outstanding
shares of common stock subject to options held by that person
that are currently exercisable or exercisable within
60 days of August 31, 2005. We did not deem these
shares outstanding, however, for the purpose of computing the
percentage ownership of any other person.
79
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|
|
Percentage of Common Stock |
|
|
Number of Shares of |
|
Beneficially Owned |
|
|
Common Stock |
|
|
Name of Beneficial Owner |
|
Beneficially Owned |
|
Before Offering |
|
After Offering |
|
|
|
|
|
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities Affiliated with Kleiner Perkins Caufield &
Byers(1)
|
|
|
2,366,627 |
|
|
|
12.5 |
% |
|
|
9.7 |
% |
Entities Affiliated with Versant Ventures(2)
|
|
|
2,366,623 |
|
|
|
12.5 |
|
|
|
9.7 |
|
Entities Affiliated with TPG Ventures(3)
|
|
|
1,910,273 |
|
|
|
10.1 |
|
|
|
7.9 |
|
Incyte Corporation(4)
|
|
|
1,544,603 |
|
|
|
6.0 |
|
|
|
6.3 |
|
Andrew H., Daniel R., James S. and Thomas J. Tisch(5)
|
|
|
1,213,760 |
|
|
|
6.4 |
|
|
|
5.0 |
|
Julian C. Baker and Felix J. Baker(6)
|
|
|
996,299 |
|
|
|
5.3 |
|
|
|
4.1 |
|
Entities Affiliated with J.P. Morgan Direct Venture
Capital(7)
|
|
|
950,056 |
|
|
|
5.0 |
|
|
|
3.9 |
|
Directors and Named Executive Officers:
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|
|
|
|
|
|
|
|
|
|
|
|
Julian C. Baker(8)
|
|
|
996,299 |
|
|
|
5.3 |
% |
|
|
4.1 |
% |
Brook H. Byers(9)
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|
|
2,366,627 |
|
|
|
12.5 |
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|
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9.7 |
|
Fred E. Cohen, M.D., Ph.D.(10)
|
|
|
1,964,895 |
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|
|
10.4 |
|
|
|
8.0 |
|
Samuel D. Colella(11)
|
|
|
2,366,623 |
|
|
|
12.5 |
|
|
|
9.7 |
|
Michael D. Goldberg
|
|
|
48,713 |
|
|
|
* |
|
|
|
* |
|
Randall S. Livingston(12)
|
|
|
10,484 |
|
|
|
* |
|
|
|
* |
|
Joffre B. Baker, Ph.D.(13)
|
|
|
428,478 |
|
|
|
2.3 |
|
|
|
1.8 |
|
G. Bradley Cole(14)
|
|
|
64,322 |
|
|
|
* |
|
|
|
* |
|
Kimberly J. Popovits(15)
|
|
|
376,456 |
|
|
|
1.9 |
|
|
|
1.5 |
|
Randal W. Scott, Ph.D.(16)
|
|
|
2,248,796 |
|
|
|
11.9 |
|
|
|
9.2 |
|
Steven Shak, M.D.
|
|
|
428,478 |
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|
|
2.3 |
|
|
|
1.8 |
|
All directors and executive officers as a group (17)
(11 persons)
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|
|
11,300,171 |
|
|
|
59.3 |
% |
|
|
46.1 |
% |
|
|
|
|
* |
Represents beneficial ownership of less than 1%. |
|
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(1) |
Principal address for Kleiner Perkins Caufield & Byers
affiliated entities is 2750 Sand Hill Road, Menlo Park,
California 94025. Includes 1,556,459 shares held by Kleiner
Perkins Caufield & Byers X-A, L.P., 43,899 shares
held by Kleiner Perkins Caufield & Byers X-B, L.P., and
766,269 shares held by individual entities affiliated with
Kleiner Perkins Caufield & Byers. Mr. Byers, who
is also one of our directors, is a managing member of
KPCB X Associates, LLC, the general partner of these funds
and, as such, has shared voting and investment authority over
these shares. However, Mr. Byers disclaims beneficial
ownership of these shares except to the extent of his pecuniary
interest therein. |
|
(2) |
Principal address for Versant Ventures affiliated entities is
3000 Sand Hill Road, Bldg 4, Suite 210, Menlo Park,
California 94025. Includes 2,192,151 shares held by Versant
Venture Capital I, L.P., 42,412 shares held by
Versant Affiliates Fund I-A, L.P., 89,066 shares held
by Versant Affiliates Fund I-B, L.P. and 42,994 shares
held by Versant Side Fund I, L.P. Mr. Colella, who is
also one of our directors, is a managing director of Versant
Ventures I, LLC, the general partner of Versant Venture
Capital I, Versant Affiliates Fund I-A, Versant
Affiliates Fund I-B and Versant Side Fund. In such
capacity, Mr. Colella may be deemed to share voting and
investment power with respect to the shares held by Versant
Venture Capital I, Versant Affiliates Fund I-A,
Versant Affiliates Fund I-B and Versant Side Fund I.
Mr. Colella disclaims beneficial ownership of the shares
owned by these funds, except to the extent of his pecuniary
interest therein. |
|
(3) |
Principal address for TPG Ventures affiliated entities is 345
California Street, Suite 2600, San Francisco,
California 94104. Includes 573,081 shares owned by TPG
Ventures, L.P. and 1,337,192 shares owned by TPG
Biotechnology Partners, L.P. Dr. Cohen, who is also one of
our directors, is a managing director of Texas Pacific Group
Ventures. In such capacity, Dr. Cohen may be deemed to
share voting and investment power with respect to the shares
held by TPG Ventures, L.P. and TPG Biotechnology Partners, L.P.
Dr. Cohen disclaims beneficial ownership of the shares
owned by these funds, except to the extent of his pecuniary
interest therein. |
80
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(4) |
Principal address is Experimental Station, Route 141 &
Henry Clay Road, Building E336, Wilmington, Delaware 19880.
Number of shares of common stock beneficially owned by Incyte is
comprised of 1,127,937 shares prior to offering and
416,666 shares purchased by Incyte in a concurrent private
sale at the initial public offering price of $12.00 per
share. |
|
(5) |
Principal address is 655 Madison Avenue, 19th Floor, New York,
New York 10021. Includes 1,213,760 shares held by Four
Partners. By virtue of their status as managing trustees of the
trusts which are the general partners of Four Partners, each of
Andrew H. Tisch, James S. Tisch, Daniel R. Tisch and Thomas J.
Tisch may be deemed to have shared beneficial ownership of
shares owned by Four Partners and shared power to vote or direct
the vote and dispose or direct the disposition of these shares. |
|
(6) |
Principal address is 667 Madison Avenue, New York, New
York 10021. Includes 173,897 shares owned by Baker
Bros. Investments, L.P., 173,897 shares owned by Baker/
Tisch Investments, L.P., 15,314 shares owned by Baker Bros.
Investments II, L.P., 158,486 shares owned by Baker Biotech
Fund I, L.P., 142,794 shares owned by Baker Biotech
Fund II, L.P., 19,583 shares owned by Baker Biotech
Fund II (Z), L.P., 116,213 shares owned by Baker
Biotech Fund III, L.P., 22,218 shares owned by Baker
Biotech Fund III (Z), L.P. and 173,897 shares owned by
FBB Associates, a general partnership. Julian C. Baker, who is
also one of our directors, and Felix J. Baker, by virtue of
their control of entities that have the power to control the
investment decisions of Baker Bros. Investments, L.P., Baker/
Tisch Investments, L.P., Baker Bros. Investments II, L.P., Baker
Biotech Fund I, L.P., Baker Biotech Fund II, L.P.,
Baker Biotech Fund II (Z), L.P., Baker Biotech
Fund III, L.P., Baker Biotech Fund III (Z), L.P.
and FBB Associates, may each be deemed to be the beneficial
owner of shares held by such entities and may be deemed to have
shared power to vote or direct the vote of and to dispose or
direct the disposition of the shares. |
|
(7) |
Principal address for J.P. Morgan Direct Venture Capital
affiliated entities is 522 Fifth Avenue, New York, New York
10036. Includes 735,486 shares held by J.P. Morgan
Direct Venture Capital Institutional Investors II LLC,
209,821 shares held by J.P. Morgan Direct Venture
Capital Private Investors II LLC and 4,749 shares held
by 522 Fifth Avenue Fund, L.P. (collectively, the
Global Fund Entities). The investment advisor
of the Global Fund Entities is J.P. Morgan Investment
Management Inc. (JPMIM). JPMIM has sole voting power
with respect to the shares held by the Global
Fund Entities. In addition, interests in 522 Fifth
Avenue Fund, L.P. are owned both by a wholly owned subsidiary of
JPMorgan Chase & Co. (JPM Chase), a
publicly traded company, and employees of JPM Chase. As a
result, each of JPMIM, JPM Chase and employees of JPM Chase may
be deemed beneficial owners of the shares held by the Global
Fund Entities, however, each disclaim such beneficial
ownership except to the extent of such persons pecuniary
interest therein. |
|
(8) |
Includes 173,897 shares owned by Baker
Bros. Investments, L.P., 173,897 shares owned by
Baker/ Tisch Investments, L.P., 15,314 shares owned by
Baker Bros. Investments II, L.P., 158,486 shares owned by
Baker Biotech Fund I, L.P., 142,794 shares owned by
Baker Biotech Fund II, L.P., 19,583 shares owned by
Baker Biotech Fund II (Z), L.P., 116,213 shares owned
by Baker Biotech Fund III, L.P., 22,218 shares owned
by Baker Biotech Fund III (Z), L.P. and 173,897 shares
owned by FBB Associates, a general partnership. Mr. Baker
disclaims beneficial ownership of the shares held by these
entities except to the extent of his pecuniary interest therein. |
|
(9) |
Includes 2,366,627 shares held by Kleiner Perkins
Caufield & Byers affiliated entities. Mr. Byers
disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein. |
|
|
(10) |
Includes 1,910,273 shares held by TPG Ventures affiliated
entities, 5,203 shares issuable upon exercise of options
that are exercisable within 60 days of July 31, 2005
and 6,068 shares held by family trusts of which
Dr. Cohen is a trustee. Dr. Cohen disclaims beneficial
ownership of the shares held by the TPG Ventures affiliated
entities except to the extent of his pecuniary interest therein. |
|
(11) |
Includes 2,366,623 shares held by Versant Ventures
affiliated entities. Mr. Colella disclaims beneficial
ownership of these shares except to the extent of his pecuniary
interest therein. |
|
(12) |
Includes 4,335 shares issuable upon exercise of options
that are exercisable within 60 days of August 31, 2005. |
|
(13) |
Includes 116,343 shares held by a family trust of which
Dr. Baker is a trustee. |
|
(14) |
Includes 52,024 shares issuable upon exercise of options
that are exercisable within 60 days of August 31, 2005. |
|
(15) |
Includes 17,342 shares issuable upon exercise of options
that are exercisable within 60 days of August 31, 2005. |
|
(16) |
Includes 5,199 shares held in trust for the benefit of
Dr. Scotts minor children, of which
Dr. Scotts sister is the trustee. |
|
(17) |
Includes 78,904 shares issuable upon exercise of options
that are exercisable within 60 days of August 31, 2005. |
81
DESCRIPTION OF CAPITAL STOCK
General
The following description of our capital stock and provisions of
our restated certificate of incorporation and bylaws is only a
summary. You should also refer to the copies of our restated
certificate of incorporation and bylaws that have been filed
with the Securities and Exchange Commission as exhibits to our
registration statement, of which this prospectus forms a part,
and to the provisions of Delaware law.
