UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended:
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number: 000-51541
GENOMIC HEALTH, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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77-0552594
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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301 Penobscot Drive
Redwood City, California
(Address of principal
executive offices)
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94063
(Zip
Code)
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(650) 556-9300
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered:
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Common Stock
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The NASDAQ Stock Market
LLC
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Securities registered pursuant to Section 12(g) of the
Act and Title of Class:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (check one):
Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
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No
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As of June 30, 2006, the aggregate market value of voting
and non-voting common stock held by non-affiliates of the
registrant was approximately $288.5 million, based on the
closing price of the common stock as reported on the NASDAQ
Global Market for that date.
There were 24,563,212 shares of the registrants
Common Stock issued and outstanding on February 28, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial
Ownership Reporting Compliance), 11, 12, 13 and 14 of
Part III incorporate by reference information from the
registrants proxy statement to be filed with the
Securities and Exchange Commission in connection with the
solicitation of proxies for the registrants 2007 Annual
Meeting of Stockholders to be held on June 12, 2007.
PART I
ITEM 1.
Business
.
This Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
When used in this Report, the words expects,
anticipates, intends,
estimates, plans, believes,
and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods
and include statements about our expectation that, for the
foreseeable future, substantially all of our revenues will be
derived from Oncotype DX; the factors we believe to be driving
demand for Oncotype DX and our ability to sustain such demand;
our expectation that our research and development expense levels
will remain high as we seek to enhance Oncotype DX and develop
new tests; our expectation that our general and administrative
and sales and marketing expenses will increase and our
anticipated uses of those funds; our expectations regarding
capital expenditures; the factors that may impact our financial
results; the extent and duration of our net losses; our ability
to comply with the requirements of being a public company; our
ability to attract and retain experienced personnel; the impact
changes in healthcare policy or regulation could have on our
business; the adequacy of our product liability insurance; our
ability to recognize revenues other than on a cash basis and
when we expect we will recognize a majority of revenues upon
providing tests; the level of investment in our sales force; the
capacity of our commercial laboratory to process tests and our
expected expanded capacity; our dependence on collaborative
relationships and the success of those relationships; whether
any tests will result from our collaborations; our belief that
clinical results support our development of a test for colon
cancer; the applicability of clinical results to actual
outcomes; our estimates and assumptions with respect to disease
incidence; the ability of our test to impact treatment
decisions; the economic benefits of our test to the healthcare
system, our compliance with federal, state and foreign
regulatory requirements; our expectation that product revenues
will increase; how we intend to spend our existing cash and cash
equivalents and how long we expect our existing cash to last;
our expected future sources of cash; our plans to borrow
additional amounts under existing or new financing arrangements;
the potential impact resulting from the regulation of Oncotype
DX by the U.S. Food and Drug Administration, or FDA, and
our belief that Oncotype DX is properly regulated under the
Clinical Laboratory Improvement Amendments of 1988, or CLIA; our
beliefs regarding reimbursement for Medicare inpatients; our
plans to pursue reimbursement on a
case-by-case
basis; our ability, and expectations as to the amount of time it
will take, to achieve successful reimbursement from third-party
payors and government insurance programs; our intent to enter
into additional foreign distribution arrangements; the factors
that we believe will drive the establishment of coverage
policies; the impact of changing interest rates; the amount of
future revenues that we may derive from Medicare patients or
categories of patients; increases in patient and physician
demand resulting from our direct sales approach; plans for
enhancements of Oncotype DX to address different patient
populations of breast cancer or to report single gene results;
plans for, and the timeframe for the development and commercial
launch of, future tests addressing multiple cancers; our
expectation regarding when we may move another potential test
into development; the outcome or success of clinical trials; our
intellectual property and our strategies regarding filing
additional patent applications to strengthen our intellectual
property rights; the impact of accounting pronouncements and our
critical accounting policies, estimates, models and assumptions
on our financial results; our anticipated cash needs and our
estimates regarding our capital requirements and our needs for
additional financing; and anticipated trends and challenges in
our business and the markets in which we operate.
Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those expected. These risks and uncertainties
include, but are not limited to, those risks discussed in
Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays
in research and development efforts; the risk that we may not
obtain reimbursement for our existing test and any future tests
we may develop; the risks and uncertainties associated with the
regulation of our test by FDA; the ability to compete against
third parties; our ability to obtain capital when needed; and
our history of operating losses. These forward-looking
statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to update to
any forward-looking statements contained herein to reflect any
change in the Companys expectations with regard thereto or
any change in events, conditions or circumstances on which any
such statement is based.
3
This Annual Report contains statistical data that we obtained
from reports generated by the American Cancer Society and by
DaVinci Oncology Specialists, a division of The Mattson Jack
Group, Inc., or that we derived from information contained in
these reports. These reports generally indicate that they have
obtained their information from sources believed to be reliable
but do not guarantee the accuracy and completeness of their
information. Although we believe that the reports are reliable,
we have not independently verified their data.
All references to Genomic Health, we,
us, or our mean Genomic Health, Inc.
The Genomic Health logo, Oncotype, Oncotype DX and Recurrence
Score are trademarks or registered trademarks of Genomic Health,
Inc. We also refer to trademarks of other corporations and
organizations in this Report.
Company
Overview
Genomic Health, Inc. was formed as a Delaware corporation in
August 2000. We are a life science company focused on the
development and commercialization of genomic-based clinical
diagnostic tests for cancer that allow physicians and patients
to make individualized treatment decisions. In January 2004, we
launched our first test under the brand name Onco
type
DX
for early stage breast cancer patients. We believe that
Onco
type
DX is the first genomic test with clinical
evidence supporting its ability to predict the likelihood of
cancer recurrence, the likelihood of patient survival within
10 years of diagnosis and the likelihood of chemotherapy
benefit. Our initial test is focused on patients with early
stage, node negative, or N−, estrogen receptor positive,
or ER+, breast cancer who will be treated with tamoxifen, a
frequently used hormonal therapy. Of the 240,000 patients
who were expected to be diagnosed with breast cancer in the
United States in 2006, approximately half were predicted to be
early stage breast cancer patients that are N−and ER+.
Many of the diagnostic factors currently used in connection with
early stage breast cancer are subjective, have limited
capability to predict future cancer recurrence and are not
useful in predicting chemotherapy benefit. We believe that the
use of Onco
type
DX can provide a deeper understanding of
each patients breast cancer and therefore should result in
better informed and more appropriate treatment decisions.
We developed Onco
type
DX using a multi-step approach,
conducting clinical studies on tumor specimens from more than
2,600 breast cancer patients. Our technology provides
quantitative gene expression information for each patients
tumor, which we refer to as an oncotype. When an oncotype is
correlated with known clinical outcomes, it can be useful in
predicting the likelihood of an individual patients tumor
behavior. Onco
type
DX for breast cancer utilizes a
21-gene panel whose composite gene expression profile can be
represented by a single quantitative score, which we call a
Recurrence Score. The higher the Recurrence Score, the more
aggressive the tumor and the more likely it is to recur. The
lower the Recurrence Score, the less aggressive the tumor and
the less likely it is to recur. Onco
type
DX has been
clinically validated for N−, ER+, tamoxifen-treated breast
cancer patients by two large independent studies. Moreover, we
have demonstrated that the Recurrence Score correlates with
chemotherapy benefit, and we are undertaking further studies to
support this finding. Onco
type
DX is commercially
available at a list price of $3,460 through our laboratory
located in Redwood City, California, which is accredited under
the Clinical Laboratory Improvement Amendments of 1988, or CLIA,
and by the College of American Pathologists, or CAP. Since the
commercial launch of Onco
type
DX in 2004 through
December 31, 2006, over 21,500 tests had been delivered for
use in treatment planning by more than 5,000 physicians.
Substantially all of our tests to date have been delivered to
physicians in the United States. We believe that each year we
may experience decreased demand for our test in the summer
months of July and August, which may be attributed to
physicians, surgeons and patients scheduling vacations during
this time. One major customer accounted for approximately 47% of
our product revenue for the year ended December 31, 2006;
no revenue from this customer was recorded in 2005. Another
major customer accounted for approximately 4% and 11% of our
revenue in 2006 and 2005, respectively.
Scientific
Background
Limits
of Existing Approaches for Determining Cancer
Treatments
Cancer is a group of complex molecular diseases characterized by
the uncontrolled growth and spread of abnormal cells resulting
from genetic mutations or damage that can severely disrupt
normal body functions. In
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2006, approximately 1.4 million people in the United States
were expected to be diagnosed with cancer. Common types of
cancer include breast, prostate, lung and colon. Cancers are
difficult to treat because each type responds differently to
treatments, depending upon the individual and the type and
location of the cancer.
To treat cancer effectively, physicians diagnose and gauge the
stage of a patients disease to determine the best course
of therapy. The most common practice used to diagnose cancer is
through pathologic evaluation of tumors under a microscope. For
solid tumors, tumor tissue is typically removed through surgery
or needle biopsy, fixed in a chemical preservative and embedded
in paraffin wax. A pathologist places thin sections of this
fixed paraffin embedded, or FPE, tissue onto glass slides so it
can be studied under a microscope. In many cases, pathologists
also use molecular staining techniques, including
protein-specific staining, to improve the quality of their
diagnosis. After visually examining the sample, the pathologist
judges whether the biopsy contains normal or cancerous cells.
The pathologist may also grade the tumor based on how aggressive
the cancer cells appear under the microscope.
Once a pathologist diagnoses cancer, the patients
physician determines the stage of the cancer based on further
analysis of the patients condition using a variety of
clinical measures, including the pathology grade, size of the
tumor, how deeply the tumor has invaded tissues at the site of
origin and the extent of any invasion into surrounding organs,
lymph nodes or distant sites. Patient history, physical signs,
symptoms and information obtained from existing tests are also
evaluated and considered.
Physicians currently rely primarily on tumor pathology grade and
stage when predicting whether a cancer will recur, which is the
key determinant in treatment decisions. Because tumor pathology
and staging are heavily dependent on visual assessment and human
interpretation, physicians and patients make treatment decisions
often using subjective and qualitative information that may not
reflect the molecular nature of the patients cancer. As a
result, many patients are misclassified as high risk when they
are low risk for recurrence or low risk when they are high risk
for recurrence, resulting in over-treatment for some and
under-treatment for others.
For many cancer patients, chemotherapy is commonly used as a
treatment. Chemotherapy involves the use of highly toxic drugs
to kill cancer cells. It is often given after surgery to kill
remaining cancer cells that could not be physically removed, to
reduce the risk of disease recurrence. Chemotherapy can take
months to complete and can dramatically impact a patients
quality of life. Patients usually experience a wide range of
acute toxicities, including infection, pain in the mouth and
throat, weight loss, fatigue, hair loss, rashes and injection
site reactions. In addition, long-term effects of chemotherapy
can include cognitive impairment, cardiac tissue damage,
infertility, disease of the central nervous system, chronic
fatigue, secondary malignancies and personality changes. Overall
benefits of chemotherapy vary significantly across cancer
populations, and the benefit of treatment may not always justify
the cost of the therapy or the physical and mental burden
patients endure.
Use of
Genomics to Understand Cancer
Genomics is the study of complex sets of genes, their expression
and their function in a particular organism. A gene is a set of
instructions or information that is embedded in the DNA of a
cell. For a gene to be turned on or expressed by a
cell, the cell must first transcribe a copy of its DNA sequence
into messenger RNA, which is then translated by the cell into
protein. Proteins are large molecules that control most
biological processes and make up molecular pathways, which cells
use to carry out their specific functions.
Genomics can also be used to understand diseases at the
molecular level. Diseases can occur when mutated or defective
genes inappropriately activate or block molecular pathways that
are important for normal biological function. Disease can result
from inheriting mutated genes or from developing mutations in
otherwise normal cells. Such mutations can be the cause of
cancer. The ability to detect a mutation or its functional
results and to understand the process by which the mutation
contributes to disease is crucial to understanding the molecular
mechanisms of a disease.
A common form of genomic analysis is the measurement of gene
expression, or the presence and amount of one or more RNA
sequences in a particular cell or tissue. Mutations may change
the gene expression pattern of a cell as the cell responds to an
altered genetic code. Quantifying the differences in gene
expression has become a common way to study the behavior of an
altered cell. This method allows for the measurement of the
expression of single or multiple genes. These expression levels
can be correlated with disease and clinical outcomes.
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Advances in genomic technology have accelerated the rate and
lowered the cost of gene expression analysis, thus providing
unprecedented opportunity for clinical utility. We believe gene
expression technology has the potential to improve the quality
of diagnosis and treatment of disease by arming patients and
physicians with an understanding of disease at a molecular level
that is specific to each patient.
Cancer results from alterations in cells caused by the molecular
changes of mutated genes. The behavior of cancer is dependent on
many different genes and how they interact. Cancer is
complicated and it may not be possible to identify a single gene
that adequately signals a more aggressive or less aggressive
type of cancer. The ability to analyze multiple genes expressed
by the tumor provides more valuable information, which enables
individualized cancer assessment and treatment.
The key to utilizing genomics in cancer is identifying specific
sets of genes and gene interactions that are important for
diagnosing different subsets of cancers. Studies can be
performed which link response to therapy or the likelihood of
recurrence to the pattern of gene expression in tumors. These
results can then be used to develop tests that quantify gene
expression of an individuals tumor, allowing physicians to
better understand what treatments are most likely to work for an
individual patient or how likely a cancer is to recur.
Our
Solution
Our genomic-based diagnostic approach correlates gene expression
information to clinical outcomes and provides information
designed to improve treatment decisions for cancer patients. We
have optimized technology for quantitative gene expression on
FPE tissue by developing methods and processes for screening
hundreds of genes at a time using minimal amounts of tissue.
This technology allows us to analyze archived samples of tissue,
retained by hospitals for most cancer patients, to correlate
gene expression with known clinical outcomes. Once we have
established and validated a test, we can then analyze a
patients tumor and correlate the result to known clinical
outcomes. As a result, each tumors gene expression can be
quantified and correlated with responsiveness to therapy or the
likelihood of cancer recurrence or progression. Onco
type
DX, our first clinically validated product, uses this
quantitative molecular pathology approach to provide an
individualized analysis of each patients tumor.
We believe that our multi-gene analysis, as opposed to
single-gene analysis, provides a more powerful approach to
distinguish tumors as being more or less likely to recur or
progress. Furthermore, as shown in breast cancer, our approach
can be used to determine whether a cancer is more or less likely
to benefit from therapy. This information ultimately allows the
physician and patient to choose a course of treatment that is
individualized for each patient.
Our solution fits within current clinical practice and
therapeutic protocols, facilitating product adoption. We analyze
tissues as they are currently handled, processed and stored by
clinical pathology laboratories. Once a patient is diagnosed
with breast cancer and a physician orders Onco
type
DX,
the pathology lab provides us with the tumor block or thin
sections from the biopsy specimen utilized for the diagnosis.
Because the specimens are chemically preserved and embedded in
paraffin wax, they require no special handling and can be sent
by overnight mail to our laboratory in California. We believe
this provides an advantage over tests using fresh or frozen
tissue that require special handling, such as shipping frozen
tissue on dry ice. We typically analyze the tissue and deliver
our results to the treating physician within 10 to 14 days
of receipt of the tissue sample. This is within the crucial
decision window after the tumor has been surgically removed and
before the patient and the treating physician discuss additional
treatment options.
We believe our solution provides information that has the
following benefits:
Improved Quality of Treatment Decisions.
We
believe our approach to genomic-based cancer analysis improves
the quality of cancer treatment decisions by providing an
individualized analysis of each patients tumor that is
correlated to clinical outcome. Our approach represents a
substantial departure from existing approaches to treatment,
which often use subjective, anatomic and qualitative factors to
determine treatments. Onco
type
DX has been shown in
clinical studies to classify many patients into recurrence risk
categories different from classifications based on current
guidelines. Thus, our solution enables patients and physicians
to make more informed decisions about treatment risk-benefit
considerations and, consequently, design an individualized
treatment plan.
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Improved Economics of Cancer Care.
We believe
that improving the quality of treatment decisions can result in
significant economic benefits. In early stage breast cancer, our
data shows that many patients are misclassified as high or low
risk under existing treatment guidelines. Many low risk patients
misclassified as high risk receive toxic and expensive
chemotherapy treatment regimens. Chemotherapy and related costs
may exceed $20,000, as compared to Onco
type
DXs
list price of $3,460. On the other hand, some high risk patients
misclassified as low risk are not provided chemotherapy
treatment, possibly necessitating future treatment costing up to
$50,000 or more if the cancer recurs.
Oncotype
DX
Onco
type
DX uses quantitative molecular pathology to
improve cancer treatment decisions. We offer Onco
type
DX
as a clinical laboratory test, where we analyze tumor tissue
samples in our laboratory and provide physicians with genomic
information specific to the patients tumor. Early stage
breast cancer is the first patient population where we have
commercialized a genomic test that has been shown clinically to
predict the likelihood of cancer recurrence, the likelihood of
patient survival within 10 years of diagnosis and the
likelihood of chemotherapy benefit.
Our technology provides quantitative gene expression information
for each patients tumor, which we refer to as an oncotype.
When an oncotype is correlated with known clinical outcomes, it
can be useful in predicting the likelihood of an individual
patients tumor behavior. This allows the physician and
patient to address key issues such as risk of disease recurrence
or progression, likelihood of long-term survival and potential
benefit from chemotherapy or other treatments. In breast cancer,
we developed our gene panel by narrowing the field of the
approximately 25,000 human genes down to 250 cancer-related
genes through review of existing research literature and
computer analysis of genomic databases. We evaluated the 250
genes in three independent clinical studies to identify a
21-gene panel whose composite gene expression profile can be
represented by a single quantitative score, which we call a
Recurrence Score. The higher the Recurrence Score, the more
aggressive the tumor and the more likely it is to recur. The
lower the Recurrence Score, the less aggressive the tumor and
the less likely it is to recur. Moreover, we have demonstrated
that the Recurrence Score also correlates with the likelihood of
chemotherapy benefit, and we are undertaking further studies to
support this finding.
Oncotype
DX for Breast Cancer
Approximately 240,000 new cases of breast cancer were diagnosed
in the United States in 2006. Following diagnosis, a physician
determines the stage of the breast cancer by examining the
following:
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the size of the tumor,
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node status, referred to as node positive, or N+, where the
tumor has spread to the lymph nodes, and node negative, or
N−, where the tumor has not spread to the lymph
nodes, and
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the extent to which the cancer has spread to other parts of the
body.
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Breast cancer tumors are classified as
stage I, II, III or IV. Stage I and II are
generally referred to as early stage breast cancer, and
stage III and IV are generally referred to as
late-stage breast cancer. Standard treatment guidelines weigh
the stage of the cancer and additional factors to predict cancer
recurrence and determine treatment protocol such as:
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the presence or absence of estrogen receptors, referred to as
estrogen receptor positive, or ER+, where estrogen receptors are
present, and estrogen receptor negative, or ER−, where
estrogen receptors are not present,
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the abundance of human epidermal growth factor
receptor-type 2, or HER2, genes or protein in the tumor,
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the age of the patient, and
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the histological type and grading of the tumor as reported by
the pathologist.
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Because these diagnostic factors have limited capability to
predict future recurrence and chemotherapy benefit, and some are
subjective, a large percentage of early stage breast cancer
patients are classified as high risk.
7
As a consequence, the use of chemotherapy has become standard
practice in these patients even though the benefit to this
patient group as a whole is small. Most early stage breast
cancer patients have N−, ER+ tumors. These patients have
been demonstrated to respond well to hormonal therapy such as
tamoxifen. Identifying which of these patients will further
benefit from chemotherapy is a difficult decision under current
guidelines. A National Surgical Adjuvant Breast and Bowel
Project, or NSABP, study published in 2004 showed that after
12 years of
follow-up,
overall survival in N−, ER+ breast cancer patients using
tamoxifen hormonal therapy alone was approximately 83% and the
overall survival using tamoxifen hormonal therapy and
chemotherapy was 87%. Therefore, the incremental survival
benefit of chemotherapy in this study was only 4%. Our test is
designed to help identify those patients with aggressive tumors
who are most likely to benefit from chemotherapy and identify
those patients with less aggressive tumors who may receive
minimal clinical benefit from chemotherapy.
We believe that Onco
type
DX is the first genomic test
that has clinical evidence supporting its ability to predict the
likelihood of cancer recurrence, the likelihood of patient
survival within 10 years of diagnosis and the likelihood of
chemotherapy benefit in early stage, N−, ER+ breast cancer
patients treated with tamoxifen. Onco
type
DX is currently
available at a list price of $3,460. We accept orders from all
50 states through our commercial laboratory located in
Redwood City, California. Our laboratory is licensed under CLIA
and accredited by CAP.
When the treating physician places an order for Onco
type
DX, the local pathology laboratory sends the tumor sample to
our laboratory. Once we receive the tumor sample, it is logged
in and processed by our pathology department. Suitable samples
then undergo a process by which RNA is extracted and purified.
We then analyze the resulting material and produce a report,
typically within 10 to 14 days of the receipt of the sample
that shows a Recurrence Score on a continuum between 0-100. The
Recurrence Score, along with other data and tests that
physicians obtain, forms the basis for the treatment decision.
The Recurrence Score has been clinically validated to correlate
with an individuals likelihood of breast cancer recurrence
within 10 years of diagnosis. The lower the Recurrence
Score the less likely the tumor is to recur and the higher the
Recurrence Score the more likely the tumor is to recur. A
Recurrence Score range from 0 to 100 correlates to an actual
recurrence range from about 3% recurrence to over 30% recurrence
for patients in our validation study using the NSABP Study B-14
population. This continuous range of scores differentiates
Onco
type
DX from other tests that predict only high or
low risk by providing an individualized level of risk. To
evaluate our clinical validation studies and compare Onco
type
DX to other methods of classifying risk, we defined
Recurrence Score ranges for low, intermediate and high risk
groups. A Recurrence Score below 18 correlates with a low
likelihood of recurrence; a Recurrence Score equal to or greater
than 18 but less than 31 correlates with an intermediate
likelihood of recurrence; and a Recurrence Score equal to or
greater than 31 correlates with a high likelihood of recurrence.
Within each risk category, Onco
type
DX further quantifies
the risk for any given patient. For example, a low risk patient
may have as low as a 3% likelihood of recurrence of breast
cancer within 10 years or as high as an 11% likelihood of
recurrence, depending on the individual Recurrence Score. We
believe this represents a substantial improvement upon existing
methods for classifying patient risk.
Clinical
Development and Validation of Oncotype DX
Clinical
Development of the Oncotype DX Recurrence Score
We developed Onco
type
DX using a multi-step approach,
conducting clinical studies on tumor specimens from more than
2,600 breast cancer patients. First, we developed methods, using
RT-PCR, to quantify the expression of hundreds of genes in RNA
isolated from fixed paraffin embedded tumor tissue. We then
selected 250 cancer-related genes using computer analysis of
genomic databases and our knowledge of cancer pathways. Third,
we performed three independent breast cancer clinical studies in
a total of 447 patients with known clinical outcomes to
test the relationship between the expression of the 250
cancer-related genes and recurrence. Two of these studies were
conducted at Providence Saint Joseph Medical Center and Rush
University Medical Center, using samples from patients with
N− and N+ tumors who received tamoxifen, chemotherapy
or both. A third study was conducted in our specific target
population of N−, ER+ patients treated with tamoxifen.
From these studies we selected a panel of 21 genes, comprised of
16 cancer-related genes and five reference genes, with which we
developed the Recurrence Score utilizing a number of statistical
approaches. The Recurrence
8
Score is obtained by first normalizing the expression of the
cancer-related genes against the reference genes and then
applying the Recurrence Score formula to calculate a single
score scaled between 0 and 100.
Clinical
Validation of Prediction of Recurrence and Survival in N−,
ER+ Patients Treated with Tamoxifen
Our clinical validation studies were designed to answer two
questions about the utility of the Recurrence Score when
N−, ER+ breast cancer patients treated with tamoxifen make
additional treatment decisions. First, we wanted to test whether
Onco
type
DX could differentiate patients with a high
likelihood of recurrence from patients with a low likelihood of
recurrence. Second, we wanted to expand these results with a
second study to demonstrate success in predicting breast cancer
survival in a community hospital setting.
Oncotype DX Predicts the Likelihood of
Recurrence.
Our initial validation study was
performed in 2003 in collaboration with the NSABP to determine
whether Onco
type
DX predicts the likelihood of breast
cancer recurrence. This study, which was reported at the
San Antonio Breast Cancer Conference in December 2003 and
published in
The New England Journal of Medicine
in
December 2004, evaluated the ability of Onco
type
DX to
quantify the likelihood of breast cancer recurrence over
10 years. The study involved 668 patients who were
enrolled in the NSABP Study B-14 between 1982 and 1988. Each
patient sample was analyzed in a blinded fashion and the results
provided back to the NSABP through a neutral party at the
University of Pittsburgh for analysis. The Recurrence Score was
used to prospectively define the following three risk groups
based on our clinical development studies described above:
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a low risk group, with a Recurrence Score of less than 18,
classified 51% of patients with an average recurrence rate of
6.8%;
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an intermediate risk group, with a Recurrence Score equal to or
greater than 18 but less than 31, classified 22% of the
patients with an average recurrence rate of 14.3%; and
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a high risk group, with a Recurrence Score greater than 31,
which included 27% of the patients with an average recurrence
rate of 30.5%.
|
The Recurrence Score was able to assign patients into high and
low risk groups (p<0.001) and, when the Recurrence Score was
examined together with age and tumor size in a multivariate
analysis, only the Recurrence Score remained a significant
predictor of patient outcome (p<0.001). A p-value indicates
the probability that the result obtained in a statistical test
is due to chance rather than a true relationship between
measures. A small p-value, generally less than 0.05, or
p<0.05, indicates that it is very unlikely that the results
were due to chance. In this study we also demonstrated that the
likelihood of distant recurrence at 10 years increased
continuously as the Recurrence Score increased, with a range
from about 3% recurrence for a Recurrence Score of zero to
greater than 30% recurrence for patients in the high Recurrence
Score category. In addition, in subgroup analysis of various
ages, tumor sizes and pathology grade, the Recurrence Score
remained a consistent predictor of distant recurrence.
Oncotype DX Predicts the Likelihood of Breast Cancer Survival
in a Community Hospital Setting.
In collaboration
with Northern California Kaiser Permanente, we conducted a
large, case-control, epidemiological study of breast cancer
patients diagnosed from 1985 to 1994 at 14 Northern California
Kaiser hospitals. This study was initially reported at the
San Antonio Breast Cancer Conference in December 2004 and
further detailed results were presented at the annual meeting of
the American Society of Clinical Oncology, or ASCO, in May 2005
and published in the
Journal of Clinical Oncology
in May
2006. Patients who died of breast cancer, or the cases, were
matched with up to three controls based on each cases age,
race and ethnicity, tamoxifen treatment, facility and diagnosis
year. Controls had to be alive at the time of the corresponding
cases death in order to compare outcomes and availability
of
follow-up
for those patients alive at time of each case death. To be
eligible, patients had to be N−, less than 75 years
old and not have received adjuvant chemotherapy. Among a
potentially eligible population of 4,964 patients, we
identified 220 eligible cases and 570 matched controls.
Approximately one-third of the study patients were treated with
tamoxifen. This study was performed to confirm that the
Recurrence Score predicts breast cancer survival at
10 years in ER+ patients treated with tamoxifen. The
likelihood of breast cancer survival at 10 years was more
than five fold higher for patients in the pre-defined low
Recurrence Score group when compared to patients in the
pre-defined high Recurrence Score group (p<0.003). With
respect to the group of ER+ patients
9
treated with tamoxifen, the absolute risk of breast cancer death
at 10 years in the pre-specified risk groups was 2.8% for
the low risk group, 10.7% for the intermediate risk group and
15.5% for the high risk group. Additionally, in the larger
population of ER+ patients untreated with tamoxifen, the
Recurrence Score was also statistically significantly associated
with breast cancer death at 10 years (p<0.025). This
study, conducted in a community hospital setting, demonstrates
that the Recurrence Score is independently associated with risk
of breast cancer death and is able to identify subgroups of
patients according to low, intermediate and high risk of death
at 10 years.
Additional
Questions Addressed by Further Studies
Additional studies were conducted to investigate three clinical
and scientific questions:
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How do patients in the different Recurrence Score risk groups
respond to tamoxifen plus chemotherapy versus tamoxifen alone?
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Does the Recurrence Score predict the likelihood of recurrence,
the benefit from tamoxifen or both?
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Does the Recurrence Score apply to untreated
ER− patients and untreated ER+ patients?
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Oncotype DX Predicts the Likelihood of Chemotherapy
Benefit.
We conducted a study in 2004 with the
NSABP to determine whether Onco
type
DX is predictive of
the likelihood of chemotherapy benefit. This study, which was
reported initially at the San Antonio Breast Cancer
Conference in December 2004 and further detailed results were
presented at ASCOs annual meeting in May 2005, included
651 patients from the NSABP Study B-20 with N−, ER+
breast cancer enrolled from 1988 to 1993. Of these patients, 227
were treated with tamoxifen alone and 424 were treated with
tamoxifen plus chemotherapy. The results of this study
demonstrated that low risk patients, as defined by the
Recurrence Score, had a 96% recurrence-free survival rate at
10 years without chemotherapy compared with a 95% survival
rate with chemotherapy, and intermediate risk patients as
defined by the Recurrence Score had a 90% survival rate without
chemotherapy compared with an 89% rate with chemotherapy. High
risk patients as defined by the Recurrence Score had a 60%
survival rate without chemotherapy compared with an 88% rate
with chemotherapy (p<0.001). These results demonstrate that
Onco
type
DX not only quantifies recurrence and survival
risk but also correlates with the likelihood of chemotherapy
benefit in early stage N−, ER+ breast cancer patients.
Oncotype DX Predicts Likelihood of Recurrence Because it
Predicts both Prognosis and Tamoxifen Benefit.
In
2004, we conducted an expanded study with the NSABP Study B-14
population to determine whether Onco
type
DX captures
information regarding likelihood of distant recurrence,
tamoxifen benefit, or both. This studys conclusions were
initially reported at the San Antonio Breast Cancer
Conference in December 2004. Further detailed results were
presented at ASCOs annual meeting in May 2005 and
published in the
Journal of Clinical Oncology
in May
2006. The study included 645 patients with N−, ER+
breast cancer enrolled from 1982 to 1988, 355 of whom were given
placebos and 290 of whom where treated with tamoxifen. The
results of this study demonstrated that Onco
type
DX
predicts the likelihood of distant disease recurrence in
tamoxifen-treated patients with N−, ER+ breast cancer
because it captures both prognosis and tamoxifen benefit.
Furthermore, this study of Onco
type
DX demonstrates that
low and intermediate risk patients as defined by the Recurrence
Score had the largest benefit of tamoxifen and high risk
patients as defined by the Recurrence Score had minimal benefit
of tamoxifen. The quantitative levels of ER, as defined by
Onco
type
DX, varied by over two-hundred fold within the
ER+ population and increasing levels of quantitative ER gene
expression correlated with increasing tamoxifen benefit.
Finally, Onco
type
DX was able to discriminate between
high and low risk patients in a subset of patients not treated
with tamoxifen.
Results Were Inconclusive as to Whether Oncotype DX Predicts
Likelihood of Recurrence in a Mixed Population of N−,
Untreated Patients.
In 2003, we conducted a trial
with The M.D. Anderson Cancer Center to test the predictive
power of Onco
type
DX in untreated breast cancer patients
who were either ER−or ER+. This study was first reported
at the San Antonio Breast Cancer Conference in December
2003 and published in
Clinical Cancer Research
in May
2005. Out of a pool of over 4,000 N− patient tissue
samples, only 149 patients were untreated and had a
sufficient tissue sample and RNA available to make them eligible
for the study. The study population differed significantly from
the NSABP Study B-14 treatment arm used for our initial
validation study in that none of the patients were treated with
tamoxifen, and the population included ER− and ER+
patients. This
10
study did not demonstrate a significant predictive power for
Onco
type
DX in untreated N patients. Importantly, it also
did not demonstrate the expected predictive power for other
known predictive factors. For example, tumor grade inversely
correlated with expected outcomes. Subsequent evaluations of
Onco
type
DX in the NSABP Study B-14 placebo arm using
samples from untreated ER+ patients and in the Kaiser Permanente
population-based study using samples from untreated ER+ and
ER− patients demonstrated a correlation between the
Recurrence Score and recurrence and survival. These results were
reported at the San Antonio Breast Cancer Conference in
December 2004 and ASCOs annual meeting in May 2005.
Health
Economic Benefits of Oncotype DX
We are sponsoring third-party studies conducted by researchers
affiliated with academic institutions to examine the health
economic implications of Onco
type
DX. Two such studies,
one of which was published in
The American Journal of Managed
Care
in May 2005, analyzed data from patients in the NSABP
Study B-14 multi-center clinical trial to compare risk
classification based on guideline criteria from the National
Comprehensive Cancer Network, or NCCN, to risk classification by
Onco
type
DX. Of the 668 patients in the NSABP study
population, NCCN guidelines classified 615, or 92%, as high risk
and 53, or 8%, as low risk. Of the 615 patients classified
as high risk by NCCN, Onco
type
DX classified 49% as low
risk, 22% as intermediate risk and 29% as high risk. Of the
53 patients that NCCN classified as low risk, Onco
type
DX classified 6% as high risk, 22% as intermediate risk and
72% as low risk. In each case, Onco
type
DX provided a
more accurate classification of risk than the NCCN guidelines as
measured by 10 year distant recurrence free survival.
Based on these results, a model was designed to forecast
quality-adjusted survival and expected costs, or the net present
value of all costs of treatment until death, if Onco
type
DX was used in patients classified as low risk or high risk
by NCCN guidelines. The model, when applied to a hypothetical
population of 100 patients with the demographic and disease
characteristics of the patients entered in the NSABP Study B-14,
demonstrated an increase to quality-adjusted survival in this
population of 8.6 years and a reduction in projected
aggregate costs of approximately $200,000. Furthermore, the
model showed that as the expected costs and anticipated toxicity
of chemotherapy regimens increase, the use of the Recurrence
Score to identify which patients would benefit from chemotherapy
should lead to larger reductions in projected overall costs.
According to this study, if all early stage breast cancer
patients and their physicians used Onco
type
DX and acted
on the information provided by the Recurrence Score, there would
be significant economic benefit to the healthcare system.
New
Product Development
We developed Onco
type
DX using the following multi-phased
clinical development platform that we intend to use in
developing future products for breast and other cancers:
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Early Development Phase.
In this phase, we
establish a product definition and research plan. Our research
team initiates the clinical research program with computer-based
screening of the approximately 25,000 genes in the human genome
to select candidate genes. The gene selection process uses
genomic databases and knowledge of key cancer and drug related
pathways. We use internally developed software for optimization
and rapid selection of target DNA sequences in order to develop
quantitative molecular pathology assays for each gene. To date,
we have compiled a library of over 1,300 individual gene tests
for use in multiple product opportunities. We secure access to
archival tumor biopsy samples for feasibility studies as well as
archival tumor biopsy samples correlated with clinical data for
gene identification studies. The goal of these studies is to
identify genes that correlate with a specific clinical outcome
prior to moving the program into development.
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Development Phase.
We conduct additional
clinical studies to refine the gene set in the specific patient
population of interest. We select the final gene panel through
statistical modeling of the gene correlation data to develop the
best quantitative correlation to the target clinical outcome.
