UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2009
Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 000-51541
GENOMIC HEALTH, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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77-0552594
(I.R.S. Employer Identification No.)
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301 Penobscot Drive
Redwood City, California 94063
(Address of principal executive offices, including Zip Code)
(650) 556-9300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
The number of outstanding shares of the registrants Common Stock, $0.0001 par value, was
28,558,428 as of July 31, 2009.
GENOMIC HEALTH, INC.
INDEX
2
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
GENOMIC HEALTH, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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June 30,
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December 31,
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2009
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2008
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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11,366
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$
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11,171
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Short-term investments
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44,363
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45,499
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Accounts
receivable (net of allowance for doubtful accounts; June 30, 2009 - $624, December 31, 2008 - $881)
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7,938
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8,807
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Prepaid expenses and other current assets
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5,195
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4,781
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Total current assets
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68,862
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70,258
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Property and equipment, net
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13,869
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15,562
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Restricted cash
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500
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500
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Other assets
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337
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369
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Total assets
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$
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83,568
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$
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86,689
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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2,531
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$
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1,898
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Accrued compensation
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5,929
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4,157
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Accrued license fees
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2,392
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2,553
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Accrued expenses and other current liabilities
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5,126
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4,398
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Notes payable current portion
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835
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1,814
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Deferred revenues current portion
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1,492
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2,381
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Other current liabilities
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364
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364
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Total current liabilities
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18,669
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17,565
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Notes payable long-term portion
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105
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225
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Deferred revenues long-term portion
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476
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1,417
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Other liabilities
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1,113
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1,307
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Commitments (Note 5)
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Stockholders equity:
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Preferred stock, $0.0001 par value per share, 5,000,000 shares authorized, none issued and
outstanding at June 30, 2009 and December 31, 2008
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Common stock, $0.0001 par value per share, 100,000,000 shares authorized, 28,555,977 and
28,461,327 shares issued and outstanding at June 30, 2009 and December 31, 2008,
respectively
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2
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2
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Additional paid-in capital
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240,165
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234,412
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Accumulated other comprehensive income
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90
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245
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Accumulated deficit
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(177,052
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)
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(168,484
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)
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Total
stockholders equity
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63,205
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66,175
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Total liabilities and stockholders equity
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$
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83,568
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$
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86,689
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See accompanying notes.
3
GENOMIC HEALTH, INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2009
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2008
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2009
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2008
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Revenues:
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Product revenues
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$
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35,191
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$
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26,327
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$
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68,618
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$
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49,682
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Contract revenues
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1,361
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1,456
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1,830
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1,541
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Total revenues
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36,552
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27,783
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70,448
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51,223
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Operating expenses:
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Cost of product revenues
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7,891
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6,850
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15,719
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12,734
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Research and development
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9,243
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7,322
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17,888
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13,728
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Selling and marketing
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15,709
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11,827
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30,406
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24,194
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General and administrative
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7,651
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6,225
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14,989
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12,130
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Total operating expenses
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40,494
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32,224
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79,002
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62,786
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Loss from operations
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(3,942
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(4,441
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(8,554
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(11,563
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Interest and other income
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213
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448
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462
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1,069
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Interest and other expense
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(34
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(106
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(86
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(239
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Loss before income taxes
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(3,763
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(4,099
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(8,178
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(10,733
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Provision for income taxes
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(180
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(390
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Net loss
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$
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(3,943
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$
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(4,099
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$
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(8,568
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$
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(10,733
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Basic and diluted net loss per share
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$
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(0.14
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$
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(0.15
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$
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(0.30
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$
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(0.38
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Shares used in computing basic and diluted net loss per share
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28,540,832
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28,262,407
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28,518,518
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28,239,908
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See accompanying notes.
4
GENOMIC HEALTH, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Six Months Ended
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June 30,
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2009
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2008
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Operating activities
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Net loss
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$
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(8,568
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$
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(10,733
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
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Depreciation and amortization
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3,175
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2,220
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Employee stock-based compensation
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5,056
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4,541
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Non-employee stock-based compensation
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34
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1
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Gain on disposal of property and equipment
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(43
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Changes in assets and liabilities:
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Accounts receivable
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869
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(2,271
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)
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Prepaid expenses and other assets
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(409
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)
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(1,518
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)
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Accounts payable
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633
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(53
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Accrued expenses and other liabilities
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555
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1,617
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Accrued compensation
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1,772
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482
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Deferred revenues
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(1,830
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)
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3,160
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Lease incentive obligations
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(182
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)
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508
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Net cash provided by (used in) operating activities
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1,062
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(2,046
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)
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Investing activities
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Purchases of property and equipment
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(1,412
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)
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(4,823
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)
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Purchases of short-term investments
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(31,319
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)
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(73,569
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)
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Maturities of short-term investments
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32,300
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59,299
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Net cash used in investing activities
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(431
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)
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(19,093
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)
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Financing activities
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Principal payments of notes payable
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(1,099
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)
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(1,381
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)
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Proceeds from issuance of common stock under stock plans
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663
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578
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Net cash used in financing activities
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(436
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)
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(803
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)
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Net increase (decrease) in cash and cash equivalents
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195
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(21,942
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)
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Cash and cash equivalents at the beginning of the period
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11,171
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39,164
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Cash and cash equivalents at the end of the period
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$
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11,366
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$
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17,222
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Cash paid for interest
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$
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86
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$
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230
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See accompanying notes.
5
GENOMIC HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
The Company
Genomic Health, Inc. (the Company) is a life science company focused on the development and
commercialization of genomic- based clinical diagnostic tests for cancer that allow physicians and
patients to make individualized treatment decisions. In 2004, the Company launched its first test,
the Onco
type
DX breast cancer test, which has been shown to predict the likelihood of breast cancer
recurrence and the likelihood of chemotherapy benefit in a large portion of breast cancer patients.
The Company was incorporated in Delaware in August 2000 and is located in Redwood City, California.
Principles of Consolidation
The condensed consolidated financial statements include all the accounts of the Company and
its wholly-owned subsidiaries. The Company has two wholly-owned subsidiaries, Genomic Health
Switzerland LLC, which was established in 2009 to support the
Companys international sales and marketing efforts,
and Onco
type
Laboratories, Inc., which was established in 2003 and is inactive. All
significant intercompany balances and transactions have been eliminated.
Basis of Presentation and Use of Estimates
The accompanying interim period condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States (GAAP). The
condensed consolidated balance sheet as of June 30, 2009, condensed consolidated statements of
operations for the three and six months ended June 30, 2009 and 2008 and condensed consolidated
statements of cash flows for the six months ended June 30, 2009 and 2008 are unaudited, but include
all adjustments, consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of its financial position, operating results and cash flows for
the periods presented. The condensed consolidated balance sheet at December 31, 2008 has been
derived from audited financial statements. However, it does not include certain information and
notes required by GAAP for complete consolidated financial statements. In preparing these financial
statements, the Company has evaluated events and transactions for potential recognition or
disclosure through August 7, 2009, the date these financial statements were issued.
The preparation of financial statements in conformity with GAAP requires management to make
judgments, assumptions and estimates that affect the amounts reported in the Companys condensed
consolidated financial statements and accompanying notes. Actual results could differ materially
from those estimates.
Revenue Recognition
The Company derives its revenues from product sales and contract research arrangements. The
Company operates in one industry segment. Product revenues are derived solely from the sale of the Onco
type
DX breast cancer test.
The Company generally bills third-party payors for a test upon generation and delivery of a
Recurrence Score report to the physician. As such, the Company takes assignment of benefits and the
risk of collection with the third-party payor. The Company usually bills the patient directly for
amounts owed after multiple requests for payment have been denied or only partially paid by the
insurance carrier. The Company pursues case-by-case reimbursement where third-party reimbursement
policies are not in place or payment history has not been established.
The Companys product revenues for tests performed are recognized when the following revenue
recognition criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured. Criterion (1) is satisfied when the Company has an
arrangement to pay or contract with the payor in place addressing reimbursement for the Onco
type
DX
breast cancer test. In the absence of such arrangements, the Company considers that criterion (1) is satisfied
when a third-party payor pays the Company for the test performed. In addition, the Company must
receive a written request to perform the test from a physician. Criterion (2) is satisfied when the
Company performs the test and generates and delivers to the
physician, or makes available on its web
portal, a Recurrence Score report. Determination of criteria (3) and (4) is based on managements
judgments regarding whether the fee charged for products or services delivered is fixed or
determinable, contractual agreements entered into, and the collectibility of those fees under any
contract or agreement. When
6
evaluating collectibility, the Company considers whether it has sufficient history to reliably
estimate a payors individual payment patterns. Based upon at least several months of payment
history, the Company reviews the number of tests paid against the number of tests billed and the
payors outstanding balance for unpaid tests to determine whether payments are being made at a
consistently high percentage of tests billed and at appropriate amounts given the contracted
payment amount. To the extent all criteria set forth above are not met when test results are
delivered, product revenues are recognized when cash is received from the payor.
The
Company recognizes a portion of its product revenues on an accrual basis when the criteria (3) and (4) described in the preceding paragraph are
satisfied. For all periods presented, approximately half of total product revenue recognized was
recorded on an accrual basis.
From
time to time, Company receives requests for refunds. When it
becomes aware of a request for a refund, Company ceases to record
revenue for those payments until such time it determines whether or
not a refund is due.
Contract revenues are generally derived from studies conducted with biopharmaceutical and
pharmaceutical companies. The specific methodology for revenue recognition is determined on a
case-by-case basis according to the facts and circumstances applicable to a given contract. Under
certain contracts, the Companys input, measured in terms of full-time equivalent level of effort
or running a set of assays through its clinical reference laboratory under a contractual protocol,
triggers payment obligations, and revenues are recognized as costs are incurred or assays are
processed. Certain contracts have payments that are triggered as milestones are completed, such as
completion of a successful set of experiments. Milestones are assessed on an individual basis and
revenue is recognized when these milestones are achieved, as evidenced by acknowledgment from
collaborators, provided that (1) the milestone event is substantive and its achievability was not
reasonably assured at the inception of the agreement and (2) the milestone payment is
non-refundable. Where separate milestones do not meet these criteria, the Company typically
defaults to a performance-based model, such as revenue recognition following delivery of effort as
compared to an estimate of total expected effort.
Advance payments received in excess of revenues recognized are classified as deferred revenue
until such time as the revenue recognition criteria have been met.
Allowance for Doubtful Accounts
The Company accrues an allowance for doubtful accounts against its accounts receivable
consistent with historical payment experience. Bad debt expense is included in general and
administrative expense on the Companys condensed consolidated statements of operations. Accounts
receivable are written off against the allowance when the appeals process is exhausted, when an
unfavorable coverage decision is received or when there is other substantive evidence that the
account will not be paid. As of June 30, 2009 and December 31, 2008, the Companys allowance for
doubtful accounts was $624,000 and $881,000, respectively. Write-offs for doubtful accounts of
$475,000 and $800,000 were recorded against the allowance during the three and six months ended
June 30, 2009, respectively, and $7,000 and $138,000 during the three and six months ended June 30,
2008, respectively. Bad debt expense was $395,000 and $543,000 for the three and six months ended June 30, 2009,
respectively and $273,000 and $357,000 for the three and six months ended June 30, 2008,
respectively.
Research and Development Expenses
Research and development expenses are comprised of the following types of costs incurred in
performing research and development activities: salaries and benefits, allocated overhead and
facility occupancy costs, contract services, reagents and laboratory supplies, and costs to acquire
in-process research and development projects and technologies that have no alternative future use.
Research and development expenses also include costs related to activities performed under
contracts with biopharmaceutical and pharmaceutical companies. Research and development costs are
expensed as incurred.
The Company enters into collaboration and clinical study agreements with clinical
collaborators and records these costs as research and development expenses. The Company records
accruals for estimated study costs comprised of work performed by its collaborators under contract
terms. Advance payments for goods or services that will be used or rendered for future research and
development activities are deferred and capitalized and recognized as an expense as the goods are
delivered or the related services are performed.
Emerging Issues Task Force Issue No. 07-1,
Accounting for Collaborative Arrangements
(EITF
07-1), was ratified by the Financial Accounting Standards Board (FASB) in November 2007 and
adopted by the Company as of January 2009. EITF 07-1
7
defines collaborative arrangements and establishes reporting requirements for transactions
between participants in a collaborative arrangement and between participants in the arrangement and
third parties. EITF 07-1 requires collaborators to present the results of activities for which they
act as the principal on a gross basis and report any payments received from, or made to, other
collaborators based on applicable GAAP or, in the absence of applicable GAAP, based on analogy to
authoritative accounting literature or a reasonable, rational, and consistently applied accounting
policy election. The adoption of EITF 07-1 did not have a material effect on the Companys
condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In April 2009, FASB issued three related Staff Positions: (i) FASB Staff Position 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have
Significantly Decreased and Identifying Transactions That Are Not Orderly
(FSP 157-4), (ii) FASB
Staff Position FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary
Impairment
(FSP FAS 115-2 and FAS 124-2), and (iii) FASB Staff Position FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instrument
s (FSP FAS 107-1 and APB 28-1), which
are effective for interim and annual periods ending after June 15, 2009. FSP 157-4 provides
guidance on how to determine the fair value of assets and liabilities under Statement of Financial
Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157) in the current economic
environment and reemphasizes that the objective of a fair value measurement remains an exit price.
FSP FAS 115-2 and FAS 124-2 modifies the requirements for recognizing other-than-temporarily
impaired debt securities and revises the existing impairment model for such securities. FSP FAS
107-1 and APB 28-1 enhances the disclosure of instruments under the scope of SFAS 157 for both
interim and annual periods. The Companys adoption of these Staff Positions as of June 30, 2009 did
not have a material impact on its financial condition or results of operations.
In May 2009, FASB issued Statement of Financial Accounting Standards No. 165,
Subsequent
Events
(SFAS 165). SFAS 165 establishes general standards for accounting disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available
to be issued and applies to both interim and annual financial statements. SFAS 165 is effective for
interim or annual financial periods ending after June 15, 2009 and was adopted by the Company as
of June 30, 2009. The adoption of SFAS 165 did not have a material impact on the Companys
financial condition or results of operations.
In June 2009, FASB issued Statement of Financial Accounting Standards No. 168,
The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
, a
replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 establishes the FASB Accounting
Standards Codification (Codification) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Certain accounting standards have allowed for the continued
application of superseded accounting standards for transactions that have an ongoing effect in an
entitys financial statements. That superseded guidance has not been included in the Codification,
shall be considered grandfathered, and shall continue to remain authoritative for those
transactions after the effective date of this Statement, which is for financial statements issued
for interim and annual periods ending after September 15, 2009. The Company does not expect the
adoption of SFAS 168 to have a material impact on its financial condition or results of operations.
8
Note 2. Net Loss Per Share
Basic net loss per share is calculated by dividing net loss for the period by the
weighted-average number of common shares outstanding for the period without consideration for
potential common shares. Diluted net loss per share is calculated by dividing net loss by the
weighted-average number of common shares outstanding for the period and dilutive potential common
shares for the period determined using the treasury-stock method. For purposes of this calculation,
options to purchase common stock are considered to be potential common shares but are not included
in the calculation of diluted net loss per share because their effect is anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share amounts)
|
|
Net loss
|
|
$
|
(3,943
|
)
|
|
$
|
(4,099
|
)
|
|
$
|
(8,568
|
)
|
|
$
|
(10,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average net common shares outstanding for basic
and diluted loss per common share
|
|
|
28,540,832
|
|
|
|
28,262,407
|
|
|
|
28,518,518
|
|
|
|
28,239,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding dilutive securities not included in diluted net loss
per share calculation (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
4,730,556
|
|
|
|
3,931,216
|
|
|
|
4,730,556
|
|
|
|
3,931,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
The Company reports comprehensive loss and its components as part of total stockholders
equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net loss
|
|
$
|
(3,943
|
)
|
|
$
|
(4,099
|
)
|
|
$
|
(8,568
|
)
|
|
$
|
(10,733
|
)
|
Unrealized gain (loss) on available-for-sale securities
|
|
|
(23
|
)
|
|
|
(121
|
)
|
|
|
(155
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(3,966
|
)
|
|
$
|
(4,220
|
)
|
|
$
|
(8,723
|
)
|
|
$
|
(10,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Fair Value Measurements
In September 2006, FASB issued SFAS 157, which defines fair value, establishes a framework for
measuring fair value and requires expanded disclosures regarding fair value measurements. SFAS 157
applies whenever standards require (or permit) assets or liabilities to be measured at fair value,
and does not expand the use of fair value in any new circumstances. The Company adopted SFAS 157 as
of January 1, 2008 for financial assets and liabilities measured at fair value and as of January 1,
2009 for non-financial assets and liabilities measured at fair value. There was no financial
statement impact as a result of these adoptions.
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid
to transfer a liability, or an exit price, in the principal or most advantageous market for that
asset or liability in an orderly transaction between market participants on the measurement date.
SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs, where available, and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
:
Quoted prices in active markets for identical assets or liabilities.
9
Level 2:
Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3:
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
The following tables set forth the Companys financial instruments that were measured at fair
value on a recurring basis at June 30, 2009 and December 31, 2008 by level within the fair value
hierarchy. The Company did not have any non-financial assets or liabilities that were measured or
disclosed at fair value on a recurring basis at June 30, 2009 or December 31, 2008. As required by
SFAS 157, assets and liabilities measured at fair value are classified in their entirety based on
the lowest level of input that is significant to the fair value measurement. The Companys
assessment of the significance of a particular input to the fair value measurement in its entirety
requires management to make judgments and considers factors specific to the asset or liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted
|
|
|
|
|
|
Significant
|
|
|
|
|
Markets for
|
|
Significant Other
|
|
Unobservable
|
|
|
|
|
Identical Assets
|
|
Observable Inputs
|
|
Inputs
|
|
Balance at
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
June 30, 2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits
|
|
$
|
7,141
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,141
|
|
Debt securities of U.S. Government-sponsored
agencies
|
|
|
|
|
|
|
40,614
|
|
|
|
|
|
|
|
40,614
|
|
Commercial paper
|
|
|
|
|
|
|
3,749
|
|
|
|
|
|
|
|
3,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted
|
|
|
|
|
|
Significant
|
|
|
|
|
Markets for
|
|
Significant Other
|
|
Unobservable
|
|
|
|
|
Identical Assets
|
|
Observable Inputs
|
|
Inputs
|
|
Balance at
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
December 31, 2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits
|
|
$
|
5,926
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,926
|
|
U.S. Treasury securities
|
|
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
Debt securities of U.S. Government-sponsored
agencies
|
|
|
|
|
|
|
37,350
|
|
|
|
|
|
|
|
37,350
|
|
Commercial paper
|
|
|
|
|
|
|
8,149
|
|
|
|
|
|
|
|
8,149
|
|
Corporate bonds
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with maturities of three months or less
when purchased to be cash equivalents.
The Company invests in marketable securities, primarily money market securities, obligations
of U.S. Government agencies and government-sponsored entities, corporate bonds and commercial
paper. The Company considers all investments with a maturity date less than one year as of the
balance sheet date to be short-term investments. These securities are carried at estimated fair
value with unrealized gains and losses included in stockholders equity. Those investments with a
maturity date greater than one year as of the balance sheet date are considered to be long-term
investments. All investments are classified as available for sale.
Realized gains and losses and declines in value, if any, judged to be other than temporary on
available-for-sale securities are reported in other income or expense. When securities are sold,
any associated unrealized gain or loss recorded as a separate
10
component of stockholders equity is
reclassified out of stockholders equity on a specific-identification basis and recorded in
earnings for the period.
The following tables illustrate the Companys available-for-sale securities as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Debt securities of U.S. Government-sponsored agencies
|
|
$
|
40,724
|
|
|
$
|
120
|
|
|
$
|
(229
|
)
|
|
$
|
40,614
|
|
Commercial paper
|
|
|
3,707
|
|
|
|
41
|
|
|
|
|
|
|
|
3,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,431
|
|
|
$
|
161
|
|
|
$
|
(229
|
)
|
|
$
|
44,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Debt securities of U.S. Government-sponsored agencies
|
|
$
|
37,144
|
|
|
$
|
209
|
|
|
$
|
(3
|
)
|
|
$
|
37,350
|
|
Corporate debt securities
|
|
|
8,110
|
|
|
|
42
|
|
|
|
(3
|
)
|
|
|
8,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,254
|
|
|
$
|
251
|
|
|
$
|
(6
|
)
|
|
$
|
45,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no realized gains or losses on its available-for-sale securities for the
three and six months ended June 30, 2009 and 2008, respectively.
The amortized cost and estimated fair value of available-for-sale securities by contractual
maturity at June 30, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
Market
|
|
|
Cost
|
|
Value
|
|
|
(In thousands)
|
Due in one year or less
|
|
$
|
44,431
|
|
|
$
|
44,363
|
|
Note 4. Commercial Technology and Licensing Agreements
The Company is a party to various agreements under which it licenses technology on a
nonexclusive basis in the field of human diagnostics. Access to these licenses enables the Company
to process its Onco
type
DX breast cancer tests. While certain agreements contain provisions for
fixed annual payments, license fees are generally calculated as a percentage of product revenues,
with rates that
vary by agreement and may be tiered, and payments that may be capped at annual minimum or maximum
amounts. The Company recognized costs recorded under these agreements of $2.4 million and $4.7
million for the three and six months ended June 30, 2009, respectively and $1.9 million and $3.6
million for the three and six months ended June 30, 2008, respectively, which were included in cost
of product revenues.
Note 5. Commitments
Notes Payable
In March 2005, the Company entered into an arrangement to finance the acquisition of
laboratory and office equipment, computer hardware and software and leasehold improvements. In
connection with this arrangement, the Company granted the lender a security
11
interest in the assets
purchased with the borrowed amounts. The Company can prepay all, but not part of, the amounts
outstanding under the arrangement so long as the Company also pays a 4% premium on the outstanding
principal balance. As of June 30, 2009, the outstanding notes payable principal balance under this
arrangement was $940,000 at annual interest rates ranging from 11.01% to 11.30%, depending on the
applicable note. According to the terms of the arrangement, the Company is required to notify the
lender if there is a material adverse change in its financial condition, business or operations.
The Company believes it has complied with all the material covenants of the financing arrangement
as of June 30, 2009.