Upon completion of this offering, after giving effect to the
conversion of all outstanding preferred stock into common stock
and the amendment of our certificate of incorporation, our
authorized capital stock will consist of 100,000,000 shares
of common stock, par value $0.0001 per share, and
5,000,000 shares of undesignated preferred stock, par value
$0.0001 per share.
Common Stock
As of August 31, 2005, there were 18,197,987 shares of
common stock outstanding held by approximately
177 stockholders of record, assuming the automatic
conversion of each outstanding share of preferred stock upon the
closing of this offering.
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders. We have not provided for cumulative voting for the
election of directors in our certificate of incorporation. This
means that the holders of a majority of the shares voted can
elect all of the directors then standing for election. Subject
to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets
legally available at the times and in the amounts that our board
of directors may determine from time to time. Upon our
liquidation, dissolution or winding-up, the holders of common
stock are entitled to share ratably in all assets remaining
after payment of all liabilities and the liquidation preferences
of any outstanding preferred stock. Holders of common stock have
no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to
be issued in this offering, when they are paid for, will be
fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, every three outstanding
shares of our series A, B, C and D preferred stock will be
converted into one share of common stock. Because the initial
public offering price of our common stock is greater than $11.40
per share, upon the closing of this offering every three
outstanding shares of series E preferred stock will convert
into one share of common stock, or an aggregate of approximately
6,181,326 shares of common stock. If the initial public offering
price of our common stock had been less than $11.40 per share,
then upon the closing of this offering every three outstanding
shares of series E preferred stock would have converted
into 1.128 shares of common stock, or an aggregate of
approximately 6,972,536 shares of common stock.
On September 8, 2005, our board of directors declared a
conditional dividend of 791,210 shares of our common stock,
which will be distributed upon the closing of this offering on a
pro rata basis to all of our stockholders of record as of the
date of this prospectus because the initial public offering
price of our common stock is $11.40 or greater. This conditional
dividend would not have been distributed if the initial public
offering price of our common stock had been lower than $11.40.
Our outstanding stock options will be proportionately adjusted
as a result of this dividend. Based on our outstanding shares
and stock options as of August 31, 2005, we will issue
approximately 736,142 shares pursuant to this dividend,
less an aggregate of 85 shares for which cash will be paid
in lieu of fractional interests, and the number of shares
underlying outstanding stock options will be increased by
approximately 55,068 shares. The sum of the total number of
shares issuable pursuant to the conditional dividend and the
additional shares issuable upon exercise of our outstanding
stock options as a result of the proportionate adjustments will
equal 791,210 shares. The result of the declaration of this
conditional dividend is that the sum of the number of
outstanding shares of common
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stock and shares underlying outstanding options would have been
substantially the same regardless of the price per share of our
initial public offering.
Following the conversion, our certificate of incorporation will
be amended to delete all references to the prior series of
preferred stock, and 5,000,000 shares of undesignated
preferred stock will be authorized. Our board of directors will
have the authority, without further action by our stockholders,
to issue from time to time the preferred stock in one or more
series, to establish the number of shares to be included in each
series, and to fix the powers, preferences and rights of the
shares of each wholly unissued series and any of its
qualifications, limitations or restrictions. Our board of
directors will also be able to increase or decrease the number
of shares of any series, but not below the number of shares of
that series then outstanding, without any further vote or action
by the stockholders.
The board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could harm the
voting power or other rights of the holders of the common stock,
or that could decrease the amount of earnings and assets
available for distribution to the holders of common stock. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of us and
might harm the market price of our common stock and the voting
and other rights of the holders of common stock. We have no
current plans to issue any shares of preferred stock.
Registration Rights
After this offering, the holders of 17,579,758 shares of
common stock issued upon conversion of the preferred stock will
be entitled to contractual rights to require us to register
those shares under the Securities Act. If we propose to register
any of our securities under the Securities Act for our own
account, holders of those shares are entitled to include their
shares in our registration, provided, among other conditions,
that the underwriters of any such offering have the right to
limit the number of shares included in the registration. These
holders have waived their rights to include their shares in this
offering. Six months after the effective date of the
registration statement of which this prospectus is a part, and
subject to limitations and conditions specified in the investor
rights agreement with the holders, holders of a majority of the
shares of common stock issued upon conversion of the preferred
stock may require us to prepare and file a registration
statement under the Securities Act at our expense covering those
shares, provided that the shares to be included in the
registration have an anticipated aggregate public offering price
of at least $10 million. We are not obligated to effect
more than two of these stockholder-initiated registrations.
Holders of those shares may also require us to file additional
registration statements, subject to limitations specified in the
investor rights agreement.
Anti-Takeover Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws
The provisions of Delaware law, our certificate of incorporation
and our bylaws described below may have the effect of delaying,
deferring or discouraging another party from acquiring control
of us.
We will be subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
In general, those provisions prohibit a Delaware corporation
from engaging in any business combination with any interested
stockholder for a period of three years following the date that
the stockholder became an interested stockholder, unless:
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the transaction is approved by the board before the date the
interested stockholder attained that status; |
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upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or |
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on or after the date the business combination is approved by the
board and authorized at a meeting of stockholders by at least
two-thirds of the outstanding voting stock that is not owned by
the interested stockholder. |
Section 203 defines business combination to
include the following:
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any merger or consolidation involving the corporation and the
interested stockholder; |
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder; |
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; |
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any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or |
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation. |
In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by any of
these entities or persons.
A Delaware corporation may opt out of this provision either with
an express provision in its original certificate of
incorporation or in an amendment to its certificate of
incorporation or bylaws approved by its stockholders. However,
we have not opted out, and do not currently intend to opt out
of, this provision. The statute could prohibit or delay mergers
or other takeover or change in control attempts and,
accordingly, may discourage attempts to acquire us.
Following the completion of this offering, our certificate of
incorporation and bylaws will provide that:
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our bylaws may be amended or repealed only by a two-thirds vote
of our board of directors or a two-thirds stockholder vote; |
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no action can be taken by stockholders except at an annual or
special meeting of the stockholders called in accordance with
our bylaws, and stockholders may not act by written consent; |
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stockholders may not call special meetings of the stockholders
or fill vacancies on the board; |
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the approval of holders of two-thirds of the shares entitled to
vote at an election of directors will be required to amend or
repeal the provisions of our certificate of incorporation
regarding the inability of stockholders to take action by
written consent; |
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our board of directors will be authorized to issue preferred
stock without stockholder approval, as described above; and |
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we will indemnify officers and directors against losses that
they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in
connection with takeover defense measures. |
Limitation of Liability and Indemnification Matters
We have adopted provisions in our certificate of incorporation
that limit the liability of our directors for monetary damages
for breach of their fiduciary duty as directors, except for
liability that cannot be eliminated
84
under the Delaware General Corporation Law. Delaware law
provides that directors of a company will not be personally
liable for monetary damages for breach of their fiduciary duty
as directors, except for liabilities:
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for any breach of their duty of loyalty to us or our
stockholders; |
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; |
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for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided under Section 174 of the Delaware
General Corporation Law; or |
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for any transaction from which the director derived an improper
personal benefit. |
Any amendment or repeal of these provisions requires the
approval of the holders of shares representing at least
two-thirds of the shares entitled to vote in the election of
directors, voting as one class.
Our certificate of incorporation and bylaws also provide that we
will indemnify our directors and officers to the fullest extent
permitted by Delaware law. Our certificate of incorporation and
bylaws also permit us to purchase insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of that persons actions as our officer,
director, employee or agent, regardless of whether Delaware law
would permit indemnification. We have entered into separate
indemnification agreements with our directors and executive
officers that could require us, among other things, to indemnify
them against certain liabilities that may arise by reason of
their status or service as directors and to advance their
expenses incurred as a result of any proceeding against them as
to which they could be indemnified. We believe that the
limitation of liability provision in our certificate of
incorporation and the indemnification agreements will facilitate
our ability to continue to attract and retain qualified
individuals to serve as directors and officers.
Nasdaq Symbol
Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol GHDX.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare Investor Services.
85
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that market
sales of shares or the availability of shares for sale will have
on the market price prevailing from time to time. As described
below, no shares will be available for sale shortly after this
offering due to contractual and legal restrictions on resale.
Nevertheless, sales of our common stock in the public market
after the restrictions lapse, or the perception that those sales
may occur, could cause the prevailing market price to decrease
or to be lower than it might be in the absence of those sales or
perceptions.
Sale of Restricted Shares
Upon completion of this offering, we will have outstanding
24,367,432 shares of common stock. The shares of common
stock being sold in this offering will be freely tradable, other
than by any of our affiliates as defined in
Rule 144(a) under the Securities Act or anyone who purchase
in our directed share program who are subject to a 180-day
lockup agreement, without restriction or registration under the
Securities Act. All remaining shares were issued and sold by us
in private transactions and are eligible for public sale if
registered under the Securities Act or sold in accordance with
Rule 144 or Rule 701 under the Securities Act. These
remaining shares are restricted securities within
the meaning of Rule 144 under the Securities Act.
As a result of the lockup agreements, other contractual
restrictions on resale and the provisions of Rules 144,
144(k) and 701 described below, the restricted securities will
be available for sale in the public market as follows:
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no shares will be eligible for sale prior to 180 days after
the date of this prospectus; |
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19,350,710 shares will be eligible for sale upon the
expiration of the lock-up agreements, described below, beginning
180 days after the date of this prospectus (subject to
extension) and when permitted under Rule 144, 144(k) or
701; and |
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641,691 shares will be eligible for sale upon the exercise
of vested options 180 days after the date of this
prospectus. |
Lock-up Agreements
Our directors, executive officers and substantially all of our
stockholders and optionholders, who collectively hold an
aggregate of approximately 18,349,249 shares of common
stock (representing approximately 97% of our shares of common
stock outstanding prior to this offering), have agreed that they
will not sell any common stock owned by them without the prior
written consent of J.P. Morgan Securities Inc. and Lehman
Brothers Inc. on behalf of the underwriters for a period of
180 days from the date of this prospectus, subject to
extension as described below. At any time and without public
notice, J.P. Morgan Securities Inc. and Lehman Brothers Inc. may
in their sole discretion release some or all of the securities
from these lock-up agreements. To the extent shares are released
before the expiration of the lockup period and these shares are
sold into the market, the market price of our common stock could
decline. Immediately following the 180-day lockup period, shares
of our common stock outstanding after this offering will become
available for sale, subject to legal restrictions on resale. The
180-day lock-up period may be extended under certain
circumstances where we release, or pre-announce a release of,
our earnings or announce material news or a material event
shortly before or after the termination of the 180-day period.