With a gene panel and quantitative methodology established, we
then finalize all of the remaining assay parameters. For
example, for Onco
type
DX we tested and verified protocols
for RNA extraction and amplification, automated chemistry and
reagent quality control and handling to establish a
reproducible, scaleable process. Once the genes, assay
chemistry, automation and analysis specifications are finalized,
tested and verified, we begin clinical validation.
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11
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Validation Phase.
In this phase, we conduct
one or more validation studies with prospectively designed
endpoints to test our candidate gene panel and the corresponding
quantitative expression score. These studies are conducted with
a different set of archival patient specimens to verify that the
test correlates with the predicted clinical outcome in an
independent patient population. Since we control the quality and
reproducibility of our assays using FPE tissues, we are able to
conduct large validation studies with archived samples with
years of clinical outcomes. This allows validation studies to be
performed more rapidly than would be the case with techniques
that require fresh tissue, which must be newly collected and
need many years of follow up before study results can be
obtained.
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Commercialization and Product Expansion
Phase.
Once a test is commercialized, we may
perform additional studies designed to support the tests
clinical utility and potentially to broaden its use in
additional patient populations or for additional indications.
Multiple clinical studies can also be useful for driving
adoption and reimbursement by physicians and payors. Such
studies may include prospective studies to verify that our test
is changing physician behavior as well as testing a commercial
product in new populations. The results of a study conducted by
oncologists at the Rocky Mountain Cancer, which were presented
at the 2005 San Antonio Breast Cancer Symposium, confirmed
that the Recurrence Score has an impact on treatment decisions
made by physicians in current clinical practices. Additional
studies to support the tests clinical utility and broaden
its use are currently ongoing.
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Our
Product Pipeline
Over 600,000 treatment decisions were expected to be made in the
United States in 2006 for patients diagnosed with early stages
of breast, colon, prostate, renal cell and lung cancers and
melanoma. Early stage cancers are often treated with adjuvant
treatments that are administered in conjunction with primary
therapy, such as surgery and radiation, intended to prevent the
recurrence of a particular cancer. The early stage patient
population is generally the larger treatment population for most
cancers. While our products under development focus on early
stage disease, we consider product opportunities in late-stage
disease when appropriate.
12
Product
Development Opportunities in Breast Cancer
The following table describes our current breast cancer product
and our product opportunities:
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2006 Estimated
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Treatment
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Decisions
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in the
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Anticipated
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Breast Cancer Products
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Breast Cancer Population
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United States
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Product Attributes
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Product Stage
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Onco
type
DX
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N−, ER+
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130,000
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Recurrence
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Commercial
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Chemotherapy benefit
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Chemotherapy or other
therapeutic regimens benefit
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Product Expansion
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Single gene reporting N−, ER+
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130,000
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Chemotherapy or other
therapeutic regimens benefit
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Product Expansion
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N+
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70,000
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Recurrence
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Product Expansion
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Chemotherapy or other
therapeutic regimens benefit
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Single gene reporting N+
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70,000
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Chemotherapy or other
therapeutic regimens benefit
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Product Expansion
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|
Onco
type
DX
Second Generation
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N−, ER+ and
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200,000
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(1)
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Enhanced recurrence
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Early Development
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N+
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Enhanced chemotherapy
benefit
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New Product Opportunities
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N−, ER−
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30,000
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Taxane benefit(2)
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Early Development
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Chemotherapy benefit
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Recurrence
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N+
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70,000
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(3)
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Taxane benefit
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Early Development
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Chemotherapy benefit
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N−, ER+
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130,000
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(4)
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Taxane benefit
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Early Development
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(1)
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Represents the sum of the 130,000 estimated treatment decisions
in 2006 for N−, ER+ patients and 70,000 estimated
treatment decisions in 2006 for N+ breast cancer patients listed
above.
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(2)
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Taxanes are a class of chemotherapy drugs that are commonly used
for breast cancer.
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(3)
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This figure is the same as the 70,000 treatment decisions listed
above.
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(4)
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This figure is the same as the 130,000 treatment decisions
listed above.
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Oncotype
DX
We are conducting clinical studies with Onco
type
DX with
the goals of expanding the applications in which it may be used
and improving certain product features. Approximately
70,000 patients were expected to be diagnosed in the United
States in 2006 with N+ breast cancer and many may not benefit
from chemotherapy or may have other health issues that increase
the risk of chemotherapy treatment. Our early clinical research
studies with Rush University Medical Center and Providence Saint
Joseph Medical Center support further investigation of
Onco
type
13
DX for prediction of recurrence in this patient population. Node
positive studies are ongoing with additional studies planned for
2007 which, if successful, may support the launch of a
commercial product in 2008. Additionally, we believe that gene
scores reported as individual gene scores in addition to the
Recurrence Score may have additional utility in predicting
outcomes for specific therapies or disease subtypes. For
example, a quantitative ER score may be a clinically useful
predictor of tamoxifen benefit based on our studies of the NSABP
Study B-14 population. We are conducting additional studies to
evaluate the clinical utility of individual Onco
type
DX
genes and, if successful, plan to provide single gene results
for ER and progesterone receptor, or PR, gene expression in test
results by the end of 2007.
Second
Generation Oncotype DX
We are in the early development phase of investigating
additional genes and gene combinations that may add to the
predictive power of Onco
type
DX. A second generation
product, if successful, could further refine and improve the
classification of patients and result in better information for
treatment decisions. We have identified multiple genes through
research and development studies that, in varying combinations,
may provide improved prediction of recurrence risk and
likelihood of chemotherapy benefit.
Recurrence
and Benefit Test for N−, ER− Breast
Cancer
We are in the early development phase for a product to predict
the likelihood of recurrence and chemotherapy benefit in
N−, ER− breast cancer patients. This population
was expected to represent approximately 30,000 patients in
the United States in 2006. To date, we have conducted several
clinical research studies that included N−,
ER− breast cancer patients, and we plan to continue
to explore opportunities in this population, including tests to
better define ER− patients based on quantitative
molecular pathology.
Taxane
Benefit Test
We are also in the early development phase for a product to
predict the likelihood of taxane benefit. Taxanes are a class of
chemotherapy drugs that are used in addition to traditional
chemotherapy regimens in some patients but have side effects and
are most often used in patients with aggressive or later stage
tumors. The potential population for this product includes the
estimated 70,000 N+ breast cancer patients as well as N−,
ER− patients at high risk and N− patients
at high risk in the United States in 2006. We have developed a
number of hypotheses and selected a gene panel to investigate
this product opportunity further.
14
Product
Development Opportunities in Other Cancers
The following table describes our products in various stages of
development for cancers other than breast cancer:
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2006 Estimated
|
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Total Incidence
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2006 Estimated
|
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in the
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Addressable
|
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Anticipated Product
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Product Opportunity
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United States
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Population
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Attributes
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Product Stage
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Colon Cancer
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120,000
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65,000
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Recurrence
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Development
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Prediction of drug
response
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Prostate Cancer
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260,000
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200,000
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Progression
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Early Development
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Recurrence
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Renal Cell Cancer
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40,000
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25,000
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Recurrence
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Early Development
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Prediction of drug
response
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Non-small Cell Lung Cancer
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160,000
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45,000
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Recurrence
Prediction of drug response
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Early Development
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Melanoma
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70,000
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60,000
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Recurrence
|
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Early Development
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Prediction of drug
response
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Colon
Cancer Recurrence and Response Test
In January 2007 we moved a potential test to predict the
likelihood of recurrence and chemotherapy benefit in patients
with early stage colon cancer from early development to
development phase. Colon cancer was expected to affect
approximately 120,000 individuals in the United States in 2006,
of which approximately 65,000 early stage patients needed to
decide whether or not to use chemotherapy for their cancer, as
well as which chemotherapy to use. Only a small percentage of
colon cancer patients are expected to have a survival benefit
from additional treatment after surgery. We have developed an
investigational 758-gene panel for colon cancer and have
established a collaborative agreement with the NSABP, as well as
other academic groups, to access colon tissue samples that have
associated clinical outcome data. If successful, studies in 2007
may lead to a validation study in 2008, which could result in a
commercial launch in 2009.
Prostate
Cancer Progression and Recurrence Test
We are in the early development phase for a test to predict the
likelihood of progression and recurrence of prostate cancer in
early stage patients. Approximately 260,000 men were expected to
be diagnosed with prostate cancer in the United States in 2006,
approximately 200,000 of whom will need to make critical
decisions on whether or not to undergo local therapy, such as
surgery or radiation, and on whether or not to have additional
treatment after local therapy. Because the side effects of
surgery and local radiation therapy can be serious, a need
exists for a reliable test to determine the likelihood of
progression. There is also a need for a reliable test to
determine the likelihood of recurrence after local treatment,
because hormonal therapy and chemotherapy have significant side
effects as well. We are in the process of defining our prostate
cancer gene panel and we have completed initial feasibility
studies and gained access to clinical samples correlated with
outcome data in prostate cancer under a collaborative agreement
with an academic group.
Renal
Cell Cancer Recurrence and Response Test
We are in the early development phase for a test to predict the
likelihood of recurrence and response to therapy in renal cell
cancer. Approximately 40,000 individuals were expected to be
diagnosed with renal cell cancer in the United States in 2006.
Recently reported studies suggest that some of these patients
may respond to new treatments.
15
We have completed initial feasibility studies to extract RNA
from renal cell cancer specimens and are currently working to
define potential products for patients with renal cell cancer
under a collaborative agreement with an academic group that has
access to clinical samples correlated to outcome data.
Non-small
Cell Lung Cancer Recurrence and Response Test
We are in the early development phase for a test to predict the
likelihood of chemotherapy benefit in early stage, non-small
cell lung cancer. Approximately 160,000 individuals were
expected to be diagnosed with non-small cell lung cancer in the
United States in 2006, of which approximately 45,000 of those
patients were expected to be diagnosed before the cancer spreads
and will need to make chemotherapy treatment decisions. Recent
clinical studies suggest that at least some of those early stage
patients will benefit from chemotherapy. The use of chemotherapy
in early stage non-small cell lung cancer is relatively recent
and is likely to accelerate. We have completed initial
feasibility studies in lung tissues as a part of our EGFR
inhibitor program described below and are in the process of
defining our lung cancer gene panel. We have a collaborative
agreement with an academic group that has access to clinical
samples correlated to outcome data.
Melanoma
Recurrence and Response Test
We are in the early development phase for a test to predict the
likelihood of recurrence and response to therapy for patients
with melanoma. Approximately 70,000 individuals were expected to
be diagnosed with melanoma in the United States in 2006, of
which approximately 60,000 of those patients were expected to be
diagnosed before the cancer spreads and will need to make
chemotherapy decisions. Recently reported studies suggest that
some of these patients may respond to new treatments. We have
conducted initial feasibility studies to extract RNA from
melanoma cancer specimens and are currently working to define
potential products for melanoma under a collaborative agreement
with an academic group that has access to tissue samples that
have been correlated to outcome data.
Product
Development Opportunities for Targeted
Therapeutics
Both anti-cancer drugs recently approved by FDA and new
anti-cancer drugs in clinical development are designed to
provide more targeted treatment, which should improve efficacy
and reduce side effects. A need exists to identify those
patients who, based on the genomic profile of their tumors, are
most likely to benefit from these therapies. We believe our
individualized genomic analysis has the potential to improve
patient selection for these therapies. We have had a number of
discussions with pharmaceutical companies regarding the use of
Onco
type
DX or our clinical development platform to
identify subsets of patients more likely to respond to a
particular therapy. We have completed several studies with
different companies to evaluate our technology, and we have
discussed our clinical development platform with pharmaceutical
companies for exploratory clinical studies.
Epidermal
Growth Factor Receptor, or EGFR, Inhibitor Response
Test
We are in the early development phase to develop tests to
predict the likelihood of response to the EGFR inhibitor class
of drugs. The market opportunity for these tests will initially
be limited to metastatic disease in lung and colon cancer, with
an estimated 60,000 patients in the United States in 2006,
where such drugs are currently approved. We have conducted three
small clinical research studies in lung cancer, colon cancer and
head and neck cancer which allowed us to identify and file
patent applications on a number of genes which may predict the
response to EGFR inhibitors. Further clinical development may
require partnerships with pharmaceutical companies that have
access to appropriate clinical trial specimens.
In July 2005, we signed a collaborative agreement with
Bristol-Myers Squibb Company and ImClone Systems Incorporated to
develop a genomic test to predict the likelihood of response to
Erbitux in colorectal carcinoma. Erbitux is a targeted therapy
currently approved for the treatment of metastatic colorectal
carcinoma. Consistent with terms we generally require in our
collaborative agreements, the agreement provides for research
funding support and milestone payments and provides us
commercial rights to diagnostic tests that result from the
collaboration.
16
Targeted
Therapies in Breast Cancer
We entered into collaborative agreements with Aventis, Inc., a
member of the sanofi-aventis group, and the Eastern Cooperative
Oncology Group to investigate the ability of gene expression in
fixed-paraffin-embedded tissues to predict the likelihood of
response to adjuvant chemotherapy, including Taxotere, in
patients with early breast cancer and zero to three involved
lymph nodes. The agreements provide us with commercial rights to
diagnostic tests that may result from the collaboration and were
effective as of December 1, 2005.
We cannot assure you that any of the above product opportunities
or products in development will ever be commercialized or, if
commercialized, will ever be successful.
Technology
We utilize existing technologies such as RT-PCR and information
technologies and optimize and integrate them into new processes.
We expect to continue to extend the capabilities of the various
components of our process to develop effective products. Our
technology allows us to:
Extract
RNA from FPE-tumor Biopsies
Our product development requires that we be able to quantify the
relative amounts of RNA in patients FPE tissue specimens.
We have developed proprietary technology, intellectual property
and know-how for optimized and automated methods for extraction
and analysis of RNA from FPE tissue. Although others can extract
RNA from FPE tissue, to our knowledge the process has not been
optimized and scaled up for high-throughput clinical testing and
large-scale clinical development studies involving large numbers
of genes. Our process uses commercially available reagents and
instruments with our own proprietary process and automation
protocols, which results in RNA extraction from the range of
tissues used in our clinical development studies and our
commercial laboratory test.
Amplify
and Detect Diminished Amounts of RNA Consistently
We use a well-established technology that we license from Roche
called RT-PCR as the basis for our quantitative molecular
pathology assays. This technology uses PCR along with
fluorescent detection methods to quantify the relative amount of
RNA in a biological specimen. We believe our technology platform
has the following advantages:
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Sensitivity.
We have developed protocols for
extracting and quantifying RNA utilizing RT-PCR. Our method for
amplifying small fragmented RNA is designed to allow us in the
future to conduct studies with hundreds to thousands of genes
from 10 micron sections of FPE tissue. Together with the
inherent amplification of PCR, our platform provides us with
sophisticated capabilities to quantify RNA levels from minimal
amounts of tissue. The ability to amplify RNA allows us to
maintain a repository of RNA from limited tissue samples that
can be used for later studies.
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Specificity.
Human tissues contain thousands
of different genes that are often highly related in sequence
content, making it challenging for genomic tests to specifically
identify molecules of interest. Our RT-PCR platform is highly
specific because it works only when three different test
reagents, called DNA probes and primers, independently match
each gene to be measured. In addition, we have designed and
implemented proprietary software for selecting optimal probe and
primer sequences in an automated, high-throughput process. Our
technology is also capable of quantifying non-coding RNA
sequences that are present in miniscule quantities within
tissues. The ability to utilize these sequences allows us to
design highly specific assays for closely related genes.
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Precision and Reproducibility.
The reagents,
materials, instruments and controls in our processes are used by
trained personnel following validated standard operating
procedures. Validation studies have shown that these standard
operating procedures precisely quantify tested RNA with minimal
variability in the assay system across days, instruments and
operators. This enables our laboratory to produce consistently
precise and accurate gene expression results. Our quality
control methods for our reagents and processes, along with
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our software for automation, sample tracking, data quality
control and statistical analysis, add to the reproducibility and
precision of our test.
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Dynamic Range.
Because our RT-PCR platform can
amplify small amounts of RNA in proportion to the amount present
in the sample, we are able to measure RNA levels across as much
as a hundred thousand fold range of differing RNA expression.
Having a broad range of high resolution testing capability
increases the quality of our correlations with clinical outcomes
and therefore the predictive power of our tests.
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Analyze
Hundreds of Genes
Historically, RT-PCR has been used to screen one or, at most, a
few genes at a time. The methods and know-how we have developed
allow us to expand RT-PCR technology to a scale that enables
screening of hundreds of genes at a time while using minimal
amounts of tissue. During our initial years of operation, we
typically screened 48 to 96 genes from a standard FPE tissue
sample using RNA from three 10 micron sections of tissue. By
2003, we routinely screened 192 genes from each sample and, by
2004, we screened 384 genes per sample. Today, we have the
capability to screen up to 768 different genes per sample
without sacrificing the sensitivity, specificity and
reproducibility of RT-PCR. With continued investment in
miniaturization and automation, we believe that our technology
will be capable of continued increases in throughput.
Employ
Advanced Information Technology
We have developed computer programs to automate our RT-PCR assay
process. We have also developed a laboratory information
management system to track our gene-specific reagents,
instruments, assay processes and the data generated. Similarly,
we have automated data analysis, storage and process quality
control. We use statistical methods to optimize and monitor
assay performance and to analyze data from our early development
and development studies.
Competition
We believe that we compete primarily on the basis of:
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the value of the quantitative information Onco
type
DX
provides;
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the clinical validation of Onco
type
DXs ability to
predict recurrence and survival, and the demonstration of
Onco
type
DXs ability to predict the likelihood of
chemotherapy benefit;
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our ability to perform clinical studies using archival tissue as
it is currently processed, handled and stored;
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our ability to screen hundreds of genes at a time;
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the speed with which our clinical development platform can
commercialize products;
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our clinical collaborations with clinical study groups;
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the level of customer service we provide, both to patients and
health care professionals; and
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our ability to obtain appropriate regulatory approvals in a
timely fashion.
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We believe that we compete favorably with respect to these
factors, although we cannot assure you that we will be able to
continue to do so in the future or that new products that
perform better than Onco
type
DX will not be introduced.
We believe that our continued success depends on our ability to:
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continue to innovate and maintain scientifically advanced
technology;
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enhance Onco
type
DX for breast cancer to provide
information in response to additional indications;
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continue to validate our products, especially with respect to
chemotherapy benefit;
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continue to obtain positive reimbursement decisions from payors;
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expand Onco
type
DX for use in other forms of cancer;
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attract and retain skilled scientific and sales personnel;
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obtain patents or other protection for our products;
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obtain and maintain our clinical laboratory accreditations and
licenses; and
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successfully market and sell Onco
type
DX.
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Currently, our principal competition comes from existing
diagnostic methods utilized by pathologists and oncologists,
which generally involve assessing and evaluating the grade and
stage of cancerous tumors when determining risk of recurrence.
These methods, which have been used for many years and are
therefore difficult to change or supplement, are typically
accomplished in a short period of time without much expense. In
addition, companies offering capital equipment and inexpensive
kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like Onco
type
DX that are performed
outside the pathology laboratory. Also, few diagnostic methods
are as expensive as Onco
type
DX and others may develop
lower-priced, less complex tests that could be viewed as the
equivalent of ours.
We also face competition from many companies that offer products
or have conducted research to profile gene expression in breast
cancer, including Agendia B.V. and AviaraDX. Commercial
laboratories with strong distribution networks for diagnostic
tests, such as Genzyme Corporation, Laboratory Corporation of
America Holdings and Quest Diagnostics Incorporated, may become
competitors. Other potential competitors include companies that
develop diagnostic tests such as Bayer Healthcare LLC, Celera
Genomics, a division of Applera Corporation, Roche Diagnostics,
a division of F. Hoffmann-La Roche Ltd, and Veridex LLC, a
Johnson & Johnson company, other small companies and
academic and research institutions. In addition, in December
2005, the federal government allocated a significant amount of
funding to The Cancer Genome Atlas, a project aimed at
developing a comprehensive catalog of the genetic mutations and
other genomic changes that occur in cancers and maintaining the
information in a free public database. As more information
regarding cancer genomics becomes available to the public, we
anticipate that more products aimed at identifying targeted
treatment options will be developed and these products may
compete with ours.
Our test is currently considered relatively expensive for a
diagnostic test, and we expect to raise prices in the future.
Many of our present and potential competitors have widespread
brand recognition and substantially greater financial and
technical resources and development, production and marketing
capabilities than we do. Others may develop lower-priced, less
complex tests that could be viewed by physicians and payors as
functionally equivalent to our test. Some competitors have
developed tests cleared for marketing by FDA, and there may be a
marketing differentiation or a perception that an FDA-cleared
test is more desirable than Onco
type
DX. Competition
among these entities to recruit and retain highly qualified
scientific, technical and professional personnel and consultants
is also intense. If we are unable to compete successfully
against current or future competitors, we may be unable to
increase market acceptance for and sales of our test, which
could prevent us from increasing or sustaining our revenues, or
achieving or sustaining profitability.
Reimbursement
Revenues for clinical laboratory tests may come from several
sources, including commercial third-party payors, such as
insurance companies and health maintenance organizations,
government payors, such as Medicare and Medicaid, patients and
in some cases, from hospitals or referring laboratories (who, in
turn bill third-party payors for testing).
To gain broad reimbursement coverage, we are focusing on
educating payors on the following Onco
type
DX attributes:
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Test Performance.
Onco
type
DX provides
results that have been documented in clinical studies to be
reproducible, sensitive, accurate and specific to the
patients tumor. Patients may benefit from treatment
decisions based on prediction of the likelihood of recurrence,
survival and chemotherapy benefit.
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Clinical Utility.
Patients are provided a
Recurrence Score on a risk continuum that may contribute to
decision making regarding the use of adjuvant chemotherapy. We
believe the large difference in risk of
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distant recurrence between tumors with low Recurrence Scores and
high Recurrence Scores is indicative of the clinical utility of
our test.
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Peer-reviewed Publication and Consistent Study
Outcomes.
The 2003 NSABP validation study was
peer-reviewed and published in
The New England Journal of
Medicine
in December 2004. In May 2006, two peer-reviewed
articles were published supporting the clinical validity of
Onco
type
DX and, therefore, the use and coverage of
Onco
type
DX.
The Journal of Cancer Oncology
published the results of the 2004 NSABP study supporting the
predictive value of Onco
type
DX on the likelihood of
chemotherapy benefit.
Breast Cancer Research
published
the results of the Kaiser Permanente study showing a significant
correlation between the Onco
type
DX recurrence score and
breast cancer survival. Physicians and payors often require one,
and many require two or more, peer-reviewed publications to
provide a basis for use and reimbursement decisions. The results
of the independent Kaiser Permanente study reinforce the
findings in the NSABP study. We believe that additional
publications, including our findings on the magnitude of
chemotherapy benefit, will increase usage and create a more
favorable reimbursement environment.
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Patient and Physician Demand.
Increasing
awareness and demand in the cancer community for Onco
type
DX will be necessary for widespread payor adoption.
Increased usage of the test by physicians can influence payors
and facilitate the reimbursement decision process.
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Improved Economics.
We are sponsoring
third-party studies and providing information to payors to
demonstrate the economic benefits that can result from the use
of Onco
type
DX. A health economic analysis of Onco
type
DX was published in
The American Journal of Managed Care
in May 2005.
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As a relatively new test, Onco
type
DX may be considered
investigational by payors and not covered under their
reimbursement policies. Consequently, we have pursued
case-by-case
reimbursement and expect the test will continue to be reviewed
on this basis until policy decisions have been made by
individual payors. We are also working with public and private
payors and health plans to secure coverage for Onco
type
DX based upon clinical evidence showing the utility of the
test. As of February 2007, health plans covering nearly
100 million lives have approved our test for coverage.
As of December 31, 2006, Aetna, Inc., Kaiser Foundation
Health Plan, Inc. and National Heritage Insurance Company, or
NHIC, the local Medicare carrier for California with
jurisdiction for claims submitted by us for Medicare patients,
had issued positive coverage determinations for Onco
type
DX. In January 2007, United HealthCare Insurance Company
entered into a national laboratory services agreement to support
reimbursement for our test. In addition, many regional payors
have issued policies supporting reimbursement for our test.
These regional payors include Harvard Pilgrim Health Care, Inc.,
Medical Mutual of Ohio, Humana, Healthnet, Premera Blue Cross,
Blue Cross/Blue Shield of Alabama, Blue Cross/Blue Shield of
Minnesota, Blue Cross/Blue Shield of South Carolina, Mountain
State Blue Cross, covering West Virginia, and CareFirst,
covering Blue Cross of Delaware, Maryland and District of
Columbia. The Federal Employees Health Benefits Program has also
made a positive coverage determination for beneficiaries who are
covered under their Blue Cross/Blue Shield plan option. Where
policies are not in place, we pursue
case-by-case
reimbursement. Through this process, as of December 31,
2006, more than 500 health insurance companies, third-party
administrators, provider networks and other health systems had
reimbursed one or more Onco
type
DX tests. We believe that
it may take several years to achieve successful reimbursement
with a majority of payors. However, we cannot predict whether,
or under what circumstances, payors will reimburse for our
tests. Payment amounts can also vary across individual policies
and coverage and payment policies, when adopted, are generally
applied prospectively rather than retroactively. Denial of
coverage by payors, or payment at inadequate levels, would have
a material adverse impact on market acceptance of our products.
In early 2005, the Medical Advisory Panel of the Blue Cross and
Blue Shield Associations Technology Evaluation Center, or
BCBSA, a technology assessment group, concluded that the
existing clinical data in support of Onco
type
DX does not
meet the panels technology criteria for clinical
effectiveness and appropriateness. This assessment is provided
for informational purposes to members of BCBSA and can be used
by third-party payors and health care providers such as Blue
Cross and Blue Shield, which provide healthcare coverage for
nearly one-third of all Americans, as grounds to deny coverage
for Onco
type
DX. Other payors have determined that the
test is investigational or have issued negative
technology assessment reviews.
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Commercial Third-party Payors and Patient
Pay.
Where there is a payor policy in place, we
bill the payor and the patient in accordance with the
established policy. Where there is no payor policy in place, we
pursue reimbursement on behalf of each patient on a
case-by-case
basis. We request that physicians have a billing conversation
with patients prior to a test being submitted to discuss the
patients responsibility should their policy not cover the
test. We also request that the physician inform the patient that
we will take on the primary responsibility for obtaining
third-party reimbursement on behalf of patients, including
appeals for initial denials, prior to billing a patient. With
this practice established, we believe that most patients
receiving the Onco
type
DX test have agreed to the test
knowing that they may be responsible for all or some portion of
the cost of the test should their medical insurer deny or limit
coverage. Our efforts on behalf of patients take a substantial
amount of time, and bills may not be paid for many months, if at
all. Furthermore, if a third-party payor denies coverage after
final appeal, it may take a substantial amount of time to
collect from the patient, and we may not be successful.
Medicare and Medicaid.
In determining whether
or not Medicare will pay for a test, the Centers for Medicare
and Medicaid Services, or CMS, which oversees Medicare, can
permit the contractors, who process and pay Medicare claims, to
make that determination or it can make a national coverage
determination, which will bind all Medicare contractors. To
date, CMS has not issued a national coverage determination on
Onco
type
DX. As a result, whether or not Medicare will
cover the test when billed by us is the decision of NHIC, the
current local Medicare carrier for California and the contractor
with jurisdiction to process claims submitted by us. In January
2006, NHIC released a local coverage determination providing
coverage for the Onco
type
DX test for female patients
with estrogen-receptor positive, node-negative carcinoma of the
breast when the ordering physician has determined, prior to
ordering the test, that the intention to treat or not treat with
adjuvant chemotherapy would be contingent, at least in part, on
the results of the test for the individual patient in question.
The local coverage determination was based upon a determination
by NHIC that the Onco
type
DX test is safe and effective
and reasonable and necessary to contribute to breast cancer
diagnosis and major treatment decisions. The local coverage
determination indicated that
case-by-case
review may be performed, as needed, and the test will be covered
only when ordered by the treating physician, when necessary for
diagnosis or treatment decisions and when used in patient care.
The local coverage determination states that the Onco
type
DX test will be covered only when performed within six
months of diagnosis of breast cancer and that the test will not
be covered for male patients with breast cancer or for patients
with recurrent or metastatic breast cancer who have had a
previous Onco
type
DX test. The local coverage
determination is effective for Onco
type
DX tests provided
on or after February 27, 2006.
The local coverage determination explains that most or all
coverage decisions for Medicare beneficiaries related to the
Onco
type
DX tests will be made by NHIC. Until recently,
there had been some question as to whether claims for
Onco
type
DX tests performed on Medicare beneficiaries who
were hospital inpatients at the time the tumor tissue samples
were obtained may be billed by us to NHIC or must be
incorporated in the payment that the hospital receives for their
services related to the patients breast cancer. As of
December 31, 2006, the volume of patients who fell into
this category represented a very small portion (approximately
2%) of our total testing population.
Based on a final rule effective January 1, 2007, we are
permitted to submit claims to NHIC for the Onco
type
DX
tests performed on Medicare beneficiaries who were hospital
inpatients or outpatients at the time the tumor tissue samples
were obtained, but only if the test was ordered at least
14 days following the date of the patients discharge
from the hospital and where other specified conditions are met.
We are in the process of making arrangements with hospitals for
payment of the test when performed for the small portion of
Medicare beneficiaries, representing approximately 3% of our
total testing population, who are hospital inpatients or
outpatients at the time specimens are collected and who do not
meet criteria under the final rule for billing by us. Finally,
we have been engaged in discussions with the Centers for
Medicare/Medicaid Services, or CMS, about the application of the
final rule to hospital outpatients. We believe the final rule
should not apply to the Onco
type
DX tests performed on
tumor tissue samples obtained while the patient is a hospital
outpatient, and that the tests performed on tissue samples taken
from hospital outpatients are eligible to be billed by us under
the Medicare program, regardless of when the testing of such
tissue samples takes place. While we are continuing to pursue
this matter, at this point, CMS intends for the final rule to
apply to outpatients as well as inpatients, and we are notifying
hospitals accordingly.
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In addition, each state Medicaid program, which pays for
services furnished to the eligible medically indigent, will
usually make its own decision whether or not to cover
Onco
type
DX. To date, we have a limited number of
approvals from state Medicaid programs.
Medicare currently contracts with a large number of fiscal
intermediaries and carriers that are responsible for processing
and paying claims. Within the next few years, Medicare is
expected to reduce this number to fifteen regional Medical
Administrative Contractors, or MACs. If NHIC is not selected as
one of these regional MACs, we cannot be certain that we will
obtain a positive local coverage determination from another
contractor.
Payment
Clinical laboratory testing services, when covered by
third-party payors, are paid under various methodologies,
including prospective payment systems and fee schedules. Under
Medicare, payment is generally made under the Clinical
Laboratory Fee Schedule with amounts assigned to specific
procedure billing codes. Each Medicare carrier jurisdiction has
a fee schedule that establishes the price for each specific
laboratory billing code. The Social Security Act establishes
that these fee schedule amounts are to be increased annually by
the percentage increase in the consumer price index, or CPI, for
the prior year. Congress has frequently legislated that the CPI
increase not be implemented. In the Medicare Prescription Drug,
Improvement and Modernization Act, or MMA, Congress eliminated
the CPI update through 2008. In addition, the National
Limitation Amount, or NLA, which acts as a ceiling on Medicare
reimbursement, is set at a percentage of the median of all the
carrier fee schedule amounts for each test code. In the past,
Congress has frequently lowered the percentage of the median
used to calculate the NLA in order to achieve budget savings.
Currently, the NLA ceiling is set at 74% of the medians for
established tests and 100% of the median for diagnostic tests
for which no limitation amount was established prior to 2001.
Thus, no carrier can pay more than the NLA amount for any
specific code.
At the present time, there is no specific Current Procedural
Terminology (CPT) procedure code to report Onco
type
DX.
Therefore, the test generally must be reported under a
non-specific, unlisted procedure code, which is subject to
manual review of each claim. We have been informed by NHIC that,
under the local coverage determination, we may expect claims to
be paid consistent with the average allowed reimbursement rate
for Onco
type
DX claims that were billed and processed to
completion as of September 30, 2005.
A Healthcare Common Procedure Coding System (HCPCS) code has
been issued effective January 1, 2006 that some private
third-party payors may accept on claims for the Onco
type
DX test. Medicare will not accept this HCPCS code, however.
In the future, we may move forward with plans to obtain specific
CPT procedure coding. If we do move forward with plans to obtain
specific CPT coding, there is no assurance that specific coding
will be adopted or that adequate payment will be assigned if and
when a specific procedure code is adopted.
Several provisions of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or MMA, may affect
future payments for clinical laboratory testing services,
including Onco
type
DX. First, the Clinical Laboratory Fee
Schedule payments under Medicare are frozen through 2008 with
zero-percent annual adjustment. This would affect Medicare and
Medicaid payments for Onco
type
DX if a specific procedure
code and Clinical Laboratory Fee Schedule payment are assigned
to the test. Second, Congress authorized the Medicare program to
conduct a demonstration project on applying competitive bidding
to certain clinical laboratory tests. It is not clear whether
competitive bidding will be applied more broadly to clinical
laboratory services under Medicare at some point in the future
and, if so, whether this would impact payment for Onco
type
DX, which is provided solely by us. Third, Medicare is
reforming the local contractor process to replace current
contracts with fiscal intermediaries, who are billed by
hospitals and other institutional providers, and carriers, which
are billed by physicians, independent laboratories and other
suppliers, with new contracts. These reforms may result in a
change in the contractors to whom we send Medicare claims, which
may affect coverage for Onco
type
DX. Finally, on several
occasions, including in 2003 during the negotiations over the
MMA, Congress has considered imposing a 20% co-insurance amount
on clinical laboratory services, which would require
beneficiaries to pay a portion of the cost of their clinical
laboratory testing. Although that requirement has not been
enacted at this time, Congress could decide to impose such an
obligation at some point in the future. If so, it could make it
more difficult for us to collect payment for Onco
type
DX.
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Regulation
Clinical
Laboratory Improvement Amendments of 1988
As a clinical laboratory, we are required to hold certain
federal, state and local licenses, certifications and permits to
conduct our business. Under CLIA, we are required to hold a
certificate applicable to the type of work we perform and to
comply with standards covering personnel, facilities
administration, quality systems and proficiency testing.
We have a certificate of accreditation under CLIA to perform
testing and are accredited by CAP. To renew our CLIA
certificate, we are subject to survey and inspection every two
years to assess compliance with program standards. The standards
applicable to the testing which we perform may change over time.
We cannot assure you that we will be able to operate profitably
should regulatory compliance requirements become substantially
more costly in the future.
If our laboratory is out of compliance with CLIA requirements,
we may be subject to sanctions such as suspension, limitation or
revocation of our CLIA certificate, as well as directed plan of
correction, state
on-site
monitoring, civil money penalties, civil injunctive suit or
criminal penalties. We must maintain CLIA compliance and
certification to be eligible to bill for services provided to
Medicare beneficiaries. If we were to be found out of compliance
with CLIA program requirements and subjected to sanction, our
business could be harmed.
Food
and Drug Administration
The U.S. Food and Drug Administration, or FDA, regulates
the sale or distribution, in interstate commerce, of medical
devices, including in vitro diagnostic test kits. Devices
subject to FDA regulation must undergo pre-market review prior
to commercialization unless the device is of a type exempted
from such review. In addition, manufacturers of medical devices
must comply with various regulatory requirements under the
Federal Food, Drug and Cosmetic Act and regulations promulgated
under that Act, including quality system review regulations,
unless exempted from those requirements for particular types of
devices. Entities that fail to comply with FDA requirements can
be liable for criminal or civil penalties, such as recalls,
detentions, orders to cease manufacturing and restrictions on
labeling and promotion.