As of June 30, 2009, the Companys aggregate commitments under its financing arrangement were
as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payments
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
Years Ending December 31,
|
|
|
|
|
2009 (remainder of the year)
|
|
$
|
749
|
|
2010
|
|
|
238
|
|
|
|
|
|
Total minimum payments
|
|
|
987
|
|
Less: interest portion
|
|
|
(47
|
)
|
|
|
|
|
Present value of net minimum payments
|
|
|
940
|
|
Less: current portion of obligations
|
|
|
(835
|
)
|
|
|
|
|
Long-term obligations
|
|
$
|
105
|
|
|
|
|
|
Lease Obligations
In September 2005, the Company entered into a non-cancelable lease for 48,000 square feet of
laboratory and office space that the Company occupies in Redwood City, California. The lease
expires in February 2012 and includes lease incentive obligations of $834,000 that are being
amortized on a straight-line basis over the life of the lease. In connection with this lease, the
Company was required to secure a $500,000 letter of credit, which is classified as restricted cash
on the condensed consolidated balance sheets.
In January 2007, the Company entered into a non-cancelable lease for an additional 48,000
square feet of laboratory and office space in a nearby location. The lease expires in February 2012
and includes lease incentive obligations totaling $283,000 that are being amortized on a
straight-line basis over the life of the lease. In connection with this lease, the Company paid a
$151,000 cash security deposit, which is included in other assets on the condensed consolidated
balance sheets.
Future non-cancelable commitments under these operating leases at June 30, 2009 were as
follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payments
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
Years Ending December 31,
|
|
|
|
|
2009 (remainder of the year)
|
|
$
|
774
|
|
2010
|
|
|
1,634
|
|
2011
|
|
|
1,723
|
|
2012
|
|
|
290
|
|
|
|
|
|
Total minimum payments
|
|
$
|
4,421
|
|
|
|
|
|
Clinical Collaborator Costs
The Company has entered into a variety of collaboration and specimen transfer agreements
relating to its development efforts. The Company recorded expenses of $891,000 and $1.5 million for
the three and six months ended June 30, 2009, respectively, and $416,000 and $493,000 for the three
and six months ended June 30, 2008, respectively, relating to services provided in connection with
these agreements, which are included in research and development expenses. In addition to these
expenses, certain agreements
12
contain provisions for royalties from inventions resulting from these
agreements. The Company has certain options and rights relating to joint inventions arising out of
these agreements.
In addition to costs for research and development, under one of our collaboration agreements,
we make fixed annual payments resulting from the launch and commercialization of the Onco
type
DX
breast cancer test. At June 30, 2009, future payments remaining under this agreement totaled
$950,000, of which $475,000 is payable in January 2010 and $475,000 is payable in January 2011.
These payments are recorded in cost of product revenues as license fees. Expense is recorded
ratably over the year before the relevant payment is made. If at any time the Company discontinues
the sale of the Onco
type
DX breast cancer test, no future annual payments will be payable and the
Company will have no further obligation under the agreement. If the Companys cash balance is less
than $5.0 million on the due date of any of the annual payments, the Company may be able to defer
any current annual payment due for a period of up to 12 months.
Note 6. Stock-Based Compensation
Stock Incentive Plan
On September 8, 2005, the Board of Directors approved the 2005 Stock Incentive Plan (the 2005
Plan), which was later approved by the Companys stockholders. The Company initially reserved
5,000,000 shares of the Companys common stock for issuance under the 2005 Plan. The 2005 Plan
became effective upon the closing of the Companys initial public offering on October 4, 2005.
Pursuant to the 2005 Plan, stock options, restricted shares, stock units, and stock appreciation
rights may be granted to employees, consultants, and outside directors of the Company. Options
granted may be either incentive stock options or nonstatutory stock options. On June 8, 2009, the
Companys stockholders approved an amendment to the 2005 Plan to increase the shares reserved for
issuance under the 2005 Plan by 3,980,000 shares. The amended and restated plan also extends the
term under which awards may be granted under the 2005 Plan until January 27, 2019. As of June 30,
2009, the 2005 Plan provides for the issuance of a maximum of 8,980,000 shares, of which 4,874,939
shares of common stock were then available for future issuance.
Stock Options
The Company uses the Black-Scholes option valuation model to value stock options under
Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment
(SFAS
123R). The Company recorded stock-based compensation expense of $2.5 million and $5.1 million for
the three and six months ended June 30, 2009, respectively, and $2.3 million and $4.5 million for
the three and six months ended June 30, 2008, respectively. Stock-based compensation expense was
calculated based on awards ultimately expected to vest and has been reduced for estimated
forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. The following
table presents the impact of SFAS 123R on selected statements of operations line items for the
three and six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of product revenues
|
|
$
|
88
|
|
|
$
|
125
|
|
|
$
|
181
|
|
|
$
|
239
|
|
Research and development
|
|
|
770
|
|
|
|
720
|
|
|
|
1,540
|
|
|
|
1,455
|
|
Selling and marketing
|
|
|
798
|
|
|
|
648
|
|
|
|
1,595
|
|
|
|
1,278
|
|
General and administrative
|
|
|
880
|
|
|
|
792
|
|
|
|
1,740
|
|
|
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,536
|
|
|
$
|
2,285
|
|
|
$
|
5,056
|
|
|
$
|
4,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense resulting from the adoption of SFAS 123R represents
expense related to stock options granted on or after January 1, 2006, as well as stock options
granted prior to, but not yet vested as of, January 1, 2006. As of June 30, 2009, total
unrecognized compensation expense related to unvested stock options, net of estimated forfeitures,
was $20.6 million. The Company expects to recognize this expense over a weighted-average period of
35 months.
13
Valuation Assumptions
Option valuation models require the input of highly subjective assumptions that can vary over
time. The Companys expected volatility is based on the historical volatility of the Companys
common stock. The expected life of options granted is estimated based on historical option exercise
data and assumptions related to unsettled options. The risk-free interest rate is estimated using
published rates for U.S. Treasury securities with a remaining term approximating the expected life
of the options granted. The Company uses a dividend yield of zero as it has never paid cash
dividends and does not anticipate paying cash dividends in the foreseeable future. The Company
granted options to purchase 80,350 and 207,550 shares of common stock to employees and directors
during the three and six months ended June 30, 2009, respectively. The Company granted options to
purchase 154,600 and 198,200 shares of common stock to employees and directors during the three and
six months ended June 30, 2008, respectively. The weighted-average fair values and the assumptions
used in calculating such values for stock options granted during these periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Expected volatility
|
|
|
55
|
%
|
|
|
60
|
%
|
|
|
56
|
%
|
|
|
60
|
%
|
Risk-free interest rate
|
|
|
2.73
|
%
|
|
|
3.22
|
%
|
|
|
2.17
|
%
|
|
|
3.14
|
%
|
Expected life of options in years
|
|
|
5.60
|
|
|
|
5.74
|
|
|
|
5.76
|
|
|
|
5.77
|
|
Weighted-average fair value
|
|
$
|
9.57
|
|
|
$
|
10.95
|
|
|
$
|
10.30
|
|
|
$
|
11.19
|
|
Stock Options Exercised
For the three and six months ended June 30, 2009, the Company issued 34,360 and 94,650 shares
of common stock in connection with the exercise of stock options with a weighted-average exercise
price of $4.61 and $7.01 per share and total intrinsic value of $159,000 and $663,000,
respectively. For the three and six months ended June 30, 2008, the Company issued 41,590 and
104,820 shares of common stock in connection with the exercise of stock options with a
weighted-average exercise price of $5.12 and $5.51 per share and total intrinsic value of $213,000
and $578,000, respectively.
Note 7. Income Tax
For the three and six months ended June 30, 2009, the Company recorded a provision for income
taxes of approximately $180,000 and $390,000, respectively, that is principally comprised of
federal alternative minimum and California income tax. The tax provision for the three and six
months ended June 30, 2009 was based on the Companys estimated taxable income for the year. The
difference between the provision for income taxes that would be derived by applying the statutory
rate to the Companys loss before tax and the income tax provision actually recorded is primarily
due to the impact of non-deductible SFAS 123R stock-based compensation expenses and other currently
non-deductible items, offset by the use of federal net operating loss carry-forwards that reduce the
federal tax expense to the alternative minimum tax amount and California state income tax under their
applicable statutes. For the six months ended June 30, 2008, the Company did not record a provision
for income taxes because it estimated and incurred a taxable loss for the year ended December 31,
2008.
The Company intends to continue maintaining a full valuation allowance on its deferred tax
assets until sufficient evidence exists to support the reversal of all or some portion of these
allowances. Should the actual amounts differ from the Companys estimates, the amount of its
valuation allowance could be materially impacted.
The Company had $575,000 and $413,000 of unrecognized tax benefits as of June 30, 2009 and
2008, respectively. The Company does not anticipate a material change in its unrecognized tax
benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve
months for items that arise in the ordinary course of business.
The Company will recognize accrued interest and penalties related to unrecognized tax benefits
in income tax expense when and if incurred. As of June 30, 2009, the Company had not recognized any
tax-related penalties or interest in its consolidated balance sheets or statements of operations.
All tax years from 2000 forward remain subject to future examination by tax authorities.
14
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. When used in this report, the words expects, anticipates,
intends, estimates, plans, believes, and similar expressions are intended to identify
forward-looking statements. These are statements that relate to future periods and include
statements about our expectation that, for the foreseeable future, substantially all of our
revenues will be derived from the Oncotype DX breast cancer test; the factors that may impact our
financial results; the extent and duration of our net losses or when we may achieve profitability;
our ability to recognize revenues other than on a cash basis; our business strategy and our ability
to achieve our strategic goals; our expectations regarding product revenues; the amount of future
revenues that we may derive from Medicare patients or categories of patients; our plans to pursue
reimbursement on a case-by-case basis; our ability, and expectations as to the amount of time it
will take, to achieve successful reimbursement from third-party payors and government insurance
programs for new tests or markets, including for Oncotype DX for N+ breast cancer patients, our
Oncotype DX colon cancer test, or for patients outside of the U.S.; our expectations regarding our
international expansion and opportunities, and our expectations regarding revenues from
international sales; our intent to enter into additional foreign distribution arrangements; the
factors we believe to be driving demand for the Oncotype DX breast cancer test and our ability to
sustain or increase such demand; our success in increasing patient and physician demand as a result
of our direct sales approach; plans for enhancements of Oncotype DX to address different patient
populations of breast cancer; plans for, and the timeframe for the development or commercial launch
of, future tests addressing different patient populations or other cancers; the factors that we
believe will drive the establishment of coverage policies; the capacity of our clinical reference
laboratory to process tests and our expectations regarding capacity; our dependence on
collaborative relationships and the success of those relationships; whether any tests will result
from our collaborations; the applicability of clinical results to actual outcomes; our assumptions
regarding commercialization of a test for colon cancer and the timing of commercial availability of
any such test; our plans with respect to potential tests for ductal carcinoma in situ, or other
cancers or for patients treated with specific treatments; the occurrence, timing, outcome or
success of clinical trials or studies; our intention to plan additional development or clinical
studies; the benefits of our technology platform; the economic benefits of our test to the
healthcare system; the ability of our test to impact treatment decisions; our beliefs regarding our
competitive benefits; our beliefs regarding the benefits of individual gene reporting; the level of
investment in our sales force; our expectation that our general and administrative, sales and
marketing and research and development expenses will increase and our anticipated uses of those
funds; our expectations regarding capital expenditures; our ability to comply with the requirements
of being a public company; our ability to attract and retain experienced personnel; the adequacy of
our product liability insurance; how we intend to spend our existing cash and cash equivalents and
how long we expect our existing cash to last; our anticipated cash needs and our estimates
regarding our capital requirements and our needs for additional financing; our expected future
sources of cash; our plans to borrow under existing or new financing arrangements; our belief that
we are in material compliance with financial covenants; our expectations regarding repayment of
debt or incurrence of additional debt; our compliance with federal, state and foreign regulatory
requirements; the potential impact resulting from the regulation of Oncotype DX by the U.S. Food
and Drug Administration, or FDA, and our belief that our Oncotype DX breast cancer test is properly
regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA; the impact of new
or changing policies, regulation or legislation on our business; our belief that we have taken
reasonable steps to protect our intellectual property; our strategies regarding filing additional
patent applications to strengthen our intellectual property rights; the impact of changing interest
rates; our beliefs regarding our unrecognized tax benefits; the impact of accounting pronouncements
and our critical accounting policies, judgments, estimates, models and assumptions on our financial
results; the impact of the economy on our business, patients and payors; our expectations regarding
the impact of the economic environment on our liquidity and our investments; and anticipated trends
and challenges in our business and the markets in which we operate.
Forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expected. These risks and uncertainties include, but are
not limited to, those risks discussed in Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays in research and development
efforts; the risk that we may not obtain reimbursement for our existing test and any future tests
we may develop; the risks and uncertainties associated with the regulation of our test by FDA; our
ability to compete against third parties; our ability to obtain capital when needed; the
economic environment; and our history of operating losses. These forward-looking statements
speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any
forward-looking statements contained herein to reflect any change in our expectations with regard
thereto or any change in events, conditions or circumstances on which any such statement is based.
In this report, all references to Genomic Health, we, us, or our mean Genomic Health, Inc.
Genomic Health, the Genomic Health logo, Oncotype, Oncotype DX and Recurrence Score are
trademarks or registered trademarks of Genomic Health, Inc. We also refer to trademarks of other
corporations and organizations in this report.
15
Business Overview
We are a life science company focused on the development and commercialization of
genomic-based clinical diagnostic tests for cancer that allow physicians and patients to make
individualized treatment decisions. Our first Onco
type
DX diagnostic test is used for breast cancer
patients to predict the likelihood of cancer recurrence and the likelihood of chemotherapy benefit
and is conducted at our clinical reference laboratory in Redwood City, California. Effective July
1, 2009 the list price of our test increased from $3,820 to $3,975. Substantially all of our
historical revenues have been derived from the sale of Onco
type
DX breast cancer tests ordered by
physicians in the United States.
Oncotype DX Breast Cancer Test
For the three and six months ended June 30, 2009, we delivered more than 11,880 and 23,100
Onco
type
DX breast cancer test reports for use in treatment planning, compared to more than 9,690
and 18,850 test reports for the three and six months ended June 30, 2008. We believe increased
demand resulted from our ongoing commercial efforts, continued publication of peer-reviewed
articles on studies we sponsored, conducted or collaborated on that support the use and
reimbursement of our Onco
type
DX breast cancer test, clinical presentations at major symposia, and
the inclusion of our Onco
type
DX breast cancer test in clinical practice guidelines. However, this
increased demand is not necessarily indicative of future growth rates, and we cannot assure you
that this level of increased demand can be sustained or that publication of articles, future
appearances or presentations at medical conferences or increased commercial efforts will have a
similar impact on demand for our test in the future. We have in the past, and may in the future,
experience slower sequential growth in demand for our test in the second and third calendar
quarters, which we believe may be attributed to physicians, surgeons and patients scheduling
vacations during this time. As of June 30, 2009, our clinical reference laboratory had the capacity
to process up to 15,000 tests per calendar quarter.
We depend on third-party payors to provide reimbursement for our test. Accordingly, we have
focused substantial resources on obtaining reimbursement coverage from third-party payors. Several
large national third-party payors, a number of regional payors, and Palmetto Government Benefits
Administrators, or Palmetto GBA, the local Medicare carrier for California with jurisdiction for
claims submitted by us for Medicare patients, have issued positive coverage determinations for our
Onco
type
DX breast cancer test for patients with node negative, or N-, estrogen receptor positive,
or ER+, disease through contracts, agreements or policy decisions. Effective August 1, 2009, we
negotiated a contracted rate of reimbursement with Anthem Insurance Companies, Inc., a subsidiary
of one of the nations largest health benefits companies.
Beginning in the second half of 2008 and continuing through the first half of 2009, we
experienced an increase in usage of our Onco
type
DX breast cancer test for node positive, or N+,
patients. While some payors provide policy coverage for the use of our test in patients with lymph
node micro-metastasis (greater than 0.2mm, but not greater than 2.0 mm in size), a substantial
portion of our existing reimbursement coverage has been limited to women with early-stage N-, ER+
breast cancer. Effective June 28, 2009, Palmetto GBA extended its coverage for the Onco
type
DX
breast cancer test to include ER+ patients with N+ disease (up to three positive lymph nodes).
However, we may not be able to obtain additional reimbursement coverage from other payors for our
test for breast cancer patients with N+, ER+ disease.
Our domestic sales, marketing and reimbursement efforts are focused on direct interaction with
medical and surgical oncologists, pathologists and payors. In January 2009, we hired an additional
20 U.S. sales representatives, increasing our domestic sales force to a total of 80 sales
representatives. We have also continued to expand internationally. As of June 30, 2009, we had
received test samples from over 40 countries and established exclusive distribution agreements for
our Onco
type
DX breast cancer test with partners in over ten countries outside of the U.S. We
established a European subsidiary in February 2009 and have lead executives with assignments in
Europe and in Asia to support our international efforts. In June 2009, the St. Gallen International
Consensus Panel on the Primary Therapy of Early Breast Cancer recommended for the first time that
validated multigene assays should be considered as an adjunct to standard measures in helping
determine chemotherapy benefit for early-stage breast cancer patients. We have completed or
initiated
multiple international clinical studies intended to support the adoption of our test outside
of the U.S. For example, in April 2009, we announced results of a multi-center study in Japan
demonstrating that our test had significant prognostic value in Japanese women with ER+ early-stage
breast cancer. This was the first study to examine the utility of our Onco
type
DX breast cancer
test in a specific ethnic population. During the second quarter of 2009, we initiated our first
Taiwanese Chinese population study in collaboration with the National Taiwan University. We do not
expect international product revenues to comprise more than 10% of our total revenues for at least
the next two years.
16
Oncotype DX Colon Cancer Test Commercialization
At the May 2009 American Society of Clinical Oncology, or ASCO, meeting, we presented positive
results from our independent clinical validation study in stage II colon cancer for our Onco
type
DX
colon cancer test. The study, which utilized more than 1,400 patient samples from the
international, multi-center QUASAR trial, demonstrated that the Onco
type
DX colon cancer test can
independently predict the individual recurrence risk in stage II colon cancer patients following
surgery, and indicated that the colon cancer Recurrence Score provided additional independent
clinical value beyond standard measures of risk.
We are proceeding with commercialization plans to make our Onco
type
DX colon cancer test
available to physicians and patients in early 2010. We expect to incur additional expenses,
including infrastructure, sales and marketing and information technology costs, related to the
commercial launch of our colon cancer test. Based upon our experience in obtaining adoption and
reimbursement for our Onco
type
DX breast cancer test, we do not expect product revenues from our
colon cancer test to comprise more than 10% of our total revenues for at least the next three
years.
Product Pipeline
We continue to conduct research and development studies in breast cancer, colon cancer and
other cancers. At the May 2009 ASCO meeting, we presented results from a clinical study that
summarized the gene signatures of male patients for whom the Onco
type
DX breast cancer test was
used to guide chemotherapy treatment, indicating that breast cancer in men displays similar gene
signatures to female breast cancer. We also presented a separate study at the ASCO meeting
demonstrating that there were significant differences in gene expression between hormone receptor
negative, or triple negative, breast cancer compared with hormone receptor positive disease. We are
investigating the utility of our Onco
type
DX breast cancer test in patients with ductal carcinoma
in situ, or DCIS, which generally refers to a pre-invasive tumor with reduced risk of recurrence.
We plan to evaluate the use of the Onco
type
DX breast cancer gene panel and also seek to identify
other genes that may be used for treatment planning in DCIS.
We are planning additional studies in colon cancer for both stage II and stage III patients in
order to provide additional information regarding treatment with agents such as oxaliplatin,
epidermal growth factor, or EGFR, inhibitors and anti-angiogenesis agents. We completed processing
samples related to gene discovery work under our contract research agreement for the development of
a genomic test to estimate the risk of recurrence following surgery for patients with Stage I-III
renal carcinoma, clear cell type. We have established agreements and identified sources of clinical
samples in connection with our prostate and lung cancer programs.
Economic Environment
Continuing concerns over inflation, deflation, energy costs, geopolitical issues, the
availability and cost of credit, the Federal stimulus plan, Federal budget proposals, the U.S.
mortgage market and a declining real estate market in the U.S. have contributed to increased
volatility and diminished expectations for the global economy and expectations of slower global
economic growth going forward. These factors, combined with volatile oil prices, declining business
and consumer confidence, a volatile stock market and increased unemployment, have precipitated an
economic slowdown and recession. We continue to evaluate the impact of this environment on our cash
management, cash collection activities and volume of tests delivered.
As of the date of this report, we have not experienced a loss of principal on any of our
investments, and we expect that we will continue to be able to access or liquidate these
investments as needed to support our business activities. From time to time, we monitor the
financial position of our significant third-party payors, which include Medicare and managed care
companies. As of the date of this report, we do not expect the current economic environment to have
a material negative impact on our ability to collect payments from our third-party payors through
the end of 2009. The economic slowdown could negatively impact the volume of tests we deliver in
the future if patients lose healthcare coverage, delay medical checkups or are unable to pay for
our test.
We intend to continue to assess the impact of the economic environment on our business
activities. If the economic climate in the U.S. does not improve or continues to deteriorate, our
cash position, cash collection activities and volume of tests delivered could be negatively
impacted and we could experience lower revenues.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of operations is based on
our condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the
date of the financial statements, as well as revenues and expenses during the reporting periods. We
evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical
experience and on various other factors we believe are reasonable under the circumstances, the
results of which
17
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results could therefore differ
materially from those estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our financial statements.
Revenue Recognition
We exercise judgment in determining whether revenue is recognized on an accrual basis when
test results are delivered or on a cash basis when cash is received from the payor. Our revenues
for tests performed are recognized when the following criteria are met: (1) persuasive evidence
that an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured. We assess whether the fee is fixed or
determinable based on the nature of the fee charged for the products or services delivered and
existing contractual agreements. When evaluating collectibility, we consider whether we have
sufficient history to reliably estimate a payors individual payment patterns. Based upon at least
several months of payment history, we review the number of tests paid against the number of tests
billed and the payors outstanding balance for unpaid tests to determine whether payments are being
made at a consistently high percentage of tests billed and at appropriate amounts given the
contracted payment amount. To the extent all criteria set forth above are not met, including where
there is no evidence of payment history at the time test results are delivered, product revenues
are recognized on a cash basis when cash is received from the payor.