See Underwriting Lock-Up Agreements.
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person deemed to be our affiliate, or a person holding
restricted shares who beneficially owns shares that were
86
not acquired from us or our affiliate within the previous one
year, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
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1% of the then outstanding shares of common stock, or
approximately 243,674 shares immediately after this offering,
assuming no exercise of the underwriters over-allotment
option; or |
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the average weekly trading volume of the common stock during the
four calendar weeks preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission. |
Sales under Rule 144 are subject to requirements relating
to manner of sale, notice and availability of current public
information about us.
Rule 144(k)
A person, or persons whose shares are aggregated, who is not
deemed to have been our affiliate at any time during the
90 days immediately preceding the sale, and who
beneficially owned the shares proposed to be sold for at least
two years, including the holding period of any prior owner who
was not an affiliate of ours, may sell restricted securities
after this offering under Rule 144(k) without complying
with the volume limitations, manner of sale provisions, public
information or notice requirements of Rule 144. We
currently expect that approximately 1,977,962 shares will
qualify as Rule 144(k) shares within
180 days after the date of this prospectus; however, this
number may increase or decrease depending on a particular
stockholders status as an affiliate during the
90 days immediately preceding the sale.
Rule 701
Subject to various limitations on the aggregate offering price
of a transaction and other conditions, Rule 701 may be
relied upon with respect to the resale of securities originally
purchased from us by our employees, directors, officers,
consultants or advisers prior to the closing of this offering,
pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In
addition, the Securities and Exchange Commission has indicated
that Rule 701 will apply to stock options granted by us
before this offering, along with the shares acquired upon
exercise of those options. Securities issued in reliance on
Rule 701 are deemed to be restricted securities and,
beginning 90 days after the date of this prospectus, unless
subject to the contractual restrictions described above, may be
sold by persons other than affiliates subject only to the manner
of sale provisions of Rule 144 and by affiliates under
Rule 144 without compliance with the minimum holding period
requirements.
Stock Options
We intend to file a registration statement under the Securities
Act covering 5,000,000 shares of common stock reserved for
issuance under our stock plans. This registration statement is
expected to be filed soon after the date of this prospectus and
will automatically become effective upon filing. Accordingly,
shares registered under this registration statement will be
available for sale in the open market, unless those shares are
subject to vesting restrictions with us or the contractual
restrictions described above.
Registration Rights
In addition, after this offering, the holders of approximately
17,579,758 shares of common stock will be entitled to
rights to cause us to register the sale of those shares under
the Securities Act. Registration of these shares under the
Securities Act would result in these shares, other than shares
purchased by our affiliates, becoming freely tradable without
restriction under the Securities Act immediately upon the
effectiveness of the registration. See Description of
Capital Stock Registration Rights.
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UNDERWRITING
J.P. Morgan Securities Inc. and Lehman Brothers Inc. are
the joint book-running managers and, together with Piper
Jaffray & Co., Thomas Weisel Partners LLC and JMP
Securities LLC, are acting as representatives of the
underwriters. Under the terms of an Underwriting Agreement,
which is filed as an exhibit to the registration statement, each
of the underwriters named below has severally agreed to purchase
from us the respective number of common stock shown opposite its
name below:
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Number of | |
Underwriter |
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Shares | |
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J.P. Morgan Securities Inc.
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1,672,073 |
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Lehman Brothers Inc.
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1,672,073 |
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Piper Jaffray & Co.
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718,896 |
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Thomas Weisel Partners LLC
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718,896 |
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JMP Securities LLC
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234,784 |
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Total
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5,016,722 |
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The underwriting agreement provides that the underwriters
obligation to purchase shares of common stock depends on the
satisfaction of the conditions contained in the underwriting
agreement including:
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the obligation to purchase all of the shares of common stock
offered hereby, if any of the shares are purchased; |
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the representations and warranties made by us to the
underwriters are true in all material respects; |
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there is no material change in the financial markets; and |
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we deliver customary closing documents to the underwriters. |
Commissions and Expenses
The following table summarizes the underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares. The
underwriting fee is the difference between the initial price to
the public and the amount the underwriters pay to us for the
shares.
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No Exercise | |
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Full Exercise | |
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Per share
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0.882 |
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$ |
0.882 |
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Total
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4,424,749 |
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5,088,461 |
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The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock
directly to the public at the public offering price on the cover
of this prospectus and to selected dealers, which may include
the underwriters, at such offering price less a selling
concession not in excess of $0.53 per share. The
underwriters may allow, and the selected dealers may re-allow, a
discount from the concession not in excess of $0.10 per
share to other dealers. After the offering, the representatives
may change the offering price and other selling terms.
The expenses of the offering that are payable by us are
estimated to be $1.8 million (exclusive of underwriting
discounts and commissions).
Option to Purchase Additional Shares
We have granted the underwriters an option exercisable for
30 days after the date of the underwriting agreement, to
purchase, from time to time, in whole or in part, up to an
aggregate of 752,508 shares at the public offering price
less underwriting discounts and commissions. This option may be
exercised if the underwriters sell more than
5,016,722 shares in connection with this offering. To the
extent that this option is exercised, each underwriter will be
obligated, subject to certain conditions, to purchase its pro
rata portion of these additional shares based on the
underwriters percentage underwriting commitment in the
offering as indicated in the table at the beginning of this
Underwriting section.
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Lock-up Agreements
We, all of our directors and executive officers and
substantially all of our stockholders and optionholders have
agreed that, without the prior written consent of each of
J.P. Morgan Securities Inc. and Lehman Brothers Inc. on
behalf of the underwriters, we and they will not, subject to
some exceptions, and limited extensions in certain
circumstances, directly or indirectly, offer, pledge, announce
the intention to sell, sell, contract to sell, sell an option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise
transfer or dispose of (or enter into any transaction or device,
that is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any
common stock or any securities which may be converted into or
exchanged for any common stock or enter into any swap or other
agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the common stock for a
period of 180 days from the date of this prospectus.
The 180-day restricted period described in the preceding
paragraph will be extended if:
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during the last 17 days of the 180-day restricted period we
issue an earnings release or announce material news or a
material event relating to us; or |
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prior to the expiration of the 180-day restricted period, we
announce that we will release earnings results during the 16-day
period beginning on the last day of the 180-day period, |
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day period beginning on the issuance of the earnings release
or the announcement of the material news or material event.
Offering Price Determination
Prior to this offering, there has been no public market for our
common stock. The initial public offering price has been
negotiated between the representatives and us. In determining
the initial public offering price of our common stock, the
representatives considered:
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the history and prospectus for the industry in which we compete, |
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our financial information, |
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the ability of our management and our business potential and
earning prospects, |
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the prevailing securities markets at the time of this
offering, and |
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the recent market prices of, and the demand for, publicly traded
shares of generally comparable companies. |
Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933, as amended, and to contribute to payments that the
underwriters may be required to make for these liabilities.
Stabilization, Short Positions and Penalty Bids
The representatives may engage in stabilizing transactions,
short sales and purchases to cover positions created by short
sales, and penalty bids or purchases for the purpose of pegging,
fixing or maintaining the price of the common stock, in
accordance with Regulation M under the Securities Exchange
Act of 1934:
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum. |
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A short position involves a sale by the underwriters of shares
in excess of the number of shares the underwriters are obligated
to purchase in the offering, which creates the syndicate short
position. This short position may be either a covered short
position or a naked short position. In a covered short position,
the number of shares involved in the sales made by the
underwriters in excess of the number of shares they are
obligated to purchase is not greater than the number of shares
that they may purchase by exercising their option to purchase
additional shares. In a naked short position, the number of
shares involved is greater than the number of shares in their
option to purchase additional |
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shares. The underwriters may close out any short position by
either exercising their option to purchase additional shares
and/or purchasing shares in the open market. In determining the
source of shares to close out the short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through their option
to purchase additional shares. A naked short position is more
likely to be created if the underwriters are concerned that
there could be downward pressure on the price of the shares in
the open market after pricing that could adversely affect
investors who purchase in the offering. |
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. |
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Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions. |
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of the common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters make representation that the representatives will
engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters and/or selling group members
participating in this offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and,
depending upon the particular underwriter or selling group
member, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a
specific number of shares for sale to online brokerage account
holders. Any such allocation for online distributions will be
made by the representatives on the same basis as other
allocations.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members web
site and any information contained in any other web site
maintained by an underwriter or selling group member is not part
of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed
by us or any underwriter or selling group member in its capacity
as underwriter or selling group member and should not be relied
upon by investors.
The Nasdaq National Market
Our shares of common stock have been approved for quotation on
the Nasdaq National Market under the symbol GHDX.
Discretionary Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of shares offered by them.
Stamp Taxes
If you purchase shares of common stock offered in this
prospectus, you may be required to pay stamp taxes and other
charges under the laws and practices of the country of purchase,
in addition to the offering price listed on the cover page of
this prospectus.
Relationships
The underwriters and their affiliates may in the future perform
investment banking and advisory services for us from time to
time for which they may in the future receive customary fees and
expenses. The
90
underwriters and their affiliates may, from time to time, engage
in transactions with or perform services for our affiliates and
us in the ordinary course of their business. Certain affiliates
of J.P. Morgan Securities Inc., one of the representatives
of the underwriters, purchased an aggregate of
869,565 shares of our series D preferred stock for
approximately $2.0 million in May 2002.
Directed Share Program
At our request, the underwriters have reserved at the initial
public offering price up to 10% of the shares offered hereby for
our employees, less any shares sold to several of our
significant existing stockholders as described below. The number
of shares available for sale to the general public will be
reduced to the extent our employees purchase reserved shares.
Any reserved shares not purchased will be offered by the
underwriters to the general public on the same basis as the
other shares offered hereby. The directed share program will be
arranged through one of our underwriters, Lehman Brothers.
Insider Participation in the Offering
Several of our significant existing stockholders, including
funds affiliated with Julian C. Baker, Felix J. Baker
and Integral Capital Partners VI, L.P. or their affiliates, have
indicated an interest in purchasing up to an aggregate of
500,000 shares of our common stock in this offering, less any
shares sold to our employees pursuant to our directed share
program. However, because indications of interest are not
binding upon us or the prospective purchasers, these
stockholders may not acquire any shares in this offering.
European Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State (the Relevant Implementation
Date) it has not made and will not make an offer of shares
of common stock being offered hereby to the public in that
Relevant Member State prior to the publication of a prospectus
in relation to such shares which has been approved by the
competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive. However,
with effect from and including the Relevant Implementation Date,
it may make an offer of shares of our common stock to the public
in that Relevant Member State at any time:
|
|
|
|
|
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities; |
|
|
|
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than
43,000,000 and
(3) an annual net turnover of more than
50,000,000, as
shown in its last annual or consolidated accounts; or |
|
|
|
in any other circumstances which do not require the publication
by the issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive. |
For the purposes of this provision, the expression an
offer of shares of our common stock to the public in
any Relevant Member State means the communication in any form
and by any means of sufficient information on the terms of the
offer and the shares to be offered so as to enable an investor
to decide to purchase or subscribe such shares, as may be varied
in that Member State by any measure implementing the Prospectus
Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/ EC and
includes any relevant implementing measure in each Relevant
Member State.
Germany
The shares have not been and will not be offered to the public
within the meaning of the German Sales Prospectus Act
(Verkaufsprospektgesetz) or the German Investment Act
(Investmentgesetz). The shares have not been and will not
be listed on a German exchange. No sales prospectus pursuant to
the German Sales Prospectus Act has been or will be published or
circulated in Germany or filed with the German Federal Financial
Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht) or any other governmental or
regulatory authority in Germany. This prospectus does not
constitute an offer to the public in Germany and it does not
serve for public distribution of the shares in Germany. Neither
this prospectus, nor any other
91
document issued in connection with this offering, may be issued
or distributed to any person in Germany except under
circumstances which do not constitute an offer to the public
within the meaning of the German Sales Prospectus Act or the
German Investment Act.
Italy
The offering has not been registered with the Commissione
Nazionale per le Società e la Borsa (CONSOB) pursuant
to Italian securities legislation. The shares may not be offered
or sold nor may the prospectus or any other offering materials
be distributed in the Republic of Italy unless such offer, sale
or distribution is:
|
|
|
(1) made by an investment firm, bank or financial
intermediary permitted to conduct such activities in the
Republic of Italy in accordance with Legislative Decree
No. 385 of September 1, 1993 (Decree No. 385),
Legislative Decree No. 58 of February 24, 1998, CONSOB
Regulation No. 11971 or May 14, 1999 and any other
applicable laws and regulations; |
|
|
(2) made (i) to professional investors (operatori
qualificati) as defined in Article 31, second paragraph of
CONSOB Regulation No. 11422 of July 1, 1998, as
amended, or Regulation No. 11522, (ii) in
circumstances where an exemption from the rules governing
solicitations to the public at large applies pursuant to
Article 100 of Legislative Decree No. 58 of February
24, 1998 and Article 33, first paragraph, of CONSOB
Regulation No. 11971 of May 14, 1999, as amended
or (iii) to persons located in the Republic of Italy who
submit an unsolicited request to purchase shares; and |
|
|
(3) in compliance with all relevant Italian securities and
tax laws and regulations. |
Switzerland
The shares may not be offered or sold to any investors in
Switzerland other than on a non-public basis. This prospectus
does not constitute a prospectus within the meaning of
Article 652a and Art. 1156 of the Swiss Code of Obligations
(Schweizerisches Obligationenrecht). Neither this
offering nor the shares have been or will be approved by any
Swiss regulatory authority.
United Kingdom
Each underwriter has represented, warranted and agreed that:
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|
(1) it has not offered or sold and, prior to the expiry of
a period of six months from the closing date, will not offer or
sell any shares to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; |
|
|
(2) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated any
invitation or inducement to engage in investment activity
(within the meaning of section 21 of the Financial Services and
Markets Act 2000, or FSMA) received by it in connection with the
issue or sale of any shares in circumstances in which section
21(1) of the FSMA does not apply to the Issuer; and |
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|
(3) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom. |
92
LEGAL MATTERS
The validity of the common stock offered by this prospectus will
be passed upon for us by Pillsbury Winthrop Shaw Pittman LLP,
San Francisco and Palo Alto, California. An entity in which
attorneys and former attorneys of Pillsbury Winthrop Shaw
Pittman LLP are members, and certain attorneys of Pillsbury
Winthrop Shaw Pittman LLP, own beneficially an aggregate of
19,035 shares of our common stock. Selected legal matters
relating to the offering will be passed upon for the
underwriters by Simpson Thacher & Bartlett LLP, Palo
Alto, California.
EXPERTS
The consolidated financial statements of Genomic Health, Inc. at
December 31, 2003 and 2004, and for each of the three years
in the period ended December 31, 2004, appearing in this
prospectus and registration statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 with
respect to the common stock offered by this prospectus. This
prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the
registration statement. Please refer to the registration
statement, exhibits and schedules for further information with
respect to the common stock offered by this prospectus.
Statements contained in this prospectus regarding the contents
of any contract or other document are only summaries. With
respect to any contract or document filed as an exhibit to the
registration statement, you should refer to the exhibit for a
copy of the contract or document, and each statement in this
prospectus regarding that contract or document is qualified by
reference to the exhibit. A copy of the registration statement
and its exhibits and schedules may be inspected without charge
at the Securities and Exchange Commissions public
reference room, located at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on
the public reference room. Our Securities and Exchange
Commission filings are also available to the public from the
Securities and Exchange Commissions website at www.sec.gov.
Upon completion of this offering, we will be subject to the
information reporting requirements of the Securities Exchange
Act of 1934 and we intend to file reports, proxy statements and
other information with the Securities and Exchange Commission.
93
GENOMIC HEALTH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
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, 2003 and 2004 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, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Genomic Health, Inc. at December 31,
2003 and 2004 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
Palo Alto, California
May 13, 2005,
except for the ninth paragraph of Note 1,
as to which the date is September 23, 2005.
F-2
Genomic Health, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
December 31, | |
|
|
|
Stockholders | |
|
|
| |
|
June 30, | |
|
Equity at | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
June 30, 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
11,062 |
|
|
$ |
38,275 |
|
|
$ |
25,231 |
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
563 |
|
|
|
901 |
|
|
|
2,265 |
|
|
|
|
|
|
Employee note receivable - current portion
|
|
|
|
|
|
|
75 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,625 |
|
|
|
39,251 |
|
|
|
27,671 |
|
|
|
|
|
Employee note receivable - long-term portion
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,288 |
|
|
|
2,116 |
|
|
|
3,010 |
|
|
|
|
|
Restricted cash
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
133 |
|
|
|
133 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
13,096 |
|
|
$ |
41,538 |
|
|
$ |
30,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
827 |
|
|
$ |
1,101 |
|
|
$ |
2,009 |
|
|
|
|
|
|
Accrued compensation
|
|
|
342 |
|
|
|
603 |
|
|
|
747 |
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
249 |
|
|
|
776 |
|
|
|
832 |
|
|
|
|
|
|
Notes payable - current portion
|
|
|
|
|
|
|
|
|
|
|
777 |
|
|
|
|
|
|
Note payable due to related party
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,579 |
|
|
|
2,480 |
|
|
|
4,365 |
|
|
|
|
|
Notes payable - long-term portion
|
|
|
|
|
|
|
|
|
|
|
2,483 |
|
|
|
|
|
Convertible preferred stock, $0.0001 par value;
101,216,958 shares authorized, 29,936,839, 48,480,819 and
48,480,819 shares issued and outstanding at
December 31, 2003 and 2004 and June 30, 2005
(unaudited), respectively; aggregate liquidation preference of
$103,599 at December 31, 2004 and June 30, 2005
(unaudited); no shares issued and outstanding pro forma
|
|
|
51,064 |
|
|
|
103,212 |
|
|
|
103,212 |
|
|
$ |
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 105,000,000 shares
authorized, 1,674,113, 1,875,530 and 1,932,921 shares
issued and outstanding at December 31, 2003 and 2004 and
June 30, 2005 (unaudited), respectively;
18,884,404 shares issued and outstanding pro forma
(unaudited)
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
Additional paid-in capital
|
|
|
279 |
|
|
|
4,123 |
|
|
|
5,085 |
|
|
|
108,296 |
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
(3,456 |
) |
|
|
(3,793 |
) |
|
|
(3,793 |
) |
|
Accumulated deficit
|
|
|
(39,827 |
) |
|
|
(64,822 |
) |
|
|
(80,521 |
) |
|
|
(80,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(39,547 |
) |
|
|
(64,154 |
) |
|
|
(79,228 |
) |
|
$ |
23,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$ |
13,096 |
|
|
$ |
41,538 |
|
|
$ |
30,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
Genomic Health, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
Year Ended December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
227 |
|
|
$ |
33 |
|
|
$ |
1,585 |
|
|
Contract revenues
|
|
|
|
|
|
|
125 |
|
|
|
100 |
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
125 |
|
|
|
327 |
|
|
|
33 |
|
|
|
1,685 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
|
|
|
|
|
|
|
|
1,828 |
|
|
|
931 |
|
|
|
2,874 |
|
|
Research and development
|
|
|
7,053 |
|
|
|
9,069 |
|
|
|
10,040 |
|
|
|
5,182 |
|
|
|
4,630 |
|
|
Selling and marketing
|
|
|
754 |
|
|
|
2,805 |
|
|
|
9,856 |
|
|
|
4,449 |
|
|
|
7,415 |
|
|
General and administrative
|
|
|
3,753 |
|
|
|
3,686 |
|
|
|
3,869 |
|
|
|
1,832 |
|
|
|
2,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,560 |
|
|
|
15,560 |
|
|
|
25,593 |
|
|
|
12,394 |
|
|
|
17,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11,560 |
) |
|
|
(15,435 |
) |
|
|
(25,266 |
) |
|
|
(12,361 |
) |
|
|
(16,021 |
) |
Interest income
|
|
|
502 |
|
|
|
199 |
|
|
|
295 |
|
|
|
121 |
|
|
|
393 |
|
Interest expense
|
|
|
(13 |
) |
|
|
(14 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(72 |
) |
Other (expense) income, net
|
|
|
3 |
|
|
|
|
|
|
|
(20 |
) |
|
|
(20 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(11,068 |
) |
|
$ |
(15,250 |
) |
|
$ |
(24,995 |
) |
|
$ |
(12,263 |
) |
|
$ |
(15,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(11.95 |
) |
|
$ |
(12.43 |
) |
|
$ |
(14.38 |
) |
|
$ |
(7.26 |
) |
|
$ |
(8.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
925,814 |
|
|
|
1,226,444 |
|
|
|
1,737,652 |
|
|
|
1,687,964 |
|
|
|
1,895,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per share (unaudited)
|
|
|
|
|
|
|
|
|
|
$ |
(1.60 |
) |
|
|
|
|
|
$ |
(0.83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma net loss per share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
15,632,759 |
|
|
|
|
|
|
|
18,847,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
Genomic Health, Inc.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock | |
|
|
Common Stock | |
|
Additional | |
|
Deferred | |
|
|
|
Total | |
|
|
| |
|
|
| |
|
Paid-In | |
|
Stock-based | |