Clinical laboratory services are not typically subject to FDA
regulation, but in vitro diagnostic test kits and reagents
and equipment used by these laboratories may be subject to FDA
regulation. Clinical laboratory tests that are developed and
validated by a laboratory for use in examinations the laboratory
performs itself are called laboratory development tests, or
LDTs. Most LDTs currently are not subject to pre-market review
by FDA although analyte-specific reagents or software provided
to clinical laboratories by third parties and used by clinical
laboratories to perform LDTs may be subject to review by FDA
prior to marketing. We believe that Onco
type
DX is a type
of LDT. We believe that Onco
type
DX is not subject to
regulation under current FDA policies and have communicated this
conclusion to FDA staff. We believe that the container we
provide for collection and transport of tumor samples from a
pathology laboratory to our laboratory is a medical device
subject to FDA regulation but exempt from pre-market review.
In January 2006, we received a letter from FDA regarding
Onco
type
DX inviting us to meet with FDA to discuss the
nature and appropriate regulatory status of and the least
burdensome ways that we may fulfill any FDA pre-market review
requirements that may apply. In September 2006, FDA issued draft
guidance on a new class of tests called In Vitro
Diagnostic Multivariate Index Assays. This draft guidance,
which is intended for public comment, represents the first
public discussion surrounding FDAs position regarding the
regulation of certain laboratory-developed tests. Under this
draft guidance, Onco
type
DX could be classified as either
a Class II or a Class III medical device, which may
require varying levels of FDA pre-market review depending upon
intended use and on the level of control necessary to assure the
safety and effectiveness of the test. FDA held a public meeting
on February 8, 2007 at which a number of interested parties
commented on the draft guidance. The draft guidance was open for
public comment until March 5, 2007.
We submitted formal comments in response to the draft guidance
and we intend to continue our ongoing dialogue with FDA with
respect to the regulatory status of the Onco
type
DX
breast cancer tests. We have presented information regarding
Onco
type
DX to FDA and continue to believe that our tests
are appropriately regulated under
23
CLIA and should not require pre-market review by FDA. We cannot
provide any assurance that FDA regulation, including pre-market
review, will not be required in the future for Onco
type
DX, either through new enforcement policies adopted by FDA
or new legislation enacted by Congress. If pre-market review is
required, our business could be negatively impacted until such
review is completed and approval or clearance to market is
obtained, and FDA could require that we stop selling our test
pending pre-market approval. If our test is allowed to remain on
the market but there is uncertainty about our test or if it is
labeled investigational by FDA, orders or reimbursement may
decline. The regulatory approval process may involve, among
other things, successfully completing additional clinical trials
and submitting a pre-market clearance notice or filing a
pre-market approval application with FDA. If pre-market review
is required by FDA, there can be no assurance that our test will
be cleared or approved on a timely basis, if at all. Ongoing
compliance with FDA regulations would increase the cost of
conducting our business, subject us to inspection by FDA and to
the requirements of FDA and penalties for failure to comply with
these requirements. Notwithstanding the above, we may decide to
voluntarily pursue FDA pre-market approval of Onco
type
DX
if we determine that doing so would be appropriate. Pursuing
voluntary market review may, for example, facilitate third-party
payor coverage for Onco
type
DX test or serve to
differentiate claims about the intended use of Onco
type
DX from those of other tests.
Should any of the reagents obtained by us from vendors and used
in conducting our LDT be affected by future regulatory actions,
our business could be adversely affected by those actions,
including increasing cost of testing or delaying, limiting or
prohibiting the purchase of reagents necessary to perform
testing.
Health
Insurance Portability and Accountability Act
Under the federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, the U.S. Department
of Health and Human Services, or HHS, has issued regulations to
protect the privacy and security of protected health information
used or disclosed by health care providers, such as us. HIPAA
also regulates standardization of data content, codes and
formats used in health care transactions and standardization of
identifiers for health plans and providers. Penalties for
violations of HIPAA regulations include civil and criminal
penalties.
We developed policies and procedures to comply with these
regulations by the respective compliance enforcement dates. The
requirements under these regulations may change periodically and
could have an effect on our business operations if compliance
becomes substantially more costly than under current
requirements.
In addition to federal privacy regulations, there are a number
of state laws governing confidentiality of health information
that are applicable to our operations. New laws governing
privacy may be adopted in the future as well. We have taken
steps to comply with health information privacy requirements to
which we are aware that we are subject. However, we can provide
no assurance that we are or will remain in compliance with
diverse privacy requirements in all of the jurisdictions in
which we do business. Failure to comply with privacy
requirements could result in civil or criminal penalties, which
could have a materially adverse impact on our business.
Federal
and State Self-referral Prohibitions
We are subject to the federal self-referral prohibitions
commonly known as the Stark Law, and to similar restrictions
under Californias Physician Ownership and Referral Act,
commonly known as PORA. Together these restrictions generally
prohibit us from billing a patient or any governmental or
private payor for any test when the physician ordering the test,
or any member of such physicians immediate family, has an
investment interest in, or compensation arrangement with, us,
unless the arrangement meets an exception to the prohibition.
Both the Stark Law and PORA contain an exception for referrals
made by physicians who hold investment interests in a publicly
traded company that has stockholders equity of
$75 million at the end of its most recent fiscal year or on
average during the previous three fiscal years, and which
satisfies certain other requirements. In addition, both the
Stark Law and PORA contain an exception for compensation paid to
a physician for personal services rendered by the physician. We
have compensation arrangements with a number of physicians for
personal services, such as speaking engagements and specimen
tissue preparation. We have structured these arrangements with
terms intended to comply with the requirements of the personal
services exception to Stark and PORA. However, we can not be
certain that regulators would find these arrangements to be in
compliance with Stark, PORA or similar state
24
laws. We would be required to refund any payments we receive
pursuant to a referral prohibited by these laws to the patient,
the payor or the Medicare program, as applicable.
Sanctions for a violation of the Stark Law include the following:
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denial of payment for the services provided in violation of the
prohibition;
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refunds of amounts collected by an entity in violation of the
Stark Law;
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a civil penalty of up to $15,000 for each service arising out of
the prohibited referral;
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exclusion from federal healthcare programs, including the
Medicare and Medicaid programs; and
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a civil penalty of up to $100,000 against parties that enter
into a scheme to circumvent the Stark Laws prohibition.
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These prohibitions apply regardless of the reasons for the
financial relationship and the referral. No finding of intent to
violate the Stark Law is required for a violation. In addition,
under an emerging legal theory, knowing violations of the Stark
Law may also serve as the basis for liability under the Federal
False Claims Act.
Further, a violation of PORA is a misdemeanor and could result
in civil penalties and criminal fines. Finally, other states
have self-referral restrictions with which we have to comply
that differ from those imposed by federal and California law.
While we have attempted to comply with the Stark Law, PORA and
similar laws of other states, it is possible that some of our
financial arrangements with physicians could be subject to
regulatory scrutiny at some point in the future, and we cannot
provide an assurance that we will be found to be in compliance
with these laws following any such regulatory review.
Federal
and State Anti-kickback Laws
Federal Anti-kickback Law makes it a felony for a provider or
supplier, including a laboratory, to knowingly and willfully
offer, pay, solicit or receive remuneration, directly or
indirectly, in order to induce business that is reimbursable
under any federal health care program. A violation of the
Anti-kickback Law may result in imprisonment for up to five
years and fines of up to $250,000 in the case of individuals and
$500,000 in the case of organizations. Convictions under the
Anti-kickback Law result in mandatory exclusion from federal
health care programs for a minimum of five years. In addition,
HHS has the authority to impose civil assessments and fines and
to exclude health care providers and others engaged in
prohibited activities from the Medicare, Medicaid and other
federal health care programs.
Actions which violate the Anti-kickback Law or similar laws may
also involve liability under the Federal False Claims Act, which
prohibits the knowing presentation of a false, fictitious or
fraudulent claim for payment to the U.S. Government.
Actions under the False Claims Act may be brought by the
Department of Justice or by a private individual in the name of
the government.
Although the Anti-kickback Law applies only to federal health
care programs, a number of states, including California, have
passed statutes substantially similar to the Anti-kickback Law
pursuant to which similar types of prohibitions are made
applicable to all other health plans and third-party payors.
Californias anti-kickback statute, commonly referred to as
Section 650, has been interpreted by the California
Attorney General and California courts in substantially the same
way as the HHS and the courts have interpreted the Anti-kickback
Law. A violation of Section 650 is punishable by
imprisonment and fines of up to $50,000.
Federal and state law enforcement authorities scrutinize
arrangements between health care providers and potential
referral sources to ensure that the arrangements are not
designed as a mechanism to induce patient care referrals and
opportunities. The law enforcement authorities, the courts and
Congress have also demonstrated a willingness to look behind the
formalities of a transaction to determine the underlying purpose
of payments between health care providers and actual or
potential referral sources. Generally, courts have taken a broad
interpretation of the scope of the Anti-kickback Law, holding
that the statute may be violated if merely one purpose of a
payment arrangement is to induce future referrals.
25
In addition to statutory exceptions to the Anti-kickback Law,
regulations provide for a number of safe harbors. If an
arrangement meets the provisions of a safe harbor, it is deemed
not to violate the Anti-kickback Law. An arrangement must fully
comply with each element of an applicable safe harbor in order
to qualify for protection. There are no safe harbors to
Californias Section 650.
Among the safe harbors that may be relevant to us is the
discount safe harbor. The discount safe harbor applies to
discounts provided by providers and suppliers, including
laboratories, to clients with respect to Medicare, Medicaid,
private pay or HMO patients, where the referring physician or
institution bills the payor for the test, not when the service
provider bills the payor directly. If the terms of the discount
safe harbor are met, the discounts will not be considered
prohibited remuneration under the Anti-kickback Law.
California does not have a discount safe harbor. However,
certain licensees, such as hospitals or physicians, may only
mark-up
laboratory tests purchased by those licensees from a laboratory
if certain disclosures are made to patients and third-party
payors regarding the
mark-up.
Therefore, if and when we elect to offer discounts to California
customers, including any hospital or physician, such discounts
would not likely be viewed by regulators as prohibited under
Section 650 because the
mark-up
would be disclosed by the customer to its buyer under
Californias
mark-up
laws. In contrast, any such discounts provided by us to our
non-California customers would have to be analyzed under
Californias Section 650.
The personal services safe harbor to the Anti-kickback Law
provides that remuneration paid to a referral source for
personal services will not violate the Anti-kickback Law
provided all of the elements of that safe harbor are met. One
element is that, if the agreement is intended to provide for the
services of the physician on a periodic, sporadic or part-time
basis, rather than on a full-time basis for the term of the
agreement, the agreement specifies exactly the schedule of such
intervals, their precise length, and the exact charge for such
intervals. Our personal services arrangements with some
physicians did not meet the specific requirement of this safe
harbor that the agreement specify exactly the schedule of the
intervals of time to be spent on the services because the nature
of the services, for example, speaking engagements, does not
lend itself to exact scheduling and therefore meeting this
element of the personal services safe harbor is impractical.
Failure to meet the terms of the safe harbor does not render an
arrangement illegal. Rather, an arrangement would not have the
protections of the safe harbor if challenged by a regulator and,
if necessary, the parties might be required to demonstrate why
the arrangement does not violate the Anti-kickback Law.
While we believe that we are in compliance with the
Anti-kickback Law and Section 650, there can be no
assurance that our relationships with physicians, hospitals and
other customers will not be subject to investigation or a
successful challenge under such laws. If imposed for any reason,
sanctions under the Anti-kickback Law and Section 650 could
have a negative effect on our business.
Other
Federal Fraud and Abuse Laws
In addition to the requirements that are discussed above, there
are several other health care fraud and abuse laws that could
have an impact on our business. For example, provisions of the
Social Security Act permit Medicare and Medicaid to exclude an
entity that charges the federal health care programs
substantially in excess of its usual charges for its services.
The terms usual charge and substantially in
excess are ambiguous and subject to varying
interpretations.
Further, the Federal False Claims Act prohibits a person from
knowingly submitting a claim or making a false record or
statement in order to secure payment by the federal government.
In addition to actions initiated by the government itself, the
statute authorizes actions to be brought on behalf of the
federal government by a private party having knowledge of the
alleged fraud. Because the complaint is initially filed under
seal, the action may be pending for some time before the
defendant is even aware of the action. If the government is
ultimately successful in obtaining redress in the matter or if
the plaintiff succeeds in obtaining redress without the
governments involvement, then the plaintiff will receive a
percentage of the recovery. Finally, the Social Security Act
includes its own provisions that prohibit the filing of false
claims or submitting false statements in order to obtain
payment. Violation of these provisions may result in fines,
imprisonment or both, and possible exclusion from Medicare or
Medicaid.
26
California
Laboratory Licensing
In addition to federal certification requirements of
laboratories under CLIA, licensure is required and maintained
for our laboratory under California law. Such laws establish
standards for the
day-to-day
operation of a clinical laboratory, including the training and
skills required of personnel and quality control. In addition,
California laws mandate proficiency testing, which involves
testing of specimens that have been specifically prepared for
the laboratory.
If our laboratory is out of compliance with California
standards, the California Department of Health Services, or DHS,
may suspend, restrict or revoke our license to operate our
laboratory; assess substantial civil money penalties; or impose
specific corrective action plans. Any such actions could
materially affect our business. We maintain a current license in
good standing with DHS. However, we cannot provide assurance
that DHS will at all times in the future find us to be in
compliance with all such laws.
New
York Laboratory Licensing
Because we receive specimens from New York State, our clinical
laboratory is required to be licensed by New York. We
maintain such licensure for our laboratory under New York state
laws and regulations, which establish standards for:
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day-to-day
operation of a clinical laboratory, including training and skill
levels required of laboratory personnel;
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physical requirements of a facility;
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equipment; and
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quality control.
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New York law also mandates proficiency testing for laboratories
licensed under New York state law, regardless of whether or not
such laboratories are located in New York. If a laboratory is
out of compliance with New York statutory or regulatory
standards, the New York State Department of Health, or the DOH,
may suspend, restrict or revoke the laboratorys New York
license or assess civil money penalties. Statutory or regulatory
noncompliance may result in a laboratorys being found
guilty of a misdemeanor under New York law. Should we be found
out of compliance with New York laboratory requirements, we
could be subject to such sanctions, which could harm our
business. We maintain a current license in good standing with
the DOH. However, we cannot provide assurance that the DOH will
at all times find us to be in compliance with all such laws.
Other
States Laboratory Testing
Florida, Maryland, Pennsylvania and Rhode Island require
out-of-state
laboratories which accept specimens from those states to be
licensed. We have obtained licenses in those four states and
believe we are in compliance with applicable licensing laws.
From time to time, we may become aware of other states that
require out of state laboratories to obtain licensure in order
to accept specimens from the state, and it is possible that
other states do have such requirements or will have such
requirements in the future. If we identify any other state with
such requirements or if we are contacted by any other state
advising us of such requirements, we intend to follow
instructions from the state regulators as to how we should
comply with such requirements.
Patents
and Proprietary Technology
In order to remain competitive, we must develop and maintain
protection on the proprietary aspects of our technologies. We
rely on a combination of patent applications, copyrights,
trademarks, trade secret laws and confidentiality, material data
transfer agreements, licenses and invention assignment
agreements to protect our intellectual property rights. We also
rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and
maintain our competitive position. We generally protect this
information with reasonable security measures.
27
As December 31, 2006, we had two issued patents, one of
which was issued jointly to us and to the NSABP, and a number of
pending U.S. patent applications, including provisional and
non-provisional filings. Our issued patents expire in 2023 and
2024, respectively. Some of these U.S. patent applications
also have corresponding pending applications under the Patent
Cooperation Treaty in Canada, Europe, Japan and Australia. In
these patent applications, we have either sole or joint
ownership positions. In those cases where joint ownership
positions were created, we have negotiated contractual
provisions providing us with the opportunity to acquire
exclusive rights under the patent applications. Under three
patent applications, we have elected to allow exclusive options
to lapse without exercising the option. The joint ownership
agreements generally are in the form of material data transfer
agreements that were executed at the onset of our collaborations
with third parties.
Our patent applications relate to two main areas: gene
expression technology methods, and gene markers for cancer
recurrence and drug response in certain forms of cancer. We
intend to file additional patent applications in the United
States and abroad to strengthen our intellectual property
rights. Our patent applications may not result in issued
patents, and we cannot assure you that any patents that might
issue will protect our technology. Any patents issued to us in
the future may be challenged by third parties as being invalid
or unenforceable, or third parties may independently develop
similar or competing technology that are not covered by our
patents. We cannot be certain that the steps we have taken will
prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
We have received notices of claims of infringement,
misappropriation or misuse of other parties proprietary
rights and may from time to time receive additional notices.
Some of these claims may lead to litigation. We cannot assure
you that we will prevail in these actions, or that other actions
alleging misappropriation or misuse by us of third-party trade
secrets, infringement by us of third-party patents and
trademarks or the validity of patents issued to us in the
future, will not be asserted or prosecuted against us, or that
any assertions of misappropriation, infringement or misuse or
prosecutions seeking to establish the validity of our patents
will not materially or adversely affect our business, financial
condition and results of operations.
An adverse determination in litigation or interference
proceedings to which we may become a party relating to any
patents issued to us in the future or any patents owned by third
parties could subject us to significant liabilities to third
parties or require us to seek licenses from third parties.
Furthermore, if we are found to willfully infringe these
patents, we could, in addition to other penalties, be required
to pay treble damages. Although patent and intellectual property
disputes in this area have often been settled through licensing
or similar arrangements, costs associated with such arrangements
may be substantial and could include ongoing royalties. We may
be unable to obtain necessary licenses on satisfactory or
commercially feasible terms, if at all. If we do not obtain
necessary licenses, we may not be able to redesign
Onco
type
DX or other of our tests to avoid infringement,
or such redesign may take considerable time, and force us to
reassess our business plans. Adverse determinations in a
judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and
selling Onco
type
DX or other of our tests, which would
have a significant adverse impact on our business.
All employees and technical consultants working for us are
required to execute confidentiality agreements in connection
with their employment and consulting relationships with us.
Confidentiality agreements provide that all confidential
information developed or made known to others during the course
of the employment, consulting or business relationship shall be
kept confidential except in specified circumstances. Agreements
with employees provide that all inventions conceived by the
individual while employed by us are our exclusive property. We
cannot provide any assurance that employees and consultants will
abide by the confidentiality or assignment terms of these
agreements. Despite measures taken to protect our intellectual
property, unauthorized parties might copy aspects of our
technology or obtain and use information that we regard as
proprietary.
Roche
License Agreement
We have obtained from Roche Molecular Systems, Inc. a
non-exclusive license under a number of U.S. patents
claiming nucleic acid amplification processes known as
polymerase chain reaction, or PCR, homogeneous polymerase chain
reaction, and reverse transcription polymerase chain reaction,
or RT-PCR. We use these processes in our research and
development and in the processing of our tests. The Roche
license is limited to the performance of clinical laboratory
services within the United States and Puerto Rico, and does not
include the right to make or
28
sell products using the patented processes. The license
continues as long as the underlying patent rights are in effect,
but is subject to early termination by Roche under the following
circumstances:
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a change in our ownership;
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a declaration of bankruptcy or insolvency, the making of an
assignment for the benefit of our creditors, having a receiver
appointed, or losing the federal or state licenses necessary for
our operation;
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a change in our status to a non-profit entity or government
institution; or
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our breach of or default under a material term of the license.
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If the Roche license is terminated, we will be unable to use the
licensed processes to conduct research and development or to
perform our tests. As payment for the licenses granted to us, we
make royalty payments to Roche consisting of a specified
percentage of our net revenues.
Oxford
Finance Agreements
We have entered into a master security agreement and a number of
promissory notes with Oxford Finance Corporation to finance
equipment leases, computer and software leases and leasehold
improvements. Under the master security agreement, we granted a
security interest to Oxford in all of our goods, equipment,
instruments and investment property. Events that would
constitute a default by us under the master security agreement
include, among others, our failure to pay an obligation when
due, an attempt by us to sell, lease, transfer or encumber the
collateral, our failure to maintain liability insurance as
required by the agreement; our dissolving, becoming insolvent,
filing for bankruptcy or having a receiver appointed, a change
in our ownership or a material adverse change in our financial
condition, business or operations.
If we default under the master security agreement, Oxford may
declare all of our indebtedness under the promissory notes to be
immediately due and payable.
The promissory notes provide that amounts borrowed will be
repaid in periodic installments. Principal underlying promissory
notes to finance equipment leases must be paid in 45 to
48 monthly installments, and principal underlying
promissory notes to finance computer and software leases and
leasehold improvements must be paid in 36 monthly
installments. Prepayment of indebtedness under a promissory note
is subject to a prepayment penalty and is allowed only after the
first anniversary of the note. As of December 31, 2006, the
outstanding principal amount under these promissory notes was
$7.3 million.
Research
and Development Expenses
Research and development expenses were $12.8 million,
$9.5 million and $10.0 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Employees
As of December 31, 2006, we had 191 employees. None of our
employees are covered by collective bargaining arrangements, and
our management considers its relationships with employees to be
good.
Available
Information
Our website is located at
www.genomichealth.com.
We make
available free of charge on our website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the Securities and Exchange Commission. Our website
and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on
Form 10-K.
29
RISKS
RELATED TO OUR COMPANY
We are
an early stage company with a history of losses, and we expect
to incur net losses for the foreseeable future.
We have incurred substantial net losses since our inception. For
the year ended December 31, 2006, we incurred a net loss of
$28.9 million. From our inception in August 2000 through
December 31, 2006, we had an accumulated deficit of
approximately $125.1 million. To date, we have not, and we
may never, achieve revenues sufficient to offset expenses. We
expect to devote substantially all of our resources to continue
commercializing our existing test, Onco
type
DX, and to
develop future tests.
We expect to incur additional losses in future years, and we may
never achieve profitability. In addition, we have only recently
begun to commercialize Onco
type
DX and do not expect our
losses to be substantially mitigated by revenues from
Onco
type
DX or future products, if any, for a number of
years.
We
expect to continue to incur significant research and development
expenses, which may make it difficult for us to achieve
profitability.
In recent years, we have incurred significant costs in
connection with the development of Onco
type
DX. Our
research and development expenses were $12.8 million for
the year ended December 31, 2006. We expect our research
and development expense levels to remain high for the
foreseeable future as we seek to enhance our existing test and
develop new tests. As a result, we will need to generate
significant revenues in order to achieve profitability. Our
failure to achieve profitability in the future could cause the
market price of our common stock to decline.
If
third-party payors, including managed care organizations and
Medicare, do not provide reimbursement or rescind their
reimbursement policies for Oncotype DX, its commercial success
could be compromised.
Oncotype
DX has a list price of $3,460. Physicians and
patients may decide not to order Onco
type
DX unless
third-party payors, such as managed care organizations as well
as government payors such as Medicare and Medicaid, pay a
substantial portion of the tests price. There is
significant uncertainty concerning third-party reimbursement of
any test incorporating new technology, including Onco
type
DX. Reimbursement by a third-party payor may depend on a
number of factors, including a payors determination that
tests using our technologies are:
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not experimental or investigational,
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medically necessary,
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appropriate for the specific patient,
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cost-effective, and
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supported by peer-reviewed publications.
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Since each payor makes its own decision as to whether to
establish a policy to reimburse, seeking these approvals is a
time-consuming and costly process. To date, we have secured
policy-level reimbursement approval from only a limited number
of third-party payors and have a limited number of approvals for
state Medicaid programs. We cannot be certain that coverage for
Onco
type
DX will be provided in the future by any
third-party payors.
Several entities conduct technology assessments of new medical
tests and devices and provide the results of their assessments
for informational purposes to other parties. These assessments
may be used by third-party payors and health care providers such
as Blue Cross and Blue Shield, which provide healthcare coverage
for nearly one-third of all Americans, as grounds to deny
coverage for a test or procedure. Onco
type
DX has
received negative assessments and may receive additional
negative assessments in the future. For example, in early 2005,
the Medical Advisory Panel of the Blue Cross and Blue Shield
Associations Technology Evaluation Center, a technology
30
assessment group, concluded that the existing clinical data in
support of Onco
type
DX did not meet the panels
technology criteria for clinical effectiveness and
appropriateness.
In January 2006, NHIC, the California Medicare contractor with
responsibility for processing and paying claims submitted by us,
released a local coverage determination providing coverage for
Onco
type
DX when used in accordance with the terms of the
determination. The local coverage determination is effective for
Onco
type
DX tests provided on or after February 27,
2006. Until recently, there had been some question as to whether
claims for Onco
type
DX tests performed on Medicare
beneficiaries who were hospital inpatients at the time the tumor
tissue samples were obtained may be billed by us to NHIC or must
be incorporated in the payment that the hospital receives for
their services related to the patients breast cancer. As
of December 31, 2006, the volume of patients who fell into
this category represented a very small portion (approximately
2%) of our total testing population.
Based on a final rule effective January 1, 2007, we are
permitted to submit claims to NHIC for the Onco
type
DX
tests performed on Medicare beneficiaries who were hospital
inpatients or outpatients at the time the tumor tissue samples
were obtained, but only if the test was ordered at least
14 days following the date of the patients discharge
from the hospital and where other specified conditions are met.
We are in the process of making arrangements with hospitals for
payment of the test when performed for the small portion of
Medicare beneficiaries, representing approximately 3% of our
total testing population, who are hospital inpatients or
outpatients at the time specimens are collected and who do not
meet criteria under the final rule for billing by us. Finally,
we have been engaged in discussions with the Centers for
Medicare/Medicaid Services, or CMS, about the application of the
final rule to hospital outpatients. We believe the final rule
should not apply to the Onco
type
DX tests performed on
tumor tissue samples obtained while the patient is a hospital
outpatient, and that the tests performed on tissue samples taken
from hospital outpatients are reimbursable under the Medicare
program, regardless of when the testing of such tissue samples
takes place. While we are continuing to pursue this matter, at
this point, CMS intends for the final rule to apply to
outpatients as well as inpatients, and we are notifying
hospitals accordingly.
Insurers, including managed care organizations as well as
government payors such as Medicare, have increased their efforts
to control the cost, utilization and delivery of health care
services. From time to time, Congress has considered and
implemented changes in the Medicare fee schedules in conjunction
with budgetary legislation, most recently in February 2006.
Further reductions of reimbursement for Medicare services may be
implemented from time to time. Reductions in the reimbursement
rates of other third- party payors have occurred and may occur
in the future. These measures have resulted in reduced prices,
added costs and decreased test utilization for the clinical
laboratory industry.
Medicare currently contracts with a large number of fiscal
intermediaries and carriers that are responsible for processing
and paying claims. Within the next few years, Medicare is
expected to reduce this number to fifteen regional Medical
Administrative Contractors, or MACs. If NHIC is not selected as
one of these regional MACs, we cannot be certain that we will
obtain a positive local coverage determination from another
contractor.
If we are unable to obtain reimbursement approval from private
payors and Medicare and Medicaid programs for Onco
type
DX, or if the amount reimbursed is inadequate, our ability
to generate revenues from Onco
type
DX could be limited.
Even if we are being reimbursed, insurers may cancel their
contracts with us at any time or stop paying for our test which
would reduce our revenue.
If the
U.S. Food and Drug Administration, or FDA, were to begin
regulating our test, we could be forced to stop sales of
Oncotype DX, we could experience significant delays in
commercializing any future products, we could incur substantial
costs and time delays associated with meeting requirements for
pre-market approval or we could experience decreased demand for
or reimbursement of our test.
Clinical laboratory tests like Onco
type
DX are regulated
under the Clinical Laboratory Improvement Amendments of 1988, or
CLIA, as administered through the CMS, as well as by applicable
state laws. Diagnostic kits that are sold and distributed
through interstate commerce are regulated as medical devices by
FDA. Clinical laboratory tests that are developed and validated
by a laboratory for its own use are called laboratory
development tests, or LDTs. Most LDTs currently are not subject
to FDA regulation, although reagents or software provided by
third parties and used to perform LDTs may be subject to
regulation. We believe that 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
31
regulation under established FDA policies. The container we
provide for collection and transport of tumor samples from a
pathology laboratory to our laboratory is a medical device
subject to FDA regulation but is currently exempt from
pre-market review by FDA.
In January 2006, we received a letter from FDA regarding
Onco
type
DX inviting us to meet with FDA to discuss the
nature and appropriate regulatory status of and the least
burdensome ways that we may fulfill any FDA pre-market review
requirements that may apply. In September 2006, FDA issued draft
guidance on a new class of tests called In Vitro
Diagnostic Multivariate Index Assays. This draft guidance,
which is intended for public comment, represents the first
public discussion surrounding FDAs position regarding the
regulation of certain laboratory-developed tests. Under this
draft guidance, Onco
type
DX could be classified as either
a Class II or a Class III medical device, which may
require varying levels of FDA pre-market review depending upon
intended use and on the level of control necessary to assure the
safety and effectiveness of the test. The draft guidance was
open for public comment until March 5, 2007, during which
time we and others had the opportunity to comment on their
proposed guidelines. In addition, FDA held a public meeting on
February 8, 2007 at which several interested parties
commented on the draft guidance.
We cannot provide any assurance that FDA regulation, including
pre-market review, will not be required in the future for
Onco
type
DX, either through new enforcement policies
adopted by FDA or new legislation enacted by Congress. If
pre-market review is required, our business could be negatively
impacted until such review is completed and approval or
clearance to market is obtained, and FDA could require that we
stop selling our test pending pre-market approval. If our test
is allowed to remain on the market but there is uncertainty
about our test or if it is labeled investigational by FDA,
orders or reimbursement may decline. The regulatory approval
process may involve, among other things, successfully completing
additional clinical trials and submitting a pre-market clearance
notice or filing a pre-market approval application with FDA. If
pre-market review is required by FDA, there can be no assurance
that our test will be cleared or approved on a timely basis, if
at all. Ongoing compliance with FDA regulations would increase
the cost of conducting our business, and subject us to
inspection by FDA and to the requirements of FDA and penalties
for failure to comply with these requirements. Notwithstanding
the above, we may decide voluntarily to pursue FDA pre-market
review of Onco
type
DX if we determine that doing so would
be appropriate.
Should any of the reagents obtained by us from vendors and used
in conducting our LDT be affected by future regulatory actions,
our business could be adversely affected by those actions,
including increasing cost of testing or delaying, limiting or
prohibiting the purchase of reagents necessary to perform
testing.
If we
were required to conduct additional clinical trials prior to
marketing our test, those trials could lead to delays or failure
to obtain necessary regulatory approvals and harm our ability to
become profitable.
If FDA decides to regulate our test, it may require extensive
pre-market clinical testing prior to submitting a regulatory
application for commercial sales. If we are required to conduct
pre-market clinical trials, whether using prospectively acquired
samples or archival samples, delays in the commencement or
completion of clinical testing could significantly increase our
test development costs and delay commercialization. Many of the
factors that may cause or lead to a delay in the commencement or
completion of clinical trials may also ultimately lead to delay
or denial of regulatory approval. The commencement of clinical
trials may be delayed due to insufficient patient enrollment,
which is a function of many factors, including the size of the
patient population, the nature of the protocol, the proximity of
patients to clinical sites and the eligibility criteria for the
clinical trial. We may find it necessary to engage contract
research organizations to perform data collection and analysis
and other aspects of our clinical trials, which might increase
the cost and complexity of our trials. We may also depend on
clinical investigators, medical institutions and contract
research organizations to perform the trials properly. If these
parties do not successfully carry out their contractual duties
or obligations or meet expected deadlines, or if the quality,
completeness or accuracy of the clinical data they obtain is
compromised due to the failure to adhere to our clinical
protocols or for other reasons, our clinical trials may have to
be extended, delayed or terminated. Many of these factors would
be beyond our control. We may not be able to enter into
replacement arrangements without undue delays or considerable
expenditures. If there are delays in testing or approvals as a
result of the failure to perform by third parties, our research
and development costs would increase, and we may not be able to
obtain regulatory
32
approval for our test. In addition, we may not be able to
establish or maintain relationships with these parties on
favorable terms, if at all. Each of these outcomes would harm
our ability to market our test, or to become profitable.
Complying
with numerous regulations pertaining to our business is an
expensive and time-consuming process, and any failure to comply
could result in substantial penalties.
We are subject to CLIA, a federal law that regulates clinical
laboratories that perform testing on specimens derived from
humans for the purpose of providing information for the
diagnosis, prevention or treatment of disease. CLIA is intended
to ensure the quality and reliability of clinical laboratories
in the United States by mandating specific standards in the
areas of personnel qualifications, administration, and
participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. We have a
current certificate of accreditation under CLIA to perform
testing. To renew this certificate, we are subject to survey and
inspection every two years. Moreover, CLIA inspectors may make
random inspections of our laboratory.
We are also required to maintain a license to conduct testing in
California. California laws establish standards for
day-to-day
operation of our clinical laboratory, including the training and
skills required of personnel and quality control. Moreover,
several states require that we hold licenses to test specimens
from patients residing in those states. Other states have
similar requirements or may adopt similar requirements in the
future. Finally, we may be subject to regulation in foreign
jurisdictions as we seek to expand international distribution of
our test.
If we were to lose our CLIA accreditation or California license,
whether as a result of a revocation, suspension or limitation,
we would no longer be able to sell Onco
type
DX, which
would limit our revenues and harm our business. If we were to
lose our license in other states where we are required to hold
licenses, we would not be able to test specimens from those
states.
We are subject to other regulation by both the federal
government and the states in which we conduct our business,
including:
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Medicare billing and payment regulations applicable to clinical
laboratories;
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the federal Medicare and Medicaid Anti-kickback Law and state
anti-kickback prohibitions;
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the federal physician self-referral prohibition, commonly known
as the Stark Law, and the state equivalents;
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the federal Health Insurance Portability and Accountability Act
of 1996;
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the Medicare civil money penalty and exclusion
requirements; and
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the federal civil and criminal False Claims Act.
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The risk of our being found in violation of these laws and
regulations is increased by the fact that many of them have not
been fully interpreted by the regulatory authorities or the
courts, and their provisions are open to a variety of
interpretations. Any action brought against us for violation of
these laws or regulations, even if we successfully defend
against it, could cause us to incur significant legal expenses
and divert our managements attention from the operation of
our business. If our operations are found to be in violation of
any of these laws and regulations, we may be subject to any
applicable penalty associated with the violation, including
civil and criminal penalties, damages, fines, we could be
required to refund payments received by us, and we could be
required to curtail or cease our operations. Any of the
foregoing consequences could seriously harm our business and our
financial results.
Our
financial results depend on sales of one test, Oncotype DX, and
we will need to generate sufficient revenues from this and other
tests to run our business.
For the foreseeable future, we expect to derive substantially
all of our revenues from sales of one test, Onco
type
DX.
We have been selling this test since January 2004. We are in
various stages of research and development for other tests that
we may offer as well as for enhancements to our existing test.
We do not currently expect to commercialize tests for colon
cancer until 2009, and we are not currently able to estimate
when we may be able to commercialize tests for other cancers or
whether we will be successful in doing so. If we are unable to
increase sales of Onco
type
DX or to successfully develop
and commercialize other tests or enhancements, our revenues and
our ability to achieve profitability would be impaired, and the
market price of our common stock could decline.
33
We may
experience limits on our revenues if physicians decide not to
order our test.
If medical practitioners do not order Onco
type
DX or any
future tests developed by us, we will likely not be able to
create demand for our products in sufficient volume for us to
become profitable. To generate demand, we will need to continue
to make oncologists, surgeons and pathologists aware of the
benefits of Onco
type
DX and any products we may develop
in the future through published papers, presentations at
scientific conferences and
one-on-one
education by our sales force. In addition, we will need to
demonstrate our ability to obtain adequate reimbursement
coverage from third-party payors.