Contract revenues are generally derived from studies conducted with biopharmaceutical and
pharmaceutical companies and are recognized on a contract-specific basis. Under certain contracts,
revenues are recognized as costs are incurred or assays are processed. We may exercise judgment
when estimating full-time equivalent level of effort, costs incurred and time to project
completion. For certain contracts, we utilize the performance-based method of revenue recognition,
which requires that we estimate the total amount of costs to be expended for a project and
recognize revenue equal to the portion of costs expended to date. The estimated total costs to be
expended are necessarily subject to revision from time to time as the underlying facts and
circumstances change.
Allowance for Doubtful Accounts
We accrue an allowance for doubtful accounts against our accounts receivable based on
estimates consistent with historical payment experience. Our allowance for doubtful accounts is
evaluated quarterly and adjusted when trends or significant events indicate that a change in
estimate is appropriate. As of June 30, 2009 and December 31, 2008, our allowance for doubtful
accounts was $624,000 and $881,000, respectively. The decrease in our allowance for doubtful
accounts reflected the impact of writedowns and improved collections on our outstanding accounts
receivable.
Research and Development Expenses
We enter into collaboration and clinical trial agreements with clinical collaborators and
record these costs as research and development expenses. We record accruals for estimated study
costs based on estimates of services received and effort expended by our collaborators pursuant to
these agreements. The financial terms of these agreements are subject to negotiations, may vary
from contract to contract, and may result in uneven payment flows. We determine our estimates
through discussion with internal clinical development personnel and outside service providers as to
the progress or stage of completion of services provided and the agreed upon fee to be paid for
such services. Advance payments for goods or services that will be used or rendered for research
and development activities are deferred and capitalized and recognized as an expense as the goods
are delivered or the related services are performed.
All potential future product programs outside of breast and colon cancer are in the research
or early development phase. The expected time frame in which a test for one of these other cancers
can be brought to market is uncertain given the technical challenges and clinical variables that
exist between different types of cancers. In 2008, we began maintaining information regarding costs
incurred for activities performed under certain contracts with biopharmaceutical and pharmaceutical
companies. However, we do not
generally record or maintain information regarding costs incurred in research and development
on a program-specific basis. Our research and development staff and associated infrastructure
resources are deployed across several programs. Many of our costs are thus not attributable to
individual programs. As a result, we are unable to determine the duration and completion costs of
our research and development programs or when, if ever, and to what extent we will receive cash
inflows from the commercialization and sale of a product.
18
Stock-based Compensation Expense
Under the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment
, or SFAS 123R, our employee stock-based compensation is estimated at the date
of grant based on the fair value of the award using the Black-Scholes option-pricing model and is
recognized as expense ratably over the requisite service period. The application of SFAS 123R
requires significant judgment and the use of estimates, particularly surrounding assumptions used
in determining fair value. The Black-Scholes valuation method requires the use of estimates such as
stock price volatility and expected option lives, as well as expected option forfeiture rates, to
value stock-based compensation. Our assumptions regarding expected volatility are based on the
historical volatility of our common stock. The expected life of options is estimated based on
historical option exercise data and assumptions related to unsettled options. Expected option
forfeiture rates are based on historical data, and compensation expense is adjusted for actual
results.
As required under SFAS 123R, we review our valuation assumptions on an ongoing basis, and, as
a result, our valuation assumptions used to value employee stock-based awards granted in future
periods may change. See Note 6, Stock-Based Compensation, in the Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
Results of Operations
Three and Six Months Ended June 30, 2009 and 2008
We recorded a net loss for the three and six months ended June 30, 2009 of $3.9 million and
$8.6 million, respectively, compared to a net loss for the three and six months ended June 30, 2008
of $4.1 million and $10.7 million, respectively. On a basic and diluted per share basis, net loss
was $0.14 and $0.30 for the three and six months ended June 30, 2009, respectively, compared to
$0.15 and $0.38 for the three and six months ended June 30, 2008, respectively.
Revenues
We derive our revenues from product sales and, to a lesser extent, from contract research
arrangements. We operate in one industry segment. All of our product revenues have been derived
solely from the sale of our Onco
type
DX breast cancer test. Payors are billed upon generation and
delivery of a breast cancer Recurrence Score report to the physician. Product revenues are recorded
on a cash basis unless a contract or arrangement to pay is in place with the payor at the time of
billing and collectibility is reasonably assured. Contract revenues are derived from studies
conducted with biopharmaceutical and pharmaceutical companies and are recorded as contractual
obligations are completed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months Ended
|
|
|
|
Ended June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Product revenues
|
|
$
|
35,191
|
|
|
$
|
26,327
|
|
|
$
|
68,618
|
|
|
$
|
49,682
|
|
Contract revenues
|
|
|
1,361
|
|
|
|
1,456
|
|
|
|
1,830
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
36,552
|
|
|
$
|
27,783
|
|
|
$
|
70,448
|
|
|
$
|
51,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase in product revenues
|
|
$
|
8,864
|
|
|
|
|
|
|
$
|
18,936
|
|
|
|
|
|
Period over period percentage increase in product revenues
|
|
|
34
|
%
|
|
|
|
|
|
|
38
|
%
|
|
|
|
|
The period over period increases in product revenues resulted from increased adoption, as
evidenced by a 23% increase in test volume for both the three and six month comparative periods. We
also experienced expanded reimbursement coverage and an increase in the amount of revenue
recognized per test for both the three and six month comparative periods. For all periods
presented, approximately 50% of product revenues were recorded on an accrual basis and recognized
at the time the test results were delivered. The balance of product revenues was recognized upon
cash collection as payments were received.
Product revenues from Medicare payments were $6.4 million, or 18%, and $13.0 million, or 19%,
of product revenues for the three and six months ended June 30, 2009, respectively compared to $5.7
million, or 22%, and $11.4 million, or 23%, of product revenues for the three and six months ended
June 30, 2008, respectively. Product revenues from United HealthCare Insurance Company payments
were $3.0 million, or 8%, and $5.8 million, or 8%, of product revenues for the three and six months
ended June 30, 2009,
19
respectively, compared to $3.3 million, or 12%, and $6.4 million, or 13%, of
product revenues for the three and six months ended June 30, 2008, respectively.
Contract revenues were $1.4 million and $1.8 million for the three and six months ended June
30, 2009, respectively, compared to $1.5 million for each of the three and six months ended June
30, 2008. Contract revenues represented studies assessing our gene expression technology or work in
gene selection and protocol design with our pharmaceutical partners. The period over period
variances in contract revenues were due to project timing for ongoing contract research and
development activities. We expect that our contract revenues will continue to fluctuate based on
the number and timing of studies being conducted.
Cost of Product Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Tissue sample processing costs
|
|
$
|
5,381
|
|
|
$
|
4,837
|
|
|
$
|
10,808
|
|
|
$
|
8,897
|
|
Stock-based compensation
|
|
|
88
|
|
|
|
125
|
|
|
|
181
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tissue sample processing costs
|
|
|
5,469
|
|
|
|
4,962
|
|
|
|
10,989
|
|
|
|
9,137
|
|
License fees
|
|
|
2,422
|
|
|
|
1,888
|
|
|
|
4,730
|
|
|
|
3,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product revenues
|
|
$
|
7,891
|
|
|
$
|
6,850
|
|
|
$
|
15,719
|
|
|
$
|
12,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase
|
|
$
|
1,041
|
|
|
|
|
|
|
$
|
2,985
|
|
|
|
|
|
Period over period percentage increase
|
|
|
15
|
%
|
|
|
|
|
|
|
23
|
%
|
|
|
|
|
Cost of product revenues represents the cost of materials, direct labor, equipment and
infrastructure expenses associated with processing tissue samples (including histopathology,
anatomical pathology, paraffin extraction, reverse transcription polymerase chain reaction, or
RT-PCR, quality control analyses and shipping charges to transport tissue samples), stock-based
compensation and license fees. Infrastructure expenses include allocated facility occupancy and
information technology costs. Costs associated with performing our test are recorded as tests are
processed. Costs recorded for tissue sample processing represent the cost of all the tests
processed during the period regardless of whether revenue was recognized with respect to a specific
test. Royalties for licensed technology calculated as a percentage of product revenues and fixed
annual payments relating to the launch and commercialization of our Onco
type
DX breast cancer test
are recorded as license fees in cost of product revenues at the time product revenues are
recognized or in accordance with other contractual obligations. License fees represent a
significant component of our cost of product revenues and are expected to remain so for the
foreseeable future.
The
$544,000, or 11%, increase in tissue sample processing costs for the three months ended
June 30, 2009 compared to the three months ended June 30, 2008 reflected a 23% increase in test
volume, partially offset by lower consulting expenses and other cost efficiencies. The
$1.9 million, or 22%, increase in tissue sample processing costs for the six months ended June 30,
2009 compared to the six months ended June 30, 2008 reflected a 23% increase in test volume. The
$534,000, or 28%, and $1.1 million, or 31%, increases in license fees for the three and six month
comparative periods included higher royalties due to increases of $8.9 million, or 34%, and $18.9
million, or 38%, respectively, in product revenues recognized. We expect the cost of product
revenues to increase to the extent we process more tests.
20
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Personnel-related expenses
|
|
$
|
4,550
|
|
|
$
|
4,037
|
|
|
$
|
9,258
|
|
|
$
|
7,788
|
|
Stock-based compensation
|
|
|
770
|
|
|
|
720
|
|
|
|
1,540
|
|
|
|
1,455
|
|
Collaboration expenses
|
|
|
891
|
|
|
|
416
|
|
|
|
1,495
|
|
|
|
493
|
|
Infrastructure and all other costs
|
|
|
3,032
|
|
|
|
2,149
|
|
|
|
5,595
|
|
|
|
3,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
9,243
|
|
|
$
|
7,322
|
|
|
$
|
17,888
|
|
|
$
|
13,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase
|
|
$
|
1,921
|
|
|
|
|
|
|
$
|
4,160
|
|
|
|
|
|
Period over period percentage increase
|
|
|
26
|
%
|
|
|
|
|
|
|
30
|
%
|
|
|
|
|
Research and development expenses represent costs incurred to develop our technology and
carry out clinical studies and include personnel-related expenses, reagents and supplies used in
research and development laboratory work, infrastructure expenses, including allocated overhead and
facility occupancy costs, contract services and other outside costs. Research and development
expenses also include costs related to activities performed under contracts with biopharmaceutical
and pharmaceutical companies.
The $1.9 million, or 26%, increase in research and development expenses for the three months
ended June 30, 2009 compared to the three months ended June 30, 2008 reflected a $513,000 increase
in personnel-related expenses, an $883,000 increase in infrastructure and other expenses
and a $475,000 increase in collaboration expenses related to clinical studies for a variety of
cancers. The $4.2 million, or 30%, increase in research and development expenses for the six months
ended June 30, 2009 compared to the six months ended June 30, 2008 reflected a $1.5 million
increase in personnel-related expenses, a $1.6 million increase in infrastructure and other
expenses and a $1.0 million increase in collaboration expenses. We expect our research and
development expenses to increase as we continue to invest in our product pipeline for breast, colon
and other cancers.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Personnel-related expenses
|
|
$
|
7,417
|
|
|
$
|
5,334
|
|
|
$
|
14,654
|
|
|
$
|
11,192
|
|
Stock-based compensation
|
|
|
798
|
|
|
|
648
|
|
|
|
1,629
|
|
|
|
1,278
|
|
Promotional and marketing materials
|
|
|
3,439
|
|
|
|
2,960
|
|
|
|
5,949
|
|
|
|
5,841
|
|
Travel, meetings and seminars
|
|
|
1,927
|
|
|
|
1,621
|
|
|
|
3,985
|
|
|
|
3,297
|
|
Infrastructure and all other costs
|
|
|
2,128
|
|
|
|
1,264
|
|
|
|
4,188
|
|
|
|
2,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing expenses
|
|
$
|
15,709
|
|
|
$
|
11,827
|
|
|
$
|
30,406
|
|
|
$
|
24,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase
|
|
$
|
3,882
|
|
|
|
|
|
|
$
|
6,212
|
|
|
|
|
|
Period over period percentage increase
|
|
|
33
|
%
|
|
|
|
|
|
|
26
|
%
|
|
|
|
|
Our selling and marketing expenses consist primarily of personnel-related expenses,
education and promotional expenses, and infrastructure expenses, including allocated facility
occupancy and information technology costs. These expenses include the costs of educating
physicians, laboratory personnel and other healthcare professionals regarding our genomic
technologies, how our Onco
type
DX breast cancer test was developed and validated and the value of the quantitative
information that the test provides. Selling and marketing expenses also include the costs of
sponsoring continuing medical education, medical meeting participation and dissemination of our
scientific and economic publications related to our Onco
type
DX platform.
The $3.9 million, or 33%, increase in selling and marketing expenses for the three months
ended June 30, 2009 compared to the three months ended June 30, 2008 was due to a $2.1 million
increase in personnel-related expenses, due primarily to the addition of 20 domestic field sales
representatives in January 2009, a $864,000 increase in infrastructure expenses, including
allocations for
21
information technology, recruiting and other expenses, $306,000 in higher
travel-related expenses primarily associated with the increase in field sales personnel and our
international expansion, a $150,000 increase in stock-based compensation, and a $479,000 increase
in promotional field and marketing materials. The $6.2 million, or 26%, increase in selling and
marketing expenses for the six months ended June 30, 2009 was due to a $3.5 million increase in
personnel-related expenses, due primarily to the addition of field sales personnel, a $1.6 million
increase in infrastructure expenses, $688,000 in higher travel-related expenses, and a $351,000
increase in stock-based compensation. We expect selling and marketing expenses to increase in
future periods as we prepare for the commercialization of our Onco
type
DX colon cancer test and
continue to expand our commercial efforts in international markets.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Personnel-related expenses
|
|
$
|
4,811
|
|
|
$
|
3,736
|
|
|
$
|
9,616
|
|
|
$
|
7,126
|
|
Stock-based compensation
|
|
|
880
|
|
|
|
792
|
|
|
|
1,740
|
|
|
|
1,569
|
|
Professional fees and all other costs
|
|
|
1,960
|
|
|
|
1,697
|
|
|
|
3,633
|
|
|
|
3,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
7,651
|
|
|
$
|
6,225
|
|
|
$
|
14,989
|
|
|
$
|
12,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period over period dollar increase
|
|
$
|
1,426
|
|
|
|
|
|
|
$
|
2,859
|
|
|
|
|
|
Period over period percentage increase
|
|
|
23
|
%
|
|
|
|
|
|
|
24
|
%
|
|
|
|
|
Our general and administrative expenses consist primarily of personnel-related expenses
and professional fees and other costs, including intellectual property defense and prosecution
costs, advisory and auditing expenses, billing and collection costs, bad debt expense and other
professional and administrative costs and related infrastructure expenses, including allocated
facility occupancy and information technology costs.
The $1.4 million, or 23%, and $2.9 million, or 24%, increases in general and administrative
expenses for the three and six month comparative periods, respectively, were primarily due to
increases in personnel-related expenses due to increases in headcount period over period. We expect
general and administrative expenses to increase as we hire additional staff and incur other
expenses to support the growth of our business and to the extent we spend more on fees for billing
and collections as we process more tests.
Interest and Other Income
Interest and other income was $213,000 and $462,000 for the three and six months ended June
30, 2009, respectively, compared to $448,000 and $1.1 million for the three and six months ended
June 30, 2008, respectively. The $235,000 and $607,000 decreases for the three and six month
comparative periods were primarily due to lower market yields. We expect our interest income may
continue to decrease if the overall decline in interest rates continues.
Interest and Other Expense
Interest and other expense was $34,000 and $86,000 for the three and six months ended June 30,
2009 compared to $106,000 and $239,000 for the three and six months ended June 30, 2008. The
$72,000 and $153,000 decreases for the three and six month comparative periods were primarily due
to lower average balances on our equipment financing notes as we paid them down. We
expect our interest expense to decline as we continue to make payments on our equipment
financing. We do not anticipate using additional equipment financing as a funding source in the
next twelve months.
Income Tax Expense
For the three and six months ended June 30, 2009, we recorded income tax expense of
approximately $180,000 and $390,000, respectively, which was principally comprised of federal
alternative minimum tax and California income tax. The provision for income taxes for the three and
six months ended June 30, 2009 was based on our estimated taxable income for the year. For the
three and six months ended June 30, 2008, we did not record a provision for income taxes because we
estimated and incurred a taxable loss for the year ended December 31, 2008.
22
We intend to maintain a full valuation allowance on our deferred tax assets until sufficient
evidence exists to support the reversal of all or some portion of these allowances. Should the
actual amounts differ from our estimates, the amount of our valuation allowance could be materially
impacted.
Liquidity and Capital Resources
As of June 30, 2009, we had an accumulated deficit of $177.1 million. We have not yet achieved
profitability and anticipate that we will likely incur additional net losses. We cannot provide
assurance as to when, if ever, we will achieve profitability. We expect that our research and
development, selling and marketing and general and administrative expenses will continue to
increase and, as a result, we will need to generate significant product revenues to achieve
profitability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
As of June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
55,729
|
|
|
$
|
60,627
|
|
|
$
|
(4,898
|
)
|
Working capital
|
|
|
50,193
|
|
|
|
56,661
|
|
|
|
(6,468
|
)
|
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
1,062
|
|
|
|
(2,046
|
)
|
|
|
3,108
|
|
Investing activities
|
|
|
(431
|
)
|
|
|
(19,093
|
)
|
|
|
18,662
|
|
Financing activities
|
|
|
(436
|
)
|
|
|
(803
|
)
|
|
|
367
|
|
Capital expenditures (included in investing activities above)
|
|
|
(1,412
|
)
|
|
|
(4,823
|
)
|
|
|
3,411
|
|
Sources of Liquidity
At June 30, 2009, we had cash, cash equivalents and short-term investments of $55.7 million
compared to $60.6 million at June 30, 2008. In accordance with our investment policy, available
cash is invested in short-term, low-risk, investment-grade debt instruments. Our cash and
short-term investments are held in a variety of interest-bearing instruments including money market
accounts, obligations of U.S. government-sponsored entities, high-grade corporate bonds and
commercial paper. At June 30, 2009, our holdings of obligations of U.S. government-sponsored
entities consisted entirely of debt securities issued by the Federal Home Loan Bank, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Historically we have financed our operations primarily through sales of our equity securities
and cash received in payment for our tests. At June 30, 2009, we had approximately $46.5 million of
securities available for issuance under a shelf registration statement. Purchases of equipment and
leasehold improvements have been partially financed through capital equipment financing
arrangements. At June 30, 2009 and 2008, we had notes payable under these equipment financing
arrangements of $940,000 and $3.3 million, respectively. Our existing notes payable under these
arrangements are scheduled to be fully paid by November 2010.
Cash Flows
Net cash provided by operating activities was $1.1 million for the six months ended June 30,
2009 compared to net cash used in operating activities of $2.0 million for the six months ended
June 30, 2008. Net cash provided by (used in) operating activities includes net loss adjusted for
certain non-cash items and changes in assets and liabilities. Net cash provided by operating
activities for
the six months ended June 30, 2009 reflected a $1.8 million increase in accrued compensation
expense and a $1.2 million increase in accounts payable, accrued expenses and other liabilities,
partially offset by a $1.8 million decrease in deferred revenues reflecting the recognition of
collaboration contract revenue. Net cash used in operating activities for the six months ended June
30, 2008 reflected a $4.0 million net loss excluding depreciation and stock-based compensation for
the period, a $2.3 million increase in accounts receivable and a $1.5 million increase in prepaid
expenses and other assets, partially offset by the receipt of $3.7 million in advance collaboration
contract payments and a $2.1 million decrease in accrued expenses and other liabilities.
Net cash used in investing activities was $431,000 for the six months ended June 30, 2009,
compared to $19.1 million for the six months ended June 30, 2008. Our investing activities have
consisted predominately of purchases and maturities of marketable securities and capital
expenditures. Net cash used in investing activities for the six months ended June 30, 2009 included
$1.4 million in capital expenditures, partially offset by $1.0 million in net maturities of
short-term investments. Net cash used in investing activities for the six months ended June 30,
2008 included $14.3 million in net purchases of short-term investments, reflecting the investment
of
23
a portion of the cash proceeds from our May 2007 public offering of common stock, and $4.8
million in capital expenditures, primarily for facility expansion and improvements.
Net cash used in financing activities was $436,000 for the six months ended June 30, 2009,
compared to $803,000 for the six months ended June 30, 2008. Our financing activities include
proceeds from the sale of our common stock and payments on our capital equipment financing
arrangements. Net cash used in financing activities for the six months ended June 30, 2009 included
$1.1 million in principal payments on our debt, partially offset by $663,000 in proceeds from the
issuance of our common stock upon the exercise of stock options. Net cash used in financing
activities for the six months ended June 30, 2008 included $1.4 million in principal payments on
our debt, partially offset by $578,000 in proceeds from the issuance of our common stock upon the
exercise of stock options.
Contractual Obligations
The following summarizes our significant contractual obligations as of June 30, 2009 and the
effect those obligations are expected to have on our liquidity and cash flows in future periods:
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Payments Due by Period
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More
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Less than
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than 5
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Total
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1 Year
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1-3 Years
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3-5 Years
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Years
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(In thousands)
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Notes payable obligations
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$
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987
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$
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879
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$
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108
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$
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$
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Non-cancelable operating lease obligations
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4,421
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1,582
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2,839
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Total
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$
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5,408
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$
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2,461
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$
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2,947
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$
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$
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Our notes payable obligations are for principal and interest payments on capital
equipment financing. In March 2005, we entered into an arrangement to finance the acquisition of
laboratory equipment, computer hardware and software, leasehold improvements and office equipment.
In connection with this arrangement, we granted the lender a security interest in the assets
purchased with these borrowings. We can prepay all, but not part, of the amounts owing under the
arrangement so long as we also pay a 4% premium on the remaining payments. As of June 30, 2009, the
outstanding notes payable principal balance under this arrangement totaled $940,000 at annual
interest rates ranging from 11.01% to 11.30%, depending upon the applicable note.
Our non-cancelable operating lease obligations are for laboratory and office space. In
September 2005, we entered into a non-cancelable lease for 48,000 square feet of laboratory and
office space in Redwood City, California. In January 2007, we entered into a non-cancelable lease
for an additional 48,000 square feet of office space in a nearby location. Both leases expire in
February 2012.
We are required to make a series of annual payments under one of our collaboration agreements
beginning on the date that we commercially launched our Onco
type
DX breast cancer test. At June 30,
2009, future annual payments due under this agreement totaled $950,000, of which $475,000 is due
each of the years 2010 and 2011. However, because either party may terminate the agreement upon
thirty days prior written notice, these payments are not included in the table above.