|
|
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Accumulated Deficit | |
|
Equity (Deficit) | |
|
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2001
|
|
|
25,862,926 |
|
|
$ |
41,783 |
|
|
|
|
1,373,750 |
|
|
$ |
|
|
|
$ |
27 |
|
|
|
|
|
|
$ |
(13,509 |
) |
|
$ |
(13,482 |
) |
Issuance of Series D convertible preferred stock in March,
May and November 2002 to investors at $2.30 per share for cash
(net of issuance costs of $79)
|
|
|
4,073,913 |
|
|
|
9,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to consultants upon exercise of stock
options at $0.66 to $0.69 per share for cash
|
|
|
|
|
|
|
|
|
|
|
|
13,133 |
|
|
|
1 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Issuance of common stock to an employee upon exercise of stock
options at $0.66 per share for cash
|
|
|
|
|
|
|
|
|
|
|
|
3,333 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Stock-based compensation related to consultant options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
36 |
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,068 |
) |
|
|
(11,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
29,936,839 |
|
|
|
51,073 |
|
|
|
|
1,390,216 |
|
|
|
1 |
|
|
|
74 |
|
|
|
|
|
|
|
(24,577 |
) |
|
|
(24,502 |
) |
Issuance of common stock to consultants upon exercise of stock
options at $0.60 to $0.69 per share for cash
|
|
|
|
|
|
|
|
|
|
|
|
36,500 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Issuance of common stock to employees upon exercise of stock
options at $0.60 to $0.69 per share for cash
|
|
|
|
|
|
|
|
|
|
|
|
247,396 |
|
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
163 |
|
Series E issuance costs
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to consultant options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,250 |
) |
|
|
(15,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
29,936,839 |
|
|
|
51,064 |
|
|
|
|
1,674,113 |
|
|
|
1 |
|
|
|
279 |
|
|
|
|
|
|
|
(39,827 |
) |
|
|
(39,547 |
) |
Issuance of common stock to consultants upon exercise of stock
options at $0.66 to $1.38 per share for cash
|
|
|
|
|
|
|
|
|
|
|
|
1,125 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Repurchase of common stock issued to founders
|
|
|
|
|
|
|
|
|
|
|
|
(13,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to employees upon exercise of stock
options at $0.66 to $1.38 per share for cash
|
|
|
|
|
|
|
|
|
|
|
|
213,964 |
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
143 |
|
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-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,647 |
|
|
|
(3,647 |
) |
|
|
|
|
|
|
|
|
Amortization of deferred stock-based 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 |
|
|
|
|
1,875,530 |
|
|
|
1 |
|
|
|
4,123 |
|
|
|
(3,456 |
) |
|
|
(64,822 |
) |
|
|
(64,154 |
) |
Issuance of common stock to employees upon exercise of stock
options at $0.66 to $1.38 per share for cash (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
56,058 |
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
56 |
|
Issuance of common stock to consultants upon exercise of stock
options at $0.69 to $3.00 per share for cash (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
1,333 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Stock-based compensation related to consultant options
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
58 |
|
Deferred stock-based compensation (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
846 |
|
|
|
(846 |
) |
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
|
|
|
|
509 |
|
Net loss and comprehensive loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,699 |
) |
|
|
(15,699 |
) |
Balance at June 30, 2005 (unaudited)
|
|
|
48,480,819 |
|
|
$ |
103,212 |
|
|
|
|
1,932,921 |
|
|
$ |
1 |
|
|
$ |
5,085 |
|
|
$ |
(3,793 |
) |
|
$ |
(80,521 |
) |
|
$ |
(79,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
Genomic Health, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
Year Ended December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(11,068 |
) |
|
$ |
(15,250 |
) |
|
$ |
(24,995 |
) |
|
$ |
(12,263 |
) |
|
$ |
(15,699 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
642 |
|
|
|
824 |
|
|
|
1,008 |
|
|
|
486 |
|
|
|
690 |
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
191 |
|
|
|
9 |
|
|
|
509 |
|
|
Non-employee stock-based compensation expense
|
|
|
36 |
|
|
|
17 |
|
|
|
53 |
|
|
|
10 |
|
|
|
58 |
|
|
Loss on disposal of property and equipment
|
|
|
6 |
|
|
|
|
|
|
|
20 |
|
|
|
20 |
|
|
|
(31 |
) |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100 |
) |
|
|
Employee note receivable
|
|
|
18 |
|
|
|
|
|
|
|
(113 |
) |
|
|
|
|
|
|
38 |
|
|
|
Prepaid expenses and other current assets
|
|
|
(366 |
) |
|
|
(61 |
) |
|
|
(338 |
) |
|
|
(243 |
) |
|
|
(1,364 |
) |
|
|
Other assets
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
Accounts payable
|
|
|
(105 |
) |
|
|
655 |
|
|
|
274 |
|
|
|
332 |
|
|
|
908 |
|
|
|
Note payable to related party
|
|
|
(1,527 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
17 |
|
|
|
116 |
|
|
|
527 |
|
|
|
148 |
|
|
|
144 |
|
|
|
Accrued compensation
|
|
|
|
|
|
|
155 |
|
|
|
261 |
|
|
|
85 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(12,344 |
) |
|
|
(13,544 |
) |
|
|
(23,112 |
) |
|
|
(11,416 |
) |
|
|
(14,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(737 |
) |
|
|
(739 |
) |
|
|
(1,856 |
) |
|
|
(797 |
) |
|
|
(1,553 |
) |
Restricted cash
|
|
|
106 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(631 |
) |
|
|
(739 |
) |
|
|
(1,806 |
) |
|
|
(797 |
) |
|
|
(1,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (repayment of) long-term debt due to related party
|
|
|
313 |
|
|
|
(152 |
) |
|
|
(161 |
) |
|
|
(79 |
) |
|
|
|
|
Proceeds from notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,260 |
|
Proceeds from issuance of common stock
|
|
|
11 |
|
|
|
188 |
|
|
|
144 |
|
|
|
32 |
|
|
|
58 |
|
Sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of convertible preferred stock
|
|
|
9,291 |
|
|
|
(9 |
) |
|
|
52,148 |
|
|
|
29,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
9,615 |
|
|
|
27 |
|
|
|
52,131 |
|
|
|
29,872 |
|
|
|
3,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,360 |
) |
|
|
(14,256 |
) |
|
|
27,213 |
|
|
|
17,659 |
|
|
|
(13,044 |
) |
Cash and cash equivalents at the beginning of period
|
|
|
28,678 |
|
|
|
25,318 |
|
|
|
11,062 |
|
|
|
11,062 |
|
|
|
38,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$ |
25,318 |
|
|
$ |
11,062 |
|
|
$ |
38,275 |
|
|
$ |
28,721 |
|
|
$ |
25,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
1 |
|
|
$ |
26 |
|
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
Genomic Health, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 2004 and
pertaining to June 30, 2005 and
the six months ended June 30, 2004 and 2005 is
unaudited)
|
|
Note 1. |
The Company and Summary of Significant Accounting Policies |
|
|
|
Description of Business and Principles of
Consolidation |
Genomic Health, Inc. (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.
Since the Companys inception in 2000, the focus of its
operations has consisted principally of the development of
initial products, raising capital, establishing facilities and
recruiting personnel. In January 2004, the Company
commercialized its first product, Oncotype DX, a genomic
test used to quantify the likelihood of recurrence in early
stage breast cancer.
The Company has incurred significant losses and expects to incur
additional losses in the foreseeable future as commercial and
development efforts continue. If financing arrangements
contemplated by management are not realized, the Company may
have to seek other sources of capital or re-evaluate its
operating plan.
In October 2003, the Company established a wholly owned
subsidiary, Oncotype Laboratories, Inc. The entity is currently
inactive. All intercompany transactions are eliminated in
consolidation.
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results may differ,
and those differences may be material.
|
|
|
Unaudited Interim Consolidated Results |
The accompanying consolidated balance sheet as of June 30,
2005, the consolidated statements of operations and cash flows
for the six months ended June 30, 2004 and 2005 and the
consolidated statements of convertible preferred stock and
stockholders equity (deficit) for the six months ended
June 30, 2005 are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the
annual financial statements and, in the opinion of management,
reflect all the adjustments, which include only normal recurring
adjustments, necessary to present fairly the Companys
financial position as of June 30, 2005. Results for the six
months ended June 30, 2004 and 2005 are not necessarily
indicative of the results to be expected for the year ended
December 31, 2005 or for any future interim period or for
any future year.
|
|
|
Unaudited Pro Forma Information |
The pro forma information assumes all of the convertible
preferred stock outstanding will automatically convert into
16,160,273 shares of common stock, based on the shares of
convertible preferred stock outstanding at June 30, 2005.
The Company has filed a registration statement with the
Securities and Exchange Commission to sell shares of its common
stock to the public. If the initial public offering price of the
Companys common stock is less than $11.40 per share,
every three shares of Series A, B, C, and D preferred stock
will convert into one share of common stock and every three
shares of Series E preferred stock will convert into 1.128
shares of common stock, or an aggregate of
16,951,483 shares of common stock. Unaudited pro forma
stockholders equity, as adjusted for the assumed
conversion of the convertible preferred stock, is set forth on
the consolidated balance sheet.
F-7
On September 8, 2005, the board of directors of the Company
declared a conditional stock dividend of 791,210 shares to
stockholders of record prior to the date of the Companys
initial public offering. The conditional stock dividend will be
distributable if the initial public offering price of the
Companys common stock is greater than or equal to $11.40 a
share. The conditional stock dividend, if paid, will be a
ratable distribution to all holders of the Companys common
stock outstanding prior to closing of the initial public
offering and after giving effect to the conversion of all of the
Companys outstanding preferred stock. The Companys
outstanding stock options will be proportionately adjusted in
the event the conditional stock dividend is distributed. If the
conditional stock dividend is distributed, it will be recorded
in the quarter ended September 30, 2005. This dividend has
no material impact on the pro forma balance sheet because of the
Companys accumulated deficit. The 791,210 shares have been
included in the pro forma net loss per share calculation.
On September 8, 2005, the board of directors of the Company
approved a 1-for-3 reverse stock split of the Companys
outstanding shares of common stock. The reverse stock split was
effected on September 23, 2005. All common share and per
share amounts contained in the consolidated financial statements
have been retroactively adjusted to reflect this stock split.
|
|
|
Cash and Cash Equivalents |
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 amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains
and losses and declines in the fair value of available-for-sale
securities below their cost that are deemed to be
other-than-temporary are reflected in other income. The cost of
securities sold is based on the specific identification method.
Interest on investments is included in interest income.
In connection with a bank agreement pertaining to a corporate
credit card account, the Company was required to hold a
certificate of deposit at 100% of the credit limit per account,
which totaled $50,000 as of December 31, 2003, and was
classified as restricted cash. During July 2004, this
restriction was removed by the bank and the amount was removed
from 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, 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 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.
The Company reviews long-lived assets, including property and
equipment, 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
F-8
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 June 30,
2005, there have been no such losses.
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 contracts with biopharmaceutical and
pharmaceutical companies. Research and development costs are
expensed as incurred.