Existing guidelines and practices regarding the treatment of
breast cancer recommend that chemotherapy be considered in most
cases, including many cases in which our test may indicate that,
based on our clinical trial results, chemotherapy is of little
or no benefit. Accordingly, physicians may be reluctant to order
a test that may suggest recommending against chemotherapy in
treating breast cancer where current guidelines recommend
consideration of such treatment. Moreover, our test provides
quantitative information not currently provided by pathologists
and it is performed at our facility rather than by the
pathologist in a local laboratory, so pathologists may be
reluctant to order or support our test. These facts may make it
difficult for us to convince medical practitioners to order
Onco
type
DX for their patients, which could limit our
ability to generate revenues and our ability to achieve
profitability.
We may
experience limits on our revenues if patients decide not to use
our test.
Some patients may decide not to order our test due to its list
price of $3,460, part or all of which may be payable directly by
the patient if the applicable payor denies reimbursement in full
or in part. Even if medical practitioners recommend that their
patients use our test, patients may still decide not to use
Onco
type
DX, either because they do not want to be made
aware of the likelihood of recurrence or they wish to pursue a
particular course of therapy regardless of test results. If only
a small portion of the patient population decides to use our
test, we will experience limits on our revenues and our ability
to achieve profitability.
If we
are unable to develop products to keep pace with rapid
technological, medical and scientific change, our operating
results and competitive position would be harmed.
In recent years, there have been numerous advances in
technologies relating to the diagnosis and treatment of cancer.
For example, technologies in addition to ours now reportedly
permit measurement of gene expression in fixed, paraffin
embedded tissue specimens. Also, new hormonal therapies such as
aromatase inhibitors are viewed by physicians as promising
therapies for breast cancer with more tolerable side effects
than those associated with tamoxifen, the hormonal therapy
commonly used today in treatment. For advanced cancer, new
chemotherapeutic strategies are being developed that may
increase survival time and reduce toxic side effects. These
advances require us continuously to develop new products and
enhance existing products to keep pace with evolving standards
of care. Our test could become obsolete unless we continually
innovate and expand our product to demonstrate recurrence and
treatment benefit in patients treated with new therapies. New
treatment therapies typically have only a few years of clinical
data associated with them, which limits our ability to perform
clinical studies and correlate sets of genes to a new
treatments effectiveness. If we are unable to demonstrate
the applicability of our test to new treatments, then sales of
our test could decline, which would harm our revenues.
Our
rights to use technologies licensed from third parties are not
within our control, and we may not be able to sell our products
if we lose our existing rights or cannot obtain new rights on
reasonable terms.
We license from third parties technology necessary to develop
our products. For example, we license technology from Roche
Molecular Systems, Inc. that we use to analyze genes for
possible inclusion in our tests and that we use in our
laboratory to conduct our test. In return for the use of a third
partys technology, we may agree to pay the licensor
royalties based on sales of our products. Royalties are a
component of cost of product revenues and impact the margin on
our test. We may need to license other technology to
commercialize future products. Our business may suffer if these
licenses terminate, if the licensors fail to abide by the terms
of the license or fail to prevent infringement by third parties,
if the licensed patents or other rights are found to be invalid
or if we are unable to enter into necessary licenses on
acceptable terms.
34
Our
competitive position depends on maintaining intellectual
property protection.
Our ability to compete and to achieve and maintain profitability
depends on our ability to protect our proprietary discoveries
and technologies. We currently rely on a combination of patent
applications, copyrights, trademarks, trade secret laws and
confidentiality agreements, material data transfer agreements,
license agreements and invention assignment agreements to
protect our intellectual property rights. We also rely upon
unpatented know-how and continuing technological innovation to
develop and maintain our competitive position. Patents may be
granted to us jointly with other organizations, and while we may
have a right of first refusal, we cannot guarantee that a joint
owner will not license rights to another party.
As December 31, 2006, we had two issued patents, one of
which was issued jointly to us and to the NSABP. Our pending
patent applications may not result in issued patents, and we
cannot assure you that our issued patent or any patents that
might ultimately be issued by the U.S. Patent and Trademark
Office will protect our technology. Any patents that may be
issued to us might be challenged by third parties as being
invalid or unenforceable, or third parties may independently
develop similar or competing technology that avoids our patents.
We cannot be certain that the steps we have taken will prevent
the misappropriation and use of our intellectual property,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
From time to time, the United States Supreme Court, other
federal courts, U.S. Congress or the U.S. Patent and
Trademark Office may change the standards of patentability and
any such changes could have a negative impact on our business.
We may
face intellectual property infringement claims that could be
time-consuming and costly to defend and could result in our loss
of significant rights and the assessment of treble
damages.
We have received notices of claims of infringement,
misappropriation or misuse of other parties proprietary
rights and may from time to time receive additional notices.
Some of these claims may lead to litigation. We cannot assure
you that we will prevail in these actions, or that other actions
alleging misappropriation or misuse by us of third-party trade
secrets, infringement by us of third-party patents and
trademarks or the validity of our patents, will not be asserted
or prosecuted against us. We may also initiate claims to defend
our intellectual property. Intellectual property litigation,
regardless of outcome, is expensive and time-consuming, could
divert managements attention from our business and have a
material negative effect on our business, operating results or
financial condition. If there is a successful claim of
infringement against us, we may be required to pay substantial
damages (including treble damages if we were to be found to have
willfully infringed a third partys patent) to the party
claiming infringement, develop non-infringing technology, stop
selling our test or using technology that contains the allegedly
infringing intellectual property or enter into royalty or
license agreements that may not be available on acceptable or
commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on
a timely basis could harm our business. In addition, revising
our test to include the non-infringing technologies would
require us to re-validate our test, which would be costly and
time consuming. Also, we may be unaware of pending patent
applications that relate to our test. Parties making
infringement claims on future issued patents may be able to
obtain an injunction that would prevent us from selling our or
using technology that contains the allegedly infringing
intellectual property, which could harm our business.
There are a number of patents and patent applications that may
constitute prior art in the field of genomic-based diagnostics.
We may be required to pay royalties, damages and costs to firms
who own the rights to these patents, or we might be restricted
from using any of the inventions claimed in those patents.
If we
are unable to compete successfully, we may be unable to increase
or sustain our revenues or achieve profitability.
Our principal competition comes from existing diagnostic methods
used by pathologists and oncologists. These methods have been
used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment
and kits or reagents to local pathology laboratories represent
another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more
readily than tests like Onco
type
DX that are performed
outside the pathology laboratory. In addition, few diagnostic
methods are as expensive as Onco
type
DX.
35
We also face competition from many from companies that offer
products or have conducted research to profile gene expression
in breast cancer, including Agendia B.V. and AviaraDX.
Commercial laboratories with strong distribution networks for
diagnostic tests, such as Genzyme Corporation, Laboratory
Corporation of America Holdings and Quest Diagnostics
Incorporated, may become competitors. Other potential
competitors include companies that develop diagnostic tests such
as Bayer Healthcare LLC, Celera Genomics, a business segment of
Applera Corporation, Roche Diagnostics, a division of F.
Hoffmann-La Roche Ltd, and Veridex LLC, a
Johnson & Johnson company, other small companies and
academic and research institutions. Our competitors may invent
and commercialize technology platforms that compete with ours.
In addition, in December 2005, the federal government allocated
a significant amount funding to The Cancer Genome Atlas, a
project aimed at developing a comprehensive catalog of the
genetic mutations and other genomic changes that occur in
cancers and maintaining the information in a free public
database. As more information regarding cancer genomics becomes
available to the public, we anticipate that more products aimed
at identifying targeted treatment options will be developed and
these products may compete with ours.
Our test is currently considered relatively expensive for a
diagnostic test, and we expect to raise prices in the future.
This could impact reimbursement of and demand for Onco
type
DX. Many of our present and potential competitors have
widespread brand recognition and substantially greater financial
and technical resources and development, production and
marketing capabilities than we do. Others may develop
lower-priced, less complex tests that could be viewed by
physicians and payors as functionally equivalent to our test,
which could force us to lower the list price of our test and
impact our operating margins and our ability to achieve
profitability. Some competitors have developed tests cleared for
marketing by FDA. There may be a marketing differentiation or
perception that an FDA-cleared test is more desirable than
Onco
type
DX, and that may discourage adoption and
reimbursement. If we are unable to compete successfully against
current or future competitors, we may be unable to increase
market acceptance for and sales of our test, which could prevent
us from increasing or sustaining our revenues or achieving or
sustaining profitability and could cause the market price of our
common stock to decline.
Our
research and development efforts will be hindered if we are not
able to contract with third parties for access to archival
tissue samples.
Under standard clinical practice in the United States, tumor
biopsies removed from patients are chemically preserved and
embedded in paraffin wax and stored. Our clinical development
relies on our ability to secure access to these archived tumor
biopsy samples, as well as information pertaining to their
associated clinical outcomes. Others have demonstrated their
ability to study archival samples and often compete with us for
access. Additionally, the process of negotiating access to
archived samples is lengthy since it typically involves numerous
parties and approval levels to resolve complex issues such as
usage rights, institutional review board approval, privacy
rights, publication rights, intellectual property ownership and
research parameters. If we are not able to negotiate access to
archival tumor tissue samples with hospitals and collaborators,
or if other laboratories or our competitors secure access to
these samples before us, our ability to research, develop and
commercialize future products will be limited or delayed.
If we
cannot maintain our current clinical collaborations and enter
into new collaborations, our product development could be
delayed.
We rely on and expect to continue to rely on clinical
collaborators to perform a substantial portion of our clinical
trial functions. If any of our collaborators were to breach or
terminate its agreement with us or otherwise fail to conduct its
collaborative activities successfully and in a timely manner,
the research, development or commercialization of the products
contemplated by the collaboration could be delayed or
terminated. If any of our collaboration agreements is
terminated, or if we are unable to renew those collaborations on
acceptable terms, we would be required to seek alternative
collaborations. We may not be able to negotiate additional
collaborations on acceptable terms, if at all, and these
collaborations may not be successful.
In the past, we have entered into clinical trial collaborations
with highly regarded organizations in the cancer field,
including the National Surgical Adjuvant Breast and Bowel
Project, or NSABP, and Northern California Kaiser Permanente.
Our success in the future depends in part on our ability to
enter into agreements with other leading cancer organizations.
This can be difficult due to internal and external constraints
placed on these organizations. Some organizations may limit the
number of collaborations they have with any one company so as to
not be perceived as biased or conflicted. Organizations may also
have insufficient administrative and related infrastructure to
enable
36
collaborations with many companies at once, which can extend the
time it takes to develop, negotiate and implement a
collaboration. Additionally, organizations often insist on
retaining the rights to publish the clinical data resulting from
the collaboration. The publication of clinical data in
peer-reviewed journals is a crucial step in commercializing and
obtaining reimbursement for a test such as ours, and our
inability to control when, if ever, results are published may
delay or limit our ability to derive sufficient revenues from
any product that may result from a collaboration.
From time to time we expect to engage in discussions with
potential clinical collaborators which may or may not lead to
collaborations. However, we cannot guarantee that any
discussions will result in clinical collaborations or that any
clinical studies which may result will be enrolled or completed
in a reasonable time frame or with successful outcomes. Once
news of discussions regarding possible collaborations are known
in the medical community, regardless of whether the news is
accurate, failure to announce a collaborative agreement or the
entitys announcement of a collaboration with an entity
other than us may result in adverse speculation about us, our
product or our technology, resulting in harm to our reputation
and our business.
New
test development involves a lengthy and complex process, and we
may be unable to commercialize any of the tests we are currently
developing.
We have multiple tests in various stages of development and
devote considerable resources to research and development. For
example, we are currently in the development stage of the
application of our technology to predict recurrence and the
therapeutic benefit of chemotherapy in colon cancer, and we are
conducting early development studies in N+ prostate, renal cell
and lung cancers and melanoma. Our N+ breast cancer program is
being considered for a move to the validation phase with
Onco
type
DX during 2007. There can be no assurance that
our technologies will be capable of reliably predicting the
recurrence of other cancers, such as colon and those cancers,
with the sensitivity and specificity necessary to be clinically
and commercially useful for the treatment of other cancers, or
that we can develop those technologies at all. In addition,
before we can develop diagnostic tests for new cancers and
commercialize any new products, we will need to:
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conduct substantial research and development;
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conduct validation studies;
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expend significant funds; and
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develop and
scale-up
our
laboratory processes.
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This process involves a high degree of risk and takes several
years. Our product development efforts may fail for many
reasons, including:
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failure of the product at the research or development stage;
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difficulty in accessing archival tissue samples, especially
tissue samples with known clinical results; or
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lack of clinical validation data to support the effectiveness of
the product.
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Few research and development projects result in commercial
products, and success in early clinical trials often is not
replicated in later studies. At any point, we may abandon
development of a product candidate or we may be required to
expend considerable resources repeating clinical trials, which
would adversely impact the timing for generating potential
revenues from those product candidates. In addition, as we
develop products, we will have to make significant investments
in product development, marketing and selling resources. If a
clinical validation study fails to demonstrate the prospectively
defined endpoints of the study, we would likely abandon the
development of the product or product feature that was the
subject of the clinical trial, which could harm our business.
The
loss of key members of our senior management team or our
inability to retain highly skilled scientists, clinicians and
salespeople could adversely affect our business.
Our success depends largely on the skills, experience and
performance of key members of our executive management team and
others in key management positions. The efforts of each of these
persons together will be critical to us as we continue to
develop our technologies and testing processes and as we attempt
to transition to a
37
company with more than one commercialized product. If we were to
lose one or more of these key employees, we may experience
difficulties in competing effectively, developing our
technologies and implementing our business strategies.
Our research and development programs and commercial laboratory
operations depend on our ability to attract and retain highly
skilled scientists and technicians, including geneticists,
licensed laboratory technicians, chemists, biostatisticians and
engineers. We may not be able to attract or retain qualified
scientists and technicians in the future due to the intense
competition for qualified personnel among life science
businesses, particularly in the San Francisco Bay Area. We
also face competition from universities and public and private
research institutions in recruiting and retaining highly
qualified scientific personnel. In addition, our success depends
on our ability to attract and retain salespeople with extensive
experience in oncology and close relationships with medical
oncologists, surgeons, pathologists and other hospital
personnel. We may have difficulties locating, recruiting or
retaining qualified salespeople, which could cause a delay or
decline in the rate of adoption of our products. If we are not
able to attract and retain the necessary personnel to accomplish
our business objectives, we may experience constraints that will
adversely affect our ability to support our discovery,
development and sales programs. All of our employees are at-will
employees, which means that either we or the employee may
terminate their employment at any time.
If our
sole laboratory facility becomes inoperable, we will be unable
to perform our test and our business will be
harmed.
We do not have redundant laboratory facilities. We perform all
of our diagnostic testing in our laboratory located in Redwood
City, California. Redwood City is situated on or near earthquake
fault lines. Our facility and the equipment we use to perform
our tests would be costly to replace and could require
substantial lead time to repair or replace. The facility may be
harmed or rendered inoperable by natural or man-made disasters,
including earthquakes, flooding and power outages, which may
render it difficult or impossible for us to perform our tests
for some period of time. The inability to perform our tests may
result in the loss of customers or harm our reputation, and we
may be unable to regain those customers in the future. Although
we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient
to cover all of our potential losses and may not continue to be
available to us on acceptable terms, or at all.
In order to rely on a third party to perform our tests, we could
only use another facility with established state licensure and
CLIA accreditation under the scope of which Onco
type
DX
could be performed following validation and other required
procedures. We cannot assure you that we would be able to find
another CLIA-certified facility willing to adopt Onco
type
DX and comply with the required procedures, or that this
laboratory would be willing to perform the tests for us on
commercially reasonable terms. In order to establish a redundant
laboratory facility, we would have to spend considerable time
and money securing adequate space, constructing the facility,
recruiting and training employees, and establishing the
additional operational and administrative infrastructure
necessary to support a second facility. Additionally, any new
clinical laboratory facility opened by us would be subject to
certification under CLIA and licensed by several states,
including California and New York, which can take a significant
amount of time and result in delays in our ability to begin
operations.
Changes
in healthcare policy could subject us to additional regulatory
requirements that may interrupt commercialization of Oncotype DX
and increase our costs.
Healthcare policy has been a subject of extensive discussion in
the executive and legislative branches of the federal and many
state governments. We developed our commercialization strategy
for Onco
type
DX based on existing healthcare policies.
Changes in healthcare policy, such as the creation of broad
limits for diagnostic products in general or requirements that
Medicare patients pay for portions of tests or services
received, could substantially interrupt the sales of Onco
type
DX, increase costs and divert managements attention.
For example, in 1989, the U.S. Congress passed federal
self-referral prohibitions commonly known as the Stark Law,
significantly restricting, regulating and changing
laboratories relationships with physicians. We cannot
predict what changes, if any, will be proposed or adopted or the
effect that such proposals or adoption may have on our business,
financial condition and results of operations.
38
We
rely on a limited number of suppliers or, in some cases, a sole
supplier, for some of our laboratory instruments and materials
and may not be able to find replacements in the event our
supplier no longer supplies that equipment.
We rely solely on Applied Biosystems, a division of Applera
Corporation, to supply some of the laboratory equipment on which
we perform our tests. We periodically forecast our needs for
laboratory equipment and enter into standard purchase orders
with Applied Biosystems based on these forecasts. We believe
that there are relatively few equipment manufacturers other than
Applied Biosystems that are currently capable of supplying the
equipment necessary for Onco
type
DX. Even if we were to
identify other suppliers, there can be no assurance that we will
be able to enter into agreements with such suppliers on a timely
basis on acceptable terms, if at all. If we should encounter
delays or difficulties in securing from Applied Biosystems the
quality and quantity of equipment we require for Onco
type
DX, we may need to reconfigure our test process, which would
result in delays in commercialization or an interruption in
sales. If any of these events occur, our business and operating
results could be harmed. Additionally, if Applied Biosystems
deems us to have become uncreditworthy, it has the right to
require alternative payment terms from us, including payment in
advance. We are also required to indemnify Applied Biosystems
against any damages caused by any legal action or proceeding
brought by a third party against Applied Biosystems for damages
caused by our failure to obtain required approval with any
regulatory agency.
We also rely on a several sole suppliers for certain laboratory
materials which we use to perform our tests. While we have
developed alternate sourcing strategies for these materials, we
can not be certain that these strategies will be effective. If
we should encounter delays or difficulties in securing these
laboratory materials, delays in commercialization or an
interruption in sales could occur.
If we
are unable to support demand for our test, our business may
suffer.
We have limited experience in processing our test and even more
limited experience in processing large volumes of tests. We
recently completed the expansion of our clinical laboratory
facilities and have ramped up our testing capacity. We have
begun to implement increases in scale and related processing,
customer service, billing and systems process improvements, and
to expand our internal quality assurance program to support
testing on a larger scale. We will also need additional
certified laboratory scientists and other scientific and
technical personnel to process our tests. We cannot assure you
that any increases in scale, related improvements and quality
assurance will be successfully implemented or that appropriate
personnel will be available. Failure to implement necessary
procedures or to hire the necessary personnel could result in
higher cost of processing or an inability to meet market demand.
Since we have limited experience handling large volumes of
Onco
type
DX tests, there can be no assurance that we will
be able to perform tests on a timely basis at a level consistent
with demand. If we encounter difficulty meeting market demand
for Onco
type
DX, our reputation could be harmed and our
future prospects and our business could suffer.
We may
be unable to manage our future growth effectively, which would
make it difficult to execute our business
strategy.
Future growth will impose significant added responsibilities on
management, including the need to identify, recruit, train and
integrate additional employees. In addition, rapid and
significant growth will place strain on our administrative and
operational infrastructure, including customer service and our
clinical laboratory. Our ability to manage our operations and
growth will require us to continue to improve our operational,
financial and management controls, reporting systems and
procedures. If we are unable to manage our growth effectively,
it may be difficult for us to execute our business strategy.
If we
were sued for product liability, we could face substantial
liabilities that exceed our resources.
The marketing, sale and use of our test could lead to the filing
of product liability claims if someone were to allege that our
test failed to perform as it was designed. We may also be
subject to liability for errors in the information we provide to
customers or for a misunderstanding of, or inappropriate
reliance upon, the information we provide. A product liability
claim could result in substantial damages and be costly and time
consuming for us to defend. Although we believe that our
existing product liability insurance is adequate, we cannot
assure you that our insurance would fully protect us from the
financial impact of defending against product liability claims.
Any
39
product liability claim brought against us, with or without
merit, could increase our insurance rates or prevent us from
securing insurance coverage in the future. Additionally, any
product liability lawsuit could cause injury to our reputation,
result in the recall of our products, or cause current
collaborators to terminate existing agreements and potential
collaborators to seek other partners, any of which could impact
our results of operations.
If we
use biological and hazardous materials in a manner that causes
injury, we could be liable for damages.
Our activities currently require the controlled use of
potentially harmful biological materials, hazardous materials
and chemicals and may in the future require the use of
radioactive compounds. We cannot eliminate the risk of
accidental contamination or injury to employees or third parties
from the use, storage, handling or disposal of these materials.
In the event of contamination or injury, we could be held liable
for any resulting damages, and any liability could exceed our
resources or any applicable insurance coverage we may have.
Additionally, we are subject on an ongoing basis to federal,
state and local laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste
products. The cost of compliance with these laws and regulations
might be significant and could negatively affect our operating
results.
Our
dependence on distributors for foreign sales of Oncotype DX
could limit or prevent us from selling our test in foreign
markets and from realizing long-term international revenue
growth.
International sales as a percentage of net revenues are expected
to remain minimal in the near term as we focus our efforts on
the sale of Onco
type
DX in the United States. We have
established an exclusive distribution network to sell
Onco
type
DX in Israel and may enter into other similar
arrangements in other countries in the future. Over the long
term, we intend to grow our business internationally, and to do
so we will need to attract additional distributors to expand the
territories in which we sell Onco
type
DX. Distributors
may not commit the necessary resources to market and sell
Onco
type
DX to the level of our expectations. If current
or future distributors do not perform adequately, or we are
unable to locate distributors in particular geographic areas, we
may not realize long-term international revenue growth.
We may
acquire other businesses or form joint ventures that could harm
our operating results, dilute your ownership of us, increase our
debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of
complementary businesses and assets, as well as technology
licensing arrangements. We also may pursue strategic alliances
that leverage our core technology and industry experience to
expand our product offerings or distribution. We have no
experience with respect to acquiring other companies and limited
experience with respect to the formation of collaborations,
strategic alliances and joint ventures. If we make any
acquisitions, we may not be able to integrate these acquisitions
successfully into our existing business, and we could assume
unknown or contingent liabilities. Any future acquisitions by us
also could result in significant write-offs or the incurrence of
debt and contingent liabilities, any of which could harm our
operating results. Integration of an acquired company also may
require management resources that otherwise would be available
for ongoing development of our existing business. We may not
identify or complete these transactions in a timely manner, on a
cost-effective basis, or at all, and we may not realize the
anticipated benefits of any acquisition, technology license,
strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of
our common stock as consideration, which would dilute your
interest in us. If the price of our common stock is low or
volatile, we may not be able to acquire other companies for
stock. Alternatively, it may be necessary for us to raise
additional funds for acquisitions through public or private
financings. Additional funds may not be available on terms that
are favorable to us, or at all.
Our
inability to raise additional capital on acceptable terms in the
future may limit our ability to develop and commercialize new
tests and technologies.
We expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure,
commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other
things:
|
|
|
|
|
sustain commercialization of our initial test or enhancements to
that test;
|
40
|
|
|
|
|
increase our selling and marketing efforts to drive market
adoption and address competitive developments;
|
|
|
|
further expand our clinical laboratory operations;
|
|
|
|
expand our technologies into other areas of cancer;
|
|
|
|
fund our clinical validation study activities;
|
|
|
|
expand our research and development activities;
|
|
|
|
acquire or license technologies; and
|
|
|
|
finance capital expenditures and our general and administrative
expenses.
|
Our present and future funding requirements will depend on many
factors, including:
|
|
|
|
|
the level of research and development investment required to
maintain and improve our technology position;
|
|
|
|
costs of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
|
|
|
|
our need or decision to acquire or license complementary
technologies or acquire complementary businesses;
|
|
|
|
changes in product development plans needed to address any
difficulties in commercialization;
|
|
|
|
changes in the regulatory environment, including any decision by
FDA to regulate our activities;
|
|
|
|
competing technological and market developments;
|
|
|
|
the rate of progress in establishing reimbursement arrangements
with third-party payors; and
|
|
|
|
changes in regulatory policies or laws that affect our
operations.
|
If we raise funds by issuing equity securities, dilution to our
stockholders could result. Any equity securities issued also may
provide for rights, preferences or privileges senior to those of
holders of our common stock. If we raise funds by issuing debt
securities, these debt securities would have rights, preferences
and privileges senior to those of holders of our common stock,
and the terms of the debt securities issued could impose
significant restrictions on our operations. If we raise funds
through collaborations and licensing arrangements, we might be
required to relinquish significant rights to our technologies or
products, or grant licenses on terms that are not favorable to
us. If adequate funds are not available, we may have to scale
back our operations or limit our research and development
activities.
We
must implement additional and expensive finance and accounting
systems, procedures and controls as we grow our business and
organization and to satisfy new reporting requirements, which
will increase our costs and require additional management
resources.
As a public reporting company, we are required to comply with
the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the Securities and Exchange Commission, including
expanded disclosures and accelerated reporting requirements and
more complex accounting rules. Compliance with Section 404
and other requirements has increased our costs and required
additional management resources. We have upgraded our finance
and accounting systems, procedures and controls and will need to
continue to implement additional finance and accounting systems,
procedures and controls as we grow our business and organization
and to satisfy existing reporting requirements. If we fail to
maintain or implement adequate controls, if we are unable to
complete the required Section 404 assessment as to the
adequacy of our internal control over financial reporting in
future
Form 10-K
filings, or if our independent registered public accounting firm
is unable to provide us with an unqualified report as to the
effectiveness of our internal control over financial reporting
in future
Form 10-K
filings, our ability to obtain additional financing could be
impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and
in the accuracy of our periodic reports filed under the Exchange
Act. A lack of investor confidence in the reliability and
accuracy of our public reporting could cause our stock price to
decline.
|
|
ITEM 1B.
|
Unresolved
Staff
Comments
.
|
None.
41
At December 31, 2006, we occupied approximately
48,000 square feet of laboratory and office space. On
January 3, 2007, we entered into a lease agreement for an
additional 48,000 square feet of office space, which we
intend to occupy in March 2007. We believe that these facilities
are adequate to meet our business requirements for the near-term
and that additional space, when needed, will be available on
commercially reasonable terms.
|
|
ITEM 3.
|
Legal
Proceedings
.
|
We were not a party to any legal proceedings other than in the
ordinary course of our business at December 31, 2006, or at
the date of this report.
|
|
ITEM 4.
|
Submission
of Matters to a Vote of Security Holders.
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
Executive
Officers
The names of our executive officers and their ages as of
March 1, 2007, are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
Randal W. Scott, Ph.D.
|
|
|
49
|
|
|
Chief Executive Officer and
Chairman of the Board
|
Kimberly J. Popovits
|
|
|
48
|
|
|
President, Chief Operating Officer
and Director
|
Joffre B. Baker, Ph.D.
|
|
|
59
|
|
|
Chief Scientific Officer
|
Steven Shak, M.D.
|
|
|
56
|
|
|
Chief Medical Officer
|
G. Bradley Cole
|
|
|
51
|
|
|
Executive Vice President, Chief
Financial Officer and Secretary
|
Randal W. Scott, Ph.D.
, has served as our Chairman
of the Board and Chief Executive Officer since our inception in
August 2000 and served as President from August 2000 until
February 2002, Chief Financial Officer from December 2000 until
April 2004, and Secretary from August 2000 until December 2000
and from May 2003 until February 2005. Dr. Scott was a
founder of Incyte Corporation, a genomic information company,
and served Incyte in various roles, including Chairman of the
Board from August 2000 to December 2001, President from January
1997 to August 2000, and Chief Scientific Officer from March
1995 to August 2000. Dr. Scott holds a B.S. in Chemistry
from Emporia State University and a Ph.D. in Biochemistry from
the University of Kansas.
Kimberly J. Popovits
has served as our President and
Chief Operating Officer since February 2002 and as a director
since March 2002. From November 1987 to February 2002,
Ms. Popovits served in various roles at Genentech, Inc., a
biotechnology company, most recently serving as Senior Vice
President, Marketing and Sales from February 2001 to February
2002, and as Vice President, Sales from October 1994 to February
2001. Prior to joining Genentech, she served as
Division Manager, Southeast Region, for American Critical
Care, a Division of American Hospital Supply, a supplier of
health care products to hospitals. Ms. Popovits is a
director of Nuvelo, Inc., a biotechnology company.
Ms. Popovits holds a B.A. in Business from Michigan State
University.
Joffre B. Baker, Ph.D.
, has served as our Chief
Scientific Officer since December 2000. From March 1997 to
October 2000, Dr. Baker served as the Vice President for
Research Discovery at Genentech. From March 1993 to October
2000, Dr. Baker oversaw Research Discovery at Genentech,
which includes the Departments of Cardiovascular Research,
Oncology, Immunology, Endocrinology, and Pathology. From July
1991 to October 1993, he served as Genentechs Director of
Cardiovascular Research. Prior to joining Genentech,
Dr. Baker was a member of the faculty of the Department of
Biochemistry at the University of Kansas. He holds a B.S. in
Biology and Chemistry from the University of California,
San Diego and a Ph.D. in Biochemistry from the University
of Hawaii.
Steven Shak, M.D.
, has served as our Chief Medical
Officer since December 2000. From July 1996 to October 2000,
Dr. Shak served in various roles in Medical Affairs at
Genentech, most recently as Senior Director and Staff Clinical
Scientist. From November 1989 to July 1996, Dr. Shak served
as a Director of Discovery Research at Genentech, where he was
responsible for Pulmonary Research, Immunology, and Pathology.
Prior to joining Genentech, Dr. Shak was an Assistant
Professor of Medicine and Pharmacology at the New York
University School
42
of Medicine. Dr. Shak holds a B.A. in Chemistry from
Amherst College and an M.D. from the New York University School
of Medicine, and completed his post-doctoral training at the
University of California, San Francisco.
G. Bradley Cole
has served as our Executive Vice
President and Chief Financial Officer since July 2004 and our
Secretary from February 2005. From December 1997 to May 2004, he
served in various positions at Guidant Corporation, a medical
device company, most recently serving as Vice President, Finance
and Business Development for the Endovascular Solutions Group
from January 2001 until May 2004. From July 1994 to December
1997, Mr. Cole was Vice President, Finance and Chief
Financial Officer of Endovascular Technologies, Inc., a medical
device company that was acquired by Guidant Corporation. From
December 1988 to February 1994, he served as Vice President,
Finance and Chief Financial Officer of Applied Biosystems
Incorporated, a life sciences systems company. Mr. Cole
holds a B.S. in Business from Biola University and an M.B.A.
from San Jose State University.
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
(a) Our common stock is traded on the NASDAQ Global Market
under the symbol GHDX and has been trading since our
initial public offering on September 29, 2005. The
following table sets forth the range of high and low sale prices
for our common stock, based on the last daily sale, in each of
the quarters since our stock began trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Stock price high
|
|
$
|
16.70
|
|
|
$
|
11.77
|
|
|
$
|
14.64
|
|
|
$
|
23.89
|
|
Stock price low
|
|
$
|
9.11
|
|
|
$
|
9.92
|
|
|
$
|
10.86
|
|
|
$
|
13.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter(1)
|
|
|
Quarter
|
|
|
Stock price high
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
11.75
|
|
|
$
|
11.69
|
|
Stock price low
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
11.55
|
|
|
$
|
8.81
|
|
|
|
|
(1)
|
|
From September 29, 2005
|
According to the records of our transfer agent, we had 156
stockholders of record as of March 1, 2007.
We have never declared or paid any cash dividends on our capital
stock, and we do not currently intend to pay any cash dividends
on our common stock in the foreseeable future. We expect to
retain future earnings, if any, to fund the development and
growth of our business. Our board of directors will determine
future cash dividends, if any. There are currently no
contractual restrictions on our ability to pay dividends.
(b) On September 28, 2005, a Registration Statement on
Form S-1
(File
No. 333-126626)
relating to our initial public offering was declared effective
by the SEC. The closing was on October 4, 2005 and the net
offering proceeds to us were approximately $53.5 million.
Through December 31, 2006, $29.1 million of the net
proceeds were used to build our commercial capabilities in
selling and marketing related to Onco
type
DX,
$15.3 million were used to fund research and development
programs for Onco
type
DX and in other cancers, and
$6.8 million were used to expand facilities and laboratory
operations capacity and for information systems infrastructure
and no funds were used for working capital and general corporate
purposes. A portion of the net proceeds may also be used for
working capital and general corporate purposes and to acquire or
invest in complementary businesses, technologies, services or
products. Pending use for these or other purposes, net proceeds
have been invested in interest bearing, investment grade
securities.
43
Stock
Performance Graph
The following information is not deemed to be soliciting
material or to be filed with the Securities
and Exchange Commission or subject to Regulation 14A or 14C
under the Securities Exchange Act of 1934 or to the liabilities
of Section 18 of the Securities Exchange Act of 1934, and
will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent we specifically
incorporate it by reference into such a filing.
Set forth below is a line graph showing the cumulative total
stockholder return (change in stock price plus reinvested
dividends) assuming the investment of $100 on September 29,
2005 (the day of our initial public offering) in each of our
common stock, the NASDAQ Market Index and the NASDAQ
Biotechnology Index for the period commencing on
September 29, 2005 and ending on December 31, 2006.
The comparisons in the table are required by the Securities and
Exchange Commission and are not intended to forecast or be
indicative of future performance of our common stock.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG GENOMIC HEALTH INC.,
NASDAQ MARKET AND NASDAQ BIOTECH INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2005
|
|
|
December 31, 2005
|
|
|
December 31, 2006
|
Genomic Health, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
77.53
|
|
|
|
$
|
158.30
|
|
NASDAQ Market Index
|
|
|
$
|
100.00
|
|
|
|
$
|
102.81
|
|
|
|
$
|
101.72
|
|
NASDAQ Biotechnology Index
|
|
|
$
|
100.00
|
|
|
|
$
|
102.67
|
|
|
|
$
|
113.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
ITEM 6.
Selected
Financial Data.