We have also committed to make potential future payments to third parties as part of our
collaboration agreements. Payments under these agreements generally become due and payable only
upon achievement of specific project milestones. Because the achievement of these milestones is
generally neither probable nor reasonably estimable, such commitments have not been included in the
table above.
Off-Balance Sheet Arrangements
As of June 30, 2009, we have no material off-balance sheet arrangements other than the lease
obligations and payments under clinical study agreements discussed above.
24
Operating Capital and Capital Expenditure Requirements
We expect to continue to incur net losses in the future and to make capital expenditures to
keep pace with the expansion of our research and development programs, to scale our commercial
operations, including the commercialization and launch of our Onco
type
DX colon cancer test and to
support our international expansion efforts. We expect to spend approximately $6.2 million over the
next twelve months for planned laboratory equipment and other expenditures to support the growth of
our business. It may take years to move any one of a number of product candidates in research
through development and validation to commercialization. We expect that our cash and cash
equivalents will be used to fund working capital and for capital expenditures and other general
corporate purposes, such as licensing technology rights, partnering arrangements for our tests
outside the United States or reduction of debt obligations. We may also use cash to acquire or
invest in complementary businesses, technologies, services or products. We have no current plans,
agreements or commitments with respect to any such acquisition or investment, and we are not
currently engaged in any negotiations with respect to any such transaction.
The amount and timing of actual expenditures may vary significantly depending upon a number of
factors, such as the progress of our commercialization efforts, product development, regulatory
requirements, the amount of cash used by operations and progress in reimbursement.
We currently anticipate that our cash, cash equivalents and short-term investments, together
with collections from our Onco
type
DX breast cancer test, will be sufficient to fund our operations
and facilities expansion plans for at least the next 12 months. We cannot be certain that our
international expansion, the commercialization of our Onco
type
DX colon cancer test or the
development of future tests will be successful or that we will be able to raise sufficient
additional funds to see these activities through to a successful result.
Our future funding requirements will depend on many factors, including the following:
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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 Onco
type
DX for breast cancer;
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the rate of progress and cost of selling and marketing activities associated with
commercialization of Onco
type
DX for colon cancer;
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the rate of progress and cost of research and development activities associated with
products in the research and early development phase focused on cancers other than breast
and colon cancer;
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the cost of acquiring or achieving access to tissue samples and technologies;
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the cost of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights;
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the effect of competing technological and market developments;
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costs related to international expansion;
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the cost and delays in product development as a result of any changes in regulatory
oversight applicable to our products or operations; and
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the economic and other terms and timing of any contract research arrangements, clinical
study agreements, licensing or other arrangements into which we may enter.
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Until we can generate and maintain sufficient product revenues to finance our cash
requirements, which we may never do, we expect to finance future cash needs primarily through
public or private equity offerings, debt financings, borrowings or strategic collaborations. The
issuance of equity securities may result in dilution to stockholders, or may provide for rights,
preferences or privileges senior to those of our holders of common stock. If we raise funds by
issuing debt securities, these debt securities would have rights, preferences and privileges senior
to those of holders of our common stock. The terms of debt securities or borrowings could impose
significant restrictions on our operations. We do not know whether additional funding will be
available on acceptable terms, if at all. If we are not able to secure additional funding when
needed, we may have to delay, reduce the scope of or eliminate one or more research and development
programs or selling and marketing initiatives. In addition, we may have to work with a partner on
one or more of our product or market development programs, which would lower the economic value of
those programs to our company.
25
Recent Accounting Pronouncements
In April 2009, Financial Accounting Standards Board, or FASB, issued three related Staff
Positions: (i) FASB Staff Position 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That
Are Not Orderly, or
FSP 157-4, (ii) FASB Staff Position FAS 115-2 and FAS 124-2,
Recognition and
Presentation of Other-Than-Temporary Impairment
, or FSP FAS 115-2 and FAS 124-2, and (iii) FASB
Staff Position FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
, or FSP FAS 107-1 and APB 28-1, which was effective for interim and annual periods
ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair value of
assets and liabilities under Statement of Financial Accounting Standards No. 157,
Fair Value
Measurements
, or SFAS 157, in the current economic environment and reemphasizes that the objective
of a fair value measurement remains an exit price. FSP FAS 115-2 and FAS 124-2 modifies the
requirements for recognizing other-than-temporarily impaired debt securities and revises the
existing impairment model for such securities. FSP FAS 107-1 and APB 28-1 enhances the disclosure
of instruments under the scope of SFAS 157 for both interim and annual periods. Our adoption of
these Staff Positions as of June 30, 2009 did not have a material impact on our financial condition
or results of operations.
In May 2009, FASB issued Statement of Financial Accounting Standards No. 165,
Subsequent
Events
(SFAS 165). SFAS 165 establishes general standards for accounting disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available
to be issued and applies to both interim and annual financial statements. SFAS 165 is effective for
interim or annual financial periods ending after June 15, 2009. Our adoption of SFAS 165 as of
June 30, 2009 did not have a material impact on our financial condition or results of operations.
In June 2009, FASB issued Statement of Financial Accounting Standards No. 168,
The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
, a
replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 establishes the FASB Accounting
Standards Codification (Codification) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Certain accounting standards have allowed for the continued
application of superseded accounting standards for transactions that have an ongoing effect in an
entitys financial statements. That superseded guidance has not been included in the Codification,
shall be considered grandfathered, and shall continue to remain authoritative for those
transactions after the effective date of this Statement, which is for financial statements issued
for interim and annual periods ending after September 15, 2009. We do not expect the adoption of
SFAS 168 to have a material impact on our financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to our cash equivalents and marketable securities. The
primary objective of our investment activities is to preserve our capital to fund operations. We
also seek to maximize income from our investments without assuming significant risk. Our investment
policy provides for investments in short-term, low-risk, investment-grade debt instruments. Our
investments in marketable securities, which are comprised primarily of money market funds,
obligations of U.S. Government agencies and government-sponsored entities, high-grade corporate
bonds and commercial paper, are subject to default, changes in credit rating and changes in market
value. Due to recent financial and economic conditions, similar investments have experienced losses
in value and liquidity constraints which differ from historical patterns. These investments are
also subject to interest rate risk and will decrease in value if market rate interest rates
increase.
Our cash, cash equivalents and marketable securities, totaling $55.7 million at June 30, 2009,
did not include any auction preferred stock, auction rate securities or mortgage-backed
investments. We currently do not hedge interest rate exposure, and we do not have any foreign
currency or other derivative financial instruments. The securities in our investment portfolio are
classified as available for sale and are, due to their short-term nature, subject to minimal
interest rate risk. To date, we have not experienced a loss of principal on any of our investments.
Although we currently expect that our ability to access or liquidate these investments as needed to
support our business activities will continue, we cannot ensure that this will not change. We
believe that, if market interest rates were to change immediately and uniformly by 10% from levels
at June 30, 2009, the impact on the fair value of these securities or our cash flows or income
would not be material.
ITEM 4. CONTROLS AND PROCEDURES.
(a)
Evaluation of disclosure controls and procedures
. We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,
or Exchange Act, that are designed to ensure that information required
26
to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Our disclosure controls and
procedures have been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
(b)
Changes in internal control over financial reporting
. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
occurred during our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS.
We are an early stage company with a history of net losses, and we expect to incur net losses for
the foreseeable future.
We have incurred substantial net losses since our inception. For the six months ended June 30,
2009 and 2008, we incurred net losses of $8.6 million and $10.7 million, respectively. From our
inception in August 2000 through June 30, 2009, we had an accumulated deficit of $177.1 million. To
date, we have not, and we may never, achieve revenues sufficient to offset expenses. We expect to
devote substantially all of our resources to continue to invest in our product pipeline, including
our Onco
type
DX breast and colon cancer tests and future products, and our commercial and
laboratory infrastructure. We expect to incur additional losses in the future and we may never
achieve profitability.
We expect to continue to incur significant research and development expenses, which may make it
difficult for us to achieve profitability.
In recent years, we have incurred significant costs in connection with the development of our
Onco
type
DX platform. Our research and development expenses were $17.9 million and $13.7 million,
respectively, for the six months ended June 30, 2009 and 2008. We expect our research and
development expense levels to remain high and to continue to increase for the foreseeable future as
we seek to expand the clinical utility of our Onco
type
DX breast cancer test and develop new tests.
As a result, we will need to generate significant revenues in order to achieve profitability. Our
failure to achieve profitability in the future could cause the market price of our common stock to
decline.
Declining general economic or business conditions may have a negative impact on our business.
Continuing concerns over inflation, deflation, energy costs, geopolitical issues, the
availability and cost of credit, the Federal stimulus package, Federal budget proposals, the U.S.
mortgage market and a declining real estate market in the U.S. have contributed to increased
volatility and diminished expectations for the global economy and expectations of slower global
economic growth going forward. These factors, combined with volatile oil prices, declining business
and consumer confidence, a declining stock market and increased unemployment, have precipitated an
economic slowdown and recession. If the economic climate in the U.S. does not improve or continues
to deteriorate, our business, including our patient population, our suppliers and our third-party
payors, could be negatively affected, resulting in a negative impact on our product revenues.
If third-party payors, including managed care organizations and Medicare, do not provide
reimbursement or rescind their favorable reimbursement policies for our Oncotype DX tests, our
commercial success could be compromised.
Physicians and patients may decide not to order our Onco
type
DX tests unless third-party
payors, such as managed care organizations as well as government payors such as Medicare and
Medicaid, pay a substantial portion of the test price. Reimbursement by a third-party payor may
depend on a number of factors, including a payors determination that tests using our technologies
are:
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not experimental or investigational,
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medically necessary,
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appropriate for the specific patient,
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cost-effective,
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supported by peer-reviewed publications, and
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included in clinical practice guidelines.
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There is uncertainty concerning third-party payor reimbursement of any test incorporating new
technology, including our Onco
type
DX platform. Several entities conduct technology assessments of
new medical tests and devices and provide the results of their assessments for informational
purposes to other parties. These assessments may be used by third-party payors and health care
providers as grounds to deny coverage for a test or procedure. Although there are a number of
favorable assessments of our Onco
type
DX breast cancer test, the test has received negative
assessments in the past and may receive additional negative assessments in the future.
28
Since each payor makes its own decision as to whether to establish a policy to reimburse our
test, seeking these approvals is a time-consuming and costly process. To date, we have secured
policy-level reimbursement approval for our Onco
type
DX breast cancer test for N- patients from a
number of third-party payors. We cannot be certain that coverage for this test will be provided in
the future by additional third-party payors or that existing reimbursement policies will remain in
place.
Under current Medicare billing rules, claims for Onco
type
DX breast cancer tests performed on
Medicare beneficiaries who were hospital inpatients at the time the tumor tissue samples were
obtained and whose tests were ordered less than 14 days from discharge must be incorporated in the
payment that the hospital receives for the inpatient services provided. Medicare billing rules also
require hospitals to bill for the test when ordered for hospital outpatients less than 14 days
following the date of the hospital procedure where the tumor tissue samples were obtained.
Accordingly, we are required to bill individual hospitals for tests performed on Medicare
beneficiaries during these time frames. Because we generally do not have a written agreement in
place with these hospitals to purchase these tests, we may not be paid for our tests or may have to
pursue payment from the hospital on a case-by-case basis. We believe patients coming under this
rule represent approximately 3% of our total testing population. We believe these billing rules may
lead to confusion regarding whether Medicare provides adequate reimbursement for our test, and
could discourage Medicare patients from using our test. Although we are working with Medicare and
Congress, as well as with other diagnostic laboratories to revise or reverse these billing rules,
we have no assurance that Medicare will do so or that Congress will require Medicare to do so, and
we also cannot ensure that hospitals will agree to arrangements to pay us for tests performed on
patients falling under these rules.
Insurers, including managed care organizations as well as government payors such as Medicare
and Medicaid, have increased their efforts to control the cost, utilization and delivery of health
care services. From time to time, Congress has considered and implemented changes in the Medicare
fee schedules in conjunction with budgetary legislation. Further reductions of reimbursement for
Medicare services may be implemented from time to time. Reductions in the reimbursement rates of
other third-party payors have occurred and may occur in the future. These measures have resulted in
reduced payment rates and decreased test utilization for the clinical laboratory industry.
Following the reporting of clinical studies to support the use of our Onco
type
DX breast
cancer test in patients with N+, ER+ disease, we experienced an increase in usage for N+ patients.
We may not be able to obtain reimbursement coverage for our test for breast cancer patients who are
N+, ER+ that is similar to the coverage we have obtained for early-stage N-, ER+ patients. In
addition, we may not be able to obtain reimbursement coverage for any other new test or test
enhancement we may develop in the future.
If we are unable to obtain reimbursement approval from private payors and Medicare and
Medicaid programs for our tests, or if the amount reimbursed is inadequate, our ability to generate
revenues from our tests could be limited. Even if we are being reimbursed, insurers may withdraw
their coverage policies or cancel their contracts with us at any time or stop paying for our test,
which would reduce our revenue.
We depend on a limited number of payors for a significant portion of our product revenues and if
these or other payors stop providing reimbursement or decrease the amount of reimbursement for
our test, our revenues could decline.
For the three and six months ended June 30, 2009, payments from the administrator for Medicare
accounted for 18% and 19% of our product revenues, respectively,
compared to 22% and 23%, respectively, for the
same periods in 2008. Payments from United HealthCare Insurance Company accounted for 8% of our
product revenues for each of the three and six months ended June 30, 2009 compared to 12% and 13%, respectively,
for the same periods in 2008. In the future, it is possible that these or other third-party payors
that provide reimbursement for our test may suspend, revoke or discontinue coverage at any time, or
may reduce the reimbursement rates payable to us. Any such actions could have a negative impact on
our revenues.
If FDA were to begin regulating our test, we could incur substantial costs and time delays
associated with meeting requirements for pre-market clearance or approval or we could experience
decreased demand for or reimbursement of our tests.
Clinical laboratory tests like ours are regulated under CLIA, as administered through CMS, as
well as by applicable state laws. Diagnostic kits that are sold and distributed through interstate
commerce are regulated as medical devices by FDA. Clinical laboratory tests that are developed and
validated by a laboratory for its own use are called laboratory developed tests, or LDTs. Most LDTs
are not currently subject to FDA regulation, although reagents or software provided by third
parties and used to perform LDTs may be subject to regulation. We believe that Onco
type
DX is not a
diagnostic kit and also believe that it is an LDT. As a result, we believe Onco
type
DX should not
be subject to regulation under established FDA policies. The container we provide for collection
and transport of tumor samples from a pathology laboratory to our laboratory may be a medical
device subject to FDA regulation but is currently exempt from pre-market review by FDA.
29
In January 2006, we received a letter from FDA regarding our Onco
type
DX breast cancer test
inviting us to meet with FDA to discuss the nature and appropriate regulatory status of and the
least burdensome ways that we may fulfill any FDA pre-market review requirements that may apply. In
September 2006, FDA issued draft guidance on a new class of tests called In Vitro Diagnostic
Multivariate Index Assays, or IVDMIAs. Under this draft guidance, our test could be classified as
either a Class II or a Class III medical device, which may require varying levels of FDA pre-market
review depending upon intended use and on the level of control necessary to assure the safety and
effectiveness of the test. In July 2007, FDA posted revised draft guidance that addressed some of
the comments submitted in response to the September 2006 draft guidance. The revised draft guidance
includes an 18 month transition period of FDA enforcement discretion following release of final
guidance for currently available tests if the laboratory submits a pre-market review submission
within 12 months of the publication of final guidance. The comment period for this revised guidance
expired in October 2007.
In May 2007, FDA issued a guidance document Class II Special Controls Guidance Document: Gene
Expression Profiling Test System for Breast Cancer Prognosis. This guidance document was developed
to support the classification of gene expression profiling test systems for breast cancer prognosis
into Class II. In addition, in June 2007, FDA issued a guidance document Pharmacogenetic Tests and
Genetic Tests for Heritable Markers which provides recommendations to sponsors and FDA reviewers
in preparing and reviewing pre-market approval applications, or PMAs, and pre-market notification,
or 510(k), submissions for pharmacogenetic and other human genetic tests, whether testing is for
single markers or for multiple markers simultaneously (multiplex tests).
In addition, the Secretary of the Department of Health and Human Services, or HHS, requested
that its Advisory Committee on Genetics, Health and Society make recommendations about the
oversight of genetic testing. A final report was published in April 2008. If the reports
recommendations for increased oversight of genetic testing were to result in further regulatory
burdens it could have a negative impact on our business and could delay the commercialization of
tests in development.
We cannot provide any assurance that FDA regulation, including pre-market review, will not be
required in the future for our tests, either through new enforcement policies adopted by FDA or new
legislation enacted by Congress. It is possible that legislation will be enacted into law and may
result in increased regulatory burdens for us to continue to offer our tests.
If pre-market review is required, our business could be negatively impacted until such review
is completed and clearance to market or approval is obtained, and FDA could require that we stop
selling our test pending pre-market clearance or approval. If our test is allowed to remain on the
market but there is uncertainty about our test, if it is labeled investigational by FDA, or if
labeling claims FDA allows us to make are very limited, orders or reimbursement may decline. The
regulatory approval process may involve, among other things, successfully completing additional
clinical trials and submitting a pre-market clearance notice or filing a PMA application with FDA.
If pre-market review is required by FDA, there can be no assurance that our test will be cleared or
approved on a timely basis, if at all. Ongoing compliance with FDA regulations would increase the
cost of conducting our business, and subject us to inspection by FDA and to the requirements of FDA
and penalties for failure to comply with these requirements. We may also decide voluntarily to
pursue FDA pre-market review of our tests if we determine that doing so would be appropriate.
Should any of the reagents obtained by us from vendors and used in conducting our test be
affected by future regulatory actions, our business could be adversely affected by those actions,
including increasing the cost of testing or delaying, limiting or prohibiting the purchase of
reagents necessary to perform testing.
If we were required to conduct additional clinical trials prior to continuing to sell our
Oncotype DX breast cancer test or marketing our colon cancer test or any other new test, those
trials could lead to delays or failure to obtain necessary regulatory approval, which could cause
significant delays in commercializing any future products and harm our ability to become
profitable.
If FDA decides to regulate our tests, it may require additional pre-market clinical testing
prior to submitting a regulatory notification or application for commercial sales. If we are
required to conduct pre-market clinical trials, whether using prospectively acquired samples or
archival samples, delays in the commencement or completion of clinical testing could significantly
increase our test development costs and delay commercialization. Many of the factors that may cause
or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to
delay or denial of regulatory clearance or approval. The commencement of clinical trials may be
delayed due to insufficient patient enrollment, which is a function of many factors, including the
size of the patient population, the nature of the protocol, the proximity of patients to clinical
sites and the eligibility criteria for the clinical trial.
30
We may find it necessary to engage contract research organizations to perform data collection
and analysis and other aspects of our clinical trials, which might increase the cost and complexity
of our trials. We may also depend on clinical investigators, medical institutions and contract
research organizations to perform the trials properly. If these parties do not successfully carry
out their contractual duties or obligations or meet expected deadlines, or if the quality,
completeness or accuracy of the clinical data they obtain is compromised due to the failure to
adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended,
delayed or terminated. Many of these factors would be beyond our control. We may not be able to
enter into replacement arrangements without undue delays or considerable expenditures. If there are
delays in testing or approvals as a result of the failure to perform by third parties, our research
and development costs would increase, and we may not be able to obtain regulatory clearance or
approval for our test. In addition, we may not be able to establish or maintain relationships with
these parties on favorable terms, if at all. Each of these outcomes would harm our ability to
market our test, or to become profitable.
Complying with numerous regulations pertaining to our business is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties.
We are subject to CLIA, a federal law that regulates clinical laboratories that perform
testing on specimens derived from humans for the purpose of providing information for the
diagnosis, prevention or treatment of disease. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the United States by mandating specific standards in the
areas of personnel qualifications, administration, and participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. We have a current
certificate of accreditation under CLIA to perform testing. To renew this certificate, we are
subject to survey and inspection every two years. Moreover, CLIA inspectors may make random
inspections of our clinical reference laboratory.
We are also required to maintain a license to conduct testing in California. California laws
establish standards for day-to-day operation of our clinical reference laboratory, including the
training and skills required of personnel and quality control. Because we receive specimens from
New York State, our clinical reference laboratory is required to be licensed by New York. New York
law also mandates proficiency testing for laboratories licensed under New York state law,
regardless of whether or not such laboratories are located in New York. Moreover, several other
states require that we hold licenses to test specimens from patients in those states. Other states
may have similar requirements or may adopt similar requirements in the future. Finally, we may be
subject to regulation in foreign jurisdictions as we seek to expand international distribution of
our test.
If we were to lose our CLIA accreditation or California license, whether as a result of a
revocation, suspension or limitation, we would no longer be able to sell our test, which would
limit our revenues and harm our business. If we were to lose our license in New York or in other
states where we are required to hold licenses, we would not be able to test specimens from those
states.
We are subject to other regulation by both the federal government and the states in which we
conduct our business, including:
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Medicare billing and payment regulations applicable to clinical laboratories;
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the federal Medicare and Medicaid Anti-kickback Law and state anti-kickback prohibitions;
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the federal physician self-referral prohibition, commonly known as the Stark Law, and the
state equivalents;
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the federal Health Insurance Portability and Accountability Act of 1996;
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the Medicare civil money penalty and exclusion requirements; and
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the federal civil and criminal False Claims Act and state equivalents.
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We have adopted policies and procedures designed to comply with these laws, including policies
and procedures relating to financial arrangements between us and physicians who refer patients to
us. In the ordinary course of our business, we conduct internal reviews of our compliance with
these laws. Our compliance is also subject to governmental review. The growth of our business and
sales organization may increase the potential of violating these laws or our internal policies and
procedures. The risk of our being found in violation of these laws and regulations is further
increased by the fact that many of them have not been fully interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of interpretations. Any
action brought against us for violation of these laws or regulations, even if we successfully
defend against it, could cause us to incur significant legal expenses and divert our managements
attention from the operation of our business. If our operations are found to be in violation of any
of these laws and regulations, we may be subject to any applicable penalty associated with the
violation, including civil and criminal penalties, damages and fines, we could be required to
refund payments received by us, and we could be required to curtail or cease our operations. Any of
the foregoing consequences could seriously harm our business and our financial results.