One customer accounted for approximately 9% of the
Companys total revenue for the six months ended
June 30, 2005, and approximately 11% of the Companys
total revenue for the quarter ended June 30, 2005.
The Company displays comprehensive loss and its components as
part of the statements of convertible preferred stock and
stockholders equity (deficit). Comprehensive loss consists
entirely of net loss.
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, 2004 or June 30, 2005.
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.
As permitted by Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for
Stock-Based Compensation (SFAS 123), as
amended by SFAS No. 148, the Company has elected to
follow Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations in
accounting for stock option grants to employees using the
intrinsic value method and to disclose the pro forma effect of
SFAS 123. The information regarding net loss and net loss
per share prepared in accordance with SFAS 123 has been
determined as if the Company had accounted for employee
F-9
stock options under the fair value method prescribed by
SFAS 123 and the net loss per share method under
SFAS 148. The resulting effect on net loss and net loss per
share pursuant to SFAS 123 is not likely to be
representative of the effects in future years, due to subsequent
years including additional grants and years of vesting.
The Company estimated the fair value of these options at the
date of grant using the Black-Scholes option valuation model
with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
Volatility factor
|
|
|
80% |
|
|
|
80% |
|
|
|
80% |
|
|
|
80% |
|
|
|
80% |
|
Average risk-free interest rate
|
|
|
4.0% |
|
|
|
2.0% |
|
|
|
2.8% |
|
|
|
2.0% |
|
|
|
4.0% |
|
Dividend yield
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Expected life of options
|
|
|
4 years |
|
|
|
4 years |
|
|
|
4 years |
|
|
|
4 years |
|
|
|
4 years |
|
In connection with the grant of certain stock options to
employees during the year ended December 31, 2004 and six
months ended June 30, 2005, the Company recorded deferred
stock compensation within stockholders equity
(deficit) of $3,647,000 and $846,000, respectively. This
represents the difference between the reassessed fair value of
common stock and the option exercise price at the date of grant.
Such amounts will be amortized over the vesting period of the
applicable options on a straight-line basis. For the year ended
December 31, 2004 and six months ended June 30, 2005,
the Company recorded stock-based compensation expense of
$191,000 and $509,000, respectively. The expected future
amortization expense under APB 25 for deferred stock-based
compensation for stock options granted through June 2005, is as
follows (in thousands):
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
|
2005 (remainder of the year)
|
|
$ |
559 |
|
2006
|
|
|
1,117 |
|
2007
|
|
|
1,117 |
|
2008 (and thereafter)
|
|
|
1,000 |
|
|
|
|
|
|
|
$ |
3,793 |
|
|
|
|
|
For purposes of disclosures pursuant to SFAS 123, as
amended by SFAS 148, the estimated fair value of options is
amortized to expense straight-line over the options
vesting period. The following table shows the pro forma effect
on net loss and net loss per common share if the fair value
provisions of SFAS 123 had been applied (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
Net loss as reported
|
|
$ |
(11,068 |
) |
|
$ |
(15,250 |
) |
|
$ |
(24,995 |
) |
|
$ |
(12,263 |
) |
|
$ |
(15,699 |
) |
Add: Total stock-based employee compensation expense included in
net loss
|
|
|
|
|
|
|
|
|
|
|
191 |
|
|
|
9 |
|
|
|
509 |
|
Deduct: Total stock-based employee compensation expense
determined under the fair-value based method for all awards
|
|
|
(27 |
) |
|
|
(87 |
) |
|
|
(320 |
) |
|
|
(63 |
) |
|
|
(633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(11,095 |
) |
|
$ |
(15,337 |
) |
|
$ |
(25,124 |
) |
|
$ |
(12,317 |
) |
|
$ |
(15,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share applicable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted, as reported
|
|
$ |
(11.95 |
) |
|
$ |
(12.43 |
) |
|
$ |
(14.38 |
) |
|
$ |
(7.26 |
) |
|
$ |
(8.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted, pro forma
|
|
$ |
(11.98 |
) |
|
$ |
(12.51 |
) |
|
$ |
(14.46 |
) |
|
$ |
(7.30 |
) |
|
$ |
(8.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
Equity instruments granted to nonemployees are valued using the
Black-Scholes method and accounted for as prescribed by
SFAS 123 and Emerging Issues Task Force 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 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 and 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 the
criteria set forth in (1) and (2) above are met, and (3)
and (4) 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 recognized at the time cash is collected.
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.
|
|
|
Recently Issued Accounting Pronouncements |
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which is a revision of
SFAS 123, Accounting for Stock-Based Compensation.
SFAS 123(R) is effective for public companies for the first
interim or annual period beginning after June 15, 2005,
supersedes APB 25, and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in
SFAS 123(R) is similar to the approach described in
SFAS 123, however, SFAS 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative. The new standard will be effective for the Company
beginning January 1, 2006.
Under SFAS 123(R), the Company must determine the appropriate
fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods
include prospective and retroactive adoption options. Under the
retroactive adoption option, prior periods may be restated
either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options
at the beginning of the first quarter of adoption of
SFAS 123(R), while the retroactive method would record
compensation expense for all unvested stock options beginning
with the first period restated.
F-11
The Company is evaluating the requirements of SFAS 123(R)
and expects that its adoption may have a material impact on the
Companys consolidated results of operations and earnings
per share. The Company has not yet determined the method of
adoption or the effect of adopting SFAS 123(R), and has not
determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.
Basic loss per share is calculated by dividing the loss
applicable to common stockholders by the weighted-average number
of common shares outstanding for the period less the weighted
average unvested common shares subject to repurchase and without
consideration for potential common shares. Diluted loss per
share is computed by dividing the loss applicable to common
stockholders 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.
The unaudited pro forma basic and diluted loss per share
calculations assume the conversion of all outstanding shares of
preferred stock into shares of common stock using the
as-if-converted method as of January 1, 2004 or the date of
issuance, if later.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months | |
|
|
Year Ended December 31, | |
|
Ended June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousand, except share and per share data) | |
|
|
|
|
(Unaudited) | |
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss applicable to common stockholders
|
|
$ |
(11,068 |
) |
|
$ |
(15,250 |
) |
|
$ |
(24,995 |
) |
|
$ |
(12,263 |
) |
|
$ |
(15,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
1,381,907 |
|
|
|
1,429,022 |
|
|
|
1,737,652 |
|
|
|
1,687,964 |
|
|
|
1,895,958 |
|
|
Less: Weighted-average unvested common shares subject to
repurchase
|
|
|
(456,093 |
) |
|
|
(202,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share applicable to
common stockholders
|
|
|
925,814 |
|
|
|
1,226,444 |
|
|
|
1,737,652 |
|
|
|
1,687,964 |
|
|
|
1,895,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share allocable to common stockholders
|
|
$ |
(11.95 |
) |
|
$ |
(12.43 |
) |
|
$ |
(14.38 |
) |
|
$ |
(7.26 |
) |
|
$ |
(8.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
$ |
(24,995 |
) |
|
|
|
|
|
$ |
(15,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used above
|
|
|
|
|
|
|
|
|
|
|
1,737,652 |
|
|
|
|
|
|
|
1,895,625 |
|
Pro forma adjustments to reflect assumed weighted-average effect
of conversion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
13,103,898 |
|
|
|
|
|
|
|
16,160,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments to reflect effect of stock dividend
|
|
|
|
|
|
|
|
|
|
|
791,210 |
|
|
|
|
|
|
|
791,210 |
|
Shares used to compute pro forma basic and diluted net loss
per share
|
|
|
|
|
|
|
|
|
|
|
15,632,759 |
|
|
|
|
|
|
|
18,847,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
$ |
(1.60 |
) |
|
|
|
|
|
$ |
(0.83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding dilutive securities not included in
diluted loss per share applicable to common stockholders
calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
9,978,946 |
|
|
|
9,978,946 |
|
|
|
16,160,273 |
|
|
|
13,525,045 |
|
|
|
16,160,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
736,166 |
|
|
|
683,051 |
|
|
|
1,368,566 |
|
|
|
751,906 |
|
|
|
1,424,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,715,112 |
|
|
|
10,661,997 |
|
|
|
17,528,839 |
|
|
|
14,276,951 |
|
|
|
17,584,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
|
|
Note 2. |
License and Collaborative Agreements |
In March 2001, the Company entered into various licensing,
collaborative and technology transfer agreements with Incyte
Corporation (Incyte, formerly Incyte Genomics,
Inc.), a related party, to utilize certain intellectual
property, technologies and know-how in exchange for milestone
and royalty payments. The Company is required to make milestone
and royalty payments on net sales of products covered by certain
licenses granted under these agreements. Total expense
associated with these agreements (including royalties due) was
$3.0 million, $1.2 million, $1.3 million,
$684,000 and $6,000 for the years ended December 31, 2002,
2003 and 2004 and the six months ended June 30, 2004 and
2005, respectively. All such amounts have been recorded as
research and development expense or, in the case of royalties,
as cost of product revenues.
Collaborative and Technology Transfer Agreement. Under
the Collaborative and Technology Transfer Agreement, the Company
agreed to fund a collaborative research and development project
relating to specific technologies. The total consideration paid
under this agreement was recorded as research and development
expense in 2001 on a straight-line basis over the term of the
agreement that was terminated in December 2001. Additionally, as
part of this agreement, Incyte transferred certain technology
and know-how to the Company. The total consideration paid for
this technology and know-how was recorded as research and
development expense on a straight-line basis through
December 31, 2002, which was the end of the estimated
useful life of the technology and know-how received.
Patent License Agreement. Incyte granted the Company
certain patent rights under a Patent License Agreement. The
amount paid to Incyte under this agreement was recorded as
research and development expense in 2001, as the Company
determined at that time that it did not anticipate receiving
benefit from these patent rights in the future. In March 2004,
the Company terminated its rights to some of these patents.
LifeSeq Collaborative Agreement. Under the LifeSeq
Collaborative Agreement, Incyte has agreed to grant the Company
access to certain database products and information. One of the
genes in the Oncotype DX 21-gene panel is licensed under
this agreement. Upon commercialization of Oncotype DX,
the Company was required to make a milestone payment and pay
royalties each quarter based on net sales of Oncotype DX.
Incyte agreed to defer a portion of the payments originally due
during 2002. The deferred amounts, plus interest, were repaid in
eight quarterly installments beginning January 1, 2003 and
ending October 1, 2004. The remaining consideration is
being recorded as research and development expense on a
straight-line basis through the end of the access term in April
2005.
|
|
Note 3. |
Specimen Transfer and Collaboration Agreements |
The Company has entered into a variety of specimen transfer and
collaboration agreements relating to its development efforts.
The Company recorded research and development expenses of
$240,000, $844,000 and $1.1 million for the years ended
December 31, 2002, 2003 and 2004, respectively, and
$827,000 and $34,000 for the six months ended June 30, 2004
and 2005, respectively, relating to services provided in
connection with these agreements. In addition to these expenses,
certain agreements contain provisions for possible royalties
from inventions from these collaborations.