The following selected consolidated financial data should be
read together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this report. The selected consolidated
balance sheet data at December 31, 2006 and 2005 and the
selected consolidated statements of operations data for each
year ended December 31, 2006, 2005 and 2004 have been
derived from our audited consolidated financial statements that
are included elsewhere in this report. The selected consolidated
balance sheet data at December 31, 2004, 2003 and 2002 and
the selected consolidated statements of operations data for each
year ended December 31, 2003 and 2002 have been derived
from our audited consolidated financial statements not included
in this report. Historical results are not necessarily
indicative of the results to be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
27,006
|
|
|
$
|
4,823
|
|
|
$
|
227
|
|
|
$
|
|
|
|
$
|
|
|
Contract revenues
|
|
|
2,168
|
|
|
|
379
|
|
|
|
100
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
29,174
|
|
|
|
5,202
|
|
|
|
327
|
|
|
|
125
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
9,908
|
|
|
|
6,249
|
|
|
|
1,828
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,841
|
|
|
|
9,465
|
|
|
|
10,040
|
|
|
|
9,069
|
|
|
|
7,053
|
|
Selling and marketing
|
|
|
24,625
|
|
|
|
15,348
|
|
|
|
9,856
|
|
|
|
2,805
|
|
|
|
754
|
|
General and administrative
|
|
|
12,765
|
|
|
|
6,485
|
|
|
|
3,869
|
|
|
|
3,686
|
|
|
|
3,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60,139
|
|
|
|
37,547
|
|
|
|
25,593
|
|
|
|
15,560
|
|
|
|
11,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(30,965
|
)
|
|
|
(32,345
|
)
|
|
|
(25,266
|
)
|
|
|
(15,435
|
)
|
|
|
(11,560
|
)
|
Interest and other income
(expense), net
|
|
|
2,045
|
|
|
|
984
|
|
|
|
271
|
|
|
|
185
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
|
$
|
(15,250
|
)
|
|
$
|
(11,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
$
|
(13.82
|
)
|
|
$
|
(12.43
|
)
|
|
$
|
(11.95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
1,808,022
|
|
|
|
1,226,444
|
|
|
|
925,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes non-cash charges for stock-based compensation expense
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
167
|
|
|
$
|
53
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
|
|
Research and development
|
|
|
821
|
|
|
|
323
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
779
|
|
|
|
274
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,137
|
|
|
|
426
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,904
|
|
|
$
|
1,076
|
|
|
$
|
191
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2006, we adopted Statement of Financial
Accounting Standard No. 123R,
Share-based Payment
,
using the modified prospective method. Prior to 2006,
stock-based compensation was recognized in accordance with
Accounting Principles Board Opinion No. 25.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheets
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,926
|
|
|
$
|
18,839
|
|
|
$
|
38,275
|
|
|
$
|
11,062
|
|
|
$
|
25,318
|
|
Short-term investments
|
|
|
29,289
|
|
|
|
50,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
37,535
|
|
|
|
65,801
|
|
|
|
36,771
|
|
|
|
10,046
|
|
|
|
25,165
|
|
Total assets
|
|
|
58,024
|
|
|
|
75,799
|
|
|
|
41,538
|
|
|
|
13,096
|
|
|
|
27,376
|
|
Notes payable, short-term
|
|
|
2,547
|
|
|
|
1,052
|
|
|
|
|
|
|
|
161
|
|
|
|
163
|
|
Notes payable, long-term
|
|
|
4,726
|
|
|
|
2,621
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
103,212
|
|
|
|
51,064
|
|
|
|
51,073
|
|
Accumulated deficit
|
|
|
(125,103
|
)
|
|
|
(96,183
|
)
|
|
|
(64,822
|
)
|
|
|
(39,827
|
)
|
|
|
(24,577
|
)
|
Total stockholders equity
(deficit)
|
|
|
41,829
|
|
|
|
67,517
|
|
|
|
(64,154
|
)
|
|
|
(39,547
|
)
|
|
|
(24,502
|
)
|
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation
|
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the related notes included
in Item 8 for this Annual Report on
Form 10-K.
Historical results are not necessarily indicative of future
results.
Business
Overview
We are a life science company focused on the development and
commercialization of genomic-based clinical diagnostic tests for
cancer that allow physicians and patients to make individualized
treatment decisions. Our first test, Onco
type
DX, is used
for early stage breast cancer patients to predict the likelihood
of cancer recurrence, the likelihood of patient survival and the
likelihood of chemotherapy benefit. All tumor samples are sent
to our laboratory in Redwood City, California for analysis. Upon
generation and delivery of a Recurrence Score report to the
physician, we generally bill third-party payors for Onco
type
DX. The list price of our test is $3,460.
We launched Onco
type
DX in January 2004 and initially
made sales to a select number of physicians in a few markets in
the United States through a small direct sales force. Late in
2004 and continuing into 2006, we experienced a significant
increase in demand for Onco
type
DX. For the year ended
December 31, 2006, more than 14,500 tests were delivered
for use in treatment planning, compared to more than 7,000 and
more than 500 tests delivered for the years ended
December 31, 2005 and 2004, respectively. Since the
commercial launch of Onco
type
DX more than 21,500 tests
have been delivered for use in treatment planning by more than
5,000 physicians. We believe increased demand in 2005 resulted
from the publication of our validation study in
The New
England Journal of Medicine
and the presentation of our
chemotherapy benefit study at the San Antonio Breast Cancer
Symposium, both of which occurred in December 2004. We also
experienced increased demand in 2006 following clinical
presentations at major symposia in December 2005 and February
2006, as well as the May 2006 publication of two peer-reviewed
articles supporting the use and reimbursement of Onco
type
DX. The expansion of our domestic field sales organization
in July 2006 also increased demand for our test. However, this
increased demand is not necessarily indicative of future growth
rates, and we cannot assure you that this level of increased
demand can be sustained or that future appearances or
presentations at medical conferences or publication of articles
will have similar impact on demand for Onco
type
DX.
Moreover, we believe that each year we may experience decreased
demand for our test in the summer months of July and August,
which may be attributed to physicians, surgeons and patients
scheduling vacations during this time. As of December 31,
2006, our laboratory had the capacity to process up to 7,000
tests per fiscal quarter.
We believe the key factors that will drive broader adoption of
Onco
type
DX will be acceptance by healthcare providers of
its clinical benefits, demonstration of the cost-effectiveness
of using our test, expanded reimbursement by third-party payors,
expansion of our sales force and increased marketing efforts.
Reimbursement of Onco
type
DX by third-party payors is
essential to our commercial success. In general, clinical
laboratory services, when covered, are paid under various
methodologies, including prospective payment systems and fee
schedules.
46
Reimbursement from payors depends upon whether a test covered
under the patients policy and if payment practices for the
test have been established. As a relatively new test,
Onco
type
DX may be considered investigational by payors
and not covered under current reimbursement policies. Until we
reach agreement with a payor on contract terms or a payor
establishes a policy for payment of Onco
type
DX, we
recognize revenue on a cash basis.
Upon commercialization of Onco
type
DX, we began working
with third-party payors to establish reimbursement coverage
policies. As of December 31, 2006, Aetna, Inc., Kaiser
Foundation Health Plan, Inc. and National Heritage Insurance
Company (NHIC), the local Medicare carrier for California with
jurisdiction for claims submitted by us for Medicare patients,
had issued positive coverage determinations for Onco
type
DX. In January 2007, United HealthCare Insurance Company
entered into a national laboratory services agreement to
supporting reimbursement for our test. In addition, many
regional payors had issued policies supporting reimbursement for
our test. Where contracts or policies are not in place, we
pursue
case-by-case
reimbursement. We believe that as much as 20% of our future test
volume may be derived from Medicare patients. We are working
with many payors to establish policy-level reimbursement which,
if in place, should allow us to recognize revenues upon
completing our test and submitting an invoice. We do not expect
to recognize the majority of revenues in this manner until late
2007, at the earliest.
In early February 2006, we obtained our first reimbursement
coverage outside of the United States. Clalit Health Care, the
largest government payor in Israel, covering 60% of the
population, established a reimbursement coverage policy for
Onco
type
DX for their patients. Onco
type
DX is
currently offered for sale in Israel under a testing and
services agreement with a third party. Tests ordered in Israel
are processed in our Redwood City, California central reference
laboratory.
Effective December 2005, we entered into collaborative
agreements with Aventis, Inc., a member of the sanofi-aventis
group, and the Eastern Cooperative Oncology Group to investigate
the ability of gene expression in fixed-paraffin-embedded
tissues to predict the likelihood of response to adjuvant
chemotherapy, including Taxotere, in patients with early breast
cancer and zero to three involved lymph nodes. The agreements
provide Genomic Health with commercial rights to diagnostic
tests that may result from the collaboration and were effective
as of December 1, 2005. We began to recognize revenue under
these agreements in the first quarter of 2006.
We are continuing to work on extending Onco
type
DX for
breast cancer into N+ and ER- populations. During 2007, we may
introduce single gene information for ER and PR genes into the
Onco
type
DX patient report to provide better information
for improved treatment decision making. Also during 2007, we
plan to conduct further studies using Onco
type
DX in N+
patients which, if successful, could result in a product
offering sometime in 2008.
In July 2005 we signed a collaborative agreement with National
Surgical Adjuvant Breast and Bowel Project, or NSABP, to begin
work in colon cancer using our clinical development platform.
This is the same group with which we conducted our successful
clinical validation studies in breast cancer which led to our
development of Onco
type
DX. The agreement requires
certain payments to be made by us during the research and
development period. If the collaboration results in a commercial
product, we will be required to make additional payments upon
first commercial sale and during commercialization of the
product. At the American Society of Clinical Oncology meeting in
June 2006, a study conducted with the NSABP was presented
demonstrating correlation between gene expression and colon
cancer recurrence in patients with stage II and III
colon cancer treated with surgery. These data support additional
studies and development of an Onco
type
DX test for colon
cancer. During 2006, we entered into additional agreements with
NSABP and other academic institutions to further our clinical
studies in colon cancer, including arrangements for a clinical
validation study.
In July 2005 we signed a collaborative agreement with
Bristol-Myers Squibb Company and ImClone Systems Incorporated to
develop a genomic test to predict the likelihood of response to
Erbitux in colorectal cancer. Erbitux is a targeted therapy
currently approved for the treatment of metastatic colorectal
cancer. The agreement provides for research funding support and
milestone payments and gives us commercial rights to diagnostic
tests that may result from the collaboration.
In December 2006, we finalized a collaborative agreement to
sponsor a research project to validate a pre-specified gene
panel and algorithm that will be used to predict clinical
outcomes for stage II colon cancer patients treated either
with surgery alone or surgery plus chemotherapy. The agreement
requires certain payments to be
47
made by us during the research and development period. If the
collaboration results in a commercial product, we will be
required to make additional payments upon first commercial sale
and during commercialization of the product.
We are continuing to conduct research and early development
studies in a variety of cancers other than breast cancer and in
January 2007 announced the decision to move our colon program
for Stage I and Stage II cancer patients into full scale
development.
Since our inception, we have generated significant net losses.
As of December 31, 2006, we had an accumulated deficit of
$125.1 million. We incurred net losses of
$28.9 million, $31.4 million and $25.0 million
for the years ended December 31, 2006, 2005, and 2004,
respectively. We expect our net losses to continue for at least
the next two years. We anticipate that a substantial portion of
our capital resources and efforts over the next several years
will be focused on research and development, both to develop
additional tests for breast cancer and to develop tests for
other cancers, to scale up our commercial organization, and for
other general corporate purposes. Our financial results will be
limited by a number of factors, including establishment of
coverage policies by third-party insurers and government payors,
our ability in the short term to collect from payors often
requiring a
case-by-case
manual appeals process, and our ability to recognize revenues
other than from cash collections on tests billed until such time
as reimbursement policies or contracts are in effect. Until we
receive routine reimbursement and are able to record revenues as
tests are performed and reports delivered, we are likely to
continue reporting net losses.
Financial
Operations Overview
Revenues
We derive our revenues from product sales and contract research
arrangements. We operate in one industry segment. Our product
revenues are derived solely from the sale of our Onco
type
DX test. Payors are billed upon generation and delivery of a
Recurrence Score report to the physician. Product revenues are
recorded on a cash basis unless a contract or policy is in place
with the payor at the time of billing and collectibility is
reasonably assured. Contract revenues are derived from studies
conducted with biopharmaceutical and pharmaceutical companies
and are recorded on an accrual basis as contractual obligations
are completed.
Cost
of Product Revenues
Cost of product revenues represents the cost of materials,
direct labor, costs associated with processing tissue samples
including histopathology, anatomical pathology, paraffin
extraction, reverse transcription polymerase chain reaction, or
RT-PCR, and quality control analyses, license fees and delivery
charges necessary to render an individualized test result. Costs
associated with performing our test are recorded as tests are
processed. License fees are recorded at the time product
revenues are recognized or in accordance with other contractual
obligations. License fees represent a significant component of
our cost of product revenues and are expected to remain so for
the foreseeable future.
Research
and Development Expenses
Research and development expenses represent costs incurred to
develop our technology and to carry out our clinical studies to
validate our multi-gene tests and include salaries and benefits,
allocated overhead and facility occupancy costs, contract
services and other outside costs, and costs to acquire
in-process research and development projects and technologies
that have no alternative future use. Research and development
expenses also include costs related to activities performed
under contracts with biopharmaceutical and pharmaceutical
companies.
We charge all research and development expenses to operations as
they are incurred. All potential future product programs outside
of breast and colon cancer are in the early development phase.
The expected time frame in which a test for one of these other
cancers can be brought to market is uncertain given the
technical challenges and clinical variables that exist between
different types of cancers.
48
We do not record or maintain information regarding costs
incurred in research and development on a program or project
specific basis. Our research and development staff and
associated infrastructure resources are deployed across several
programs. Many of our costs are thus not attributable to
individual programs. We believe that allocating costs on the
basis of time incurred by our employees does not accurately
reflect the actual costs of a project.
As a result of the uncertainties discussed above, we are unable
to determine the duration and completion costs of our research
and development programs or when, if ever, and to what extent we
will receive cash inflows from the commercialization and sale of
a product.
Selling
and Marketing Expenses
Our selling and marketing expenses consist primarily of
personnel costs and education and promotional expenses
associated with Onco
type
DX. These expenses include the
costs of educating physicians, laboratory personnel and other
healthcare professionals regarding our genomic technologies, how
our Onco
type
DX test was developed and validated and the
value of the quantitative information that Onco
type
DX
provides. Selling and marketing expenses also include the costs
of sponsoring continuing medical education, medical meeting
participation and dissemination of our scientific and economic
publications related to Onco
type
DX.
General
and Administrative Expenses
Our general and administrative expenses consist primarily of
personnel related costs, legal costs, including intellectual
property, accounting costs and other professional and
administrative costs.
Critical
Accounting Policies and Significant Judgments and
Estimates
This discussion and analysis of our financial condition and
results of operations is based on our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and the disclosure of
contingent assets and liabilities at the date of the financial
statements, as well as revenues and expenses during the
reporting periods. We evaluate our estimates and judgments on an
ongoing basis. We base our estimates on historical experience
and on various other factors we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results
could therefore differ materially from those estimates under
different assumptions or conditions.
We believe the following critical accounting policies reflect
our more significant estimates and assumptions used in the
preparation of our financial statements.
Revenue
Recognition
Product revenues for our first product, Onco
type
DX, from
the commercial launch in January 2004 through December 31,
2006, have largely been recognized on a cash basis because we
have limited collection experience and a limited number of
contracts. Beginning in the fourth quarter of 2005 and
continuing through 2006, we recognized some product revenue from
private payors on an accrual basis. For the year ended
December 31, 2006, a portion of Medicare related product
revenue was recognized on an accrual basis.
Our product revenues for tests performed are recognized when the
following criteria of revenue recognition are met:
(1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Criterion
(2) is satisfied we perform the test and generate and
deliver a report to the physician. Determination of criteria
(3) and (4) is based on managements judgments
regarding the nature of the fee charged for products or services
delivered and the collectibility of those fees. Product revenues
where all criteria set forth above are not met are recognized on
a cash basis when cash is received.
We generally bill third-party payors for Onco
type
DX upon
generation and delivery of a Recurrence Score report to the
physician. As such, we take assignment of benefits and the risk
of collection with the third-party payor.
49
We usually bill the patient directly for amounts owed after
multiple requests for payment have been denied or only partially
paid by the insurance carrier. As a relatively new test,
Onco
type
DX may be considered investigational by payors
and not covered under their reimbursement policies.
Consequently, we pursue
case-by-case
reimbursement where policies are not in place or payment history
has not been established.
In 2006 we began accruing an allowance for bad debt against our
accounts receivable consistent with historical payment
experience. Bad debt expense is included in general and
administrative expense on our consolidated statements of
operations. As of December 31, 2006, our allowance for bad
debt was $510,000. No write-offs for bad debt were recorded
against the allowance during the year ended December 31,
2006. Bad debt expense was $510,000 was for the year ended
December 31, 2006. No bad debt expense was recorded for the
years ended December 31, 2005 and 2004 because the vast
majority revenue was recorded on a cash basis. Accounts
receivable over 90 days will be written off when the
appeals process is exhausted, when an unfavorable coverage
decision is received, or when there is other substantive
evidence that the account will not be paid.
Contract revenues are derived from studies conducted with
biopharmaceutical and pharmaceutical companies and are
recognized on a contract specific basis. Under certain
contracts, our input, measured in terms of full-time equivalent
level of effort or running a set of assays through our
laboratory under a contractual protocol, triggers payment
obligations and revenues are recognized as costs are incurred or
assays are processed. Certain contracts have payment obligations
that are triggered as milestones are complete, such as
completion of a successful set of experiments. In these cases,
revenues are recognized when the milestones are achieved.
Stock-based
Compensation Expense
Through December 31, 2005, we accounted for stock-based
payment transactions under Accounting Principles Board Opinion
No. 25, or APB 25. On January 1, 2006, we adopted
Statement of Financial Accounting Standards No. 123
(Revised 2004),
Share-Based Payment
, or
SFAS 123R
. S
FAS 123R, which addresses the
accounting for stock-based payment transactions whereby an
entity receives employee services in exchange for equity
instruments, including stock options. SFAS 123R eliminates
the ability to account for stock-based compensation transactions
using the intrinsic value method under APB 25, and instead
requires that such transactions be accounted for using a
fair-value based method. SFAS 123R is a complex accounting
standard, the application of which requires significant judgment
and the use of estimates, particularly surrounding assumptions
used in determining fair value. We use the Black-Scholes
valuation method, which requires the use of estimates such as
stock price volatility and expected options lives, as well as
expected option forfeiture rates, to value equity-based
compensation. There is little historical evidence or guidance
available with respect to developing these assumptions and
models. Expected volatility is based on comparable peer data as
well as historical volatility of our stock. The expected life of
options granted is estimated based on historical option exercise
and employee termination experience and peer group data.
We have elected the modified prospective transition method as
permitted under SFAS 123R and, accordingly, prior periods
have not been restated to reflect the impact of SFAS 123R.
The modified prospective transition method requires that
stock-based compensation expense be recorded for all new and
unvested stock options that are ultimately expected to vest as
the requisite service is rendered beginning on January 1,
2006. Stock-based compensation expense resulting from the
adoption of SFAS 123R represents expense related to stock
options granted during the year ended December 31, 2006, as
well as stock options granted prior to, but not yet vested as of
January 1, 2006. As of December 31, 2006, total
compensation expense related to non-vested stock options not yet
recognized was $14.3 million, which is expected to be
recognized over a period of 39 months.
Equity instruments granted to non-employees are valued using the
Black-Scholes method and accounted for as prescribed by
SFAS 123R and Emerging Issues Task Force, or EITF,
Consensus
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
, and will be subject to periodic
revaluation over their vesting terms.
Clinical
Collaborator Costs
We enter into collaboration and clinical trial agreements with
clinical collaborators and record these costs as research and
development expenses. We record accruals for estimated study
costs comprised of work performed by our collaborators under
contract terms.
50
In addition to costs for research and development, under one of
our collaboration agreements, we make annual payments resulting
from the commercial launch of Onco
type
DX. These payments
are recorded in cost of product revenues as a license payment.
Expense is recorded ratably over the year before the relevant
payment is made. However, either party may terminate the
agreement upon 30 days prior written notice. If this
collaborative agreement were not cancelable, a liability for the
entire stream of remaining payments of $2.2 million would
be recorded and expense would be recognized ratably through 2011.
Results
of Operations
Years
Ended December 31, 2006 and 2005
Revenues.
Total revenues were
$29.2 million for the year ended December 31, 2006
compared to $5.2 million for the year ended
December 31, 2005. Product revenues from Onco
type
DX
were $27.0 million for the year ended December 31,
2006 compared to $4.8 million for the comparable period in
2005. Approximately 40% of product revenue for the year ended
December 31, 2006 was recorded on an accrual basis compared
to 7% for the comparable period in 2005. The balance of product
revenue was recognized upon cash collection. Product revenue
from Medicare was $12.7 million, representing 47% of total
product revenue for the year ended December 31, 2006; we
had no product revenue from Medicare in 2005. This increase was
a result of the February 27, 2006 effective coverage date
for Medicare patients and the receipt of payments for tests
provided to Medicare patients prior to the effective coverage
date.
Contract revenues were $2.2 million for the year ended
December 31, 2006 compared to $379,000 for the comparable
period in 2005. Contract revenues represented studies assessing
our gene expression technology or collaborative work in gene
selection and protocol design with our pharmaceutical partners.
The increase in contract revenues reflected the initiation of
the collaboration with Aventis, Inc., and the Eastern
Cooperative Oncology Group as well as ongoing work with
Bristol-Myers Squibb and ImClone Systems.
Cost of Product Revenues.
For the year ended
December 31, 2006, cost of product revenues was
$9.9 million for Onco
type
DX, consisting of tissue
sample processing costs of $7.7 million and license fees of
$2.2 million. For the year ended December 31, 2005,
cost of product revenues was $6.2 million, consisting of
tissue sample processing costs of $5.5 million and license
fees of $786,000. Test volume for the year ended
December 31, 2006 more than doubled over the prior year,
resulting in a decrease in the cost per test delivered. During
the years ended December 31, 2006 and 2005, we recorded
tissue sample processing costs for Onco
type
DX that
included direct material costs, direct labor costs, equipment
costs, shipping costs and other infrastructure costs. All costs
recorded for tissue sample processing in those periods represent
the cost of all the tests processed regardless of whether
revenue was recognized with respect to that test. License fees
were recorded in cost of product revenues for contractual
obligations and royalties due on product revenues.
Research and Development Expenses.
Research
and development expenses increased to $12.8 million for the
year ended December 31, 2006 from $9.5 million for the
comparable period in 2005. The increase in research and
development expenses was primarily due to a $1.7 million
increase in personnel and related costs, a $1.2 million
increase in collaboration expense and a $595,000 increase in
infrastructure-related expense. We expect that our research and
development expenses will increase as our investment in
developing tests for cancers, including cancers other than
breast cancer, continues.
Selling and Marketing Expenses.
Selling and
marketing expenses increased to $24.6 million for the year
ended December 31, 2006 from $15.3 million for the
comparable period in 2005. The $9.3 million increase in
selling and marketing expenses was primarily due a
$4.9 million increase in personnel related costs, mostly to
expand our domestic field sales organization, a
$2.7 million increase in promotional field and marketing
expense, $900,000 in higher travel-related expenses associated
with field personnel and a $698,000 increase in
infrastructure-related expense. We expanded our domestic field
sales force to support Onco
type
DX in the second half of
2006 and we expect that selling and marketing expenses will
continue to increase in future periods as we continue to expand
our sales force and conduct additional physician and patient
education.
General and Administrative Expenses.
General
and administrative expenses increased to $12.8 million for
the year ended December 31, 2006 from $6.5 million for
the comparable period in 2005. The $6.3 million increase
51
in general and administrative expenses included a
$2.6 million increase in personnel costs, $1.2 million
in higher billing and collection fees paid to third-party
billing and collection vendors, an increase of $1.1 million
in legal and accounting fees, an increase of $510,000 in expense
to establish a bad debt reserve against accounts receivable, an
increase of $335,000 in insurance related costs and an increase
of $292,000 in costs for third-party service providers related
to being a public company, including investor relations. We
expect general and administrative expenses to continue to
increase as we spend more on fees for billing and collections
due to revenue growth and continue to incur costs associated
with regulatory matters and other expenses associated with the
growth of our business.
Interest Income.
Interest income was
$2.5 million for the year ended December 31, 2006
compared to $1.2 million for the comparable period in 2005,
reflecting higher average cash balances and higher market yields.
Interest Expense.
Interest expense was
$446,000 for the year ended December 31, 2006 compared to
$258,000 for the comparable period in 2005, reflecting interest
expense incurred on our equipment financing line established at
the end of March 2005 under which draws have been made and
interest expense has been incurred.
Years
Ended December 31, 2005 and 2004
Revenues.
Product revenues were
$5.2 million for the year ended December 31, 2005, as
compared to $327,000 for the year ended December 31, 2004.
Product revenues for the year ended December 31, 2005 were
$4.8 million, as compared to $227,000 in the comparable
period in 2004. Product revenues were primarily recognized upon
cash receipt. A portion of product revenue was recorded on an
accrual basis for the first time in the fourth quarter of 2005.
Contract revenues were $379,000 for the year ended
December 31, 2005, up from $100,000 in the comparable
period in 2004. Contract revenues were for studies assessing our
gene expression technology and initial collaborative work in
gene selection with our pharmaceutical partners.
Cost of Product Revenues.
For the year ended
December 31, 2005, cost of product revenues was
$6.2 million for Onco
type
DX, consisting of tissue
sample processing costs of $5.5 million and license fees of
$786,000. For the year ended December 31, 2004, cost of
product revenues was $1.8 million, consisting of tissue
sample processing costs of $1.3 million and license fees of
$477,000. During the years ended December 31, 2005 and
2004, we recorded costs for Onco
type
DX that included
direct material costs, direct labor costs, equipment costs and
other infrastructure costs. All costs recorded for tissue sample
processing in those years represent the cost of all the tests
processed regardless of whether revenue was recognized with
respect to that test. License fees were recorded in cost of
product revenues for contractual obligations and royalties due
on product revenues.
Research and Development Expenses.
Research
and development expenses decreased to $9.5 million for the
year ended December 31, 2005, from $10.0 million for
the comparable period in 2004. The decrease in research and
development expenses was primarily due to $1.5 million in
decreased costs for clinical development programs studying
distant survival and chemotherapy benefits in early stage breast
cancer patients and decreased license fees of $645,000 partially
offset by increased personnel costs of $1.4 million and an
increase of $217,000 in facilities, depreciation and other
general expenses.
Selling and Marketing Expenses.
Selling and
marketing expenses increased to $15.3 million for the year
ended December 31, 2005, from $9.9 million for the
comparable period in 2004. The $5.4 million increase
primarily reflected an increase of $3.1 million in
personnel related costs, mostly to establish a domestic field
sales organization, and $985,000 in higher travel expenses
associated with field sales personnel, an increase of $903,000
in field promotional and marketing expenses and an increase of
$458,000 in facilities, depreciation and other general expenses.
General and Administrative Expenses.
General
and administrative expenses increased to $6.5 million for
the year ended December 31, 2005 from $3.9 million for
the comparable period in 2004. The increase in general and
administrative expenses reflected an increase of
$1.2 million in personnel costs, stock-based compensation
and consulting costs, an increase of $626,000 in billing and
collections fees paid to third-party billing and collection
vendors and a $178,000 increase in insurance-related costs.
These higher costs were offset in part by a $383,000 decrease in
costs related to infrastructure support.
52
Interest Income and Other
Income/Expense.
Interest income was
$1.2 million for the year ended December 31, 2005,
compared with $295,000 in the comparable period in 2004. This
$946,000 increase was due to higher average cash balances from
our December 2004 preferred stock financing, our September 2005
public offering and higher interest rates during the year ended
December 31, 2005. Other expense was $1,000 for the year
ended December 31, 2005, compared with $20,000 for the
comparable period in 2004.
Interest Expense.
Interest expense was
comprised of the interest on deferral of contractual payments
under a collaboration agreement and interest indebtedness.
Interest expense increased to $258,000 for the year ended
December 31, 2005, from $4,000 in the comparable period in
2004. The increase resulted from the initiation of an equipment
financing line established in March 2005 under which draws have
been made and interest expense has been incurred. No such
arrangement existed in the prior year.
Liquidity
and Capital Resources
Since our inception in August 2000, we have incurred significant
losses and, as of December 31, 2006, we had an accumulated
deficit of approximately $125.1 million. We have not yet
achieved profitability and anticipate that we will continue to
incur net losses for at least the next two years. We expect that
our research and development, selling and marketing and general
and administrative expenses will continue to grow and, as a
result, we will need to generate significant product revenues to
achieve profitability. We may never achieve profitability.
Sources
of Liquidity
Since our inception through December 31, 2006, we have
received net proceeds of $103.2 million from the sale of
preferred stock and $575,000 from the issuance of common stock
to employees, consultants and directors in connection with the
exercise of stock options. In October 2005, we completed an
initial public offering and a concurrent private placement of
our common stock, resulting in net proceeds of
$58.5 million. Purchases of equipment and leasehold
improvements have been partially financed through loans. At
December 31, 2006, we had cash, cash equivalents and
short-term investments of $44.2 million and debt under our
equipment loan of $7.3 million. At December 31, 2005,
we had cash, cash equivalents and short-term investments of
$69.5 million and debt under our equipment loan of
$3.7 million.
Cash
Flows
As of December 31, 2006, we had $44.2 million in cash,
cash equivalents and short-term investments, compared to
$69.5 million at December 31, 2005. This decrease of
$25.3 million was due primarily to cash used in operating
activities of $20.8 million and purchases of property,
equipment and leasehold improvements of $8.4 million,
partially offset by net proceeds from our equipment loans of
$3.6 million.
Net cash used in operating activities was $20.8 million for
the year ended December 31, 2006, compared to
$27.6 million for the year ended December 31, 2005.
The decrease in cash used in operating activities of
$6.8 million was primarily due to a decrease in net loss,
excluding non-cash adjustments, of $5.4 million, a decrease
in prepaid expenses and other assets of $599,000 and an increase
in accounts payable and accrued liabilities of $584,000. The
decrease in net loss resulted from a $22.2 million increase
in revenues for Onco
type
DX, a $1.8 million increase
in revenue from pharmaceutical collaborators, and a
$1.2 million increase in interest income, partially offset
by a $22.6 million increase in operating expenses.
Net cash provided by investing activities was $13.1 million
for the year ended December 31, 2006, compared to net cash
used in investing activities of $54.2 million for the year
ended December 31, 2005. This increase of
$67.3 million was due to a decrease of $72.1 million
in short-term investments offset by a $5.4 million increase
in cash used to acquire property, equipment and leasehold
improvements.
Net cash provided by financing activities during the year ended
December 31, 2006 was $3.8 million, compared to
$62.4 million for the year ended December 31, 2005.
Amounts for 2006 represented $3.6 million of net proceeds
from our equipment loan and $179,000 of net proceeds from
issuance of common stock related to stock option exercises.
Amounts in the year ended December 31, 2005 included net
proceeds from our initial public
53
offering of $53.5 million, proceeds from our private
placement with Incyte of $5.0 million and net proceeds from
our equipment loan of $3.7 million.
Off-Balance
Sheet Activities
As of December 31, 2006, we have not engaged in any
off-balance sheet activities.
Contractual
Obligations
As of December 31, 2006, we had the following contractual
commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
Than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Notes payable obligations
|
|
$
|
8,468
|
|
|
$
|
3,223
|
|
|
$
|
5,007
|
|
|
$
|
238
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
4,026
|
|
|
|
730
|
|
|
|
1,531
|
|
|
|
1,626
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,494
|
|
|
$
|
3,953
|
|
|
$
|
6,538
|
|
|
$
|
1,864
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2005, we entered into an arrangement to finance the
acquisition of laboratory equipment, computer hardware and
software, leasehold improvements and office equipment. In
connection with this arrangement, we granted the lender a
security interest in the assets purchased with the borrowed
amounts. We could not prepay any amounts owed until April 2006,
at which point we could prepay all, but not part, of the amounts
owing under the arrangement so long as we also pay a 6% premium
on the remaining payments. This premium is reduced to 5% in 2007
and 4% in 2008. As of December 31, 2006, borrowings under
this arrangement were $7.3 million at an annual interest
rate of 10.23%, 10.30%, 10.49%, 10.56%, 10.65%, 11.01%, 11.18%
or 11.30%, depending upon the applicable note.
As December 31, 2006, we leased approximately
48,000 square feet of laboratory and office space under a
lease we entered into in September 2005. The lease has a term of
six years. As of December 31, 2006, we are required to make
aggregate rent payments of $730,000 in 2007, $753,000 in 2008,
$778,000 in 2009, $799,000 in 2010 and $966,000 in 2011 and
thereafter, all of which are included in the table above.
In January 2007, we executed an agreement to lease approximately
48,000 square feet of additional laboratory and office
space near the location we currently occupy. The lease has a
term of six years. Under the new lease, we are required to make
aggregate rent payments of $375,000 in 2007, $595,000 in 2008,
$741,000 in 2009, $835,000 in 2010 and $1.0 million in 2011
and thereafter, which are not included in the table above.
In addition to the above, we are required to make a series of
annual payments under one of our collaboration agreements
beginning on the date that we commercially launched Onco
type
DX. The initial payment of $150,000 was made in January
2004. For a period of seven years on each anniversary of this
first payment, we are required to make additional payments in
increasing amounts. Payments of $150,000 and $300,000 were made
in January 2005 and January 2006, respectively. We are required
to make additional payments of $300,000 in 2007 and $475,000 in
each of 2008 through 2011. However, either party may terminate
the agreement upon 30 days prior written notice.
Operating
Capital and Capital Expenditure Requirements
We expect to continue to incur substantial operating losses in
the future and to make capital expenditures to keep pace with
the expansion of our research and development programs and to
scale up our commercial operations. It may take several years to
move any one of a number of product candidates in early
development through the development phase and validation phase
to commercialization. We expect that our cash and cash
equivalents will be used to fund working capital and for capital
expenditures and other general corporate purposes, such as
licensing technology rights, partnering arrangements for our
tests outside the United States or reduction of debt
obligations. We have spent approximately $6.8 million
through December 31, 2006 for facility expansion and
improvements and are considering an additional approximately
$1.0 million in further facility improvements.
54
The amount and timing of actual expenditures may vary
significantly depending upon a number of factors, such as the
progress of our product development, regulatory requirements,
commercialization efforts, the amount of cash used by operations
and progress in reimbursement. We expect that we will receive
limited payments for Onco
type
DX billings in the
foreseeable future. As reimbursement contracts with third-party
payors are put into place, we expect an increase in the number
and level of payments received for Onco
type
DX billings.
We currently anticipate that our cash, cash equivalents and
short-term investments, together with collections from
Onco
type
DX and amounts available under our equipment
credit facility, will be sufficient to fund our operations and
facility expansion plans for at least the next 12 months.
We cannot be certain that any of our reimbursement contract
programs or development of future products will be successful or
that we will be able to raise sufficient additional funds to see
these programs through to a successful result.
Our future funding requirements will depend on many factors,
including the following:
|
|
|
|
|
the rate of progress in establishing reimbursement arrangements
with third-party payors;
|
|
|
|
the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts;
|
|
|
|
the rate of progress and cost of research and development
activities associated with expansion of Onco
type
DX for
breast cancer;
|
|
|
|
the rate of progress and cost of research and development
activities associated with products in the research phase
focused on cancers other than breast cancer;
|
|
|
|
the cost of acquiring or achieving access to tissue samples and
technologies;
|
|
|
|
the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
|
|
|
|
the effect of competing technological and market developments;
|
|
|
|
the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our
products; and
|
|
|
|
the economic and other terms and timing of any collaborations,
licensing or other arrangements into which we may enter.
|
We may also use cash to acquire or invest in complementary
businesses, technologies, services or products. Until we can
generate a sufficient amount of product revenues to finance our
cash requirements, which we may never do, we expect to finance
future cash needs primarily through public or private equity
offerings, debt financings, borrowings or strategic
collaborations. The issuance of equity securities may result in
dilution to stockholders, and debt financing may involve
restrictive covenants. We do not know whether additional funding
will be available on acceptable terms, or at all. If we are not
able to secure additional funding when needed, we may have to
delay, reduce the scope of or eliminate one or more research and
development programs or selling and marketing initiatives. In
addition, we may have to work with a partner on one or more of
our product development programs or market development programs,
which would lower the economic value of those programs to our
company.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards
No. 157,
Fair Value Measurements,
or SFAS 157.