31
Our financial results depend on sales of one test, our Oncotype DX breast cancer test, and we
will need to generate sufficient revenues from this and other tests to run our business.
For the foreseeable future, we expect to derive substantially all of our revenues from sales
of one test, our Onco
type
DX breast cancer test. We have been selling this test since January 2004.
While we currently expect to commercialize a test for colon cancer in early 2010, there can be no
assurance that we will be successful in doing so. We are in various stages of research and
development for other tests that we may offer as well as for enhancements to our existing test. We
are not currently able to estimate when we may be able to commercialize tests for other cancers or
whether we will be successful in doing so. If we are unable to increase sales of our test or to
successfully develop and commercialize other tests or enhancements, our revenues and our ability to
achieve profitability would be impaired, and the market price of our common stock could decline.
Commercialization of our Oncotype DX colon cancer test will require significant effort and
expense on our part, and our commercialization efforts may not be successful.
Commercialization of our Onco
type
DX colon cancer test will require significant effort and
expense on our part. For example, we will need to expand our clinical reference laboratory
capabilities, internal quality assurance and information technology systems and processes to
accommodate processing of more than one type of test. In addition, we will need to obtain CLIA
certification and some state permits before we may conduct a second type of test at our clinical
reference laboratory. We will also need to educate physicians, patients and payors about the
benefits and cost-effectiveness of our Onco
type
DX colon cancer test and to establish reimbursement
arrangements for this test with payors. We will be required to implement additional customer
service and billing processes and procedures to handle a second test, and we may need to hire
additional scientific, technical and other personnel to support the commercialization process. We
cannot assure you that our commercialization efforts will be successfully implemented, that our
educational efforts will result in sufficient physician or patient demand or that we will be able
to obtain adequate reimbursement for our colon cancer test. If we fail to successfully
commercialize our Onco
type
colon cancer test, our reputation could be harmed and our future
prospects and our business could suffer.
New test development involves a lengthy and complex process, and we may be unable to
commercialize any of the tests we are currently developing.
We have multiple tests in early development and devote considerable resources to research and
development. For example, we are conducting early development studies in colon cancer for stage III
patients, prostate, renal cell and lung cancers. There can be no assurance that our technologies
will be capable of reliably predicting the recurrence of cancers other than breast cancer with the
sensitivity and specificity necessary to be clinically and commercially useful, or that our colon
cancer test will result in a commercially successful product. In addition, before we can develop
diagnostic tests for new cancers and commercialize any new products, we will need to:
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conduct substantial research and development;
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conduct validation studies;
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expend significant funds; and
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develop and scale our laboratory processes to accommodate different tests.
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This product development process involves a high degree of risk and takes several years. Our
product development efforts may fail for many reasons, including:
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failure of the product at the research or development stage;
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difficulty in accessing archival tissue samples, especially tissue samples with known
clinical results; or
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lack of clinical validation data to support the effectiveness of the product.
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Few research and development projects result in commercial products, and success in early
clinical trials often is not replicated in later studies. At any point, we may abandon development
of a product candidate or we may be required to expend considerable
32
resources repeating clinical trials, which would adversely impact the timing for generating
potential revenues from those product candidates. In addition, as we develop products, we will have
to make significant investments in product development, marketing and selling resources. If a
clinical validation study fails to demonstrate the prospectively defined endpoints of the study, we
might choose to abandon the development of the product or product feature that was the subject of
the clinical trial, which could harm our business.
If we are unable to support demand for our tests, our business may suffer.
We have added a second shift at our clinical laboratory facility and will need to ramp up our
testing capacity as our test volume grows. We will need to continue to implement increases in scale
and related processing, customer service, billing and systems process improvements, and to expand
our internal quality assurance program to support testing on a larger scale. We will also need
additional certified laboratory scientists and other scientific and technical personnel to process
higher volumes of our tests. We cannot assure you that any increases in scale, related improvements
and quality assurance will be successfully implemented or that appropriate personnel will be
available. As our colon cancer test and additional products are commercialized, we will need to
bring new equipment on-line, implement new systems, controls and procedures and hire personnel with
different qualifications. Failure to implement necessary procedures or to hire the necessary
personnel could result in higher cost of processing or an inability to meet market demand. There
can be no assurance that we will be able to perform tests on a timely basis at a level consistent
with demand, that our efforts to scale our commercial operations will not negatively affect the
quality of our test results, or that we will be successful in responding to the growing complexity
of our testing operations. If we encounter difficulty meeting market demand or quality standards
for our tests, our reputation could be harmed and our future prospects and our business could
suffer.
We may experience limits on our revenues if physicians decide not to order our test.
If medical practitioners do not order our Onco
type
DX breast cancer test, our colon cancer
test once it is commercially available, or any future tests developed by us, we will likely not be
able to create demand for our products in sufficient volume for us to become profitable. To
generate demand, we will need to continue to make oncologists, surgeons and pathologists aware of
the benefits of each type of test through published papers, presentations at scientific conferences
and one-on-one education by our sales force. In addition, we will need to demonstrate our ability
to obtain adequate reimbursement coverage from third-party payors.
Prior to the inclusion of our Onco
type
DX breast cancer test in clinical guidelines,
guidelines and practices regarding the treatment of breast cancer often recommended that
chemotherapy be considered in most cases, including many cases in which our test might indicate
that, based on our clinical trial results, chemotherapy would be of little or no benefit.
Accordingly, physicians may be reluctant to order a test that may suggest recommending against
chemotherapy in treating breast cancer. Moreover, our test provides quantitative information not
currently provided by pathologists and it is performed at our facility rather than by the
pathologist in a local laboratory, so pathologists may be reluctant to support our test. These
facts may make it difficult for us to convince medical practitioners to order our test for their
patients, which could limit our ability to generate revenues and our ability to achieve
profitability.
We may experience limits on our revenues if patients decide not to use our test.
Some patients may decide not to use our Onco
type
DX breast cancer test due to its price, part
or all of which may be payable directly by the patient if the applicable payor denies reimbursement
in full or in part. Even if medical practitioners recommend that their patients use our test,
patients may still decide not to use our test, either because they do not want to be made aware of
the likelihood of recurrence or they wish to pursue a particular course of therapy regardless of
test results. Additionally, the current economic slowdown could negatively impact patients,
resulting in loss of healthcare coverage, delayed medical checkups or inability to pay for a
relatively expensive test. If only a small portion of the patient population decides to use our
test, we will experience limits on our revenues and our ability to achieve profitability.
33
If we are unable to develop products to keep pace with rapid technological, medical and
scientific change, our operating results and competitive position would be harmed.
In recent years, there have been numerous advances in technologies relating to the diagnosis
and treatment of cancer. For example, technologies in addition to ours now reportedly permit
measurement of gene expression in fixed paraffin embedded, or FPE, tissue specimens. New
chemotherapeutic or biologic strategies are being developed that may increase survival time and
reduce toxic side effects. These advances require us to continuously develop new products and
enhance existing products to keep pace with evolving standards of care. Our tests could become
obsolete unless we continually innovate and expand our product to demonstrate recurrence and
treatment benefit in patients treated with new therapies. New treatment therapies typically have
only a few years of clinical data associated with them, which limits our ability to perform
clinical studies and correlate sets of genes to a new treatments effectiveness. If we are unable
to demonstrate the applicability of our tests to new treatments, then sales of our test could
decline, which would harm our revenues.
Our rights to use technologies licensed from third parties are not within our control, and we may
not be able to sell our products if we lose our existing rights or cannot obtain new rights on
reasonable terms.
We license from third parties technology necessary to develop our products. For example, we
license technology from Roche that we use to analyze genes for possible inclusion in our tests and
that we use in our clinical reference laboratory to conduct our test. In return for the use of a
third partys technology, we may agree to pay the licensor royalties based on sales of our
products. Royalties are a component of cost of product revenues and impact the margin on our test.
We may need to license other technologies to commercialize future products. Our business may suffer
if these licenses terminate, if the licensors fail to abide by the terms of the license or fail to
prevent infringement by third parties, if the licensed patents or other rights are found to be
invalid or if we are unable to enter into necessary licenses on acceptable terms. Companies that
attempt to replicate our tests could be set up in countries that do not recognize our intellectual
property. Such companies could send test results into the United States and therefore reduce sales
of our tests.
If we are unable to maintain intellectual property protection, our competitive position could be
harmed.
Our ability to compete and to achieve and maintain profitability is impacted by our ability to
protect our proprietary discoveries and technologies. We currently rely on a combination of patent
applications, copyrights, trademarks, and confidentiality, material data transfer, license and
invention assignment agreements to protect our intellectual property rights. We also rely upon
trade secret laws to protect unpatented know-how and continuing technological innovation. Our
intellectual property strategy is intended to develop and maintain our competitive position.
Patents may be granted to us jointly with other organizations, and while we may have a right of
first refusal, we cannot guarantee that a joint owner will not license rights to another party, and
cannot guarantee that a joint owner will cooperate with us in the enforcement of patent rights.
As of June 30, 2009, we had four issued patents in the U.S. covering genes and methods that
are components of the Onco
type
DX breast cancer test, one of which was issued jointly to us and to
the National Surgical Adjuvant Breast and Bowel Project, or NSABP, and one European patent for
methods used to determine gene expression. Our pending patent applications may not result in issued
patents, and we cannot assure you that our issued patents or any patents that might ultimately be
issued by the U.S. Patent and Trademark Office will protect our technology. Any patents that may be
issued to us might be challenged by third parties as being invalid or unenforceable, or third
parties may independently develop similar or competing technology that avoids our patents. We
cannot be certain that the steps we have taken will prevent the misappropriation and use of our
intellectual property, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
From time to time, the United States Supreme Court, other federal courts, the U.S. Congress or
the U.S. Patent and Trademark Office may change the standards of patentability and any such changes
could have a negative impact on our business. In addition, competitors may develop their own
versions of our test in countries where we did not apply for patents or where our patents have not
issued and compete with us in those countries, including encouraging the use of their test by
physicians or patients in other countries.
34
We may face intellectual property infringement claims that could be time-consuming and costly to
defend and could result in our loss of significant rights and the assessment of treble damages.
We have received notices of claims of infringement or misuse of other parties proprietary
rights in the past and may from time to time receive additional notices. Some of these claims may
lead to litigation. We cannot assure you that we will prevail in such actions, or that other
actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us
of third-party patents and trademarks or the validity of our patents, will not be asserted or
prosecuted against us. We may also initiate claims to defend our intellectual property.
Intellectual property litigation, regardless of outcome, is expensive and time-consuming, could
divert managements attention from our business and have a material negative effect on our
business, operating results or financial condition. If there is a successful claim of infringement
against us, we may be required to pay substantial damages (including treble damages if we were to
be found to have willfully infringed a third partys patent) to the party claiming infringement,
develop non-infringing technology, stop selling our test or using technology that contains the
allegedly infringing intellectual property or enter into royalty or license agreements that may not
be available on acceptable or commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on a timely basis could harm our
business. In addition, revising our test to include the non-infringing technologies would require
us to re-validate our test, which would be costly and time-consuming. Also, we may be unaware of
pending patent applications that relate to our test. Parties making infringement claims on future
issued patents may be able to obtain an injunction that would prevent us from selling our test or
using technology that contains the allegedly infringing intellectual property, which could harm our
business.
It is possible that a third party or patent office might take the position that one or more
patents or patent applications constitute prior art in the field of genomic-based diagnostics. In
such a case, we might be required to pay royalties, damages and costs to firms who own the rights
to these patents, or we might be restricted from using any of the inventions claimed in those
patents.
If we are unable to compete successfully, we may be unable to increase or sustain our revenues or
achieve profitability.
Our principal competition comes from existing diagnostic methods used by pathologists and
oncologists. These methods have been used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment and kits or reagents to local
pathology laboratories represent another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more readily than tests like ours that are
performed outside the pathology laboratory. In addition, few diagnostic methods are as expensive as
our Onco
type
DX breast cancer test.
We also face competition from many public and private companies that offer products or have
conducted research to profile genes, gene expression or protein expression in breast cancer, such
as Celera Corporation, Clarient Diagnostic Services, Agendia B.V., Applied Genomics,
bioTheranostics, Exagen Diagnostics and University Genomics. Commercial laboratories with strong
distribution networks for diagnostic tests, such as Genzyme Corporation, Laboratory Corporation of
America Holdings and Quest Diagnostics Incorporated, may become competitors. Other potential
competitors include companies that develop diagnostic tests such as Bayer Diagnostics, a division
of Siemens AG, Roche Diagnostics, a division of F. Hoffmann-La Roche Ltd, and Veridex LLC, a
Johnson & Johnson company, as well as other companies and academic and research institutions. Our
competitors may invent and commercialize technology platforms that compete with ours. In addition,
in December 2005, the federal government allocated a significant amount of funding to The Cancer
Genome Atlas, a project aimed at developing a comprehensive catalog of the genetic mutations and
other genomic changes that occur in cancers and maintaining the information in a free public
database. As more information regarding cancer genomics becomes available to the public, we
anticipate that more products aimed at identifying targeted treatment options will be developed and
these products may compete with ours. In addition, competitors may develop their own versions of
our test in countries where we did not apply for patents or where our patents have not issued and
compete with us in those countries, including encouraging the use of their test by physicians or
patients in other countries.
Our Onco
type
DX breast cancer test is considered relatively expensive for a diagnostic test.
Effective July 1, 2009, we increased the list price of our test from $3,820 to $3,975, and we may
raise prices in the future. This could impact reimbursement of and demand for our test. Many of our
present and potential competitors have widespread brand recognition and substantially greater
financial and technical resources and development, production and marketing capabilities than we
do. Others may develop lower-priced, less complex tests that could be viewed by physicians and
payors as functionally equivalent to our test, which could force us to lower the list price of our
test and impact our operating margins and our ability to achieve profitability. Some competitors
have developed tests cleared for marketing by FDA. There may be a marketing differentiation or
perception that an FDA-cleared test is more desirable than Onco
type
DX tests, and that may
discourage adoption and reimbursement of our test. If we are unable to compete successfully against
current or future competitors, we may be unable to increase market acceptance for and sales of our
test, which could prevent us from
35
increasing or sustaining our revenues or achieving or sustaining profitability and could cause
the market price of our common stock to decline.
Our research and development efforts will be hindered if we are not able to contract with third
parties for access to archival tissue samples.
Under standard clinical practice in the United States, tumor biopsies removed from patients
are chemically preserved and embedded in paraffin wax and stored. Our clinical development relies
on our ability to secure access to these archived tumor biopsy samples, as well as information
pertaining to their associated clinical outcomes. Others have demonstrated their ability to study
archival samples and often compete with us for access. Additionally, the process of negotiating
access to archived samples is lengthy since it typically involves numerous parties and approval
levels to resolve complex issues such as usage rights, institutional review board approval, privacy
rights, publication rights, intellectual property ownership and research parameters. If we are not
able to negotiate access to archival tumor tissue samples with hospitals and clinical partners, or
if other laboratories or our competitors secure access to these samples before us, our ability to
research, develop and commercialize future products will be limited or delayed.
If we cannot maintain our current clinical collaborations and enter into new collaborations, our
product development could be delayed
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We rely on and expect to continue to rely on clinical collaborators to perform a substantial
portion of our clinical trial functions. If any of our collaborators were to breach or terminate
its agreement with us or otherwise fail to conduct the contracted activities successfully and in a
timely manner, the research, development or commercialization of the products contemplated by the
collaboration could be delayed or terminated. If any of our collaboration agreements are
terminated, or if we are unable to renew those agreements on acceptable terms, we would be required
to seek alternatives. We may not be able to negotiate additional collaborations on acceptable
terms, if at all, and these collaborations may not be successful.
In the past, we have entered into clinical trial collaborations with highly regarded
organizations in the cancer field including, for example, NSABP. Our success in the future depends
in part on our ability to enter into agreements with other leading cancer organizations. This can
be difficult due to internal and external constraints placed on these organizations. Some
organizations may limit the number of collaborations they have with any one company so as to not be
perceived as biased or conflicted. Organizations may also have insufficient administrative and
related infrastructure to enable collaborations with many companies at once, which can extend the
time it takes to develop, negotiate and implement a collaboration. Additionally, organizations
often insist on retaining the rights to publish the clinical data resulting from the collaboration.
The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and
obtaining reimbursement for a test such as ours, and our inability to control when, if ever,
results are published may delay or limit our ability to derive sufficient revenues from any product
that may result from a collaboration.
From time to time we expect to engage in discussions with potential clinical collaborators
which may or may not lead to collaborations. However, we cannot guarantee that any discussions will
result in clinical collaborations or that any clinical studies which may result will be enrolled or
completed in a reasonable time frame or with successful outcomes. Once news of discussions
regarding possible collaborations are known in the medical community, regardless of whether the
news is accurate, failure to announce a collaboration agreement or the entitys announcement of a
collaboration with an entity other than us may result in adverse speculation about us, our product
or our technology, resulting in harm to our reputation and our business.
The loss of key members of our senior management team or our inability to retain highly skilled
scientists, clinicians and salespeople could adversely affect our business.
Our success depends largely on the skills, experience and performance of key members of our
executive management team and others in key management positions. The efforts of each of these
persons together will be critical to us as we continue to develop our technologies and testing
processes and as we attempt to transition to a company with more than one commercialized product.
If we were to lose one or more of these key employees, we may experience difficulties in competing
effectively, developing our technologies and implementing our business strategies.
Our research and development programs and commercial laboratory operations depend on our
ability to attract and retain highly skilled scientists and technicians, including geneticists,
licensed laboratory technicians, chemists, biostatisticians and engineers. We may not be able to
attract or retain qualified scientists and technicians in the future due to the competition for
qualified personnel among life science businesses, particularly in the San Francisco Bay Area. We
also face competition from universities and public and private research institutions in recruiting
and retaining highly qualified scientific personnel. In addition, our success depends on our
ability to attract and retain salespeople with extensive experience in oncology and close
relationships with medical oncologists, surgeons, pathologists and other hospital personnel. We may
have difficulties locating, recruiting or retaining qualified salespeople, which could cause a
delay or decline in the rate of adoption of our products. If we are not able to attract and retain
the necessary personnel to accomplish our business objectives, we may experience constraints that
will adversely affect our ability to support our
36
discovery, development and sales programs. All of our employees are at-will employees, which
means that either we or the employee may terminate their employment at any time.
If our sole laboratory facility becomes inoperable, we will be unable to perform our test and our
business will be harmed.
We do not have redundant clinical reference laboratory facilities outside of Redwood City,
California. Redwood City is situated near earthquake fault lines. Our facility and the equipment we
use to perform our tests would be costly to replace and could require substantial lead time to
repair or replace. The facility may be harmed or rendered inoperable by natural or man-made
disasters, including earthquakes, flooding and power outages, which may render it difficult or
impossible for us to perform our tests for some period of time. The inability to perform our tests
or the backlog of tests that could develop if our facility is inoperable for even a short period of
time may result in the loss of customers or harm our reputation, and we may be unable to regain
those customers in the future. Although we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient to cover all of our potential
losses and may not continue to be available to us on acceptable terms, if at all.
In order to rely on a third party to perform our tests, we could only use another facility
with established state licensure and CLIA accreditation under the scope of which Onco
type
DX tests
could be performed following validation and other required procedures. We cannot assure you that we
would be able to find another CLIA-certified facility willing to comply with the required
procedures, that this laboratory would be willing to perform the tests for us on commercially
reasonable terms, or that it would be able to meet our quality standards. In order to establish a
redundant clinical reference laboratory facility, we would have to spend considerable time and
money securing adequate space, constructing the facility, recruiting and training employees, and
establishing the additional operational and administrative infrastructure necessary to support a
second facility. We may not be able, or it may take considerable time, to replicate our testing
processes or results in a new facility. Additionally, any new clinical reference laboratory
facility opened by us would be subject to certification under CLIA and licensed by several states,
including California and New York, which could take a significant amount of time and result in
delays in our ability to begin operations.
We are dependent on our information technology and telecommunications systems, and any failure of
these systems could harm our business.
We depend on information technology, or IT, and telecommunications systems for significant
aspects of our operations. In addition, our third-party billing and collections provider is
dependent upon telecommunications and data systems provided by outside vendors and information it
receives from us on a regular basis. These IT and telecommunications systems support a variety of
functions, including test processing, sample tracking, quality control, customer service and
support, billing and reimbursement, research and development activities, and our general and
administrative activities. Failures or significant downtime of our IT or telecommunications systems
or those used by our third-party service providers could prevent us from processing tests,
providing test results to physicians, billing payors, processing reimbursement appeals, handling
patient or physician inquiries, conducting research and development activities, and managing the
administrative aspects of our business. Any disruption or loss of IT or telecommunications systems
on which critical aspects of our operations depend could have an adverse effect on our business and
our product revenues.
Changes in healthcare policy could increase our costs and impact sales of and reimbursement for
our tests.
Healthcare policy has been a subject of extensive discussion in the executive and legislative
branches of the federal and many state governments. We developed our commercialization strategy for
our tests based on existing healthcare policies. Changes in healthcare policy, such as changes in
the FDA regulatory policy for LDTs, the creation of broad limits for diagnostic products in general
or requirements that Medicare patients pay for portions of clinical laboratory tests or services
received, could substantially impact the sales of our tests, increase costs and divert managements
attention. For example, in 1989, the U.S. Congress passed federal self-referral prohibitions
commonly known as the Stark Law, significantly restricting, regulating and changing laboratories
relationships with physicians. In addition, sales of our tests outside of the U.S. makes us subject
to foreign regulatory requirements, which may also change over time. We cannot predict what
changes, if any, will be proposed or adopted or the effect that such proposals or adoption may have
on our business, financial condition and results of operations.
Several proposals to reform the system of health care delivery in the U.S. are currently being
considered by the federal and state governments. Some of the reforms call for a government
sponsored health plan. A number of states are also contemplating significant reform of their
healthcare policies. A proposal for additional government-funded health care could subject
expenditures for health care to governmental budget constraints and limits on spending. We cannot
predict what healthcare policy reforms, if any, will be adopted or the effect that such adoption
may have on our business, financial condition and results of operations.
37
We rely on a limited number of suppliers or, in some cases, a sole supplier, for some of our
laboratory instruments and materials and may not be able to find replacements in the event our
suppliers no longer supply that equipment or those materials.