Future milestone payments, exclusive of royalty payments,
relating to the launch and commercialization of
Oncotype DX total approximately $2.5 million
and are payable as follows (in thousands):
|
|
|
|
|
|
|
|
Milestone | |
|
|
Payments | |
|
|
| |
January 2006
|
|
$ |
300 |
|
January 2007
|
|
|
300 |
|
January 2008
|
|
|
475 |
|
January 2009
|
|
|
475 |
|
January 2010
|
|
|
475 |
|
January 2011
|
|
|
475 |
|
|
|
|
|
|
Total
|
|
$ |
2,500 |
|
|
|
|
|
F-13
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 OncotypeDX. Payments
under these agreements for the years ended December 31,
2002, 2003 and 2004 and for the six months ended June 30,
2004 and 2005 were $0, $0, $477,000, $360,000 and $292,000,
respectively, and were included in cost of product revenues.
|
|
Note 5. |
Property and Equipment |
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Unaudited) | |
Computer equipment and software
|
|
$ |
688 |
|
|
$ |
963 |
|
|
$ |
955 |
|
Lab equipment
|
|
|
2,022 |
|
|
|
3,273 |
|
|
|
4,705 |
|
Furniture and fixtures
|
|
|
153 |
|
|
|
183 |
|
|
|
190 |
|
Leasehold improvements
|
|
|
165 |
|
|
|
211 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,028 |
|
|
|
4,630 |
|
|
|
6,182 |
|
Less accumulated depreciation and amortization
|
|
|
(1,740 |
) |
|
|
(2,514 |
) |
|
|
(3,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,288 |
|
|
$ |
2,116 |
|
|
$ |
3,010 |
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2002, 2003, 2004 and the
six months ended June 30, 2004 and 2005, the Company
recorded depreciation and amortization expense of $642,000,
$824,000, $1.0 million, $486,000 and $690,000, respectively.
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 cannot prepay any amounts
owing under the arrangement until April 2006, at which point it
can prepay all, but not part, of the amounts outstanding under
the arrangement so long as it also pays a 6% premium on the
outstanding principal balance. This premium is reduced to 5% of
the outstanding principal balance in April 2007 and 4% of the
outstanding principal balance in April 2008.
F-14
As of June 30, 2005, the Companys aggregate
commitments under its financing arrangement were as follows (in
thousands):
|
|
|
|
|
|
|
|
Annual | |
|
|
Payment | |
|
|
Amounts | |
|
|
| |
|
|
(Unaudited) | |
Years Ending December 31,
|
|
|
|
|
|
2005 (remainder of the year)
|
|
$ |
533 |
|
|
2006
|
|
|
1,102 |
|
|
2007
|
|
|
1,102 |
|
|
2008
|
|
|
970 |
|
|
2009
|
|
|
229 |
|
|
|
|
|
Total minimum payments
|
|
|
3,936 |
|
Less: interest portion
|
|
|
(676 |
) |
|
|
|
|
Present value of net minimum payments
|
|
|
3,260 |
|
Less: current portion of obligations
|
|
|
(777 |
) |
|
|
|
|
Long-term obligations
|
|
$ |
2,483 |
|
|
|
|
|
In June 2001, the Company entered into a four-year sublease
agreement for its current office and research facility. During
2003, the Company entered into an agreement to extend its
sublease through May 31, 2005, wherein monthly rent
beginning October 1, 2003, was modified to be
$75,000 per month. The Company entered into an additional
agreement to extend the term of the sublease agreement through
February 28, 2006, wherein monthly rent beginning
June 1, 2005 was modified to $40,000 per month.
Additionally, 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. The Company is currently
in negotiations to directly lease its facilities from the
facility owner as of the expiration of the current sublease in
February 2006.
Rent expense under all operating leases amounted to
$1.4 million, $1.3 million, $911,000, $456,000 and
$486,000 for the years ended December 31, 2002, 2003, 2004,
and the six months ended June 30, 2004 and 2005,
respectively.
Future noncancelable commitments under operating leases at
December 31, 2004, were as follows (in thousands):
|
|
|
|
|
|
|
|
Annual | |
|
|
Payment | |
|
|
Amounts | |
|
|
| |
Years Ending December 31,
|
|
|
|
|
|
2005
|
|
$ |
813 |
|
|
2006
|
|
|
122 |
|
|
2007
|
|
|
9 |
|
|
|
|
|
Total minimum payments
|
|
$ |
944 |
|
|
|
|
|
|
|
Note 7. |
Convertible Preferred Stock and Stockholders Equity
(Deficit) |
|
|
|
Convertible Preferred Stock |
The Company is authorized to issue 101,216,958 shares of
preferred stock in series, which shares have been designated
Series A, A-1, B, B-1, C, C-1, D, D-1, E and E-1 convertible
preferred stock, collectively referred to as preferred
stock.
F-15
As of December 31, 2004 and June 30, 2005, the
convertible preferred stock consisted of the following (in
thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share | |
|
|
|
Aggregate | |
|
|
Designated | |
|
Shares Issued and | |
|
Liquidation | |
|
Carrying | |
|
Liquidation | |
Series |
|
Shares | |
|
Outstanding | |
|
Preference | |
|
Amount | |
|
Preference | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Series A
|
|
|
7,935,000 |
|
|
|
7,935,000 |
|
|
$ |
1.00 |
|
|
$ |
7,917 |
|
|
$ |
7,935 |
|
Series A-1
|
|
|
7,935,000 |
|
|
|
|
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
Series B
|
|
|
15,675,674 |
|
|
|
15,675,674 |
|
|
$ |
1.85 |
|
|
|
28,947 |
|
|
|
29,000 |
|
Series B-1
|
|
|
15,675,674 |
|
|
|
|
|
|
$ |
1.85 |
|
|
|
|
|
|
|
|
|
Series C
|
|
|
2,252,252 |
|
|
|
2,252,252 |
|
|
$ |
2.22 |
|
|
|
4,919 |
|
|
|
5,000 |
|
Series C-1
|
|
|
2,252,252 |
|
|
|
|
|
|
$ |
2.22 |
|
|
|
|
|
|
|
|
|
Series D
|
|
|
4,073,913 |
|
|
|
4,073,913 |
|
|
$ |
2.30 |
|
|
|
9,290 |
|
|
|
9,370 |
|
Series D-1
|
|
|
4,073,913 |
|
|
|
|
|
|
$ |
2.30 |
|
|
|
|
|
|
|
|
|
Series E
|
|
|
20,671,640 |
|
|
|
18,543,980 |
|
|
$ |
2.82 |
|
|
|
52,139 |
|
|
|
52,294 |
|
Series E-1
|
|
|
20,671,640 |
|
|
|
|
|
|
$ |
2.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,216,958 |
|
|
|
48,480,819 |
|
|
|
|
|
|
$ |
103,212 |
|
|
$ |
103,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Every three shares of Series A, B, C, D and E preferred stock is
convertible into one share of common stock upon any of the
following events:
|
|
|
|
|
with respect to shares held by any stockholder, at any time at
the stockholders option; |
|
|
|
automatically upon the closing of an underwritten public
offering with aggregate offering proceeds not less than
$20.0 million and a per share price not less than
$11.40; and |
|
|
|
upon agreement of the majority of holders of the outstanding
shares of preferred stock voting as a single class, at the
then-effective conversion price. |
However, if the conversion occurs by reason of an agreement of
the majority of holders of the outstanding shares of preferred
stock in connection with an underwritten public offering with
aggregate offering proceeds either less than $20.0 million
or with a per share price less than $11.40, then every three
shares of Series E preferred stock will convert into
1.128 shares of common stock. If the Companys initial
public offering price of its common stock is less than $11.40
per share, it will be necessary to record a charge relating to
the beneficial conversion feature, or BCF, of the Companys
series E preferred stock. The Company currently estimates
the BCF charge, if recorded, would be approximately $803,000. If
the charge is recorded, it would increase the net loss
attributable to common stockholders and the net loss per share
attributable to common stockholders, but will have no impact on
cash and cash equivalents, total stockholders equity
(deficit) or net loss in the period in which the initial
public offering is completed.
The conversion price of the Companys preferred stock is
subject to adjustment to prevent dilution in the event that the
Company issues additional shares of preferred stock, common
stock, or common stock equivalents at a purchase price less than
the then-effective conversion price, provided, however, that
without triggering antidilution adjustments, the Company may
issue up to 2,500,000 shares of common stock that are
reserved for issuance under the Companys stock option plan
to directors, officers, employees, or consultants, or may issue
shares in connection with a bona fide acquisition or other
strategic transactions that are approved by the Board of
Directors.
F-16
Holders of preferred stock are entitled to noncumulative
dividends of $0.08, $0.148, $0.177, $0.184 and $0.226 per
share per annum for Series A, B, C, D and E, respectively,
if and when declared by the Board of Directors (adjusted for any
stock splits, stock dividends, recapitalization, or similar
events). These dividends are to be paid in advance of any
distributions to common stockholders. No dividends have been
declared through June 30, 2005.
In the event of a liquidation, dissolution, or winding up of the
Company, holders of Series A, B, C, D and E convertible
preferred stock shall have a liquidation preference prior to
payment to holders of common stock of $1.00, $1.85, $2.22, $2.30
and $2.82 per share, respectively, plus any declared but
unpaid dividends. After the payment to the holders of preferred
stock, the remaining assets of the Company shall be distributed
pro rata to the holders of common stock.
Preferred stockholders are entitled to the number of votes they
would have upon conversion of their preferred stock into common
stock on the record date.
The convertible preferred stock is classified outside of equity
in accordance with Rule 5-02.28 of Regulation S-X because
certain features of the Companys Restated Certificate of
Incorporation would allow holders of preferred stock to redeem
the preferred stock at their option and to trigger liquidation
preferences for the preferred stock. The preferred stock
constitutes a majority of the outstanding stock entitled to
vote, giving the preferred stockholders the ability to amend the
Companys Restated Certificate of Incorporation to allow
redemption of the preferred stock. A majority of the members of
our board of directors is comprised of individuals elected by
holders of our preferred stock. Thus, the preferred stockholders
have the ability to cause the Company to take corporate actions
that would trigger a liquidation preference of the preferred
stock. Because the holders of preferred stock can trigger
liquidation preferences and redeem the preferred stock at their
option, the preferred stock is redeemable upon the occurrence of
an event not solely within the control of the Company and is
therefore not considered a permanent equity security under Rule
5-02.28.
In 2000, the Company issued 1,345,000 shares of common
stock to founders at $0.003 per share, which the Company
determined to be the fair value of the common stock upon
formation of the Company. The shares sold to the founders are
subject to a right of repurchase by the Company subject to
vesting, which is over a four year period. There were 456,093,
202,578, zero and zero shares subject to repurchase at
December 31, 2002, 2003 and 2004 and June 30, 2005,
respectively.