This pronouncement defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair
value measurements. This Statement is effective for fiscal years
beginning after November 15, 2007. We are currently
evaluating the effect that the adoption of SFAS 157 will
have on our financial condition, results of operations and cash
flows.
55
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
, or
FIN 48. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS 109,
Accounting for Income Taxes.
FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We plan to adopt FIN 48 as of
January 1, 2007 and are currently evaluating the effect
that the adoption of FIN 48 will have on our financial
condition, results of operations and cash flows.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
We are exposed to interest rate risk primarily through our
investment portfolio. Our marketable securities consist of
high-quality debt securities with maturities beyond 90 days
at the date of acquisition, which mature within one year or
less. Our long-term investments consist of high-quality debt
securities with maturities beyond one year. As of
December 31, 2006, we had cash, cash equivalents and
short-term investments totaling $44.2 million. Our
investment policy calls for investments in short term, low risk,
investment-grade instruments. Based on our portfolio content and
our ability to hold investments to maturity, we believe that, if
market interest rates were to increase immediately and uniformly
by 10% from levels at December 31, 2006, the decline in
fair value would not be material.
56
|
|
ITEM 8.
|
Financial
Statements and Supplementary
Data
.
|
Genomic
Health, Inc.
Index
to consolidated financial statements
57
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Genomic Health, Inc.
We have audited the accompanying consolidated balance sheets of
Genomic Health, Inc. as of December 31, 2006 and 2005, and
the related consolidated statements of operations, convertible
preferred stock and stockholders equity (deficit), and
cash flows for each of the three years in the period ended
December 31, 2006. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the auditing
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Genomic Health, Inc. at
December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial
statements, under the heading Stock-Based Compensation, the
Company adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, effective
January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Genomic Health, Inc.s internal control
over financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 14, 2007
expressed an unqualified opinion thereon.
Palo Alto, California
March 14, 2007
58
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Genomic Health, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that Genomic Health, Inc. maintained
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Genomic Health, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of Genomic Health Inc.s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Genomic
Health, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Genomic Health, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Genomic Health, Inc. as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, convertible preferred stock and
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2006 and
our report dated March 14, 2007 expressed an unqualified
opinion thereon.
Palo Alto, California
March 14, 2007
59
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,926
|
|
|
$
|
18,839
|
|
Short-term investments
|
|
|
29,289
|
|
|
|
50,688
|
|
Accounts receivable (net of
allowance for bad debt; 2006-$510,
2005-$0)
|
|
|
1,862
|
|
|
|
314
|
|
Prepaid expenses and other current
assets
|
|
|
1,609
|
|
|
|
1,584
|
|
Employee note receivable
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
47,686
|
|
|
|
71,462
|
|
Property and equipment, net
|
|
|
9,421
|
|
|
|
3,597
|
|
Restricted cash
|
|
|
500
|
|
|
|
500
|
|
Other assets
|
|
|
417
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
58,024
|
|
|
$
|
75,799
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,523
|
|
|
$
|
1,393
|
|
Accrued compensation
|
|
|
1,868
|
|
|
|
955
|
|
Accrued expenses and other current
liabilities
|
|
|
1,474
|
|
|
|
1,364
|
|
Accrued license fees
|
|
|
907
|
|
|
|
585
|
|
Notes payable current
portion
|
|
|
2,547
|
|
|
|
1,052
|
|
Deferred revenues
current portion
|
|
|
710
|
|
|
|
238
|
|
Lease incentive
obligations current portion
|
|
|
122
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,151
|
|
|
|
5,661
|
|
Notes payable
long-term portion
|
|
|
4,726
|
|
|
|
2,621
|
|
Deferred revenues
long-term portion
|
|
|
137
|
|
|
|
|
|
Lease incentive
obligations long-term portion
|
|
|
761
|
|
|
|
|
|
Other liabilities
|
|
|
420
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par
value, 5,000,000 and none authorized, no shares issued and
outstanding at December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par
value; 100,000,000 shares authorized, 24,548,060 and
24,470,981 shares issued and outstanding at
December 31, 2006 and 2005, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
166,922
|
|
|
|
167,053
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
(3,297
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
8
|
|
|
|
(58
|
)
|
Accumulated deficit
|
|
|
(125,103
|
)
|
|
|
(96,183
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
41,829
|
|
|
|
67,517
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
58,024
|
|
|
$
|
75,799
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
60
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
27,006
|
|
|
$
|
4,823
|
|
|
$
|
227
|
|
Contract revenues
|
|
|
2,168
|
|
|
|
379
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
29,174
|
|
|
|
5,202
|
|
|
|
327
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
9,908
|
|
|
|
6,249
|
|
|
|
1,828
|
|
Research and development
|
|
|
12,841
|
|
|
|
9,465
|
|
|
|
10,040
|
|
Selling and marketing
|
|
|
24,625
|
|
|
|
15,348
|
|
|
|
9,856
|
|
General and administrative
|
|
|
12,765
|
|
|
|
6,485
|
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60,139
|
|
|
|
37,547
|
|
|
|
25,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(30,965
|
)
|
|
|
(32,345
|
)
|
|
|
(25,266
|
)
|
Interest income
|
|
|
2,480
|
|
|
|
1,241
|
|
|
|
295
|
|
Interest expense
|
|
|
(446
|
)
|
|
|
(258
|
)
|
|
|
(4
|
)
|
Other income (expense), net
|
|
|
11
|
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
$
|
(13.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
1,808,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
61
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock-based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Balance at December 31, 2003
|
|
|
29,936,839
|
|
|
$
|
51,064
|
|
|
|
1,741,684
|
|
|
$
|
|
|
|
$
|
280
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(39,827
|
)
|
|
$
|
(39,547
|
)
|
Issuance of common stock to
employees upon exercise of stock options at $0.66 to
$1.38 per share for cash
|
|
|
|
|
|
|
|
|
|
|
222,531
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
Issuance of common stock to
consultants upon exercise of stock options at $0.66 to
$1.38 per share for cash
|
|
|
|
|
|
|
|
|
|
|
1,169
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Repurchase of common stock issued
to founders
|
|
|
|
|
|
|
|
|
|
|
(14,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series E
convertible preferred stock at $2.82 per share for cash
(net of issuance costs of $146)
|
|
|
18,543,980
|
|
|
|
52,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,647
|
|
|
|
(3,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
Stock-based compensation related to
consultant options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,995
|
)
|
|
|
(24,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
48,480,819
|
|
|
|
103,212
|
|
|
|
1,951,161
|
|
|
|
|
|
|
|
4,124
|
|
|
|
(3,456
|
)
|
|
|
|
|
|
|
(64,822
|
)
|
|
|
(64,154
|
)
|
Issuance of common stock to
employees upon exercise of stock options at $0.58 to
$2.88 per share for cash
|
|
|
|
|
|
|
|
|
|
|
266,916
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
Issuance of common stock to
consultants upon exercise of stock options at $0.66 to
$2.88 per share for cash
|
|
|
|
|
|
|
|
|
|
|
5,197
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Issuance of common stock at
$12.00 per share, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
5,016,722
|
|
|
|
|
|
|
|
53,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,458
|
|
Issuance of common stock to Incyte
at $12.00 per share
|
|
|
|
|
|
|
|
|
|
|
416,666
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Conversion of preferred stock into
common stock
|
|
|
(48,480,819
|
)
|
|
|
(103,212
|
)
|
|
|
16,814,319
|
|
|
|
2
|
|
|
|
103,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,212
|
|
Stock-based compensation related to
consultant options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
|
|
(917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
1,076
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,361
|
)
|
|
|
(31,361
|
)
|
Change in unrealized loss on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
24,470,981
|
|
|
|
2
|
|
|
|
167,053
|
|
|
$
|
(3,297
|
)
|
|
|
(58
|
)
|
|
|
(96,183
|
)
|
|
|
67,517
|
|
Deferred compensation reclassified
upon adoption of SFAS 123R on January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,297
|
)
|
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to
employees upon exercise of stock options at $0.63 to
$9.39 per share for cash
|
|
|
|
|
|
|
|
|
|
|
74,826
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
Issuance of common stock to
consultants upon exercise of stock options at $2.88 per share
for cash
|
|
|
|
|
|
|
|
|
|
|
2,253
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Stock-based compensation related to
employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,904
|
|
Stock-based compensation related to
consultant stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,920
|
)
|
|
|
(28,920
|
)
|
Change in unrealized loss on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
24,548,060
|
|
|
$
|
2
|
|
|
$
|
166,922
|
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
(125,103
|
)
|
|
$
|
41,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
62
GENOMIC
HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,579
|
|
|
|
1,522
|
|
|
|
1,008
|
|
Employee stock-based compensation
|
|
|
2,904
|
|
|
|
1,076
|
|
|
|
191
|
|
Non-employee stock-based
compensation
|
|
|
83
|
|
|
|
92
|
|
|
|
53
|
|
Gain or loss on disposal of
property and equipment
|
|
|
3
|
|
|
|
(31
|
)
|
|
|
20
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,548
|
)
|
|
|
(314
|
)
|
|
|
|
|
Employee note receivable
|
|
|
37
|
|
|
|
76
|
|
|
|
(113
|
)
|
Prepaid expenses and other current
assets
|
|
|
(25
|
)
|
|
|
(683
|
)
|
|
|
(338
|
)
|
Other assets
|
|
|
216
|
|
|
|
(107
|
)
|
|
|
|
|
Accounts payable
|
|
|
1,130
|
|
|
|
292
|
|
|
|
274
|
|
Accrued expenses and other
liabilities
|
|
|
432
|
|
|
|
1,247
|
|
|
|
527
|
|
Accrued compensation
|
|
|
913
|
|
|
|
352
|
|
|
|
261
|
|
Deferred revenues
|
|
|
609
|
|
|
|
238
|
|
|
|
|
|
Lease incentive obligations
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(20,778
|
)
|
|
|
(27,601
|
)
|
|
|
(23,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(8,379
|
)
|
|
|
(2,972
|
)
|
|
|
(1,856
|
)
|
Purchase of short-term investments
|
|
|
(40,068
|
)
|
|
|
(50,688
|
)
|
|
|
|
|
Maturities of short-term
investments
|
|
|
61,467
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on
investment securities
|
|
|
66
|
|
|
|
(58
|
)
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
(500
|
)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
13,086
|
|
|
|
(54,218
|
)
|
|
|
(1,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
4,912
|
|
|
|
4,090
|
|
|
|
|
|
Principal payments of notes payable
|
|
|
(1,312
|
)
|
|
|
(417
|
)
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
|
179
|
|
|
|
58,710
|
|
|
|
144
|
|
Net proceeds from issuance of
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
52,148
|
|
Repayment of long-term debt due to
related party
|
|
|
|
|
|
|
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
3,779
|
|
|
|
62,383
|
|
|
|
52,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(3,913
|
)
|
|
|
(19,436
|
)
|
|
|
27,213
|
|
Cash and cash equivalents at the
beginning of period
|
|
|
18,839
|
|
|
|
38,275
|
|
|
|
11,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the
end of period
|
|
$
|
14,926
|
|
|
$
|
18,839
|
|
|
$
|
38,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
446
|
|
|
$
|
258
|
|
|
$
|
4
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock converted to
common upon initial public offering
|
|
|
|
|
|
|
103,212
|
|
|
|
|
|
See accompanying notes.
63
GENOMIC
HEALTH, INC.
December 31, 2006
|
|
Note 1.
|
Organization
and Summary of Significant Accounting Policies
|
The
Company
Genomic Health, Inc., or the Company, was incorporated in
Delaware in August 2000. The Company was organized to deliver
individualized genomic information to patients and their
physicians to improve the quality of treatment decisions for
patients with cancer. The Companys first test, Onco
type
DX, was launched in 2004 and is used for early stage breast
cancer patients to predict the likelihood of cancer recurrence,
the likelihood of patient survival within 10 years of
diagnosis and the likelihood of chemotherapy benefit. The
Company has incurred significant losses and expects to incur
additional losses for at least the next two years as commercial
and development efforts continue.
Initial
Public Offering
On October 4, 2005, the Company closed an initial public
offering of 5,016,722 shares of its common stock at
$12.00 per share. Net proceeds from the offering after
deducting underwriting discounts, commissions and expenses were
$53.5 million. On the closing of the Companys initial
public offering, all of the convertible preferred stock
outstanding automatically converted into 16,160,273 shares
of common stock.
An additional $5.0 million was raised on October 4,
2005, through the private sale of 416,666 shares common
stock to Incyte Corporation, a related party. As of
December 31, 2006, to the Companys knowledge, Incyte
Corporation had divested its holdings in the Companys
common stock. See Note 10 to the Companys
consolidated financial statements for further information on
related parties.
Principles
of Consolidation
The consolidated financial statements include all the accounts
of the Company and all wholly owned subsidiaries. The Company
has one wholly-owned subsidiary, Oncotype Laboratories, Inc.,
which was established in 2003 and is inactive.
Basis
of Presentation and Use of Estimates
The accompanying consolidated financial statements as of
December 31, 2006 and 2005 and for the years ended
December 31, 2006, 2005 and 2004 have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make judgments, assumptions and estimates
that affect the amounts reported in the Companys
consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Cash
Equivalents and Short-term Investments
The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash
equivalents. The Company invests in money market securities
through a major U.S. bank and is exposed to credit risk in
the event of default by the financial institution to the extent
of amounts recorded on the balance sheets.
The Company invests in short-term and long-term marketable
securities, primarily corporate notes, government agencies,
asset-backed securities and municipal bonds. The Company
considers all investments with a maturity date less than one
year as of the balance sheet date to be short-term investments.
These securities are carried at estimated fair value with
unrealized gains and losses included in stockholders
equity. Those investments with a maturity date greater than one
year as of the balance sheet date are considered to be long-term
investments. All investments are available for sale.
64
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Realized gains and losses and declines in value, if any, judged
to be other than temporary on
available-for-sale
securities are reported in other income or expense. When
securities are sold, any associated unrealized gain or loss
recorded as a separate component of stockholders equity is
reclassified out of stockholders equity on a
specific-identification basis and recorded in earnings for the
period.
Restricted
Cash
In September 2005, the Company entered into a non-cancelable
facilities lease with the facility owner that has a term of six
years. In connection with this lease, the Company was required
to secure a letter of credit, which totaled $500,000 and is
classified as restricted cash on the balance sheet.
Fair
Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, short-term
investments, trade receivables, accounts payable, approximate
fair value due to their short maturities. Based on borrowing
rates currently available to the Company for loans and capital
lease obligations with similar terms, the carrying value of the
Companys debt obligations approximates fair value.
Property
and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to five
years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the
assets or the term of the lease, whichever is shorter.
Leases
The Company enters into lease agreements for its laboratory and
office facilities. These leases are classified as operating
leases. Rent expense is recognized on a straight-line basis over
the term of the lease. Incentives granted under the
Companys facilities leases, including allowances to fund
leasehold improvements and rent holidays, are capitalized as
deferred rent and are recognized as reductions to rental expense
on a straight-line basis over the term of the lease.
Intangible
assets
Intangible assets with definite useful lives are recorded at
cost, less accumulated amortization. Amortization is recognized
over their estimated useful lives.
Impairment
of Long-lived Assets
The Company reviews long-lived assets, which include property
and equipment and intangible assets, for impairment whenever
events or changes in business circumstances indicate that the
carrying amounts of the assets may not be fully recoverable. An
impairment loss would be recognized when estimated discounted
future cash flows expected to result from the use of the asset
and its eventual disposition is less then its carrying amount.
Impairment, if any, is assessed using discounted cash flows.
Through December 31, 2006, there have been no such losses.
Research
and Development
Research and development expenses comprise the following types
of costs incurred in performing research and development
activities: salaries and benefits, allocated overhead and
facility occupancy costs, contract services and other outside
costs, and costs to acquire in-process research and development
projects and technologies that have no alternative future use.
Research and development expenses also include costs related to
activities performed under
65
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
contracts with biopharmaceutical and pharmaceutical companies.
Research and development costs are expensed as incurred.
Concentration
of Risk
Cash, cash equivalents, short-term investments and accounts
receivable are financial instruments which potentially subject
the Company to concentrations of credit risk. The Company
invests in debt instruments and in money market funds, and by
policy, limits the amount in any one type of investment, other
than securities issued or guaranteed by the
U.S. Government. Through December 31, 2006, no
material losses had been incurred. One major customer accounted
for approximately 47% of the Companys product revenue for
the year ended December 31, 2006; no revenue from this
customer was recorded in 2005. This customer represented 59% of
the Companys net accounts receivable balance as of
December 31, 2006. Another major customer accounted for
approximately 4% and 11% of the Companys revenue in 2006
and 2005, respectively. This customer represented 17% and 70% of
the Companys accounts receivable balance as of
December 31, 2006 and 2005, respectively.
Comprehensive
Loss
The Company displays comprehensive loss and its components as
part of the statements of stockholders equity. Other
comprehensive loss consists entirely of unrealized gains and
losses on investments.
Internal
Use Software
The Company accounts for software developed or obtained for
internal use in accordance with Statement of Position
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
The statement requires
capitalization of certain costs incurred in the development of
internal-use software, including external direct material and
service costs and employee payroll and payroll-related costs.
Capitalized software costs, which are included in property and
equipment, are depreciated over three to five years.
Guarantees
and Indemnifications
The Company, as permitted under Delaware law and in accordance
with its Bylaws, indemnifies its officers and directors for
certain events or occurrences, subject to certain limits, while
the officer or director is or was serving at the Companys
request in such capacity. The term of the indemnification period
is for the officers or directors lifetime. The
maximum amount of potential future indemnification is unlimited;
however, the Company has a director and officer insurance policy
that limits its exposure and may enable it to recover a portion
of any future amounts paid. The Company believes the fair value
of these indemnification agreements is minimal. Accordingly, the
Company has not recorded any liabilities for these agreements as
of December 31, 2006 and 2005.
Income
Taxes
The Company uses the liability method for income taxes, whereby
deferred income taxes are provided on items recognized for
financial reporting purposes over different periods than for
income tax purposes. Valuation allowances are provided when the
expected realization of tax assets does not meet a
more-likely-than-not criterion.
Stock-based
Compensation
Through December 31, 2005, the Company accounted for
stock-based payment transactions under Accounting Principles
Board Opinion No. 25, or APB 25. On January 1,
2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (Revised 2004),
Share-Based
Payment
, or SFAS 123R. SFAS 123R, which addresses
the accounting for stock-based payment transactions whereby an
entity receives employee services in exchange for equity
instruments, including stock options. SFAS 123R eliminates
the ability to account for stock-based compensation transactions
using the intrinsic value method under APB 25, and instead
requires that such transactions be
66
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accounted for using a fair-value based method. SFAS 123R is
a complex accounting standard, the application of which requires
significant judgment and the use of estimates, particularly
surrounding assumptions used in determining fair value. The
Company uses the Black-Scholes valuation method, which requires
the use of estimates such as stock price volatility and expected
options lives, as well as expected option forfeiture rates, to
value equity-based compensation. There is little historical
evidence or guidance available with respect to developing these
assumptions and models. Expected volatility is based on
comparable peer data as well as historical volatility of the
Companys stock. The expected life of options granted is
estimated based on historical option exercise and employee
termination experience and peer group data.
The Company has elected the modified prospective transition
method as permitted under SFAS 123R and, accordingly, prior
periods have not been restated to reflect the impact of
SFAS 123R. The modified prospective transition method
requires that stock-based compensation expense be recorded for
all new and unvested stock options that are ultimately expected
to vest as the requisite service is rendered beginning on
January 1, 2006. Stock-based compensation expense resulting
from the adoption of SFAS 123R represents expense related
to stock options granted during the year ended December 31,
2006, as well as stock options granted prior to, but not yet
vested as of, January 1, 2006. As of December 31,
2006, total compensation expense related to non-vested stock
options not yet recognized was $14.3 million, which is
expected to be recognized over a period of 39 months.
Equity instruments granted to non-employees are valued using the
Black-Scholes method and accounted for as prescribed by
SFAS 123R and Emerging Issues Task Force, or EITF,
Consensus
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
, and will be subject to periodic
revaluation over their vesting terms.
Revenue
Recognition
The Company derives its revenues from product sales and contract
research arrangements. The Company operates in one industry
segment. Product revenues are derived solely from the sale of
the Onco
type
DX test. Third-party payors are billed upon
generation and delivery of a Recurrence Score report to the
physician.
The Companys product revenues for tests performed are
recognized when the following criteria of revenue recognition
are met: (1) persuasive evidence that an arrangement
exists; (2) delivery has occurred or services rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Criterion
(2) is satisfied when the Company performs the test and
generates and delivers a report to the physician. Determination
of criteria (3) and (4) is based on managements
judgments regarding the nature of the fee charged for products
or services delivered and the collectibility of those fees.
Product revenues where all criteria set forth above are not met
are recognized on a cash basis when cash is received.
The Company generally bills third-party payors for Onco
type
DX upon generation and delivery of a Recurrence Score report
to the physician. As such, the Company takes assignment of
benefits and the risk of collection with the third-party payor.
The Company usually bills the patient directly for amounts owed
after multiple requests for payment have been denied or only
partially paid by the insurance carrier. As a relatively new
test, Onco
type
DX may be considered investigational by
payors and not covered under their reimbursement policies.
Consequently, the Company pursues
case-by-case
reimbursement where policies are not in place or payment history
has not been established. As a result, at the time of delivery
of the Recurrence Score to the physician, and in the absence of
a reimbursement contract or sufficient payment history,
collectibility cannot reasonably be assured and revenues are
therefore only recognized at the time cash is collected.
In 2006 the Company began accruing an allowance for bad debt
against its accounts receivable consistent with historical
payment experience. Bad debt expense is included in general and
administrative expense on the Companys consolidated
statements of operations. As of December 31, 2006, the
Companys allowance for bad debt was $510,000. No
write-offs for bad debt were recorded against the allowance
during the year ended December 31, 2006. Bad debt expense
was $510,000 was for the year ended December 31, 2006. No
bad debt
67
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense was recorded for the years ended December 31, 2005
and 2004 because the vast majority of revenues were recorded on
a cash basis. Accounts receivable over 90 days will be
written off when the appeals process is exhausted, when an
unfavorable coverage decision is received, or when there is
other substantive evidence that the account will not be paid.
Contract revenues are derived from studies conducted with
biopharmaceutical and pharmaceutical companies and are
recognized on a contract specific basis. Contract revenues are
recorded on an accrual basis as the contractual obligations are
completed. Under certain contracts, the Companys input,
measured in terms of full-time equivalent level of effort or
running a set of assays through its laboratory under a
contractual protocol, triggers payment obligations and revenues
are recognized as costs are incurred or assays are processed.
Certain contracts have payment obligations that are triggered as
milestones are complete, such as completion of a successful set
of experiments. In these cases, revenues are recognized when the
milestones are achieved.
Recently
Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or
FASB issued Statement of Financial Accounting Standards
No. 157,
Fair Value Measurements
, or SFAS 157.
This pronouncement defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair
value measurements. This Statement is effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the effect that the adoption of SFAS 157 will
have on its financial condition, results of operations and cash
flows.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
, or
FIN 48. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS 109,
Accounting for Income Taxes.
FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company will adopt FIN 48 as of
January 1, 2007 and is currently evaluating the effect that
the adoption of FIN 48 will have on its financial condition,
results of operations and cash flows.
|
|
Note 2.
|
Net Loss
Per Share
|
Basic net loss per share is calculated by dividing the net loss
by the weighted-average number of common shares outstanding for
the period without consideration for potential common shares.
Diluted net loss per share is computed by dividing the loss by
the weighted-average number of common shares outstanding for the
period less the weighted-average unvested common shares subject
to repurchase and dilutive potential common shares for the
period determined using the treasury-stock method. For purposes
of this calculation, preferred stock and options to purchase
stock are considered to be potential common shares and are only
included in the calculation of diluted loss per share when their
effect is dilutive.
68
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss applicable to common
stockholders
|
|
$
|
(28,920
|
)
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
24,508,845
|
|
|
|
7,557,106
|
|
|
|
1,808,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(1.18
|
)
|
|
$
|
(4.15
|
)
|
|
$
|
(13.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding dilutive
securities not included in diluted net loss per share
calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
16,160,273
|
|
Options to purchase common stock
|
|
|
2,940,803
|
|
|
|
2,021,276
|
|
|
|
1,423,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,940,803
|
|
|
|
2,021,276
|
|
|
|
17,583,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Collaboration
and Specimen Transfer Agreements
|
The Company has entered into a variety of specimen transfer and
collaboration agreements relating to its development efforts.
The Company recorded collaboration expenses of
$1.5 million, $333,000 and $1.1 million for the years
ended December 31, 2006, 2005 and 2004, respectively,
relating to services provided in connection with these
agreements. In addition to these expenses, certain agreements
contain provisions for royalties from inventions resulting from
these collaborations.
At December 31, 2006, future milestone payments, exclusive
of royalty payments, relating to the launch and
commercialization of Onco
type
DX total approximately
$2.2 million and are payable as follows (in thousands):
|
|
|
|
|
|
|
Milestone
|
|
|
|
Payments
|
|
|
January 2007
|
|
$
|
300
|
|
January 2008
|
|
|
475
|
|
January 2009
|
|
|
475
|
|
January 2010
|
|
|
475
|
|
January 2011
|
|
|
475
|
|
|
|
|
|
|
Total
|
|
$
|
2,200
|
|
|
|
|
|
|
If at any time the Company discontinues the sale of commercial
products or services resulting from the collaboration, no future
milestone payments will be payable and the Company will have no
further obligation under the agreement. If the Companys
cash balance is less than $5.0 million on the due date of
any the milestone payments, the Company may be able to defer any
current milestone payment due for a period of up to
12 months.
In addition, the Company has secured certain options and rights
relating to any joint inventions arising out of the
collaborations.
|
|
Note 4.
|
Commercial
Technology Licensing Agreements
|
The Company is a party to various agreements under which it
licenses technology on a nonexclusive basis in the field of
human diagnostics. Access to these licenses enables the Company
to process its laboratory tests for
69
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Onco
type
DX. Payments under these agreements for the
years ended December 31, 2006, 2005 and 2004 were
$2.2 million, $786,000 and $477,000, respectively, and were
included in cost of product revenues.
|
|
Note 5.
|
Short-term
Investments
|
The following tables illustrate the Companys
available-for-sale
securities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of
U.S. government agencies
|
|
$
|
9,082
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
9,085
|
|
Corporate debt securities
|
|
|
20,199
|
|
|
|
5
|
|
|
|
|
|
|
|
20,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,281
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
29,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Debt securities of
U.S. government agencies
|
|
$
|
14,625
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
14,617
|
|
Corporate debt securities
|
|
|
31,326
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
31,283
|
|
Asset-backed securities
|
|
|
4,795
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
4,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,746
|
|
|
$
|
|
|
|
$
|
(58
|
)
|
|
$
|
50,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of
available-for-sale
securities by contractual maturity at December 31, 2006 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Cost
|
|
|
Market Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
29,281
|
|
|
$
|
29,289
|
|
|
|
Note 6.
|
Property
and Equipment
|
The following table summarizes the Companys property and
equipment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Computer equipment and software
|
|
$
|
1,264
|
|
|
$
|
1,137
|
|
Lab equipment
|
|
|
7,016
|
|
|
|
5,467
|
|
Furniture and fixtures
|
|
|
280
|
|
|
|
205
|
|
Leasehold improvements
|
|
|
7,296
|
|
|
|
343
|
|
Construction in progress
|
|
|
122
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,978
|
|
|
|
7,602
|
|
Less accumulated depreciation and
amortization
|
|
|
(6,557
|
)
|
|
|
(4,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,421
|
|
|
$
|
3,597
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005 and 2004, the
Company recorded depreciation and amortization expense of
$2.6 million, $1.5 million and $1.0 million,
respectively.
70
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes Payable
In March 2005, the Company entered into an arrangement to
finance the acquisition of laboratory equipment, computer
hardware and software, leasehold improvements and office
equipment. In connection with this arrangement, the Company
granted the lender a security interest in the assets purchased
with the borrowed amounts. The Company could not prepay any
amounts owed until April 2006, at which point the Company could
prepay all, but not part, of the amounts owing under the
arrangement so long as it also pay a 6% premium on the remaining
payments. This premium is reduced to 5% in 2007 and 4% in 2008.
As of December 31, 2006, borrowings under this arrangement
were $7.3 million at an annual interest rate of 10.23%,
10.30%, 10.49%, 10.56%, 10.65%, 11.01%, 11.18% or 11.30%,
depending on the applicable note. According to the terms of the
arrangement the Company is required to notify the lender if
there is a material adverse change. The Company complied with
all the material covenants of the finance arrangement during the
years ended December 31, 2006 and 2005.
As of December 31, 2006, the Companys aggregate
commitments under its financing arrangement were as follows (in
thousands):
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
Years Ending December 31,
|
|
|
|
|
2007
|
|
$
|
3,223
|
|
2008
|
|
|
3,073
|
|
2009
|
|
|
1,934
|
|
2010
|
|
|
238
|
|
|
|
|
|
|
Total minimum payments
|
|
|
8,468
|
|
Less: interest portion
|
|
|
(1,195
|
)
|
|
|
|
|
|
Present value of net minimum
payments
|
|
|
7,273
|
|
Less: current portion of
obligations
|
|
|
(2,547
|
)
|
|
|
|
|
|
Long-term obligations
|
|
$
|
4,726
|
|
|
|
|
|
|
Leases
During 2003, the Company entered into an agreement to extend its
then existing sublease through May 31, 2005, wherein
monthly rent beginning October 1, 2003, was modified to be
$75,000 per month. During 2005, the Company entered into an
additional agreement to extend the original four-year term of
the sublease agreement through February 28, 2006, wherein
monthly rent beginning June 1, 2005 was modified to
$40,000 per month. As part of this 2005 agreement, the
Company agreed to sublease additional adjacent premises
effective February 8, 2005 through February 28, 2006
at a rate of $14,000 per month, with first and last monthly
payments of $10,000 and $14,000, respectively. In September
2005, the Company entered into a non-cancelable lease directly
with the facility owner for the entire 48,000 square feet
of laboratory and office space that the Company currently
occupies. The lease has a term of six years and included lease
incentive obligations of $960,000, which are being amortized on
a straight-line basis over the life of the lease.
Rent expense under all operating leases amounted to $810,000,
$838,000 and $911,000 for the years ended December 31,
2006, 2005 and 2004, respectively.
71
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future non-cancelable commitments under operating leases at
December 31, 2006, were as follows (in thousands):
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
|
|
Amounts
|
|
|
Years Ending December 31,
|
|
|
|
|
2007
|
|
$
|
730
|
|
2008
|
|
|
753
|
|
2009
|
|
|
778
|
|
2010
|
|
|
799
|
|
2011
|
|
|
827
|
|
Thereafter
|
|
|
139
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
4,026
|
|
|
|
|
|
|
|
|
Note 8.
|
Convertible
Preferred Stock and Stockholders Equity
(Deficit)
|
Convertible
Preferred Stock
In November 2000, January 2001, March 2001, March through
November 2002, and February through December 2004 the Company
completed private placements for the sale of 7,935,000,
15,675,674, 2,252,252, 4,073,913 and 18,543,980 shares of
Series A, B, C, D and E convertible preferred stock,
respectively, resulting in gross proceeds of $7.9 million,
$29.0 million, $5.0 million, $9.4 million and
$52.3 million, respectively.
On October 4, 2005, the Company completed its initial
public offering of 5,016,722 shares of common stock at a
price to the public of $12.00 per share. Upon consummation
of the offering, all 48,480,819 outstanding shares of preferred
stock converted into 16,160,273 of shares of common stock and a
dividend of 654,046 common shares was distributed to the
stockholders on conversion.
Note 9. Common
Stock and Equity Plans
Common
Stock
As of December 31, 2006, the Company had
24,548,060 shares of common stock outstanding. Common stock
reserved for issuance as of December 31, 2006 is as follows:
|
|
|
|
|
Options outstanding
|
|
|
2,940,803
|
|
Future option grants
|
|
|
3,258,436
|
|
Dividend
On September 8, 2005, the board of directors of the Company
declared a conditional dividend of 791,210 shares of common
stock, which was allocated upon the closing of the
Companys initial public offering on a pro rata basis to
all of the Companys stockholders and option holders of
record as of September 28, 2005. The Company issued
740,030 shares to its stockholders pursuant to this
dividend at the closing of the initial public offering on
October 4, 2005, less an aggregate of 86 shares for
which cash was paid in lieu of fractional interests, and the
number of shares underlying outstanding stock options were
increased by approximately 51,080 shares, less any
fractional shares resulting from such adjustment. The dividend
has been given retroactive effect in the accompanying
consolidated financial statements.
72
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reverse
Stock Split
On September 23, 2005, the Company effected a
1-for-3
reverse stock split of its common stock. All share and per share
amounts have been retroactively restated in the accompanying
consolidated financial statements and notes for all periods
presented.
2005
Stock Incentive Plan
On September 8, 2005, the Board of Directors approved the
2005 Stock Incentive Plan, or 2005 Plan, that was later approved
by the Companys stockholders. The Company has reserved
5,000,000 shares of the Companys common stock for
issuance under the 2005 Plan. The 2005 Plan became effective
upon the closing of the Companys initial public offering
on October 4, 2005. Pursuant to the 2005 Plan, stock
options, restricted shares, stock units, and stock appreciation
rights may be granted to employees, consultants, and outside
directors of the Company. Options granted may be either
incentive stock options or nonstatutory stock options.
Stock options are governed by stock option agreements between
the Company and recipients of stock options. Incentive stock
options may be granted under the 2005 Plan at an exercise price
of not less than 100% of the fair market value of the common
stock on the date of grant, determined by the Compensation
Committee of the Board of Directors. Nonstatutory stock options
may be granted under the 2005 Plan at an exercise price of not
less than 80% of the fair market value of the common stock on
the date of grant, determined by the Compensation Committee of
the Board of Directors. Options become exercisable and expire as
determined by the Compensation Committee, provided that the term
of incentive stock options may not exceed 10 years from the
date of grant. Stock option agreements may provide for
accelerated exercisability in the event of an optionees
death, disability, or retirement or other events.
Under the 2005 Plan, each outside director who joins the board
after the effective date of the 2005 Plan will receive an
automatic nonstatutory stock option grant that vests at a rate
of 25% at the end of the first year, with the remaining balance
vesting monthly over the next three years. On the first business
day following the annual meeting of the Companys
stockholders, each outside director who is continuing board
service and who was not initially elected to the board at the
annual meeting will receive an additional nonstatutory stock
option grant, which will vest in full immediately prior to the
next annual meeting of the Companys stockholders.
Nonstatutory stock options granted to outside directors must
have an exercise price equal to 100% of the fair market value of
the common stock on the date of grant. Nonstatutory stock
options terminate on the earlier of the day before the tenth
anniversary of the date of grant or the date twelve months after
termination of the outside directors service as a member
of the board of directors.
Restricted shares, stock appreciation rights, and stock units
granted under the 2005 Plan are governed by restricted stock
agreements, SAR agreements, and stock unit agreements between
the Company and recipients of the awards. Terms of the
agreements are determined by the Compensation Committee.
2001
Stock Incentive Plan
The Companys 2001 Stock Incentive Plan, or 2001 Plan, was
terminated upon completion of the Companys initial public
offering in October 2005. No shares of common stock are
available under the 2001 Plan other than to satisfy exercises of
stock options granted under the 2001 Plan prior to its
termination. Under the 2001 Plan, incentive stock options and
nonstatutory stock options were granted to employees, officers,
and directors of, or consultants to, the Company and its
affiliates. Options granted under the 2001 Plan expire no later
than 10 years from the date of grant.