We rely solely on Applied Biosystems, a division of Life Technologies Corporation, to supply
some of the laboratory equipment on which we perform our tests. We periodically forecast our needs
for laboratory equipment and enter into standard purchase orders with Applied Biosystems based on
these forecasts. We believe that there are relatively few equipment manufacturers other than
Applied Biosystems that are currently capable of supplying the equipment necessary for our Onco
type
DX platform. Even if we were to identify other suppliers, there can be no assurance that we will be
able to enter into agreements with such suppliers on a timely basis on acceptable terms, if at all.
If we should encounter delays or difficulties in securing from Applied Biosystems the quality and
quantity of equipment we require for our tests, we may need to reconfigure our test process, which
would result in delays in commercialization or an interruption in sales. If any of these events
occur, our business and operating results could be harmed. Additionally, if Applied Biosystems
deems us to have become uncreditworthy, it has the right to require alternative payment terms from
us, including payment in advance. We are also required to indemnify Applied Biosystems against any
damages caused by any legal action or proceeding brought by a third party against Applied
Biosystems for damages caused by our failure to obtain required approval with any regulatory
agency.
We also rely on several sole suppliers for certain laboratory materials which we use to
perform our tests. While we have developed alternate sourcing strategies for these materials, we
cannot be certain that these strategies will be effective. If we should encounter delays or
difficulties in securing these laboratory materials, delays in commercialization or an interruption
in sales could occur.
We may be unable to manage our future growth effectively, which would make it difficult to
execute our business strategy.
Future growth will impose significant added responsibilities on management, including the need
to identify, recruit, train and integrate additional employees. In addition, rapid and significant
growth will place strain on our administrative and operational infrastructure, including customer
service and our clinical laboratory. Our ability to manage our operations and growth will require
us to continue to improve our operational, financial and management controls, reporting systems and
procedures. If we are unable to manage our growth effectively, it may be difficult for us to
execute our business strategy.
If we were sued for product liability or professional liability, we could face substantial
liabilities that exceed our resources.
The marketing, sale and use of our tests could lead to the filing of product liability claims
if someone were to allege that our tests failed to perform as it was designed. We may also be
subject to liability for errors in the test results we provide to physicians or for a
misunderstanding of, or inappropriate reliance upon, the information we provide. For example,
physicians sometimes order our Onco
type
DX breast cancer test for patients who do not have the same
specific clinical attributes indicated on the report form as those for which the test provides
clinical experience information from validation studies. It is our practice to offer medical
consultation to physicians ordering our test for such patients, including ER- breast cancer
patients. A product liability or professional liability claim could result in substantial damages
and be costly and time consuming for us to defend. Although we believe that our existing product
and professional liability insurance is adequate, we cannot assure you that our insurance would
fully protect us from the financial impact of defending against product liability or professional
liability claims. Any product liability or professional liability claim brought against us, with or
without merit, could increase our insurance rates or prevent us from securing insurance coverage in
the future. Additionally, any product liability lawsuit could cause injury to our reputation,
result in the recall of our products, or cause current clinical partners to terminate existing
agreements and potential clinical partners to seek other partners, any of which could impact our
results of operations.
If we use biological and hazardous materials in a manner that causes injury, we could be liable
for damages.
Our activities currently require the controlled use of potentially harmful biological
materials, hazardous materials and chemicals and may in the future require the use of radioactive
compounds. We cannot eliminate the risk of accidental contamination or injury to employees or third
parties from the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for any resulting damages, and any liability could
exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject
on an ongoing basis to federal, state and local laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste products. The cost of compliance with
these laws and regulations may become significant and could negatively affect our operating
results.
38
International expansion of our business may expose us to business, regulatory, political,
operational, financial and economic risks associated with doing business outside of the United
States.
Our business strategy contemplates international expansion, including establishing direct
sales and physician outreach and education capabilities outside of the United States and expanding
our relationship with distributors. In February 2009, we established a subsidiary in Geneva,
Switzerland and we may establish operations in other countries in the future. Doing business
internationally involves a number of risks, including:
|
|
|
multiple, conflicting and changing laws and regulations such as tax laws, export and
import restrictions, employment laws, regulatory requirements and other governmental
approvals, permits and licenses;
|
|
|
|
|
failure by us or our distributors to obtain regulatory approvals for the use of our test
in various countries;
|
|
|
|
|
difficulties in staffing and managing foreign operations;
|
|
|
|
|
complexities associated with managing multiple payor reimbursement regimes or self-pay
systems;
|
|
|
|
|
logistics and regulations associated with shipping tissue samples, including
infrastructure conditions and transportation delays;
|
|
|
|
|
limits in our ability to penetrate international markets if we are not able to process
tests locally;
|
|
|
|
|
financial risks, such as longer payment cycles, difficulty collecting accounts receivable
and exposure to foreign currency exchange rate fluctuations;
|
|
|
|
|
political and economic instability, including wars, terrorism, and political unrest,
outbreak of disease, boycotts, curtailment of trade and other business restrictions; and
|
|
|
|
|
regulatory and compliance risks that relate to maintaining accurate information and
control over sales and distributors activities that may fall within the purview of the
Foreign Corrupt Practice Act, its books and records provisions or its anti-bribery
provisions.
|
Any of these factors could significantly harm our future international expansion and
operations and, consequently, our revenues and results of operations.
Our dependence on distributors for foreign sales of our Oncotype DX breast cancer test could
limit or prevent us from selling our test in foreign markets and from realizing long-term
international revenue growth.
As of June 30, 2009, we had exclusive distribution agreements for our Onco
type
DX breast
cancer test in over ten countries outside of the U.S., and we may enter into other similar
arrangements in other countries in the future. We intend to grow our business internationally, and
to do so we may need to attract additional distributors to expand the territories in which we sell
our test. Distributors may not commit the necessary resources to market and sell our test to the
level of our expectations. If current or future distributors do not perform adequately, or we are
unable to locate distributors in particular geographic areas, we may not realize long-term
international revenue growth. Regulatory requirements, costs of doing business outside of the
United States and the reimbursement process in foreign markets may also impact our revenues from
international sales or impact our ability to increase international sales in the future.
We may acquire other businesses or form joint ventures that could harm our operating results,
dilute our stockholders ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of complementary businesses and
assets, as well as technology licensing arrangements. We also may pursue strategic alliances that
leverage our core technology and industry experience to expand our product offerings or
distribution. We have no experience with respect to acquiring other companies and limited
experience with respect to the formation of strategic alliances and joint ventures. If we make any
acquisitions, we may not be able to integrate these acquisitions successfully into our existing
business, and we could assume unknown or contingent liabilities. Any future acquisitions by us also
could result in significant write-offs or the incurrence of debt and contingent liabilities, any of
which could harm our operating results. Integration of an acquired company also may require
management resources that otherwise would be available for ongoing development of our existing
business. We may not identify or complete these transactions in a timely manner, on a
cost-
39
effective basis, or at all, and we may not realize the anticipated benefits of any
acquisition, technology license, strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of our common stock as
consideration, which would dilute the ownership of our stockholders. If the price of our common
stock is low or volatile, we may not be able to acquire other companies for stock. The market price
of our common stock has been particularly volatile during the recent period of upheaval in the
capital markets and world economy, and this excessive volatility may continue for an extended
period of time. Alternatively, it may be necessary for us to raise additional funds for
acquisitions through public or private financings. Additional funds may not be available on terms
that are favorable to us, or at all.
Our marketable securities are subject to risks that could adversely affect our overall financial
position.
We invest our cash in accordance with an established internal policy in instruments which
historically have been highly liquid and carried relatively low risk. However, with recent credit
market conditions, similar types of investments have experienced losses in value or liquidity
issues which differ from their historical pattern. Should a portion of our marketable securities
lose value or have their liquidity impaired, it could adversely affect our overall financial
position by imperiling our ability to fund our operations and forcing us to seek additional
financing sooner than we would otherwise. Such financing, if available, may not be available on
commercially attractive terms.
Our inability to raise additional capital on acceptable terms in the future may limit our ability
to develop and commercialize new tests and technologies and expand our operations
We expect capital outlays and operating expenditures to increase over the next several years
as we expand our infrastructure, commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other things:
|
|
|
sustain commercialization of our breast cancer test and enhancements to that test
|
|
|
|
|
fund commercialization of our colon cancer test, enhancements to that test or any future
tests we may develop;
|
|
|
|
|
increase our selling and marketing efforts to drive market adoption and address
competitive developments;
|
|
|
|
|
further expand our clinical laboratory operations;
|
|
|
|
|
expand our technologies into other areas of cancer;
|
|
|
|
|
expand our research and development activities;
|
|
|
|
|
acquire or license technologies; and
|
|
|
|
|
finance capital expenditures and general and administrative expenses.
|
Our present and future funding requirements will depend on many factors, including:
|
|
|
the level of research and development investment required to maintain and improve our
technology position;
|
|
|
|
|
costs of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights;
|
|
|
|
|
our need or decision to acquire or license complementary technologies or acquire
complementary businesses;
|
|
|
|
|
changes in product development plans needed to address any difficulties in
commercialization;
|
|
|
|
|
changes in the regulatory environment, including any decision by FDA to regulate our
activities;
|
|
|
|
|
competing technological and market developments;
|
|
|
|
|
the rate of progress in establishing reimbursement arrangements with third-party payors;
and
|
|
|
|
|
changes in regulatory policies or laws that affect our operations.
|
40
If we raise funds by issuing equity securities, dilution to our stockholders could result. Any
equity securities issued also may provide for rights, preferences or privileges senior to those of
holders of our common stock. If we raise funds by issuing debt securities, these debt securities
would have rights, preferences and privileges senior to those of holders of our common stock, and
the terms of the debt securities issued could impose significant restrictions on our operations. If
we raise funds through collaborations and licensing arrangements, we might be required to
relinquish significant rights to our technologies or products, or grant licenses on terms that are
not favorable to us. The credit markets and the financial services industry have been experiencing
a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse
or sale of various financial institutions and an unprecedented level of intervention from the
United States federal government. These events have generally made equity and debt financing more
difficult to obtain. Accordingly, additional equity or debt financing might not be available on
reasonable terms, if at all. If adequate funds are not available, we may have to scale back our
operations or limit our research and development activities.
We must implement additional and expensive finance and accounting systems, procedures and
controls as we grow our business and organization and to satisfy public company reporting
requirements, which will increase our costs and require additional management resources.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002
and the related rules and regulations of the Securities and Exchange Commission. Compliance with
Section 404 of the Sarbanes-Oxley Act and other requirements has increased our costs and required
additional management resources. We will need to continue to implement additional finance and
accounting systems, procedures and controls as we grow our business and organization and to satisfy
existing reporting requirements. If we fail to maintain or implement adequate controls, if we are
unable to complete the required Section 404 assessment as to the adequacy of our internal control
over financial reporting in future Form 10-K filings, or if our independent registered public
accounting firm is unable to provide us with an unqualified report as to the effectiveness of our
internal control over financial reporting in future Form 10-K filings, our ability to obtain
additional financing could be impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and in the accuracy of our periodic
reports filed under the Exchange Act. A lack of investor confidence in the reliability and accuracy
of our public reporting could cause our stock price to decline.
41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on June 8, 2009, the stockholders:
|
1.
|
|
Elected the persons listed below to serve as
directors of Genomic Health, each for a one-year term
or until their successors are elected and qualified.
|
|
|
2.
|
|
Approved the Amended and Restated Genomic Health, Inc. 2005 Stock Incentive Plan.
|
|
|
3.
|
|
Ratified the selection of Ernst & Young LLP as the Companys independent
registered public accounting firm for the year ending December 31, 2009.
|
The following sets forth information regarding the results of the voting at the Annual
Meeting:
Proposal 1. Election of Directors
|
|
|
|
|
|
|
|
|
|
|
Votes
|
Nominee
|
|
For
|
|
Withheld
|
Randal W. Scott, Ph.D.
|
|
|
26,615,460
|
|
|
|
82,497
|
|
Kimberly J. Popovits
|
|
|
26,637,532
|
|
|
|
60,425
|
|
Julian C. Baker
|
|
|
26,111,291
|
|
|
|
586,666
|
|
Brook H. Byers
|
|
|
26,152,419
|
|
|
|
545,538
|
|
Fred E.
Cohen, M.D., D. Phil.
|
|
|
26,641,591
|
|
|
|
56,366
|
|
Samuel D. Colella
|
|
|
26,638,591
|
|
|
|
59,366
|
|
Ginger L. Graham
|
|
|
26,639,078
|
|
|
|
58,879
|
|
Randall S. Livingston
|
|
|
26,639,077
|
|
|
|
58,880
|
|
Woodrow A. Myers, Jr., M.D.
|
|
|
26,144,548
|
|
|
|
553,409
|
|
Proposal 2. Approval of the Amended and Restated Genomic Health, Inc. 2005 Stock Incentive Plan
|
|
|
|
|
|
|
Votes
|
For
|
|
Against
|
|
Abstain
|
|
Non Votes
|
17,248,123
|
|
7,157,944
|
|
7,676
|
|
2,284,214
|
Proposal 3. Appointment of Ernst & Young LLP as the Companys independent registered public
accounting firm
|
|
|
|
|
Votes
|
For
|
|
Against
|
|
Abstain
|
26,640,991
|
|
46,177
|
|
10,789
|
42
ITEM 6. EXHIBITS
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
10.1#
|
|
Amended and Restated Genomic
Health, Inc. 2005 Stock Incentive Plan.
|
|
|
|
10.2#
|
|
Form of Stock Option Agreement.
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer.
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer.
|
|
|
|
32.1*
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).
|
|
|
|
32.2*
|
|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).
|
|
|
|
#
|
|
Indicates management contract or compensatory plan or arrangement.
|
|
*
|
|
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form
10-Q and will not be deemed filed for purposes of Section 18 of the Exchange Act.
|
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
GENOMIC HEALTH, INC.
|
|
Date: August 7, 2009
|
By:
|
/s/ Kimberly J. Popovits
|
|
|
|
Kimberly J. Popovits
|
|
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
Date: August 7, 2009
|
By:
|
/s/ G. Bradley Cole
|
|
|
|
G. Bradley Cole
|
|
|
|
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
|
|
|
44
GENOMIC HEALTH, INC.
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
10.1#
|
|
Amended and Restated Genomic
Health, Inc. 2005 Stock Incentive Plan.
|
|
|
|
10.2#
|
|
Form of Stock Option Agreement.
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer.
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer.
|
|
|
|
32.1*
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).
|
|
|
|
32.2*
|
|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).
|
|
|
|
#
|
|
Indicates management contract or compensatory plan or arrangement.
|
|
*
|
|
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form
10-Q and will not be deemed filed for purposes of Section 18 of the Exchange Act.
|
Exhibit 10.1
GENOMIC HEALTH, INC.
2005 STOCK INCENTIVE PLAN
(Adopted by the Board on September 8, 2005,
and amended and restated by the Board on January 28, 2009.)
Genomic Health, Inc.
2005 Stock Incentive Plan
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
SECTION 1.
|
|
ESTABLISHMENT AND PURPOSE
|
|
|
1
|
|
|
|
|
|
|
|
|
SECTION 2.
|
|
DEFINITIONS
|
|
|
1
|
|
|
|
|
|
|
|
|
(a)
|
|
Affiliate
|
|
|
1
|
|
|
|
|
|
|
|
|
(b)
|
|
Award
|
|
|
1
|
|
|
|
|
|
|
|
|
(c)
|
|
Board of Directors
|
|
|
1
|
|
|
|
|
|
|
|
|
(d)
|
|
Change in Control
|
|
|
1
|
|
|
|
|
|
|
|
|
(e)
|
|
Code
|
|
|
2
|
|
|
|
|
|
|
|
|
(f)
|
|
Committee
|
|
|
2
|
|
|
|
|
|
|
|
|
(g)
|
|
Company
|
|
|
2
|
|
|
|
|
|
|
|
|
(h)
|
|
Consultant
|
|
|
3
|
|
|
|
|
|
|
|
|
(i)
|
|
Employee
|
|
|
3
|
|
|
|
|
|
|
|
|
(j)
|
|
Exchange Act
|
|
|
3
|
|
|
|
|
|
|
|
|
(k)
|
|
Exercise Price
|
|
|
3
|
|
|
|
|
|
|
|
|
(l)
|
|
Fair Market Value
|
|
|
3
|
|
|
|
|
|
|
|
|
(m)
|
|
ISO
|
|
|
3
|
|
|
|
|
|
|
|
|
(n)
|
|
Nonstatutory Option
or
NSO
|
|
|
3
|
|
|
|
|
|
|
|
|
(o)
|
|
Offeree
|
|
|
4
|
|
|
|
|
|
|
|
|
(p)
|
|
Option
|
|
|
4
|
|
|
|
|
|
|
|
|
(q)
|
|
Optionee
|
|
|
4
|
|
|
|
|
|
|
|
|
(r)
|
|
Outside Director
|
|
|
4
|
|
|
|
|
|
|
|
|
(s)
|
|
Parent
|
|
|
4
|
|
|
|
|
|
|
|
|
(t)
|
|
Participant
|
|
|
4
|
|
|
|
|
|
|
|
|
(u)
|
|
Plan
|
|
|
4
|
|
|
|
|
|
|
|
|
(v)
|
|
Purchase Price
|
|
|
4
|
|
|
|
|
|
|
|
|
(w)
|
|
Restricted Share
|
|
|
4
|
|
|
|
|
|
|
|
|
(x)
|
|
Restricted Share Agreement
|
|
|
4
|
|
|
|
|
|
|
|
|
(y)
|
|
SAR
|
|
|
4
|
|
|
|
|
|
|
|
|
(z)
|
|
SAR Agreement
|
|
|
4
|
|
|
|
|
|
|
|
|
(aa)
|
|
Service
|
|
|
4
|
|
|
|
|
|
|
|
|
(bb)
|
|
Share
|
|
|
5
|
|
|
|
|
|
|
|
|
(cc)
|
|
Stock
|
|
|
5
|
|
|
|
|
|
|
|
|
(dd)
|
|
Stock Option Agreement
|
|
|
5
|
|
|
|
|
|
|
|
|
(ee)
|
|
Stock Unit
|
|
|
5
|
|
Genomic Health, Inc.
2005 Stock Incentive Plan
-i-
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
(ff)
|
|
Stock Unit Agreement
|
|
|
5
|
|
|
|
|
|
|
|
|
(gg)
|
|
Subsidiary
|
|
|
5
|
|
|
|
|
|
|
|
|
SECTION 3.
|
|
ADMINISTRATION
|
|
|
5
|
|
|
|
|
|
|
|
|
(a)
|
|
Committee Composition
|
|
|
5
|
|
|
|
|
|
|
|
|
(b)
|
|
Committee for Non-Officer Grants
|
|
|
5
|
|
|
|
|
|
|
|
|
(c)
|
|
Committee Procedures
|
|
|
6
|
|
|
|
|
|
|
|
|
(d)
|
|
Committee Responsibilities
|
|
|
6
|
|
|
|
|
|
|
|
|
SECTION 4.
|
|
ELIGIBILITY
|
|
|
7
|
|
|
|
|
|
|
|
|
(a)
|
|
General Rule
|
|
|
7
|
|
|
|
|
|
|
|
|
(b)
|
|
Automatic Grants to Outside Directors
|
|
|
7
|
|
|
|
|
|
|
|
|
(c)
|
|
Ten-Percent Stockholders
|
|
|
8
|
|
|
|
|
|
|
|
|
(d)
|
|
Attribution Rules
|
|
|
8
|
|
|
|
|
|
|
|
|
(e)
|
|
Outstanding Stock
|
|
|
8
|
|
|
|
|
|
|
|
|
SECTION 5.
|
|
STOCK SUBJECT TO PLAN
|
|
|
8
|
|
|
|
|
|
|
|
|
(a)
|
|
Basic Limitation
|
|
|
8
|
|
|
|
|
|
|
|
|
(b)
|
|
Award Limitation
|
|
|
9
|
|
|
|
|
|
|
|
|
(c)
|
|
Additional Shares
|
|
|
9
|
|
|
|
|
|
|
|
|
SECTION 6.
|
|
RESTRICTED SHARES
|
|
|
9
|
|
|
|
|
|
|
|
|
(a)
|
|
Restricted Stock Agreement
|
|
|
9
|
|
|
|
|
|
|
|
|
(b)
|
|
Payment for Awards
|
|
|
9
|
|
|
|
|
|
|
|
|
(c)
|
|
Vesting
|
|
|
9
|
|
|
|
|
|
|
|
|
(d)
|
|
Voting and Dividend Rights
|
|
|
9
|
|
|
|
|
|
|
|
|
(e)
|
|
Restrictions on Transfer of Shares
|
|
|
9
|
|
|
|
|
|
|
|
|
SECTION 7.
|
|
TERMS AND CONDITIONS OF OPTIONS
|
|
|
10
|
|
|
|
|
|
|
|
|
(a)
|
|
Stock Option Agreement
|
|
|
10
|
|
|
|
|
|
|
|
|
(b)
|
|
Number of Shares
|
|
|
10
|
|
|
|
|
|
|
|
|
(c)
|
|
Exercise Price
|
|
|
10
|
|
|
|
|
|
|
|
|
(d)
|
|
Withholding Taxes
|
|
|
10
|
|
|
|
|
|
|
|
|
(e)
|
|
Exercisability and Term
|
|
|
10
|
|
|
|
|
|
|
|
|
(f)
|
|
Exercise of Options
|
|
|
10
|
|
|
|
|
|
|
|
|
(g)
|
|
Effect of Change in Control
|
|
|
11
|
|
|
|
|
|
|
|
|
(h)
|
|
No Rights as a Stockholder
|
|
|
11
|
|
|
|
|
|
|
|
|
(i)
|
|
Modification, Extension and Renewal of Options
|
|
|
11
|
|
|
|
|
|
|
|
|
(j)
|
|
Restrictions on Transfer of Shares
|
|
|
11
|
|
|
|
|
|
|
|
|
(k)
|
|
Buyout Provisions
|
|
|
11
|
|
|
|
|
|
|
|
|
SECTION 8.
|
|
PAYMENT FOR SHARES
|
|
|
11
|
|
|
|
|
|
|
|
|
(a)
|
|
General Rule
|
|
|
11
|
|
Genomic Health, Inc.