On January 2, 2001, the Company adopted the 2001 Stock
Incentive Plan (the Plan), under which incentive
stock options and nonstatutory stock options may be granted to
employees, officers, and directors of, or consultants to, the
Company and its affiliates. Options granted under the Plan
expire no later than 10 years from the date of grant. The
option price of each incentive stock option shall be at least
100% of the fair value on the date of grant, and the option
price for each nonstatutory stock option shall be not less than
85% of the fair value on the date of grant, as determined by the
Board of Directors. Options for employees may be granted with
different vesting terms from time to time, but not to exceed
five years from the date of grant.
As of December 31, 2002, 2003 and 2004, and June 30,
2005, a total of 1,166,666, 1,166,666, 2,500,000 and
2,500,000 shares of common stock have been reserved for
issuance under the Plan.
Activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options | |
|
|
|
|
| |
|
|
Shares Available | |
|
Number of | |
|
Weighted Average | |
|
|
for Grant | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
Balance at December 31, 2002
|
|
|
379,033 |
|
|
|
736,166 |
|
|
$ |
0.66 |
|
Options granted
|
|
|
(245,500 |
) |
|
|
245,500 |
|
|
$ |
0.99 |
|
Options exercised
|
|
|
|
|
|
|
(283,896 |
) |
|
$ |
0.66 |
|
Options canceled
|
|
|
14,719 |
|
|
|
(14,719 |
) |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
F-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options | |
|
|
|
|
| |
|
|
Shares Available | |
|
Number of | |
|
Weighted Average | |
|
|
for Grant | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
Balance at December 31, 2003
|
|
|
148,252 |
|
|
|
683,051 |
|
|
$ |
0.78 |
|
Options authorized
|
|
|
1,333,333 |
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(906,099 |
) |
|
|
906,099 |
|
|
$ |
2.28 |
|
Options exercised
|
|
|
|
|
|
|
(215,089 |
) |
|
$ |
0.66 |
|
Options canceled
|
|
|
5,495 |
|
|
|
(5,495 |
) |
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
580,981 |
|
|
|
1,368,566 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
Options granted (unaudited)
|
|
|
(118,999 |
) |
|
|
118,999 |
|
|
$ |
3.00 |
|
Options exercised (unaudited)
|
|
|
|
|
|
|
(57,391 |
) |
|
$ |
1.02 |
|
Options canceled (unaudited)
|
|
|
5,781 |
|
|
|
(5,781 |
) |
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005 (unaudited)
|
|
|
467,763 |
|
|
|
1,424,393 |
|
|
$ |
1.86 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning
outstanding and exercisable options as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
Number | |
|
Years Remaining | |
|
Weighted Average | |
|
Number | |
|
Weighted Average | |
Exercise Price |
|
Outstanding | |
|
Contractual Life | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.60
|
|
|
50,000 |
|
|
|
6.07 |
|
|
$ |
0.60 |
|
|
|
48,819 |
|
|
$ |
0.60 |
|
$0.66
|
|
|
169,571 |
|
|
|
6.97 |
|
|
$ |
0.66 |
|
|
|
32,367 |
|
|
$ |
0.66 |
|
$0.69
|
|
|
143,562 |
|
|
|
7.54 |
|
|
$ |
0.69 |
|
|
|
50,255 |
|
|
$ |
0.69 |
|
$1.38
|
|
|
520,433 |
|
|
|
9.39 |
|
|
$ |
1.38 |
|
|
|
35,635 |
|
|
$ |
1.38 |
|
$3.00
|
|
|
418,333 |
|
|
|
9.92 |
|
|
$ |
3.00 |
|
|
|
|
|
|
|
|
|
$3.30
|
|
|
66,667 |
|
|
|
4.92 |
|
|
$ |
3.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,368,566 |
|
|
|
|
|
|
|
|
|
|
|
167,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted as
of December 31, 2002, 2003 and 2004 was $0.66, $0.78 and
$4.98, respectively.
The following table summarizes information concerning
outstanding and exercisable options as of June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
Number | |
|
Years Remaining | |
|
Weighted Average | |
|
Number | |
|
Weighted Average | |
Exercise Price |
|
Outstanding | |
|
Contractual Life | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.60
|
|
|
50,000 |
|
|
|
5.58 |
|
|
$ |
0.60 |
|
|
|
50,000 |
|
|
$ |
0.60 |
|
$0.66
|
|
|
152,134 |
|
|
|
6.50 |
|
|
$ |
0.66 |
|
|
|
84,694 |
|
|
$ |
0.66 |
|
$0.69
|
|
|
129,790 |
|
|
|
7.01 |
|
|
$ |
0.69 |
|
|
|
59,123 |
|
|
$ |
0.69 |
|
$1.38
|
|
|
490,469 |
|
|
|
8.91 |
|
|
$ |
1.38 |
|
|
|
67,899 |
|
|
$ |
1.38 |
|
$3.00
|
|
|
535,333 |
|
|
|
9.52 |
|
|
$ |
3.00 |
|
|
|
3,667 |
|
|
$ |
3.00 |
|
$3.30
|
|
|
66,667 |
|
|
|
4.42 |
|
|
$ |
3.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,424,393 |
|
|
|
|
|
|
|
|
|
|
|
265,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted as
of June 30, 2005 was $8.55.
|
|
|
Deferred Stock-based Compensation |
No employee stock compensation expense was reflected in the
Companys reported net loss in any period prior to 2004, as
all options granted had an exercise price equal to the estimated
fair value of the underlying common stock on the date of grant.
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 June 2005
F-18
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 Opinion No. 25. In the six months ended June 30,
2005, an additional $846,000 of deferred stock-based
compensation was recorded. The deferred stock-based compensation
will be amortized on a straight-line basis over the vesting
period of the related awards, which is generally four years. For
the year ended December 31, 2004 and the six months ended
June 2005, the Company recorded employee stock-based
compensation expense of $191,000 and $509,000, respectively.
The Company has established a tax-qualified employee savings and
retirement plan for which its employees are generally eligible.
Under the 401(k) plan, Company employees may elect to
reduce their compensation and have the amount of this reduction
contributed to the 401(k) plan. The Company does not make
matching contributions. The 401(k) plan is intended to
qualify under Section 401 of the Internal Revenue Code, so
that contributions to the 401(k) plan, and income earned on
plan contributions, are not taxable to employees until withdrawn
from the plan, and so that contributions by the Company, if any,
will be deductible by the Company when made.
|
|
|
Stock Options Granted to Nonemployees |
The Company grants options to consultants from time to time in
exchange for services performed for the Company. During the
years ended December 31, 2002, 2003 and 2004, and the six
months ended June 30, 2005, the Company granted options to
purchase 27,333, 33,000, 8,333 and 5,333 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
Volatility factor
|
|
|
80% |
|
|
|
80% |
|
|
|
80% |
|
|
|
80% |
|
|
|
80% |
|
Average risk-free interest rate
|
|
|
4.0% |
|
|
|
2.0% |
|
|
|
2.4% |
|
|
|
2.0% |
|
|
|
4.0% |
|
Dividend yield
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Expected life of options
|
|
|
10 years |
|
|
|
10 years |
|
|
|
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, 2002, 2003 and
2004, and the six months ended June 30, 2005, compensation
expense related to these options was $36,000, $18,000, $53,000
and $58,000, respectively.
As of December 31, 2004, the Company had reserved shares of
common stock for future issuance as follows:
|
|
|
|
|
Stock option plan
|
|
|
1,949,547 |
|
Conversion of preferred stock
|
|
|
16,160,273 |
|
|
|
|
|
|
|
|
18,109,820 |
|
|
|
|
|
As of June 30, 2005, the Company had reserved shares of
common stock for future issuance as follows:
|
|
|
|
|
Stock option plan
|
|
|
1,892,155 |
|
Conversion of preferred stock
|
|
|
16,160,273 |
|
|
|
|
|
|
|
|
18,052,428 |
|
|
|
|
|
F-19
|
|
Note 8. |
Related Party Transactions |
The Company has entered into various agreements with Incyte
Corporation. See Note 2. The Companys Chief Executive
Officer and Chairman of the Board is a stockholder of both
Incyte and the Company, and until December 31, 2001, was
the Chairman of the Board of Incyte. In November 2000, pursuant
to a Series A preferred stock purchase agreement, Incyte
purchased 1,000,000 shares of the Companys Series A
preferred stock at a price of $1.00 per share. In March 2001,
pursuant to a Series C preferred stock purchase agreement,
Incyte purchased 2,252,252 shares of the Companys
Series C preferred stock at a price of $2.22 per
share. Under this agreement, Incyte granted the Company the
right to cause Incyte to purchase an aggregate of
$5.0 million of shares of the Companys common stock
upon closing an initial public offering of the Companys
shares of common stock, at the initial public offering, price so
long as such offering results in gross proceeds to the Company
of at least $10.0 million, excluding any amounts received
by the Company from Incyte.
As of December 31, 2003 and 2004, the Company had deferred
tax assets of approximately $15.5 million and
$25.6 million, respectively. Realization of the deferred
tax assets is dependent upon future taxable income, if any, the
amount and timing of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation
allowance. The net valuation allowance increased by
approximately $4.6 million, $6.6 million, and
$10.1 million during the years ended December 31,
2002, 2003 and 2004, respectively. Deferred tax assets primarily
relate to net operating loss and tax credit carryforwards.
Deferred tax assets and liabilities consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
14,008 |
|
|
$ |
23,944 |
|
|
Capitalized costs
|
|
|
1,664 |
|
|
|
1,546 |
|
|
Research tax credits
|
|
|
821 |
|
|
|
1,424 |
|
|
Other
|
|
|
74 |
|
|
|
98 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
16,567 |
|
|
|
27,012 |
|
Valuation allowance
|
|
|
(16,567 |
) |
|
|
(27,012 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
As of December 31, 2004, the Company had federal and state
net operating loss carryforwards of approximately
$60.2 million and $57.8 million, respectively, and
federal and state research and development tax credit
carryforwards of approximately $855,000 and $569,000,
respectively. The net operating loss and tax credit
carryforwards will expire at various dates beginning in 2021 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 10. Subsequent Events (Unaudited)
2005 Stock Incentive Plan
On September 8, 2005, the Company adopted the 2005 Stock
Incentive Plan. 5,000,000 shares of the Companys
common stock have been reserved for issuance under the
2005 Plan. Subject to stockholder approval, the
2005 Plan will become effective upon the closing of the
Companys initial public offering. 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
F-20
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 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.
Lease
In September 2005, the Company entered into a lease agreement
that will apply to the 25,000 square feet of laboratory and
office space the Company currently occupies. Under the lease,
the Company also leases approximately 23,000 square feet of
additional space that the Company expects to first occupy in
March 2006. If the Company first occupies space under this new
lease in March 2006, the Company will be required to make
aggregate rent payments of approximately $4.5 million
throughout the entire term of the lease.
F-21