Adoption
of SFAS 123R
Until December 31, 2005, the Company followed APB 25
to account for employee stock options using the intrinsic value
method. Under APB 25, no compensation expense is
recognized when the exercise price of the
73
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys employee stock options equals the market price of
the underlying stock on the date of grant. On January 1,
2006, the Company adopted SFAS 123R, which addresses the
accounting for stock-based payment transactions whereby an
entity receives employee services in exchange for equity
instruments, including stock options. SFAS 123R eliminates
the ability to account for stock-based compensation transactions
using the intrinsic value method under APB 25, and instead
requires that such transactions be accounted for using a
fair-value based method. The Company uses the Black-Scholes
option valuation model to value stock options under
SFAS 123R.
On November 10, 2005, the FASB issued FASB Staff Position No.
FAS 123(R)-3,
Transition Election Related to Accounting
for Tax Effects of Share-Based Payment Awards.
The
Company has elected to adopt the alternative transition method
provided in the FASB Staff Position for calculating the tax
effects (if any) of stock-based compensation expense pursuant to
SFAS 123R. The alternative transition method includes simplified
methods to establish the beginning balance of the additional
paid-in capital pool, or APIC pool, related to the tax effects
of employee stock-based compensation, and to determine the
subsequent impact to the APIC pool and the consolidated
statements of operations and cash flows of the tax effects (if
any) of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123R.
Employee stock-based compensation expense recognized for the
year ended December 31, 2006 was calculated based on awards
ultimately expected to vest and has been reduced for estimated
forfeitures. SFAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The
Company recorded employee stock-based compensation expense of
$2.9 million for the year ended December 31, 2006 as a
result of the adoption of SFAS 123R. The following table
presents the impact of the adoption of SFAS 123R on
selected statements of operations line items for the year ended
December 31, 2006:
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of product revenues
|
|
$
|
167
|
|
Research and development
|
|
|
821
|
|
Selling and marketing
|
|
|
779
|
|
General and administrative
|
|
|
1,137
|
|
|
|
|
|
|
Total
|
|
$
|
2,904
|
|
|
|
|
|
|
As a result of adopting SFAS 123R on January 1, 2006,
the Companys net loss for year ended December 31,
2006 was $1.8 million higher than if it had continued to
account for stock-based compensation under APB 25. Basic
and diluted net loss per share for the year ended
December 31, 2006 was $0.07 higher than if the Company had
continued to account for stock-based compensation under
APB 25.
Stock-based compensation expense resulting from the adoption of
SFAS 123R represents expense related to stock options
granted during the year ended December 31, 2006, as well as
stock options granted prior to, but not yet vested as of,
January 1, 2006. As of December 31, 2006, total
compensation expense related to non-vested stock options not yet
recognized was $14.3 million, which is expected to be
allocated to expenses over a remaining vesting period of
39 months.
74
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro
Forma Information for Period Prior to Adoption of
SFAS 123R
The following pro forma net loss and loss per share were
determined as if the Company had accounted for employee
stock-based compensation for its employee stock option plans
under the fair value method prescribed by SFAS 123:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net loss as reported
|
|
$
|
(31,361
|
)
|
|
$
|
(24,995
|
)
|
Add: Total stock-based employee
compensation expense included in net loss
|
|
|
1,076
|
|
|
|
191
|
|
Deduct: Total stock-based employee
compensation expense determined under the fair-value based
method for all awards
|
|
|
(1,482
|
)
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
Net loss, pro forma
|
|
$
|
(31,767
|
)
|
|
$
|
(25,124
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted, pro forma
|
|
$
|
(4.20
|
)
|
|
$
|
(13.90
|
)
|
|
|
|
|
|
|
|
|
|
Valuation
Assumptions
The employee stock-based compensation expense recognized under
SFAS 123R and presented in the pro forma disclosure
required under SFAS 123 was determined using the
Black-Scholes option valuation model. Option valuation models
require the input of highly subjective assumptions and these
assumptions can vary over time. Expected volatility is based on
comparable peer data as well as the historical volatility of the
Companys stock. The expected life of options granted is
estimated based on historical option exercise and employee
termination experience and comparable peer data. The risk-free
interest rate is estimated using rates available on
U.S. Treasury securities with a remaining term
approximating the expected life of the options. The Company uses
a dividend yield of zero as it has never paid cash dividends and
does not anticipate paying cash dividends in the foreseeable
future. The weighted-average fair values and the assumptions
used in calculating such values during each fiscal period are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Volatility factor
|
|
|
68
|
%
|
|
|
77
|
%
|
|
|
80
|
%
|
Risk-free interest rate
|
|
|
4.76
|
%
|
|
|
4.00
|
%
|
|
|
2.80
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life of options
|
|
|
5.5 years
|
|
|
|
4.8 years
|
|
|
|
4.0 years
|
|
Weighted-average fair value
|
|
$
|
10.27
|
|
|
$
|
6.39
|
|
|
|
4.98
|
|
Stock
Options Granted to Non-employees
The Company grants options to consultants from time to time in
exchange for services performed for the Company. During the
years ended December 31, 2006, 2005 and 2004, the Company
granted options to purchase
75
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2,850, 10,172 and 8,333 shares, respectively, of common
stock to consultants. The fair value of these option grants was
determined using the Black-Scholes option pricing model using
the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Volatility factor
|
|
|
70
|
%
|
|
|
75
|
%
|
|
|
80
|
%
|
Risk-free interest rate
|
|
|
4.80
|
%
|
|
|
4.00
|
%
|
|
|
2.40
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life of options
|
|
|
10 years
|
|
|
|
10 years
|
|
|
|
10 years
|
|
In general, the options vest over the contractual period of the
consulting arrangement and, therefore, the Company will revalue
the options periodically and record additional compensation
expense related to these options over the remaining vesting
period. During the years ended December 31, 2006, 2005 and
2004, compensation expense related to these options was $83,000,
$92,000 and $53,000, respectively.
Stock
Option Activity
The following is a summary of option activity for the years
ended December 31 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Shares Available
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Balance at December 31, 2003
|
|
|
1,541,248
|
|
|
|
710,470
|
|
|
$
|
0.74
|
|
Options granted
|
|
|
(942,453
|
)
|
|
|
942,453
|
|
|
$
|
2.18
|
|
Options exercised
|
|
|
|
|
|
|
(223,700
|
)
|
|
$
|
0.64
|
|
Options cancelled
|
|
|
5,715
|
|
|
|
(5,715
|
)
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
604,510
|
|
|
|
1,423,508
|
|
|
$
|
1.71
|
|
Options authorized
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(877,606
|
)
|
|
|
877,606
|
|
|
$
|
8.48
|
|
Options exercised
|
|
|
|
|
|
|
(272,113
|
)
|
|
$
|
0.93
|
|
2001 Plan shares expired
|
|
|
(443,998
|
)
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
7,725
|
|
|
|
(7,725
|
)
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,290,631
|
|
|
|
2,021,276
|
|
|
$
|
4.75
|
|
Options granted
|
|
|
(1,068,105
|
)
|
|
|
1,068,105
|
|
|
$
|
16.59
|
|
Options exercised
|
|
|
|
|
|
|
(77,079
|
)
|
|
$
|
2.36
|
|
2001 Plan shares expired
|
|
|
(35,589
|
)
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
71,499
|
|
|
|
(71,499
|
)
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
3,258,436
|
|
|
|
2,940,803
|
|
|
$
|
9.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of stock options exercised during 2006, 2005
and 2004 was $948,000 $942,000 and $160,000 respectively. The
estimated fair value of options vesting in 2006, 2005 and 2004
was $2.7 million, $1.6 million and $436,000,
respectively.
76
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information concerning
outstanding and exercisable options under the 2001 and 2005
Plans as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Options Exercisable
|
|
Exercise
|
|
Number
|
|
|
Years Remaining
|
|
|
Weighted-Average
|
|
|
Number
|
|
|
Weighted-Average
|
|
Price Range
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$0.58 - $1.33
|
|
|
582,609
|
|
|
|
6.61
|
|
|
$
|
1.10
|
|
|
|
403,319
|
|
|
$
|
1.01
|
|
$2.88 - $2.88
|
|
|
516,773
|
|
|
|
8.02
|
|
|
$
|
2.88
|
|
|
|
239,007
|
|
|
$
|
2.88
|
|
$3.17 - $3.17
|
|
|
69,348
|
|
|
|
2.92
|
|
|
$
|
3.17
|
|
|
|
34,674
|
|
|
$
|
3.17
|
|
$9.39 - $9.39
|
|
|
610,209
|
|
|
|
8.92
|
|
|
$
|
9.39
|
|
|
|
148,059
|
|
|
$
|
9.39
|
|
$9.55 - $17.24
|
|
|
487,409
|
|
|
|
8.85
|
|
|
$
|
12.14
|
|
|
|
35,429
|
|
|
$
|
10.51
|
|
$18.89 - $22.45
|
|
|
674,455
|
|
|
|
9.92
|
|
|
$
|
18.93
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,940,803
|
|
|
|
|
|
|
|
|
|
|
|
860,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the aggregate intrinsic value of the
outstanding options was $28.2 million and the aggregate
intrinsic value of the exercisable options was
$13.1 million. The weighted-average remaining contractual
life for exercisable options was 7.11 years.
Deferred
Stock-based Compensation
During 2004, stock options were granted with exercise prices
that were equal to the estimated fair value of the common stock
on the date of grant as determined by the Board of Directors.
Subsequent to the commencement of the initial public offering
process, the Company reassessed the fair value of its common
stock and determined that options granted from January 2004
through September 2005 were granted at exercise prices that were
below the reassessed fair value of the common stock on the date
of grant. Accordingly, deferred stock-based compensation of
$3.6 million was recorded during 2004 in accordance with
APB 25 and presented as a separate component of
stockholders equity. In the year ended December 31,
2005, an additional $917,000 of deferred stock-based
compensation was recorded. The Company recorded stock-based
compensation expense of $1.1 million and $191,000, for the
years ended December 31, 2005 and 2004, respectively.
In accordance with the provisions of SFAS 123R, on
January 1, 2006 the Company reversed the balance in
deferred compensation to additional paid-in capital on its
balance sheet.
|
|
Note 10.
|
Related
Party Transactions
|
During 2000 and 2001 Incyte Corporation purchased shares of the
Companys Series A Preferred Stock and Series C
Preferred Stock for an aggregate purchase price of
$6.0 million. The Company has two active agreements with
Incyte that were entered into in March 2001 in connection with
the sale of convertible preferred stock to Incyte; a LifeSeq
collaborative agreement and a patent license agreement. The
Company also entered into a collaboration and technology
transfer agreement with Incyte and a Proteome BioKnowledge
Library license agreement with Proteome, Inc., a then wholly
owned subsidiary of Incyte, both of which have been terminated.
Under these agreements, the Company paid Incyte database access
fees of $1.0 million in 2004 and incurred royalties expense
of $2,000, $48,000 and $270,000 in 2004, 2005 and 2006,
respectively.
In connection with the completion of the Companys initial
public offering on October 4, 2005, Incytes shares of
the Companys preferred stock were converted into common
stock. Additionally, in connection with its initial public
offering, the Company exercised an election under which Incyte
was required to acquire an additional $5.0 million of the
Companys common stock. One of the Companys directors
is also director of Incyte and holds shares, directly or
beneficially, of both companies. As of December 31, 2006,
Incyte had completely divested its holdings in the
Companys common stock.
77
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has not recognized a provision for income taxes for
any of the periods presented because the Company has incurred
operating losses to date.
As of December 31, 2006 and 2005, the Company had deferred
tax assets of approximately $50.7 million and
$39.4 million, respectively. Realization of the deferred
tax assets is dependent upon future taxable income, if any, the
amount and timing of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation
allowance. The net valuation allowance increased by
approximately $11.3 million, $12.3 million and
$10.1 million during the years ended December 31,
2006, 2005 and 2004, respectively. Deferred tax assets primarily
relate to net operating loss and tax credit carryforwards.
The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
45,503
|
|
|
$
|
36,157
|
|
Capitalized costs
|
|
|
1,310
|
|
|
|
1,428
|
|
Research tax credits
|
|
|
2,684
|
|
|
|
1,871
|
|
Other
|
|
|
1,170
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
50,667
|
|
|
|
39,360
|
|
Valuation allowance
|
|
|
(50,667
|
)
|
|
|
(39,360
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company had federal and state
net operating loss carryforwards of approximately
$114.2 million and $111.1 million, respectively, and
federal and state research and development tax credit
carryforwards of approximately $1.6 million and
$1.6 million, respectively. The net operating loss and tax
credit carryforwards will expire at various dates beginning in
2013 if not utilized.
Utilization of the net operating loss and tax credit
carryforwards may be subject to a substantial annual limitation
due to ownership change limitations defined by the Internal
Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net
operating losses and credits before utilization.
|
|
Note 12.
|
Subsequent
Events
|
In January 2007, the Company entered into a non-cancelable lease
for an additional 48,000 square feet of laboratory and
office space near the location the Company currently occupies.
The lease has a term of six years and includes lease incentive
obligations of $420,000, which are being amortized on a
straight-line basis over the life of the lease. Under the new
lease, the Company is required to make aggregate rent payments
of $375,000 in 2007, $595,000 in 2008, $741,000 in 2009,
$835,000 in 2010 and $1.0 million in 2011 and thereafter.
In connection with this lease, the Company paid a cash security
deposit of $151,000.
78
GENOMIC
HEALTH, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table contains selected unaudited statement of
operations information for each of the quarters in 2006 and
2005. The Company believes that the following information
reflects all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the
information for the periods presented. The operating results for
any quarter are not necessarily indicative of results for any
future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except per share data)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue(1)
|
|
$
|
5,060
|
|
|
$
|
8,379
|
|
|
$
|
7,119
|
|
|
$
|
8,616
|
|
Net loss
|
|
|
(6,830
|
)
|
|
|
(4,915
|
)
|
|
|
(8,180
|
)
|
|
|
(8,995
|
)
|
Basic and diluted net loss per
common share
|
|
$
|
(0.28
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.37
|
)
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
442
|
|
|
$
|
1,243
|
|
|
$
|
1,592
|
|
|
$
|
1,925
|
|
Net loss
|
|
|
(7,586
|
)
|
|
|
(8,113
|
)
|
|
|
(7,445
|
)
|
|
|
(8,217
|
)
|
Basic and diluted net loss per
common share
|
|
$
|
(3.85
|
)
|
|
$
|
(4.07
|
)
|
|
$
|
(3.42
|
)
|
|
$
|
(0.34
|
)
|
The increases in revenue in first and second quarters of 2006
were attributable to increased demand for Onco
type
DX
following clinical presentations at major symposia in December
2005 and February 2006, as well as the May 2006 publication of
two peer-reviewed articles supporting the use and reimbursement
of Onco
type
DX. In addition, several third-party payors,
including National Heritage Insurance Company (NHIC), the local
Medicare carrier for California with jurisdiction for claims
submitted by the Company for Medicare patients, issued positive
coverage determinations for the test.
Per share amounts for the quarters and full year have been
calculated separately. Accordingly quarterly amounts may not add
to the annual amount because of differences in the
weighted-average common shares outstanding during each period
principally due to the effect of the Companys issuing
shares of its common stock during the year. Basic and diluted
net loss per share decreased significantly from the third
quarter of 2005 to the fourth quarter of 2005 due to the
increase in outstanding common stock resulting from the
Companys initial public offering on September 28,
2005.
Basic and diluted net loss per common share are identical as
common equivalent shares are excluded from the calculation
because their effect is anti-dilutive.
79
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosure
.
|
Not applicable.
|
|
ITEM 9A.
|
Controls
and
Procedures
.
|
(a)
Evaluation of disclosure controls and
procedures.
We maintain disclosure controls
and procedures, as such term is defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act,
that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is
accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Our disclosure controls and procedures have been designed to
meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily
was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions.
Based on their evaluation as of the end of the period covered by
this Annual Report on
Form 10-K,
our chief executive officer and chief financial officer have
concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
(b)
Managements Annual Report on Internal Control
over Financial Reporting.
Our management is
responsible for establishing and maintaining internal control
over our financial reporting. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation
of the effectiveness of internal control to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2006. In making this
assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway
Commission, or COSO, in
Internal Control-Integrated
Framework.
Based on the assessment using those criteria,
management concluded that, as of December 31, 2006, our
internal control over financial reporting was effective. Our
independent registered public accounting firm, Ernst &
Young LLP, audited the consolidated financial statements
included in this Annual Report on
Form 10-K
and have issued an audit report on managements assessment
of our internal control over financial reporting as well as on
the effectiveness our internal control over financial reporting.
The report on the audit of internal control over financial
reporting appears on page 59.
(b)
Changes in internal controls.
There
was no change in our internal control over financial reporting
(as defined in
Rule 13a-15(f)
under the Exchange Act) identified in connection with the
evaluation described in Item 9A(a) above that occurred
during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
Other
Information
.
|
None
80
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item with respect to directors
is incorporated by reference from the information under the
caption Election of Directors contained in our Proxy
Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for
our 2007 Annual Meeting of Stockholders to be held on
June 12, 2007, or Proxy Statement. Certain information
required by this item concerning executive officers is set forth
in Part I of this Report under the caption Executive
Officers of the Registrant and is incorporated herein by
reference.
Item 405 of
Regulation S-K
calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16(a) of the
Exchange Act. This disclosure is contained in the section
entitled Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement and is incorporated
herein by reference.
We have adopted a Code of Business Conduct that applies to all
of our officers and employees, including our Chief Executive
Officer, President and Chief Operating Officer, Chief Financial
Officer and other employees who perform financial or accounting
functions. The Code of Business Conduct sets forth the basic
principles that guide the business conduct of our employees. We
have also adopted a Senior Financial Officers Code of
Ethics that specifically applies to our Chief Executive Officer,
President and Chief Operating Officer, Chief Financial Officer,
and key management employees. Stockholders may request a free
copy of our Code of Business Conduct and Ethics and our Senior
Financial Officers Code of Ethics by contacting Genomic
Health, Inc., Attention: CFO, 301 Penobscot Drive, Redwood City,
California 94063.
To date, there have been no waivers under our Code of Business
Conduct and Ethics or Senior Financial Officers Code of
Ethics. We intend to disclose future amendments to certain
provisions of our Code of Business Conduct and Ethics or Senior
Financial Officers Code of Ethics or any waivers, if and
when granted, of our Code of Business Conduct and Ethics or
Senior Financial Officers Code of Ethics on our website at
http://www.genomichealth.com
within four business
days following the date of such amendment or waiver.
Our Board of Directors has appointed an Audit Committee,
comprised of Mr. Randall S. Livingston, as Chairman,
Mr. Samuel D. Colella and Mr. Michael D. Goldberg. The
Board of Directors has determined that Mr. Livingston
qualifies as an Audit Committee Financial Expert under the
definition outlined by the Securities and Exchange Commission.
In addition, each of the members of the Audit Committee
qualifies as an independent director under the
current rules of the NASDAQ Global Market and Securities and
Exchange Commission rules and regulations.
|
|
ITEM 11.
|
Executive
Compensation
.
|
The information required by this item is incorporated by
reference from the information under the captions Election
of Directors Compensation of Directors and
Executive Compensation contained in the Proxy
Statement.
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder
Matters
.
|
The information required by this item is incorporated by
reference from the information under the caption Security
Ownership of Certain Beneficial Owners and Management
contained in the Proxy Statement.
Information about securities authorized for issuance under our
equity compensation plans appears under the caption Equity
Compensation Plan Information in the Proxy Statement. That
portion of the Proxy Statement is incorporated by reference into
this report.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
.
|
The information required by this item is incorporated by
reference from the information under the caption Certain
Relationships and Related Transactions contained in the
Proxy Statement.
81
|
|
ITEM 14.
|
Principal
Accounting Fees and
Services
.
|
The information required by this item is incorporated by
reference from the information under the caption Principal
Accountant Fees and Services contained in the Proxy
Statement.
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules.
|
|
|
(a)
|
Documents
filed as part of this report:
|
(1) Financial Statements
Reference is made to the Index to Consolidated Financial
Statements of Genomic Health under Item 8 of Part II
hereof.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they
are not applicable or not required or because the information is
included elsewhere in the Consolidated Financial Statements or
the Notes thereto.
(3) Exhibits
See Item 15(b) below. Each management contract or
compensatory plan or arrangement required to be filed has been
identified.
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
3(i)
|
|
|
Restated Certificate of
Incorporation of the Company (incorporated by reference to
exhibit 3.3 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
3(ii)
|
|
|
Amended and Restated Bylaws of the
Company, as amended April 27, 2006 (incorporated by
reference to exhibit 3(ii) to the Companys Current
Report on
Form 8-K
filed on May 2, 2006.
|
|
4.1
|
|
|
Specimen Common Stock Certificate
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
4.2
|
|
|
Amended and Restated
Investors Rights Agreement, dated February 9, 2004
between the Company and certain of its stockholders
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.1#
|
|
|
Form of Indemnification Agreement
between the Company and its officers and directors (incorporated
by reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.2#
|
|
|
2001 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1
(File No.
333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.3#
|
|
|
2005 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1
(File
333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.4.1
|
|
|
Sublease Agreement dated
June 1, 2001 between the Company and Corixa Corporation
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.4.2
|
|
|
First Amendment to Sublease
Agreement dated October 29, 2003 between the Company and
Corixa Corporation (incorporated by reference to the exhibit of
the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
82
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
10.4.3
|
|
|
Second Amendment to Sublease
Agreement dated January 31, 2005 between the Company and
Corixa Corporation (incorporated by reference to the exhibit of
the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.5
|
|
|
PCR Patent License Agreement dated
February 21, 2005 between the Company and Roche Molecular
Systems, Inc. (incorporated by reference to exhibit 10.8
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.6.1
|
|
|
Master Security Agreement dated
March 30, 2005 between the Company and Oxford Finance
Corporation (incorporated by reference to exhibit 10.9.1
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.6.2
|
|
|
Form of Promissory Note
(Equipment) issued by the Company in favor of Oxford Finance
Corporation (incorporated by reference to exhibit 10.9.2 filed
with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.6.3
|
|
|
Form of Promissory Note (Computers
and Software) issued by the Company in favor of Oxford Finance
Corporation (incorporated by reference to exhibit 10.9.3 filed
with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.6.4*
|
|
|
Schedule of Promissory Notes
issued by the Company in favor of Oxford Finance Corporation.
|
|
10.7
|
|
|
Lease dated September 23,
2005 between the Company and Metropolitan Life Insurance Company
(incorporated by reference to exhibit 10.10 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10.8*
|
|
|
Lease dated January 2, 2007
between the Company and Metropolitan Life Insurance Company.
|
|
21.1
|
|
|
List of Subsidiaries (incorporated
by reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
23.1*
|
|
|
Consent of Ernst & Young
LLP, independent registered public accounting firm.
|
|
24.1*
|
|
|
Power of Attorney (see
page 84 of this
Form 10-K).
|
|
31.1*
|
|
|
Rule 13a 14(a)
Certification of Chief Executive Officer.
|
|
31.2*
|
|
|
Rule 13a 14(a)
Certification of the Chief Financial Officer.
|
|
32.1**
|
|
|
Statement of the Chief Executive
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
32.2**
|
|
|
Statement of the Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
|
|
*
|
|
Filed herewith.
|
|
**
|
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release Nos.
33-8238
and
34-47986,
Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing
under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by
reference.
|
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements.
|
|
#
|
|
Indicates management contract or compensatory plan or
arrangement.
|
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.
|
|
(c)
|
Financial
Statements and Schedules
|
Reference is made to Item 15(a)(2) above.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GENOMIC HEALTH, INC.
Randal W. Scott, Ph.D.
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: March 16, 2007
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Randal W.
Scott, Kimberly J. Popovits and G. Bradley Cole, and each of
them, his true and lawful
attorneys-in-fact,
each with full power of substitution, for him or her in any and
all capacities, to sign any amendments to this report on
Form 10-K
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said
attorneys-in-fact
or their substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Randal
W. Scott
Randal
W. Scott, Ph.D.
|
|
Chief Executive Officer and
Chairman of the Board (Principal Executive Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ G.
Bradley Cole
G.
Bradley Cole
|
|
Executive Vice President and Chief
Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Kimberly
J. Popovits
Kimberly
J. Popovits
|
|
President, Chief Operating Officer
and Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Julian
C. Baker
Julian
C. Baker
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Brook
H. Byers
Brook
H. Byers
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Fred
E. Cohen
Fred
E. Cohen, MD., Ph.D.
|
|
Director
|
|
March 15, 2007
|
84
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Samuel
D. Colella
Samuel
D. Colella
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Michael
D. Goldberg
Michael
D. Goldberg
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Randall
S. Livingston
Randall
S. Livingston
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Woodrow
A. Myers
Woodrow
A. Myers Jr., MD
|
|
Director
|
|
March 15, 2007
|
85
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
3
|
(i)
|
|
Restated Certificate of
Incorporation of the Company (incorporated by reference to
exhibit 3.3 filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
3
|
(ii)
|
|
Amended and Restated Bylaws of the
Company, as amended April 27, 2006 (incorporated by
reference to exhibit 3(ii) to the Companys Current
Report on
Form 8-K
filed on May 2, 2006).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
4
|
.2
|
|
Amended and Restated
Investors Rights Agreement, dated February 9, 2004
between the Company and certain of its stockholders
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.1#
|
|
Form of Indemnification Agreement
between the Company and its officers and directors (incorporated
by reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.2#
|
|
2001 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1
(File No.
333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.3#
|
|
2005 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1
(File No.
333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.1
|
|
Sublease Agreement dated
June 1, 2001 between the Company and Corixa Corporation
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.2
|
|
First Amendment to Sublease
Agreement dated October 29, 2003 between the Company and
Corixa Corporation (incorporated by reference to the exhibit of
the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.4.3
|
|
Second Amendment to Sublease
Agreement dated January 31, 2005 between the Company and
Corixa Corporation (incorporated by reference to the exhibit of
the same number filed with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.5
|
|
PCR Patent License Agreement dated
February 21, 2005 between the Company and Roche Molecular
Systems, Inc. (incorporated by reference to exhibit 10.8 filed
with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.1
|
|
Master Security Agreement dated
March 30, 2005 between the Company and Oxford Finance
Corporation (incorporated by reference to exhibit 10.9.1 filed
with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.2
|
|
Form of Promissory Note
(Equipment) issued by the Company in favor of Oxford Finance
Corporation (incorporated by reference to exhibit 10.9.2 filed
with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.3
|
|
Form of Promissory Note (Computers
and Software) issued by the Company in favor of Oxford Finance
Corporation (incorporated by reference to exhibit 10.9.3 filed
with Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.6.4*
|
|
Schedule of Promissory Notes
issued by the Company in favor of Oxford Finance Corporation.
|
|
10
|
.7
|
|
Lease dated September 23,
2005 between the Company and Metropolitan Life Insurance Company
(incorporated by reference to exhibit 10.10 filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
10
|
.8*
|
|
Lease dated January 2, 2007
between the Company and Metropolitan Life Insurance Company.
|
|
21
|
.1
|
|
List of Subsidiaries (incorporated
by reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-126626),
as amended, declared effective on September 28, 2005).
|
|
23
|
.1*
|
|
Consent of Ernst & Young
LLP, independent registered public accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (see
page 84 of this
Form 10-K).
|
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
31
|
.1*
|
|
Rule 13a 14(a)
Certification of Chief Executive Officer.
|
|
31
|
.2*
|
|
Rule 13a 14(a)
Certification of the Chief Financial Officer.
|
|
32
|
.1**
|
|
Statement of the Chief Executive
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
32
|
.2**
|
|
Statement of the Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
|
|
*
|
|
Filed herewith.
|
|
**
|
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release Nos.
33-8238
and
34-47986,
Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing
under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by
reference.
|
|
|
|
Confidential treatment has been granted with respect to certain
portions of these agreements.
|
|
#
|
|
Indicates management contract or compensatory plan or
arrangement.
|
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Genomic Health,
Inc., 301 Penobscot Drive, Redwood City, California 94063.
Exhibit 10.8
LEASE
BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY (LANDLORD)
AND
GENOMIC HEALTH, INC. (TENANT)
SEAPORT CENTRE
Redwood City, California
TABLE OF CONTENTS
|
|
|
|
|
|
|
PAGE
|
ARTICLE ONE BASIC LEASE PROVISIONS
|
|
|
1
|
|
1.01 BASIC LEASE PROVISIONS
|
|
|
1
|
|
1.02 ENUMERATION OF EXHIBITS & RIDER(S)
|
|
|
2
|
|
1.03 DEFINITIONS
|
|
|
2
|
|
|
|
|
|
|
ARTICLE TWO
PREMISES, TERM, FAILURE TO GIVE POSSESSION, COMMON AREAS AND PARKING
|
|
|
6
|
|
2.01 LEASE OF PREMISES
|
|
|
6
|
|
2.02 TERM
|
|
|
6
|
|
2.03 FAILURE TO GIVE POSSESSION
|
|
|
6
|
|
2.04 AREA OF PREMISES
|
|
|
6
|
|
2.05 CONDITION OF PREMISES
|
|
|
6
|
|
2.06 COMMON AREAS & PARKING
|
|
|
6
|
|
|
|
|
|
|
ARTICLE THREE RENT
|
|
|
6
|
|
|
|
|
|
|
ARTICLE FOUR OPERATING EXPENSES RENT ADJUSTMENTS AND PAYMENTS
|
|
|
7
|
|
4.01 TENANTS SHARE OF OPERATING EXPENSES
|
|
|
7
|
|
4.02 RENT ADJUSTMENTS
|
|
|
7
|
|
4.03 STATEMENT OF LANDLORD
|
|
|
8
|
|
4.04 BOOKS AND RECORDS
|
|
|
8
|
|
4.05 TENANT OR LEASE SPECIFIC TAXES
|
|
|
8
|
|
|
|
|
|
|
ARTICLE FIVE SECURITY
|
|
|
8
|
|
|
|
|
|
|
ARTICLE SIX-UTILITIES & SERVICES
|
|
|
10
|
|
6.01 LANDLORDS GENERAL SERVICES
|
|
|
10
|
|
6.02 TENANT TO OBTAIN & PAY DIRECTLY
|
|
|
10
|
|
6.03 TELEPHONE SERVICES
|
|
|
10
|
|
6.04 FAILURE OR INTERRUPTION OF UTILITY OR SERVICE
|
|
|
10
|
|
6.05 INTENTIONALLY OMITTED
|
|
|
10
|
|
6.06 SIGNAGE
|
|
|
11
|
|
|
|
|
|
|
ARTICLE SEVEN POSSESSION, USE AND CONDITION OF PREMISES
|
|
|
11
|
|
7.01 POSSESSION AND USE OF PREMISES
|
|
|
11
|
|
7.02 HAZARDOUS MATERIAL
|
|
|
11
|
|
7.03 LANDLORD ACCESS TO PREMISES; APPROVALS
|
|
|
13
|
|
7.04 QUIET ENJOYMENT
|
|
|
13
|
|
|
|
|
|
|
ARTICLE
EIGHT MAINTENANCE & HVAC
|
|
|
13
|
|
8.01 LANDLORDS MAINTENANCE
|
|
|
13
|
|
8.02 TENANTS MAINTENANCE
|
|
|
13
|
|
|
|
|
|
|
ARTICLE NINE
ALTERATIONS AND IMPROVEMENTS
|
|
|
14
|
|
9.01 TENANT ALTERATIONS
|
|
|
14
|
|
9.02 LIENS
|
|
|
15
|
|
|
|
|
|
|
ARTICLE TEN
ASSIGNMENT AND SUBLETTING
|
|
|
15
|
|
10.01 ASSIGNMENT AND SUBLETTING
|
|
|
15
|
|
10.02 RECAPTURE
|
|
|
17
|
|
10.03 EXCESS RENT
|
|
|
17
|
|
10.04 TENANT LIABILITY
|
|
|
17
|
|
10.05 ASSUMPTION AND ATTORNMENT
|
|
|
17
|
|
|
|
|
|
|
ARTICLE ELEVEN DEFAULT AND REMEDIES
|
|
|
17
|
|
11.01 EVENTS OF DEFAULT
|
|
|
17
|
|
11.02 LANDLORDS REMEDIES
|
|
|
18
|
|
11.03 ATTORNEYS FEES
|
|
|
19
|
|
11.04 BANKRUPTCY
|
|
|
19
|
|
11.05 LANDLORDS DEFAULT
|
|
|
20
|
|
|
|
|
|
|
ARTICLE TWELVE SURRENDER OF PREMISES
|
|
|
20
|
|
12.01 IN GENERAL
|
|
|
20
|
|
12.02 LANDLORDS RIGHTS
|
|
|
20
|
|
|
|
|
|
|
ARTICLE
THIRTEEN HOLDING OVER
|
|
|
20
|
|
|
|
|
|
|
ARTICLE FOURTEEN DAMAGE BY FIRE OR OTHER CASUALTY
|
|
|
21
|
|
14.01 SUBSTANTIAL UNTENANTABILITY
|
|
|
21
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i
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PAGE
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14.02 INSUBSTANTIAL UNTENANTABILITY
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21
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14.03 RENT ABATEMENT
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21
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14.04 WAIVER OF STATUTORY REMEDIES
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22
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ARTICLE FIFTEEN EMINENT DOMAIN
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22
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15.01 TAKING OF WHOLE OR SUBSTANTIAL PART
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22
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15.02 TAKING OF PART
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22
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15.03 COMPENSATION
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22
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ARTICLE SIXTEEN INSURANCE
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22
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16.01 TENANTS INSURANCE
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22
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16.02 FORM OF POLICIES
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22
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16.03 LANDLORDS INSURANCE
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23
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16.04 WAIVER OF SUBROGATION
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23
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16.05 NOTICE OF CASUALTY
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23
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ARTICLE SEVENTEEN WAIVER OF CLAIMS AND INDEMNITY
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24
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17 01 WAIVER OF CLAIMS
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24
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17.02 INDEMNITY BY TENANT
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24
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17.03 WAIVER OF CONSEQUENTIAL DAMAGES
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24
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ARTICLE EIGHTEEN RULES AND REGULATIONS
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24
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18.01 RULES
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24
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18.02 ENFORCEMENT
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24
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ARTICLE NINETEEN LANDLORDS RESERVED RIGHTS
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24
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ARTICLE TWENTY ESTOPPEL CERTIFICATE
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25
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20.01 IN GENERAL
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25
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20.02 ENFORCEMENT
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25
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ARTICLE
TWENTY-ONE INTENTIONALLY OMITTED
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25
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ARTICLE
TWENTY-TWO REAL ESTATE BROKERS
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25
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ARTICLE TWENTY-THREE MORTGAGEE PROTECTION
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25
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23.01 SUBORDINATION AND ATTORNMENT
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25
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23.02 MORTGAGEE PROTECTION
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26
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ARTICLE
TWENTY-FOUR NOTICES
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26
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ARTICLE TWENTY-FIVE EXERCISE FACILITY
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26
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ARTICLE
TWENTY-SIX MISCELLANEOUS
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|
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27
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26.01 LATE CHARGES
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27
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26.02 NO JURY TRIAL; VENUE; JURISDICTION
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|
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27
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|
26.03 DEFAULT UNDER OTHER LEASE
|
|
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27
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|
26.04 OPTION
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|
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27
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|
26.05 TENANT AUTHORITY
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|
|
27
|
|
26.06 ENTIRE AGREEMENT
|
|
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27
|
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26.07 MODIFICATION OF LEASE FOR BENEFIT OF MORTGAGEE
|
|
|
28
|
|
26.08 EXCULPATION
|
|
|
28
|
|
26.09 ACCORD AND SATISFACTION
|
|
|
28
|
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26.10 LANDLORDS OBLIGATIONS ON SALE OF BUILDING
|
|
|
28
|
|
26.11 BINDING EFFECT
|
|
|
28
|
|
26.12 CAPTIONS
|
|
|
28
|
|
26.13 TIME; APPLICABLE LAW; CONSTRUCTION
|
|
|
28
|
|
26.14 ABANDONMENT
|
|
|
28
|
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26.15 LANDLORDS RIGHT TO PERFORM TENANTS DUTIES
|
|
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28
|
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26.16 SECURITY SYSTEM
|
|
|
29
|
|
26.17 NO LIGHT, AIR OR VIEW EASEMENTS
|
|
|
29
|
|
26.18 RECORDATION
|
|
|
29
|
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26.19 SURVIVAL
|
|
|
29
|
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26.20 EXHIBITS OR RIDERS
|
|
|
29
|
|
ii
LEASE
ARTICLE ONE
BASIC LEASE PROVISIONS
1.01 BASIC LEASE PROVISIONS
In the event of any conflict between these Basic Lease Provisions and any other Lease provision, such other Lease
provision shall control.