2005 Stock Incentive Plan
-ii-
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
(b)
|
|
Surrender of Stock
|
|
|
11
|
|
|
|
|
|
|
|
|
(c)
|
|
Services Rendered
|
|
|
12
|
|
|
|
|
|
|
|
|
(d)
|
|
Cashless Exercise
|
|
|
12
|
|
|
|
|
|
|
|
|
(e)
|
|
Exercise/Pledge
|
|
|
12
|
|
|
|
|
|
|
|
|
(f)
|
|
Promissory Note
|
|
|
12
|
|
|
|
|
|
|
|
|
(g)
|
|
Other Forms of Payment
|
|
|
12
|
|
|
|
|
|
|
|
|
(h)
|
|
Limitations under Applicable Law
|
|
|
12
|
|
|
|
|
|
|
|
|
SECTION 9.
|
|
STOCK APPRECIATION RIGHTS
|
|
|
12
|
|
|
|
|
|
|
|
|
(a)
|
|
SAR Agreement
|
|
|
12
|
|
|
|
|
|
|
|
|
(b)
|
|
Number of Shares
|
|
|
12
|
|
|
|
|
|
|
|
|
(c)
|
|
Exercise Price
|
|
|
12
|
|
|
|
|
|
|
|
|
(d)
|
|
Exercisability and Term
|
|
|
13
|
|
|
|
|
|
|
|
|
(e)
|
|
Effect of Change in Control
|
|
|
13
|
|
|
|
|
|
|
|
|
(f)
|
|
Exercise of SARs
|
|
|
13
|
|
|
|
|
|
|
|
|
(g)
|
|
Modification or Assumption of SARs
|
|
|
13
|
|
|
|
|
|
|
|
|
(h)
|
|
Buyout Provisions
|
|
|
13
|
|
|
|
|
|
|
|
|
SECTION 10.
|
|
STOCK UNITS
|
|
|
13
|
|
|
|
|
|
|
|
|
(a)
|
|
Stock Unit Agreement
|
|
|
13
|
|
|
|
|
|
|
|
|
(b)
|
|
Payment for Awards
|
|
|
13
|
|
|
|
|
|
|
|
|
(c)
|
|
Vesting Conditions
|
|
|
14
|
|
|
|
|
|
|
|
|
(d)
|
|
Voting and Dividend Rights
|
|
|
14
|
|
|
|
|
|
|
|
|
(e)
|
|
Form and Time of Settlement of Stock Units
|
|
|
14
|
|
|
|
|
|
|
|
|
(f)
|
|
Death of Recipient
|
|
|
14
|
|
|
|
|
|
|
|
|
(g)
|
|
Creditors Rights
|
|
|
14
|
|
|
|
|
|
|
|
|
SECTION 11.
|
|
ADJUSTMENT OF SHARES
|
|
|
14
|
|
|
|
|
|
|
|
|
(a)
|
|
Adjustments
|
|
|
14
|
|
|
|
|
|
|
|
|
(b)
|
|
Dissolution or Liquidation
|
|
|
15
|
|
|
|
|
|
|
|
|
(c)
|
|
Reorganizations
|
|
|
15
|
|
|
|
|
|
|
|
|
(d)
|
|
Reservation of Rights
|
|
|
16
|
|
|
|
|
|
|
|
|
SECTION 12.
|
|
DEFERRAL OF AWARDS
|
|
|
16
|
|
|
|
|
|
|
|
|
(a)
|
|
Committee Powers
|
|
|
16
|
|
|
|
|
|
|
|
|
(b)
|
|
General Rules
|
|
|
16
|
|
|
|
|
|
|
|
|
SECTION 13.
|
|
AWARDS UNDER OTHER PLANS
|
|
|
16
|
|
|
|
|
|
|
|
|
SECTION 14.
|
|
PAYMENT OF DIRECTORS FEES IN SECURITIES
|
|
|
17
|
|
|
|
|
|
|
|
|
(a)
|
|
Effective Date
|
|
|
17
|
|
|
|
|
|
|
|
|
(b)
|
|
Elections to Receive NSOs, Restricted Shares or Stock Units
|
|
|
17
|
|
|
|
|
|
|
|
|
(c)
|
|
Number and Terms of NSOs, Restricted Shares or Stock Units
|
|
|
17
|
|
Genomic Health, Inc.
2005 Stock Incentive Plan
-iii-
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
SECTION 15.
|
|
LEGAL AND REGULATORY REQUIREMENTS
|
|
|
17
|
|
|
|
|
|
|
|
|
SECTION 16.
|
|
WITHHOLDING TAXES
|
|
|
17
|
|
|
|
|
|
|
|
|
(a)
|
|
General
|
|
|
17
|
|
|
|
|
|
|
|
|
(b)
|
|
Share Withholding
|
|
|
17
|
|
|
|
|
|
|
|
|
SECTION 17.
|
|
OTHER PROVISIONS APPLICABLE TO AWARDS
|
|
|
18
|
|
|
|
|
|
|
|
|
(a)
|
|
Transferability
|
|
|
18
|
|
|
|
|
|
|
|
|
(b)
|
|
Qualifying Performance Criteria
|
|
|
18
|
|
|
|
|
|
|
|
|
SECTION 18.
|
|
NO EMPLOYMENT RIGHTS
|
|
|
18
|
|
|
|
|
|
|
|
|
SECTION 19.
|
|
DURATION AND AMENDMENTS
|
|
|
19
|
|
|
|
|
|
|
|
|
(a)
|
|
Term of the Plan
|
|
|
19
|
|
|
|
|
|
|
|
|
(b)
|
|
Right to Amend or Terminate the Plan
|
|
|
19
|
|
|
|
|
|
|
|
|
(c)
|
|
Effect of Termination
|
|
|
19
|
|
|
|
|
|
|
|
|
SECTION 20.
|
|
EXECUTION
|
|
|
20
|
|
Genomic Health, Inc.
2005 Stock Incentive Plan
-iv-
GENOMIC HEALTH, INC.
2005 STOCK INCENTIVE PLAN
(As amended and restated on January 28, 2009)
SECTION 1. ESTABLISHMENT AND PURPOSE.
The Plan was adopted by the Board of Directors on September 8, 2005, and shall be effective as
of the date of the initial offering of Stock to the public pursuant to a registration statement
filed by the Company with the Securities and Exchange Commission (the Effective Date). The Plan
was amended and restated on January 28, 2009. The purpose of the Plan is to promote the long-term
success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside
Directors and Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Employees, Outside Directors and Consultants with exceptional
qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder
interests through increased stock ownership. The Plan seeks to achieve this purpose by providing
for Awards in the form of restricted shares, stock units, options (which may constitute incentive
stock options or nonstatutory stock options) or stock appreciation rights.
SECTION 2. DEFINITIONS.
(a) Affiliate
shall mean any entity other than a Subsidiary, if the Company and/or one or
more Subsidiaries own not less than 50% of such entity.
(b) Award
shall mean any award of an Option, a SAR, a Restricted Share or a Stock Unit under
the Plan.
(c) Board of Directors
shall mean the Board of Directors of the Company, as constituted from
time to time.
(d) Change in Control
shall mean the occurrence of any of the following events:
(i) A change in the composition of the Board of Directors occurs, as a result of which
fewer than one-half of the incumbent directors are directors who either:
(A) Had been directors of the Company on the look-back date (as defined
below) (the original directors); or
(B) Were elected, or nominated for election, to the Board of Directors with the
affirmative votes of at least a majority of the aggregate of the original directors
who were still in office at the time of the election or nomination and the directors
whose election or nomination was previously so approved (the continuing
directors); or
Genomic Health, Inc.
2005 Stock Incentive Plan
-1-
(ii) Any person (as defined below) who by the acquisition or aggregation of
securities, is or becomes the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing 50% or more
of the combined voting power of the Companys then outstanding securities ordinarily (and
apart from rights accruing under special circumstances) having the right to vote at
elections of directors (the Base Capital Stock); except that any change in the relative
beneficial ownership of the Companys securities by any person resulting solely from a
reduction in the aggregate number of outstanding shares of Base Capital Stock, and any
decrease thereafter in such persons ownership of securities, shall be disregarded until
such person increases in any manner, directly or indirectly, such persons beneficial
ownership of any securities of the Company; or
(iii) The consummation of a merger or consolidation of the Company with or into another
entity or any other corporate reorganization, if persons who were not stockholders of the
Company immediately prior to such merger, consolidation or other reorganization own
immediately after such merger, consolidation or other reorganization 50% or more of the
voting power of the outstanding securities of each of (A) the continuing or surviving entity
and (B) any direct or indirect parent corporation of such continuing or surviving entity; or
(iv) The sale, transfer or other disposition of all or substantially all of the
Companys assets.
For purposes of subsection (d)(i) above, the term look-back date shall mean the later of (1)
the Effective Date or (2) the date 24 months prior to the date of the event that may constitute a
Change in Control.
For purposes of subsection (d)(ii)) above, the term person shall have the same meaning as
when used in Sections 13(d) and 14(d) of the Exchange Act but shall exclude (1) a trustee or other
fiduciary holding securities under an employee benefit plan maintained by the Company or a Parent
or Subsidiary and (2) a corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of the Stock.
Any other provision of this Section 2(d) notwithstanding, a transaction shall not constitute a
Change in Control if its sole purpose is to change the state of the Companys incorporation or to
create a holding company that will be owned in substantially the same proportions by the persons
who held the Companys securities immediately before such transaction, and a Change in Control
shall not be deemed to occur if the Company files a registration statement with the United States
Securities and Exchange Commission for the initial offering of Stock to the public.
(e) Code
shall mean the Internal Revenue Code of 1986, as amended.
(f) Committee
shall mean the Compensation Committee as designated by the Board of
Directors, which is authorized to administer the Plan, as described in Section 3 hereof.
(g) Company
shall mean Genomic Health, Inc., a Delaware corporation.
Genomic Health, Inc.
2005 Stock Incentive Plan
-2-
(h) Consultant
shall mean a consultant or advisor who provides bona fide services to the
Company, a Parent, a Subsidiary or an Affiliate as an independent contractor (not including service
as a member of the Board of Directors) or a member of the board of directors of a Parent or a
Subsidiary, in each case who is not an Employee.
(i) Employee
shall mean any individual who is a common-law employee of the Company, a
Parent, a Subsidiary or an Affiliate.
(j) Exchange Act
shall mean the Securities Exchange Act of 1934, as amended.
(k) Exercise Price
shall mean, in the case of an Option, the amount for which one Share
may be purchased upon exercise of such Option, as specified in the applicable Stock Option
Agreement. Exercise Price, in the case of a SAR, shall mean an amount, as specified in the
applicable SAR Agreement, which is subtracted from the Fair Market Value of one Share in
determining the amount payable upon exercise of such SAR.
(l) Fair Market Value
with respect to a Share, shall mean the market price of one Share,
determined by the Committee as follows:
(i) If the Stock was traded over-the-counter on the date in question but was not traded
on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last
transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall
be equal to the mean between the last reported representative bid and asked prices quoted
for such date by the principal automated inter-dealer quotation system on which the Stock is
quoted or, if the Stock is not quoted on any such system, by the Pink Sheets LLC;
(ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value
shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock
Market;
(iii) If the Stock was traded on a United States stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price reported for such
date by the applicable composite-transactions report; and
(iv) If none of the foregoing provisions is applicable, then the Fair Market Value
shall be determined by the Committee in good faith on such basis as it deems appropriate.
In all cases, the determination of Fair Market Value by the Committee shall be conclusive and
binding on all persons.
(m) ISO
shall mean an employee incentive stock option described in Section 422 of the
Code.
(n) Nonstatutory Option
or
NSO
shall mean an employee stock option that is not an ISO.
Genomic Health, Inc.
2005 Stock Incentive Plan
-3-
(o) Offeree
shall mean an individual to whom the Committee has offered the right to
acquire Shares under the Plan (other than upon exercise of an Option).
(p) Option
shall mean an ISO or Nonstatutory Option granted under the Plan and entitling
the holder to purchase Shares.
(q) Optionee
shall mean an individual or estate who holds an Option or SAR.
(r) Outside Director
shall mean a member of the Board of Directors who is not a
common-law employee of, or paid consultant to, the Company, a Parent or a Subsidiary.
(s) Parent
shall mean any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, if each of the corporations other than the Company owns stock
possessing 50% or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. A corporation that attains the status of a Parent on a date after
the adoption of the Plan shall be a Parent commencing as of such date.
(t) Particip ant
shall mean an individual or estate who holds an Award.
(u) Plan
shall mean this 2005 Stock Incentive Plan of Genomic Health, Inc., as amended
from time to time.
(v) Purchase Price
shall mean the consideration for which one Share may be acquired under
the Plan (other than upon exercise of an Option), as specified by the Committee.
(w) Restricted Share
shall mean a Share awarded under the Plan.
(x) Restricted Share Agreement
shall mean the agreement between the Company and the
recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to
such Restricted Shares.
(y) SAR
shall mean a stock appreciation right granted under the Plan.
(z) SAR Agreement
shall mean the agreement between the Company and an Optionee which
contains the terms, conditions and restrictions pertaining to his or her SAR.
(aa) Service
shall mean service as an Employee, Consultant or Outside Director, subject to
such further limitations as may be set forth in the Plan or the applicable Stock Option Agreement,
SAR Agreement, Restricted Share Agreement or Stock Unit Agreement. Service does not terminate when
an Employee goes on a bona fide leave of absence, that was approved by the Company in writing, if
the terms of the leave provide for continued Service crediting, or when continued Service crediting
is required by applicable law. However, for purposes of determining whether an Option is entitled
to ISO status, an Employees employment will be treated as terminating 90 days after such Employee
went on leave, unless such Employees right to return to active work is guaranteed by law or by a
contract. Service terminates in any event when the approved leave ends, unless such Employee
immediately returns to active work. The Company determines which leaves count toward Service, and
when Service terminates for all purposes under the Plan.
Genomic Health, Inc.
2005 Stock Incentive Plan
-4-
(bb) Share
shall mean one share of Stock, as adjusted in accordance with Section 11 (if
applicable). All share numbers herein assume, and no adjustment shall be made in respect of, the
one-for-three reverse split of the Stock approved by the Board of Directors on the date of initial
adoption of the Plan.
(cc) Stock
shall mean the Common Stock of the Company.
(dd) Stock Option Agreement
shall mean the agreement between the Company and an Optionee
that contains the terms, conditions and restrictions pertaining to such Option.
(ee) Stock Unit
shall mean a bookkeeping entry representing the equivalent of one Share,
as awarded under the Plan.
(ff) Stock Unit Agreement
shall mean the agreement between the Company and the recipient of
a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit.
(gg) Subsidiary
shall mean any corporation, if the Company and/or one or more other
Subsidiaries own not less than 50% of the total combined voting power of all classes of outstanding
stock of such corporation. A corporation that attains the status of a Subsidiary on a date after
the adoption of the Plan shall be considered a Subsidiary commencing as of such date.
(hh) Total and Permanent Disability
shall mean permanent and total disability as defined by
section 22(e)(3) of the Code.
SECTION 3. ADMINISTRATION.
(a) Committee Composition
. The Plan shall be administered by the Committee. The Committee
shall consist of two or more directors of the Company, who shall be appointed by the Board. In
addition, the composition of the Committee shall satisfy (i) such requirements as the Securities
and Exchange Commission may establish for administrators acting under plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (ii) such requirements as
the Internal Revenue Service may establish for outside directors acting under plans intended to
qualify for exemption under Section 162(m)(4)(C) of the Code.
(b) Committee for Non-Officer Grants
. The Board may also appoint one or more separate
committees of the Board, each composed of one or more directors of the Company who need not satisfy
the requirements of Section 3(a), who may administer the Plan with respect to Employees who are not
considered officers or directors of the Company under Section 16 of the Exchange Act, may grant
Awards under the Plan to such Employees and may determine all terms of such grants. Within the
limitations of the preceding sentence, any reference in the Plan to the Committee shall include
such committee or committees appointed pursuant to the preceding sentence. The Board of Directors
may also authorize one or more officers of the Company to designate Employees, other than officers
under Section 16 of the Exchange Act, to receive Awards and/or to determine the number of such
Awards to be received by such persons; provided, however, that the Board of Directors shall specify
the total number of Awards that such officers may so award.
Genomic Health, Inc.
2005 Stock Incentive Plan
-5-
(c) Committee Procedures
. The Board of Directors shall designate one of the members of the
Committee as chairman. The Committee may hold meetings at such times and places as it shall
determine. The acts of a majority of the Committee members present at meetings at which a quorum
exists, or acts reduced to or approved in writing (including via email) by all Committee members,
shall be valid acts of the Committee.
(d) Committee Responsibilities
. Subject to the provisions of the Plan, the Committee shall
have full authority and discretion to take the following actions:
(i) To interpret the Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan;
(iii) To adopt, amend or terminate sub-plans established for the purpose of satisfying
applicable foreign laws including qualifying for preferred tax treatment under applicable
foreign tax laws;
(iv) To authorize any person to execute, on behalf of the Company, any instrument
required to carry out the purposes of the Plan;
(v) To determine when Awards are to be granted under the Plan;
(vi) To select the Offerees and Optionees;
(vii) To determine the number of Shares to be made subject to each Award;
(viii) To prescribe the terms and conditions of each Award, including (without
limitation) the Exercise Price and Purchase Price, and the vesting or duration of the Award
(including accelerating the vesting of Awards, either at the time of the Award or
thereafter, without the consent of the Participant), to determine whether an Option is to be
classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the
agreement relating to such Award;
(ix) To amend any outstanding Award agreement, subject to applicable legal restrictions
and to the consent of the Participant if the Participants rights or obligations would be
materially impaired;
(x) To prescribe the consideration for the grant of each Award or other right under the
Plan and to determine the sufficiency of such consideration;
(xi) To determine the disposition of each Award or other right under the Plan in the
event of a Participants divorce or dissolution of marriage;
(xii) To determine whether Awards under the Plan will be granted in replacement of
other grants under an incentive or other compensation plan of an acquired business;
Genomic Health, Inc.
2005 Stock Incentive Plan
-6-
(xiii) To correct any defect, supply any omission, or reconcile any inconsistency in
the Plan or any Award agreement;
(xiv) To establish or verify the extent of satisfaction of any performance goals or
other conditions applicable to the grant, issuance, exercisability, vesting and/or ability
to retain any Award; and
(xv) To take any other actions deemed necessary or advisable for the administration of
the Plan.
Subject to the requirements of applicable law, the Committee may designate persons other than
members of the Committee to carry out its responsibilities and may prescribe such conditions and
limitations as it may deem appropriate, except that the Committee may not delegate its authority
with regard to the selection for participation of or the granting of Options or other rights under
the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and
other actions of the Committee shall be final and binding on all Offerees, all Optionees, and all
persons deriving their rights from an Offeree or Optionee. No member of the Committee shall be
liable for any action that he has taken or has failed to take in good faith with respect to the
Plan, any Option, or any right to acquire Shares under the Plan.
SECTION 4. ELIGIBILITY.
(a) General Rule
. Only common-law employees of the Company, a Parent or a Subsidiary shall
be eligible for the grant of ISOs. Only Employees, Consultants and Outside Directors shall be
eligible for the grant of Restricted Shares, Stock Units, Nonstatutory Options or SARs.
(b)
Automatic Grants to Outside Directors.
(i) Each Outside Director who first joins the Board of Directors on or after the
Effective Date, and who was not previously an Employee, shall receive a Nonstatutory Option,
subject to approval of the Plan by the Companys stockholders, to purchase 16,500 Shares
(subject to adjustment under Section 11) on the date of his or her election to the Board of
Directors. Twenty-five percent (25%) of the Shares subject to each Option granted under this
Section 4(b)(i) shall vest and become exercisable on the first anniversary of the date of
grant. The balance of the Shares subject to such Option (i.e. the remaining seventy-five
percent (75%)) shall vest and become exercisable monthly over a three-year period beginning
on the day which is one month after the first anniversary of the date of grant, at a monthly
rate of 2.0833% of the total number of Shares subject to such Option. Notwithstanding the
foregoing, each such Option shall become vested if a Change in Control occurs with respect
to the Company during the Optionees Service.
(ii) On the first business day following the conclusion of each regular annual meeting
of the Companys stockholders, commencing with the annual meeting occurring after the
Effective Date, each Outside Director who was not elected to the Board for the first time at
such meeting and who will continue serving as a member of the Board of Directors thereafter
shall receive an Option to purchase 8,250 Shares (subject to
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adjustment under Section 11), provided that such Outside Director has served on the
Board of Directors for at least six months. Each Option granted under this Section 4(b)(ii)
shall vest and become exercisable on the first anniversary of the date of grant; provided,
however, that each such Option shall become exercisable in full immediately prior to the
next regular annual meeting of the Companys stockholders following such date of grant in
the event such meeting occurs prior to such first anniversary date. Notwithstanding the
foregoing, each Option granted under this Section 4(b)(ii) shall become vested if a Change
in Control occurs with respect to the Company during the Optionees Service.
(iii) The Exercise Price of all Nonstatutory Options granted to an Outside Director
under this Section 4(b) shall be equal to 100% of the Fair Market Value of a Share on the
date of grant, payable in one of the forms described in Section 8(a), (b) or (d).
(iv) All Nonstatutory Options granted to an Outside Director under this Section 4(b)
shall terminate on the earlier of (A) the day before the tenth anniversary of the date of
grant of such Options or (B) the date twelve months after the termination of such Outside
Directors Service for any reason; provided, however, that any such Options that are not
vested upon the termination of the Outside Directors Service as a member of the Board of
Directors for any reason shall terminate immediately and may not be exercised.
(c) Ten-Percent Stockholder
. An Employee who owns more than 10% of the total combined voting
power of all classes of outstanding stock of the Company, a Parent or Subsidiary shall not be
eligible for the grant of an ISO unless such grant satisfies the requirements of Section 422(c)(5)
of the Code.
(d) Attribution Rules
. For purposes of Section 4(c) above, in determining stock ownership, an
Employee shall be deemed to own the stock owned, directly or indirectly, by or for such Employees
brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly,
by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately
by or for its stockholders, partners or beneficiaries.
(e) Outstanding Stock
. For purposes of Section 4(c) above, outstanding stock shall include
all stock actually issued and outstanding immediately after the grant. Outstanding stock shall
not include shares authorized for issuance under outstanding options held by the Employee or by any
other person.
SECTION 5. STOCK SUBJECT TO PLAN.
(a) Basic Limitation
. Shares offered under the Plan shall be authorized but unissued Shares
or treasury Shares. The aggregate number of Shares authorized for issuance as Awards under the Plan
shall not exceed 8,980,000 Shares. The limitations of this Section 5(a) shall be subject to
adjustment pursuant to Section 11. The number of Shares that are subject to Options or other Awards
outstanding at any time under the Plan shall not exceed the number of Shares which then remain
available for issuance under the Plan. The Company, during the term of the
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Plan, shall at all times reserve and keep available sufficient Shares to satisfy the
requirements of the Plan.
(b) Award Limitation
. Subject to the provisions of Section 11, no Participant may receive
Options, SARs, Restricted Shares or Stock Units under the Plan in any calendar year that relate to
more than 1,650,000 Shares.
(c) Additional Shares
. If Restricted Shares or Shares issued upon the exercise of Options are
forfeited, then such Shares shall again become available for Awards under the Plan. If Stock Units,
Options or SARs are forfeited or terminate for any other reason before being exercised, then the
corresponding Shares shall again become available for Awards under the Plan. If Stock Units are
settled, then only the number of Shares (if any) actually issued in settlement of such Stock Units
shall reduce the number available under Section 5(a) and the balance shall again become available
for Awards under the Plan. If SARs are exercised, then only the number of Shares (if any) actually
issued in settlement of such SARs shall reduce the number available in Section 5(a) and the balance
shall again become available for Awards under the Plan.
SECTION 6. RESTRICTED SHARES.
(a) Restricted Stock Agreement
. Each grant of Restricted Shares under the Plan shall be
evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted
Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms
that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements
entered into under the Plan need not be identical.
(b) Payment for Awards
. Restricted Shares may be sold or awarded under the Plan for such
consideration as the Committee may determine, including (without limitation) cash, cash
equivalents, full-recourse promissory notes, past services and future services.
(c) Vesting
. Each Award of Restricted Shares may or may not be subject to vesting. Vesting
shall occur, in full or in installments, upon satisfaction of the conditions specified in the
Restricted Stock Agreement. A Restricted Stock Agreement may provide for accelerated vesting in the
event of the Participants death, disability or retirement or other events. The Committee may
determine, at the time of granting Restricted Shares of thereafter, that all or part of such
Restricted Shares shall become vested in the event that a Change in Control occurs with respect to
the Company.
(d) Voting and Dividend Rights
. The holders of Restricted Shares awarded under the Plan
shall have the same voting, dividend and other rights as the Companys other stockholders. A
Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any
cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to which the dividends
were paid.
(e) Restrictions on Transfer of Shares
. Restricted Shares shall be subject to such rights of
repurchase, rights of first refusal or other restrictions as the Committee may determine.
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Such restrictions shall be set forth in the applicable Restricted Stock Agreement and shall
apply in addition to any general restrictions that may apply to all holders of Shares.
SECTION 7. TERMS AND CONDITIONS OF OPTIONS.
(a) Stock Option Agreement
. Each grant of an Option under the Plan shall be evidenced by a
Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all
applicable terms and conditions of the Plan and may be subject to any other terms and conditions
which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in
a Stock Option Agreement. The Stock Option Agreement shall specify whether the Option is an ISO or
an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not
be identical. Options may be granted in consideration of a reduction in the Optionees other
compensation.
(b) Number of Shares
. Each Stock Option Agreement shall specify the number of Shares that
are subject to the Option and shall provide for the adjustment of such number in accordance with
Section 11.
(c) Exercise Price
. Each Stock Option Agreement shall specify the Exercise Price. The
Exercise Price of an ISO shall not be less than 100% of the Fair Market Value of a Share on the
date of grant, except as otherwise provided in 4(c), and the Exercise Price of an NSO shall not be
less 85% of the Fair Market Value of a Share on the date of grant. Subject to the foregoing in
this Section 7(c), the Exercise Price under any Option shall be determined by the Committee at its
sole discretion. The Exercise Price shall be payable in one of the forms described in Section 8.
(d) Withholding Taxes
. As a condition to the exercise of an Option, the Optionee shall make
such arrangements as the Committee may require for the satisfaction of any federal, state, local or
foreign withholding tax obligations that may arise in connection with such exercise. The Optionee
shall also make such arrangements as the Committee may require for the satisfaction of any federal,
state, local or foreign withholding tax obligations that may arise in connection with the
disposition of Shares acquired by exercising an Option.
(e) Exercisability and Term
. Each Stock Option Agreement shall specify the date when all or
any installment of the Option is to become exercisable. The Stock Option Agreement shall also
specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years
from the date of grant (five years for Employees described in Section 4(c)). A Stock Option
Agreement may provide for accelerated exercisability in the event of the Optionees death,
disability, or retirement or other events and may provide for expiration prior to the end of its
term in the event of the termination of the Optionees Service. Options may be awarded in
combination with SARs, and such an Award may provide that the Options will not be exercisable
unless the related SARs are forfeited. Subject to the foregoing in this Section 7(e), the Committee
at its sole discretion shall determine when all or any installment of an Option is to become
exercisable and when an Option is to expire.
(f) Exercise of Options
. Each Stock Option Agreement shall set forth the extent to which the
Optionee shall have the right to exercise the Option following termination of the
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Optionees Service with the Company and its Subsidiaries, and the right to exercise the Option
of any executors or administrators of the Optionees estate or any person who has acquired such
Option(s) directly from the Optionee by bequest or inheritance. Such provisions shall be determined
in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to
the Plan, and may reflect distinctions based on the reasons for termination of Service.
(g) Effect of Change in Control
. The Committee may determine, at the time of granting an
Option or thereafter, that such Option shall become exercisable as to all or part of the Shares
subject to such Option in the event that a Change in Control occurs with respect to the Company.
(h) No Rights as a Stockholder
. An Optionee, or a transferee of an Optionee, shall have no
rights as a stockholder with respect to any Shares covered by his Option until the date of the
issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided
in Section 11.
(i) Modification, Extension and Renewal of Options
. Within the limitations of the Plan, the
Committee may modify, extend or renew outstanding options or may accept the cancellation of
outstanding options (to the extent not previously exercised), whether or not granted hereunder, in
return for the grant of new Options for the same or a different number of Shares and at the same or
a different exercise price, or in return for the grant of the same or a different number of Shares.
The foregoing notwithstanding, no modification of an Option shall, without the consent of the
Optionee, materially impair his or her rights or obligations under such Option.
(j) Restrictions on Transfer of Shares
. Any Shares issued upon exercise of an Option shall
be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and
other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in
the applicable Stock Option Agreement and shall apply in addition to any general restrictions that
may apply to all holders of Shares.
(k) Buyout
Provisions
. The Committee may at any time (a) offer to buy out for a payment in
cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash
out an Option previously granted, in either case at such time and based upon such terms and
conditions as the Committee shall establish.
SECTION 8. PAYMENT FOR SHARES.
(a) General Rule
. The entire Exercise Price or Purchase Price of Shares issued under the
Plan shall be payable in lawful money of the United States of America at the time when such Shares
are purchased, except as provided in Section 8(b) through Section 8(g) below.
(b) Surrender of Stock
. To the extent that a Stock Option Agreement so provides, payment may
be made all or in part by surrendering, or attesting to the ownership of, Shares which have already
been owned by the Optionee or his representative. Such Shares shall be valued at their Fair Market
Value on the date when the new Shares are purchased under the Plan. The Optionee shall not
surrender, or attest to the ownership of, Shares in payment of the Exercise
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Price if such action would cause the Company to recognize compensation expense (or additional
compensation expense) with respect to the Option for financial reporting purposes.
(c) Services Rendered
. At the discretion of the Committee, Shares may be awarded under the
Plan in consideration of services rendered to the Company or a Subsidiary prior to the award. If
Shares are awarded without the payment of a Purchase Price in cash, the Committee shall make a
determination (at the time of the award) of the value of the services rendered by the Offeree and
the sufficiency of the consideration to meet the requirements of Section 6(b).
(d) Cashless Exercise
. To the extent that a Stock Option Agreement so provides, payment may
be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable
direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to
the Company in payment of the aggregate Exercise Price.
(e) Exercise/Pledge
. To the extent that a Stock Option Agreement so provides, payment may be
made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction
to a securities broker or lender to pledge Shares, as security for a loan, and to deliver all or
part of the loan proceeds to the Company in payment of the aggregate Exercise Price.
(f) Promissory Note
. To the extent that a Stock Option Agreement or Restricted Stock
Agreement so provides, payment may be made all or in part by delivering (on a form prescribed by
the Company) a full-recourse promissory note.
(g) Other Forms of Payment
. To the extent that a Stock Option Agreement or Restricted Stock
Agreement so provides, payment may be made in any other form that is consistent with applicable
laws, regulations and rules.
(h) Limitations under Applicable Law
. Notwithstanding anything herein or in a Stock Option
Agreement or Restricted Stock Agreement to the contrary, payment may not be made in any form that
is unlawful, as determined by the Committee in its sole discretion.
SECTION 9. STOCK APPRECIATION RIGHTS.
(a) SAR Agreement
. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement
between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan
and may be subject to any other terms that are not inconsistent with the Plan. The provisions of
the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted
in consideration of a reduction in the Optionees other compensation.
(b) Number of Shares
. Each SAR Agreement shall specify the number of Shares to which the SAR
pertains and shall provide for the adjustment of such number in accordance with Section 11.
(c) Exercise Price
. Each SAR Agreement shall specify the Exercise Price. A SAR Agreement may
specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is
outstanding.
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(d) Exercisability and Term
. Each SAR Agreement shall specify the date when all or any
installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of
the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionees
death, disability or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionees service. SARs may be awarded in
combination with Options, and such an Award may provide that the SARs will not be exercisable
unless the related Options are forfeited. A SAR may be included in an ISO only at the time of grant
but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may
provide that it will be exercisable only in the event of a Change in Control.
(e) Effect of Change in Control
. The Committee may determine, at the time of granting a SAR
or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such
SAR in the event that a Change in Control occurs with respect to the Company.
(f) Exercise of SARs
. Upon exercise of a SAR, the Optionee (or any person having the right
to exercise the SAR after his or her death) shall receive from the Company (a) Shares, (b) cash or
(c) a combination of Shares and cash, as the Committee shall determine. The amount of cash and/or
the Fair Market Value of Shares received upon exercise of SARs shall, in the aggregate, be equal to
the amount by which the Fair Market Value (on the date of surrender) of the Shares subject to the
SARs exceeds the Exercise Price.
(g) Modification or Assumption of SARs
. Within the limitations of the Plan, the Committee
may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs
(whether granted by the Company or by another issuer) in return for the grant of new SARs for the
same or a different number of shares and at the same or a different exercise price. The foregoing
notwithstanding, no modification of a SAR shall, without the consent of the holder, materially
impair his or her rights or obligations under such SAR.
(h) Buyout Provisions
. The Committee may at any time (a) offer to buy out for a payment in
cash or cash equivalents a SAR previously granted, or (b) authorize an Optionee to elect to cash
out a SAR previously granted, in either case at such time and based upon such terms and conditions
as the Committee shall establish.
SECTION 10. STOCK UNITS.
(a) Stock Unit Agreement
. Each grant of Stock Units under the Plan shall be evidenced by a
Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to
all applicable terms of the Plan and may be subject to any other terms that are not inconsistent
with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need
not be identical. Stock Units may be granted in consideration of a reduction in the recipients
other compensation.
(b) Payment for Awards
. To the extent that an Award is granted in the form of Stock Units,
no cash consideration shall be required of the Award recipients.
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(c) Vesting Conditions
. Each Award of Stock Units may or may not be subject to vesting.
Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in
the Stock Unit Agreement. A Stock Unit Agreement may provide for accelerated vesting in the event
of the Participants death, disability or retirement or other events. The Committee may determine,
at the time of granting Stock Units or thereafter, that all or part of such Stock Units shall
become vested in the event that a Change in Control occurs with respect to the Company.
(d) Voting and Dividend Rights
. The holders of Stock Units shall have no voting rights.
Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committees
discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be
credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of
dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of
both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the
same conditions and restrictions (including without limitation, any forfeiture conditions) as the
Stock Units to which they attach.
(e) Form and Time of Settlement of Stock Units.
Settlement of vested Stock Units may be made
in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee.
The actual number of Stock Units eligible for settlement may be larger or smaller than the number
included in the original Award, based on predetermined performance factors. Methods of converting
Stock Units into cash may include (without limitation) a method based on the average Fair Market
Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or
in installments. The distribution may occur or commence when all vesting conditions applicable to
the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The
amount of a deferred distribution may be increased by an interest factor or by dividend
equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be
subject to adjustment pursuant to Section 11.
(f) Death of Recipient.
Any Stock Units Award that becomes payable after the recipients
death shall be distributed to the recipients beneficiary or beneficiaries. Each recipient of a
Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by
filing the prescribed form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipients death. If no beneficiary
was designated or if no designated beneficiary survives the Award recipient, then any Stock Units
Award that becomes payable after the recipients death shall be distributed to the recipients
estate.
(g) Creditors Rights.
A holder of Stock Units shall have no rights other than those of a
general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the
Company, subject to the terms and conditions of the applicable Stock Unit Agreement.
SECTION 11. ADJUSTMENT OF SHARES.
(a) Adjustments
. In the event of a subdivision of the outstanding Stock, a declaration of a
dividend payable in Shares, a declaration of a dividend payable in a form other than Shares
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in an amount that has a material effect on the price of Shares, a combination or consolidation
of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall make appropriate and
equitable adjustments in:
(i) The number of Options, SARs, Restricted Shares and Stock Units available for future
Awards under Section 5;
(ii) The limitations set forth in Section 5(b);
(iii) The number of NSOs to be granted to Outside Directors under Section 4(b);
(iv) The number of Shares covered by each outstanding Option and SAR;
(v) The Exercise Price under each outstanding Option and SAR; and
(vi) The number of Stock Units included in any prior Award which has not yet been
settled.
Except as provided in this Section 11, a Participant shall have no rights by reason of any issue by
the Company of stock of any class or securities convertible into stock of any class, any
subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or
any other increase or decrease in the number of shares of stock of any class.
(b) Dissolution or Liquidation
. To the extent not previously exercised or settled, Options,
SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the
Company.
(c) Reorganizations.
In the event that the Company is a party to a merger or other
reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization.
Such agreement shall provide for:
(i) The continuation of the outstanding Awards by the Company, if the Company is a
surviving corporation;
(ii) The assumption of the outstanding Awards by the surviving corporation or its
parent or subsidiary;
(iii) The substitution by the surviving corporation or its parent or subsidiary of its
own awards for the outstanding Awards;
(iv) Full exercisability or vesting and accelerated expiration of the outstanding
Awards; or
(v) Settlement of the full value of the outstanding Awards in cash or cash equivalents
followed by cancellation of such Awards.
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(d) Reservation of Rights
. Except as provided in this Section 11, an Optionee or Offeree
shall have no rights by reason of any subdivision or consolidation of shares of stock of any class,
the payment of any dividend or any other increase or decrease in the number of shares of stock of
any class. Any issue by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an
Option pursuant to the Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or business structure, to
merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or
assets.
SECTION 12. DEFERRAL OF AWARDS.
(a) Committee Powers
. The Committee (in its sole discretion) may permit or require a
Participant to:
(i) Have cash that otherwise would be paid to such Participant as a result of the
exercise of a SAR or the settlement of Stock Units credited to a deferred compensation
account established for such Participant by the Committee as an entry on the Companys
books;
(ii) Have Shares that otherwise would be delivered to such Participant as a result of
the exercise of an Option or SAR converted into an equal number of Stock Units; or
(iii) Have Shares that otherwise would be delivered to such Participant as a result of
the exercise of an Option or SAR or the settlement of Stock Units converted into amounts
credited to a deferred compensation account established for such Participant by the
Committee as an entry on the Companys books. Such amounts shall be determined by reference
to the Fair Market Value of such Shares as of the date when they otherwise would have been
delivered to such Participant.
(b) General Rules
. A deferred compensation account established under this Section 12 may be
credited with interest or other forms of investment return, as determined by the Committee. A
Participant for whom such an account is established shall have no rights other than those of a
general creditor of the Company. Such an account shall represent an unfunded and unsecured
obligation of the Company and shall be subject to the terms and conditions of the applicable
agreement between such Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Committee (in its sole discretion) may establish rules, procedures and
forms pertaining to such Awards, including (without limitation) the settlement of deferred
compensation accounts established under this Section 12.
SECTION 13. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards may be settled in the
form of Shares issued under this Plan. Such Shares shall be treated for all purposes under the Plan
like Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Shares
available under Section 5.
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SECTION 14. PAYMENT OF DIRECTORS FEES IN SECURITIES.
(a) Effective Date
. No provision of this Section 14 shall be effective unless and until the
Board has determined to implement such provision.
(b) Elections to Receive NSOs, Restricted Shares or Stock Units
. An Outside Director may
elect to receive his or her annual retainer payments and/or meeting fees from the Company in the
form of cash, NSOs, Restricted Shares or Stock Units, or a combination thereof, as determined by
the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Section 14 shall be filed with the Company on the prescribed form.
(c) Number and Terms of NSOs, Restricted Shares or Stock Units
. The number of NSOs,
Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and
meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the
Board. The terms of such NSOs, Restricted Shares or Stock Units shall also be determined by the
Board.
SECTION 15. LEGAL AND REGULATORY REQUIREMENTS.
Shares shall not be issued under the Plan unless the issuance and delivery of such Shares
complies with (or is exempt from) all applicable requirements of law, including (without
limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, state securities laws and regulations and the regulations of any stock exchange on
which the Companys securities may then be listed, and the Company has obtained the approval or
favorable ruling from any governmental agency which the Company determines is necessary or
advisable. The Company shall not be liable to a Participant or other persons as to: (a) the
non-issuance or sale of Shares as to which the Company has been unable to obtain from any
regulatory body having jurisdiction the authority deemed by the Companys counsel to be necessary
to the lawful issuance and sale of any Shares under the Plan; and (b) any tax consequences
expected, but not realized, by any Participant or other person due to the receipt, exercise or
settlement of any Award granted under the Plan.
SECTION 16. WITHHOLDING TAXES.
(a) General
. To the extent required by applicable federal, state, local or foreign law, a
Participant or his or her successor shall make arrangements satisfactory to the Company for the
satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company
shall not be required to issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.
(b) Share Withholding
. The Committee may permit a Participant to satisfy all or part of his
or her withholding or income tax obligations by having the Company withhold all or a portion of any
Shares that otherwise would be issued to him or her or by surrendering all or a portion of any
Shares that he or she previously acquired. Such Shares shall be valued at their Fair Market Value
on the date when taxes otherwise would be withheld in cash. In no event may a Participant have
Shares withheld that would otherwise be issued to him or her in excess of the number necessary to
satisfy the legally required minimum tax withholding.
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SECTION 17. OTHER PROVISIONS APPLICABLE TO AWARDS.
(a) Transferability
. Unless the agreement evidencing an Award (or an amendment thereto
authorized by the Committee) expressly provides otherwise, no Award granted under this Plan, nor
any interest in such Award, may be sold, assigned, conveyed, gifted, pledged, hypothecated or
otherwise transferred in any manner (prior to the vesting and lapse of any and all restrictions
applicable to Shares issued under such Award), other than by will or the laws of descent and
distribution; provided, however, that an ISO may be transferred or assigned only to the extent
consistent with Section 422 of the Code. Any purported assignment, transfer or encumbrance in
violation of this Section 17(a) shall be void and unenforceable against the Company.
(b) Qualifying Performance Criteria
. The number of Shares or other benefits granted, issued,
retainable and/or vested under an Award may be made subject to the attainment of performance goals
for a specified period of time relating to one or more of the following performance criteria,
either individually, alternatively or in any combination, applied to either the Company as a whole
or to a business unit or Subsidiary, either individually, alternatively or in any combination, and
measured either annually or cumulatively over a period of years, on an absolute basis or relative
to a pre-established target, to previous years results or to a designated comparison group or
index, in each case as specified by the Committee in the Award: (a) cash flow, (b) earnings per
share, (c) earnings before interest, taxes and amortization, (d) return on equity, (e) total
stockholder return, (f) share price performance, (g) return on capital, (h) return on assets or net
assets, (i) revenue, (j) income or net income, (k) operating income or net operating income, (l)
operating profit or net operating profit, (m) operating margin or profit margin, (n) return on
operating revenue, (o) return on invested capital, or (p) market segment shares (Qualifying
Performance Criteria). The Committee may appropriately adjust any evaluation of performance under
a Qualifying Performance Criteria to exclude any of the following events that occurs during a
performance period: (i) asset write-downs, (ii) litigation or claim judgments or settlements, (iii)
the effect of changes in tax law, accounting principles or other such laws or provisions affecting
reported results, (iv) accruals for reorganization and restructuring programs and (v) any
extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or
in managements discussion and analysis of financial condition and results of operations appearing
in the Companys annual report to stockholders for the applicable year. If applicable, the
Committee shall determine the Qualifying Performance Criteria not later than the 90
th
day of the performance period, and shall determine and certify, for each Participant, the extent to
which the Qualifying Performance Criteria have been met. The Committee may not in any event
increase the amount of compensation payable under the Plan upon the attainment of a Qualifying
Performance Goal to a Participant who is a covered employee within the meaning of Section 162(m)
of the Code.
SECTION 18. NO EMPLOYMENT RIGHTS.
No provision of the Plan, nor any right or Option granted under the Plan, shall be construed
to give any person any right to become, to be treated as, or to remain an Employee. The Company and
its Subsidiaries reserve the right to terminate any persons Service at any time and for any
reason, with or without notice.
Genomic Health, Inc.
2005 Stock Incentive Plan
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SECTION 19. DURATION AND AMENDMENTS.
(a) Term of the Plan
. The Plan, as set forth herein, shall terminate automatically on
January 27, 2019 and may be terminated on any earlier date pursuant to Subsection (b) below.
(b) Right to Amend or Terminate the Plan
. The Board of Directors may amend or terminate the
Plan at any time and from time to time. Rights and obligations under any Award granted before
amendment of the Plan shall not be materially impaired by such amendment, except with consent of
the Participant. An amendment of the Plan shall be subject to the approval of the Companys
stockholders only to the extent required by applicable laws, regulations or rules.
(c) Effect of Termination
. No Awards shall be granted under the Plan after the termination
thereof. The termination of the Plan shall not affect Awards previously granted under the Plan.
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Genomic Health, Inc.
2005 Stock Incentive Plan
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SECTION 20. EXECUTION.
To record the adoption of the Plan, as amended and restated, by the Board of Directors, the
Company has caused its authorized officer to execute the same.
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GENOMIC HEALTH, INC.
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By
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Name
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Title
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Genomic Health, Inc.
2005 Stock Incentive Plan
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