(1)
|
|
BUILDING AND ADDRESS:
|
|
|
|
As of the Date of Lease, the Building has a street address of 101 Galveston Drive Redwood City, California
94063
|
|
|
|
Building Number 10, located in Phase II (Tenants Phase) of Seaport Centre
|
|
(2)
|
|
LANDLORD AND ADDRESS:
|
|
|
|
Metropolitan Life Insurance Company,
a New York corporation
|
|
|
|
Notices to Landlord shall be addressed:
|
Metropolitan Life Insurance Company
c/o Seaport Centre Manager
701 Chesapeake Drive
Redwood City, CA 94063
with copies to the following:
Metropolitan Life Insurance Company
400 South El Camino Real, Suite 800
San Mateo, CA 94402
Attention: Assistant Vice President
(3)
|
|
TENANT; CURRENT ADDRESS & TAX ID:
|
|
|
|
|
|
|
|
(a)
|
|
Name:
|
|
Genomic Health, Inc. (Genomic Health)
|
|
(b)
|
|
State of incorporation:
|
|
a Delaware corporation
|
|
(c)
|
|
Tax Identification Number:
|
|
77-0552594
|
|
|
Tenant shall notify Landlord of any change in the foregoing.
|
|
|
|
Notices to Tenant shall be addressed:
|
Genomic Health, Inc.
301 Penobscot Drive
Redwood City, CA 94063
Attention: Chief Financial Officer
Pillsbury Winthrop Shaw Pittman LLP
50 Fremont Street
San Francisco, CA 94105
Attention: Rachel B. Horsch
(4)
|
|
DATE OF LEASE: as of January 4, 2007
|
|
(5)
|
|
LEASE TERM: The Term is the period of almost 5 years which commences on the Commencement Date and expires
on the Expiration Date, as both are defined below.
|
|
(6)
|
|
COMMENCEMENT DATE: March 1, 2007, subject to Rider 2.
|
|
(7)
|
|
EXPIRATION DATE: February 24, 2012.
|
|
(8)
|
|
MONTHLY BASE RENT: The initial monthly installment is due upon Tenants execution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
Commencement Date through
|
|
|
|
|
|
|
|
|
|
|
Expiration Date
|
|
Monthly
|
|
|
Monthly Rate/SF of Rentable Area
|
|
|
|
|
|
Months 01
12
|
|
$
|
37,500.00
|
|
|
Special Negotiated Concession - Rate Not Applicable
|
|
|
|
|
Months 13
24
|
|
$
|
52,000.00
|
|
|
Special Negotiated Concession - Rate Not Applicable
|
|
|
|
|
Months 25
36
|
|
$
|
63,701.10
|
|
|
$
|
1.35
|
|
|
|
|
|
Months 37
48
|
|
$
|
70,779.00
|
|
|
$
|
1.50
|
|
|
|
|
|
Months 49
Expiration Date
|
|
$
|
75,497.60
|
|
|
$
|
1.60
|
|
|
|
|
|
1
(9) RENT ADJUSTMENT DEPOSIT: The Rent Adjustment Deposit (at the initial monthly rate, until
further notice) shall be Twenty-Seven Thousand Three Hundred Sixty-Seven and 88/100 Dollars
($27,367.88) and is due upon Tenants execution.
(10)
|
|
RENTABLE AREA OF THE PREMISES: 47,186 square feet
|
|
(11)
|
|
RENTABLE AREA OF THE BUILDING 47,186 square feet
|
|
(12)
|
|
RENTABLE AREA OF THE PHASE: 235,620 square feet
|
|
(13)
|
|
RENTABLE AREA OF THE PROJECT: 537,444 square feet
|
|
(14)
|
|
SECURITY: The cash and/or Letter of Credit in the amount of One Hundred Fifty Thousand Nine
Hundred Ninety-Five and no/100 Dollars ($150,995.00) (and any proceeds of the Letter of
Credit drawn and held by Landlord) as provided in Article Five.
|
|
(15)
|
|
SUITE NUMBER &/OR ADDRESS OF PREMISES: 101 Galveston Drive, Redwood City, CA 94063, until
further notice
|
|
(16)
|
|
TENANTS SHARE:
|
|
|
|
|
|
|
|
|
|
Tenants Building Share:
|
|
|
100
|
%
|
|
|
Tenants Phase Share:
|
|
|
20.0263
|
%
|
|
|
Tenants Project Share:
|
|
|
08.7797
|
%
|
(17)
|
|
TENANTS USE OF PREMISES: General office use; biotechnology/pharmaceutical research and
development, assembly, biotechnical or pharmaceutical manufacturing, and warehousing.
|
(19)
|
|
BROKERS:
|
|
|
|
Landlords Broker: Cornish & Carey Commercial
|
|
|
|
Tenants Broker: BT Commercial and Technology Commercial
|
1.02
|
|
ENUMERATION OF EXHIBITS & RIDER(S)
|
The Exhibits and Rider(s) set forth below and attached to this Lease are incorporated in this
Lease by this reference:
EXHIBIT A
Plan of Premises
EXHIBIT B
Workletter Agreement
EXHIBIT C
Site Plan of Project
EXHIBIT D
Permitted Hazardous Material
EXHIBIT E
Form of Letter of Credit Acceptable from Silicon Valley Bank
EXHIBIT F
Fair Market Rental Rate
EXHIBIT G
Tenants Personal Property
EXHIBIT H
Form of Letter of Credit
RIDER 1
Commencement Date Agreement
RIDER 2
Additional Provisions
For purposes hereof, the following terms shall have the following meanings:
ADJUSTMENT YEAR: The applicable calendar year or any portion thereof after the Commencement Date
of this Lease for which a Rent Adjustment computation is being made.
AFFILIATE: Any Person (as defined below) which is controlled by, controls, or is under common
control with Tenant. The word Person means an individual, partnership, trust, corporation,
limited liability company, firm or other entity. For purposes of this definition, the word
control, means, with respect to a Person that is a corporation or a limited liability company,
the right to exercise, directly or indirectly, more than sixty percent (60%) of the voting rights
attributable to the shares or membership interests of the controlled Person and, with respect to
a Person that is not a corporation, the possession, directly or indirectly, of the power at all
times to direct or cause the direction of the management of the controlled Person.
BUILDING: Each building in which the Premises is located, as specified in Section 1.01(1).
BUILDING OPERATING EXPENSES: Those Operating Expenses described in Section 4.01.
COMMENCEMENT DATE: The date specified in Section 1.01(6) as the Commencement Date, unless changed
by operation of Article Two or Rider 2.
2
COMMON AREAS: All areas of the Project made available by Landlord from time to time for the
general common use or benefit of the tenants of the Building or Project, and their employees and
invitees, or the public, as such areas currently exist and as they may be changed from time to
time.
DECORATION: Tenant Alterations which do not require a building permit and which do not affect the
facade or roof of the Building, or involve any of the structural elements of the Building, or
involve any of the Buildings systems, including its electrical, mechanical, plumbing, security,
heating, ventilating, air-conditioning, communication, and fire and life safety systems.
DEFAULT RATE: Two (2) percentage points above the rate then most recently announced by Bank of
America N.T.& S.A. at its San Francisco main office as its corporate base lending rate, from time
to time announced, but in no event higher than the maximum rate permitted by Law.
DELIVERY DATE: The date for Landlords delivery to Tenant of possession of the Premises, if
different from the Commencement Date, as provided in Rider 2.
ENVIRONMENTAL LAWS: All Laws governing the use, storage, disposal or generation of any Hazardous
Material or pertaining to environmental conditions on, under or about the Premises or any part of
the Project, including the Comprehensive Environmental Response Compensation and Liability Act of
1980, as amended (42 U.S.C. Section 9601
et
seq
.), and the Resource Conservation and Recovery Act
of 1976, as amended (42 U.S.C. Section 6901
et
seq
.).
EXPIRATION DATE: The date specified in Section 1.01(7) unless changed by operation of Article
Two or Rider 2.
FORCE MAJEURE: Any accident, casualty, act of God, war or civil commotion, strike or labor
troubles, or any cause whatsoever beyond the reasonable control of Landlord, including water
shortages, energy shortages or governmental preemption in connection with an act of God, a
national emergency, or by reason of Law, or by reason of the conditions of supply and demand which
have been or are affected by act of God, war or other emergency.
HAZARDOUS MATERIAL: Such substances, material and wastes which are or become regulated under any
Environmental Law; or which are classified as hazardous or toxic or medical waste or biohazardous
waste under any Environmental Law; and explosives, firearms and ammunition, flammable material,
radioactive material, asbestos, polychlorinated biphenyls and petroleum and its byproducts.
INDEMNITEES: Collectively, Landlord, any Mortgagee or ground lessor of the Property, the property
manager and the leasing manager for the Property and their respective directors, officers, agents
and employees.
LAND: The parcel(s) of real estate on which the Building and Project are located.
LANDLORD WORK: The construction or installation of improvements to be furnished by Landlord, if
any, specifically described in Rider 2 attached hereto.
LAWS OR
LAW: All laws, ordinances, rules, regulations, other requirements, orders, rulings or
decisions adopted or made by any governmental body, agency, department or judicial authority
having jurisdiction over the Property, the Premises or Tenants activities at the Premises and any
covenants, conditions or restrictions of record which affect the Property.
LEASE: This instrument and all exhibits and riders attached hereto, as may be amended from time to
time.
LEASE YEAR: The twelve month period beginning on the first day of the first month following the
Commencement Date (unless the Commencement Date is the first day of a calendar month in which
case beginning on the Commencement Date), and each subsequent twelve month, or shorter, period
until the Expiration Date.
MONTHLY BASE RENT: The monthly rent specified in Section 1.01(8).
MORTGAGEE: Any holder of a mortgage, deed of trust or other security instrument encumbering the
Property.
NATIONAL HOLIDAYS: New Years Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day and other holidays recognized by the Landlord and the janitorial and other
unions servicing the Building in accordance with their contracts.
OPERATING EXPENSES: All Taxes, costs, expenses and disbursements of every kind and nature which
Landlord shall pay or become obligated to pay in connection with the ownership, management,
operation, maintenance, replacement and repair of the Property (including the amortized portion of
any capital expenditure or improvement, together with interest thereon, expenses of changing
utility service providers, and any dues, assessments and other expenses pursuant to any covenants,
conditions and restrictions, or any reciprocal easements, or any owners association now or
hereafter affecting the Project; provided however that with respect to any expenses, dues,
assessments and other expenses pursuant to any covenants, conditions and restrictions, or any
reciprocal easements or any owners association hereafter
affecting the Project, then such costs
and expenses shall only be deemed to be Operating Expenses to the extent that such costs or
expenses could otherwise be deemed to be Operating Expenses pursuant to the provisions set forth
in this section). Operating Expenses shall be allocated among the categories of Project Operating
Expenses, Building Operating Expenses or Phase Operating Expenses as provided in Article Four. If
any Operating Expense relates to more than one calendar year, such expense shall be
proportionately allocated among such related calendar years. Operating Expenses shall include the
following, by way of illustration only and not limitation: (1) all Taxes; (2) all insurance
premiums and other costs (including deductibles), including the cost of rental insurance; (3) all
license, permit and inspection fees; (4) all costs of utilities fuels and related services,
including water, sewer, light, telephone, power and steam connection, service and
3
related charges; (5) all costs to repair, maintain and operate heating, ventilating and air
conditioning systems, including preventive maintenance incurred by
Landlord, if any; (6) all
janitorial, landscaping and security services; (7) all wages, salaries, payroll taxes, fringe
benefits and other labor costs, including the cost of workers compensation and disability
insurance; (8) all costs of operation, maintenance and repair of all parking facilities and other
common areas; (9) all supplies, materials, equipment and tools; (10) dues, assessments and other
expenses pursuant to any covenants, conditions and restrictions, or any reciprocal easements, or
any owners association now or hereafter affecting the Project; (11) modifications to the Building
or the Project occasioned by Laws now or hereafter in effect, but only as amortized over the useful
life of the capital item as reasonably determined by Landlord; (12) the total charges of any
independent contractors employed in the care, operation, maintenance, repair, leasing and cleaning
of the Project, including landscaping, roof maintenance, and repair, maintenance and monitoring of
life-safety systems, plumbing systems, electrical wiring and Project signage; (13) the cost of
accounting services necessary to compute the rents and charges payable by tenants at the Project;
(14) exterior window and exterior wall cleaning and painting; (15) managerial and administrative
expenses; (16) all costs in connection with the exercise facility at the Project; (17) all costs
and expenses related to Landlords retention of consultants in connection with the routine review,
inspection, testing, monitoring, analysis and control of Hazardous Material, and retention of
consultants in connection with the clean-up of Hazardous Material (to the extent not recoverable
from a particular tenant of the Project), and all costs and expenses related to the implementation
of recommendations made by such consultants concerning the use, generation, storage, manufacture,
production, storage, release, discharge, disposal or clean-up of Hazardous Material on, under or
about the Premises or the Project (to the extent not recoverable from a particular tenant of the
Project); (18) all capital improvements made for the purpose of reducing or controlling other
Operating Expenses, and all other capital expenditures, but only as amortized over the useful life
of such capital improvement as reasonably determined by Landlord, together with interest on the
unamortized portion; (19) all property management costs and fees, including all costs in connection
with the Project property management office; and (20) all fees or other charges incurred in
conjunction with voluntary or involuntary membership in any energy conservation, air quality,
environmental, traffic management or similar organizations. Operating Expenses shall not include:
(a) costs of alterations of space to be occupied by new or existing tenants of the Project; (b)
depreciation charges; (c) interest and principal payments on loans (except for loans for capital
expenditures or improvements which Landlord is allowed to include in Operating Expenses as provided
above); (d) ground rental payments; (e) real estate brokerage and leasing commissions; (f)
advertising and marketing expenses; (g) costs of Landlord reimbursed by insurance proceeds; (h)
costs for which the Landlord is reimbursed by any other tenant or occupant of the Building (other
than payments comparable to Rent Adjustments hereunder) or by any tenants insurance carrier or by
anyone else, and electric power costs for which any tenant directly contracts with the local public
service company; (i) expenses incurred in negotiating leases of other tenants in the Project or
enforcing lease obligations of other tenants in the Project; (j) Landlords property managers
corporate general overhead or corporate general administrative expenses; (k) the wages and benefits
of any employee who does not devote substantially all of his or her employed time to the Building,
Project or Phase, unless such wages and benefits are prorated to reflect time spent on operation
and managing the Building, Project or Phase; (I) Landlords corporate general overhead or corporate
general administrative expenses associated with the operation of the business of the entity which
constitutes the Landlord, as the same are distinguished from the costs of operation of the
Building, Project or Phase; (m) executives salaries; (n) any bad debt loss, rent loss, or reserves
for bad debts or rent loss; (o) costs of Landlords charitable or political contributions; (p) the
costs of any Tenant Work (as defined in the Workletter), and (q) costs incurred in connection with
Hazardous Materials to the extent such Hazardous Materials were present on the Project prior to the
Delivery Date.
PHASE: Phase means any individual Phase of the Project, as more particularly described in the
definition of Project.
PHASE OPERATING EXPENSES: Those Operating Expenses described in Section 4.01.
PREMISES: The Premises consists of the entire Rentable Area of the Building listed in Section
1.01 and is depicted on
Exhibit A
attached hereto.
PROJECT or PROPERTY: As of the date hereof, the Project is known as Seaport Centre and consists
of those buildings (including the Building) whose general location is shown on the Site Plan of
the Project attached as
Exhibit C
, located in Redwood City, California, associated
vehicular and parking areas, landscaping and improvements, together with the Land, any associated
interests in real property, and the personal property, fixtures,
machinery, equipment, systems and
apparatus located in or used in conjunction with any of the foregoing. The Project may also be
referred to as the Property. As of the date hereof, the Project is divided into Phase I and Phase
II, which are generally designated on
Exhibit C
, each of which may individually be
referred to as a Phase. Landlord reserves the right from time to time to add or remove buildings,
areas and improvements to or from a Phase or the Project, or to add or remove a Phase to or from
the Project. In the event of any such addition or removal which affects Rentable Area of the
Project or a Phase, Landlord shall make a corresponding recalculation and adjustment of any
affected Rentable Area and Tenants Share.
PROJECT OPERATING EXPENSES: Those Operating Expenses described in Section 4.01.
REAL PROPERTY: The Property excluding any personal property.
RENT: Collectively, Monthly Base Rent, Rent Adjustments and Rent Adjustment Deposits, and all
other charges, payments, late fees or other amounts required to be paid by Tenant under this
Lease.
RENT ADJUSTMENT: Any amounts owed by Tenant for payment of Operating Expenses. The Rent
Adjustments shall be determined and paid as provided in Article Four.
RENT ADJUSTMENT DEPOSIT: An amount equal to Landlords estimate of the Rent Adjustment
attributable to each month of the applicable Adjustment Year. On or before the Commencement Date
and the beginning of each subsequent Adjustment Year or with Landlords Statement (defined in
Article Four), Landlord may estimate and notify Tenant in writing of its estimate of Operating
Expenses, including Project Operating Expenses, Building
4
Operating Expenses and Phase Operating Expenses, and Tenants Share of each, for the
applicable Adjustment Year. The Rent Adjustment Deposit applicable for the calendar year in which
the Commencement Date occurs shall be the amount, if any, specified in Section 1.01(9). Nothing
contained herein shall be construed to limit the right of Landlord from time to time during any
calendar year to revise its estimates of Operating Expenses and to notify Tenant in writing
thereof and of revision by prospective adjustments in Tenants Rent Adjustment Deposit payable
over the remainder of such year. The last estimate by Landlord shall remain in effect as the
applicable Rent Adjustment Deposit unless and until Landlord notifies Tenant in writing of a
change.
RENTABLE AREA OF THE BUILDING: The amount of square footage set forth in Section 1.01(11)
RENTABLE AREA OF THE PHASE: The amount of square footage set forth in Section 1.01(12)
RENTABLE AREA OF THE PREMISES: The amount of square footage set forth in Section 1.01(10).
RENTABLE AREA OF THE PROJECT: The amount of square footage set forth in Section 1.01(13), which
represents the sum of the rentable area of all space intended for occupancy in the Project.
SECURITY: The cash and/or Letter of Credit specified in Section 1.01, if any, paid or delivered
to Landlord as security for Tenants performance of its obligations under this Lease, and any
proceeds of the Letter of Credit drawn and held by Landlord, all as more particularly provided in
Article Five.
SUBSTANTIALLY COMPLETE: The completion of the Landlord Work or Tenant Work, as the case may be,
except for minor insubstantial details of construction, decoration or mechanical adjustments
which remain to be done.
TAXES: All
federal state, and local governmental taxes, assessments (including assessment bonds)
and charges of every kind or nature, whether general, special, ordinary or extraordinary, which
Landlord shall pay or become obligated to pay because of or in connection with the ownership,
leasing, management, control or operation of the Property or any of its components (including any
personal property used in connection therewith), which may also include any rental or similar
taxes levied in lieu of or in addition to general real and/or personal property taxes. For
purposes hereof, Taxes for any year shall be Taxes which are assessed for any period of such year,
whether or not such Taxes are billed and payable in a subsequent calendar year. There shall be
included in Taxes for any year the amount of all fees costs and expenses (including reasonable
attorneys fees) paid by Landlord during such year in seeking or obtaining any refund or reduction
of Taxes. Taxes for any year shall be reduced by the net amount of any tax refund received by
Landlord attributable to such year. If a special assessment payable in installments is levied
against any part of the Property, Taxes for any year shall include only the installment of such
assessment and any interest payable or paid during such year. Taxes shall not include any federal
or state inheritance, general income, gift or estate taxes, except that if a change occurs in the
method of taxation resulting in whole or in part in the substitution of any such taxes, or any
other assessment, for any Taxes as above defined, such substituted taxes or assessments shall be
included in the Taxes.
TENANT ADDITIONS: Collectively, Landlord Work, Tenant Work and Tenant Alterations. Tenants
Personal Property (as set forth in
Exhibit G
hereto) shall not be deemed to be included
in the definition of Tenant Additions.
TENANT
ALTERATIONS: Any alterations, improvements, additions, installations or construction in or
to the Premises or any Real Property systems serving the Premises done or caused to be done by
Tenant after the date hereof, whether prior to or after the Commencement Date (including Tenant
Work, but excluding Landlord Work).
TENANT DELAY: Any event or occurrence which delays the Substantial Completion of the Landlord
Work which is caused by or is described as follows:
(i) special
work, changes, alterations or additions requested or made by Tenant in the
design or finish in any part of the Premises after approval of the plans and
specifications (as described in the Rider 2);
(ii) Tenants delay in submitting plans, supplying information, approving plans,
specifications or estimates, giving authorizations or otherwise;
(iii) failure to approve and pay for such work as Landlord undertakes to complete at
Tenants expense;
(iv) the performance or completion by Tenant or any person engaged by Tenant of any work
in or about the Premises; or
(v) failure to perform or comply with any obligation or condition binding upon Tenant
pursuant to Rider 2, including the failure to approve and pay for such Landlord Work or
other items if and to the extent Rider 2 provides they are to be approved or paid by
Tenant.
TENANTS
FFE: The property of Tenant described in Section 5 of the Workletter.
TENANTS PERSONAL PROPERTY: Tenants property described on
Exhibit G
hereto.
TENANT WORK: All work installed or furnished to the Premises by Tenant in connection with
Tenants initial occupancy pursuant to Rider 2 and the Workletter.
TENANTS BUILDING SHARE: The share as specified in Section 1.01(16) and Section
4.01.
TENANTS PHASE: The Phase in which the Premises is located, as indicated in
Section 1.01(1).
TENANTS PHASE SHARE: The share as specified in Section 1.01(16)
and Section 4.01.
5
TENANTS PROJECT SHARE: The share as specified in Section 1.01(16) and Section 4.01.
TENANTS SHARE: Shall mean collectively, Tenants respective shares of the respective
categories of Operating Expenses, as provided in
Section 1.01(16) and Section 4.01.
TERM: The term of this Lease commencing on the Commencement Date and expiring on the Expiration
Date.
TERMINATION DATE: The Expiration Date or such earlier date as this Lease terminates or Tenants
right to possession of the Premises terminates.
WORKLETTER: The Agreement regarding the completion of Tenant Work and Landlord Work, if any, set
forth in Rider 2 and
Exhibit B
hereto.
ARTICLE TWO
PREMISES, TERM, FAILURE TO GIVE POSSESSION, COMMON AREAS AND PARKING
2.01 LEASE OF PREMISES
Landlord
hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the Term
and upon the terms, covenants and conditions provided in this Lease.
2.02 TERM (See Rider 2)
2.03 FAILURE TO GIVE POSSESSION (See Rider 2)
2.04 AREA OF PREMISES
Landlord and Tenant agree that for all purposes of this Lease the Rentable Area of the Premises,
the Rentable Area of the Building, the Rentable Area of the Phase and the Rentable Area of the
Project as set forth in Article One are controlling, and are not subject to revision after the
date of this Lease, except as otherwise provided herein.
2.05 CONDITION OF PREMISES (See Rider 2)
2.06 COMMON AREAS & PARKING
(a)
Right to Use Common Areas
. Tenant shall have the non-exclusive right, in common
with others, to the use of any common entrances, ramps, drives and similar access and serviceways
and other Common Areas in the Project. The rights of Tenant hereunder in and to the Common Areas
shall at all times be subject to the rights of Landlord and other tenants and owners in the
Project who use the same in common with Tenant, and it shall be the duty of Tenant to keep all the
Common Areas free and clear of any obstructions created or permitted by Tenant or resulting from
Tenants operations. Tenant shall not use the Common Areas or common facilities of the Building or
the Project, including the Buildings electrical room, parking lot or trash enclosures, for storage
purposes. Nothing herein shall affect the right of Landlord at any time to remove any persons not
authorized to use the Common Areas or common facilities from such areas or facilities or to
prevent their use by unauthorized persons.
(b)
Changes in Common Areas
. Landlord reserves the right, at any time and from time
to time to (i) make alterations in or additions to the Common Areas or common facilities of the
Project, including constructing new buildings or changing the location, size, shape or number of
the driveways, entrances, parking spaces, parking areas, loading and unloading areas, landscape
areas and walkways, (ii) designate property to be included in or eliminate property from the
Common Areas or common facilities of the Project, (iii) close temporarily any of the Common Areas
or common facilities of the Project for maintenance purposes, and (iv) use the Common Areas and
common facilities of the Project while engaged in making alterations in or additions and repairs
to the Project; provided however, that (x) such changes do not materially adversely affect
Tenants use of the Premises or increase Tenants costs hereunder, and (y) reasonable access to
the Premises and parking at or near the Project remains available.
(c)
Parking
. During the Term, Tenant shall have the right to use the number of Parking Spaces
specified in Section 1.01(18) for parking on an unassigned basis on that portion of the
Project designated by Landlord from time to time for parking. Tenant acknowledges and agrees that the parking
spaces in the Projects parking facility may include a mixture of spaces for compact vehicles as well as full-size
passenger automobiles, and that Tenant shall not use parking spaces for vehicles larger than the striped size of
the parking spaces. Tenant shall comply with any and all parking rules and regulations if and as from time to
time established by Landlord. Tenant shall not allow any vehicles using Tenants parking privileges to be parked,
loaded or unloaded except in accordance with this Section, including in the areas and in the manner designated
by Landlord for such activities. If any vehicle owned or operated by Tenant or any Tenant Parties (as defined in
Article Seven) is using the parking or loading areas contrary to any provision of this Section, Landlord shall have
the right, in addition to all other rights and remedies of Landlord under this Lease, to remove or tow away the vehicle
without prior notice to Tenant, and the cost thereof shall be paid to Landlord within ten (10) business days after
notice from Landlord to Tenant.
ARTICLE THREE
RENT
Tenant agrees to pay to Landlord via wire transfer in accordance with instructions set forth
below (as modified by Landlord from time to time), or to such other persons, or at such other
places or in such manner designated by Landlord, without any prior demand therefor in immediately
available funds and without any deduction or offset whatsoever, Rent, including Monthly Base Rent
and Rent Adjustments in accordance with Article Four, during the Term. Monthly Base Rent shall be
paid monthly in advance on the first day of each month of the Term, except that
6
the first installment of Monthly Base Rent shall be paid by Tenant to Landlord concurrently
with execution of this Lease by means of Tenants check payable to the order of Metropolitan Life
Insurance Company. Monthly Base Rent shall be prorated for partial months within the Term. Unpaid
Rent shall bear interest at the Default Rate from the date due until paid. Tenants covenant to
pay Rent shall be independent of every other covenant in this Lease. Until further notice to
Tenant, Rent paid by wire transfer shall be wired to:
Wells Fargo Bank, San Francisco, CA,
A/C # 482-9605856
Routing #121000248
A/C Name: CBREITF Seaport II
ARTICLE FOUR
OPERATING EXPENSES, RENT ADJUSTMENTS AND PAYMENTS
4.01 TENANTS SHARE OF OPERATING EXPENSES
Tenant shall pay Tenants Share of Operating Expenses in the respective shares of the respective
categories of Operating Expenses as set forth below.
(a) Tenants Project Share of Project Operating Expenses, which is the percentage
obtained by dividing the rentable square footage of the Premises by the rentable square
footage of the Project and as of the date hereof equals the percentage set forth in
Section 1.01(16);
(b) Tenants Building Share of Building Operating Expenses, which is the percentage
obtained by dividing the rentable square footage of the Premises respectively for each
building in which the Premises is located by the total rentable square footage of such
building and as of the date hereof equals the percentage set forth in Section 1.01(16);
(c) Tenants Phase Share of Phase Operating Expenses, which is the percentage obtained
by dividing the aggregate rentable square footage of the Premises by the total rentable
square footage of Tenants Phase and as of the date hereof equals the percentage set forth
in Section 1.01(16);
(d) Project Operating Expenses shall mean all Operating Expenses that are not included
as Phase Operating Expenses (defined below) and that are not either Building Operating
Expenses or operating expenses directly and separately identifiable to the operation,
maintenance or repair of any other building located in the Project, but Project Operating
Expenses includes operating expenses allocable to any areas of the Building or any other
building during such time as such areas are made available by Landlord for the general
common use or benefit of all tenants of the Project, and their employees and invitees, or
the public, as such areas currently exist and as they may be changed from time to time;
(e) Building Operating Expenses shall mean Operating Expenses that are directly and
separately identifiable to each building in which the Premises or part thereof is located;
(f) Phase Operating Expenses shall mean Operating Expenses that Landlord may allocate
to a Phase as directly and separately identifiable to all buildings located in the Phase
(including but not limited to the Building) and may include Project Operating Expenses
that are separately identifiable to a Phase;
(g) Landlord shall have the right to allocate a particular item or portion of
Operating Expenses as any one of Project Operating Expenses, Building Operating Expenses
or Phase Operating Expenses; however, in no event shall any portion of Building Operating
Expenses, Project Operating Expenses or Phase Operating Expenses be assessed or counted
against Tenant more than once; and.
(h) Notwithstanding anything to the contrary contained in this Section 4.01, as to
each specific category of Operating Expense which one or more tenants of the Building
either pays directly to third parties or specifically reimburses to Landlord (for example,
separately contracted janitorial services or property taxes directly reimbursed to
Landlord), then, on a category by category basis, the amount of Operating Expenses for the
affected period shall be adjusted as follows: (1) all such tenant payments with respect to
such category of expense and all of Landlords costs reimbursed thereby shall be excluded
from Operating Expenses and Tenants Building Share, Tenants Phase Share or Tenants
Project Share, as the case may be, for such category of Operating Expense shall be adjusted
by excluding the square footage of all such tenants, and (2) if Tenant pays or directly
reimburses Landlord for such category of Operating Expense, such category of Operating
Expense shall be excluded from the determination of Operating Expenses for the purposes of
this Lease.
4.02 RENT ADJUSTMENTS
Tenant shall pay to Landlord Rent Adjustments with respect to each Adjustment Year as follows:
(a) The Rent Adjustment Deposit shall be paid monthly during the Term with the payment
of Monthly Base Rent, except the first installment which shall be paid by Tenant to Landlord
concurrently with execution of this Lease. The Rent Adjustment Deposit represents, on a
monthly basis, Tenants Share of Landlords estimate of Operating Expenses, as described in
Section 4.01, for the applicable Adjustment Year (or portion thereof); and
(b) Any Rent Adjustments due in excess of the Rent Adjustment Deposits in accordance
with Section 4.03.
7
4.03 STATEMENT OF LANDLORD
Within one hundred twenty (120) days after the end of each calendar year or as soon thereafter as
reasonably possible, Landlord will furnish Tenant a statement (Landlords Statement) showing
the following:
(a) Operating Expenses for the last Adjustment Year showing in reasonable detail the
actual Operating Expenses categorized among Project Operating Expenses, Building Operating
Expenses and Phase Operating Expenses for such period and Tenants Share of each as
described in Section 4.01 above;
(b) The amount of Rent Adjustments due Landlord for the last Adjustment Year, less
credit for Rent Adjustment Deposits paid, if any; and
(c) Any change in the Rent Adjustment Deposit due monthly in the current Adjustment
Year, including the amount or revised amount due for months preceding any such change
pursuant to Landlords Statement.
Tenant shall pay to Landlord within ten (10) days after receipt of such statement any amounts for
Rent Adjustments then due in accordance with Landlords Statement. Any amounts due from Landlord
to Tenant pursuant to this Section shall be credited to the Rent Adjustment Deposit next coming
due, or refunded to Tenant if the Term has already expired provided Tenant is not in default
hereunder. No interest or penalties shall accrue on any amounts which Landlord is obligated to
credit or refund to Tenant by reason of this Section 4.03. Landlords failure to deliver
Landlords Statement or to compute the amount of the Rent Adjustments shall not constitute a
waiver by Landlord of its right to deliver such items nor constitute a waiver or release of
Tenants obligations to pay such amounts. The Rent Adjustment Deposit shall be credited against
Rent Adjustments due for the applicable Adjustment Year. During the last complete calendar year
or during any partial calendar year in which the Lease terminates, Landlord may include in the
Rent Adjustment Deposit its estimate of Rent Adjustments which may not be finally determined
until after the termination of this Lease. Tenants obligation to pay Rent Adjustments survives
the expiration or termination of the Lease. Notwithstanding the foregoing, in no event shall the
sum of Monthly Base Rent and the Rent Adjustments be less than the Monthly Base Rent payable.
4.04 BOOKS AND RECORDS
Landlord shall maintain books and records showing Operating Expenses and Taxes in accordance with
sound accounting and management practices, consistently applied. The Tenant or its representative
(which representative shall be a certified public accountant licensed to do business in the state
in which the Property is located and whose primary business is certified public accounting) shall
have the right, for a period of thirty (30) days following the date upon which Landlords
Statement is delivered to Tenant, to examine the Landlords books and records with respect to the
items in the foregoing statement of Operating Expenses and Taxes
during normal business hours,
upon written notice, delivered at least three (3) business days in advance. If Tenant does not
object in writing to Landlords Statement within sixty (60) days of Tenants receipt thereof,
specifying the nature of the item in dispute and the reasons therefor, then Landlords Statement
shall be considered final and accepted by Tenant. Any amount due to the Landlord as shown on
Landlords Statement, whether or not disputed by Tenant as provided herein shall be paid by Tenant
when due as provided above, without prejudice to any such written exception.
4.05 TENANT OR LEASE SPECIFIC TAXES
In addition to Monthly Base Rent, Rent Adjustments, Rent Adjustment Deposits and other charges to
be paid by Tenant, Tenant shall pay to Landlord, upon demand, any and all taxes payable by
Landlord (other than federal or state inheritance, general income, gift or estate taxes) whether
or not now customary or within the contemplation of the parties hereto: (a) upon, allocable to,
or measured by the Rent payable hereunder, including any gross receipts tax or excise tax levied
by any governmental or taxing body with respect to the receipt of such rent; or (b) upon or with
respect to the possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises or any portion thereof; or (c) upon the measured value of
Tenants personal properly or trade fixtures located in the Premises or in any storeroom or any
other place in the Premises or the Property, or the areas used in connection with the operation
of the Property, it being the intention of Landlord and Tenant that,
to the extent possible,
Tenant shall cause such taxes on personal property or trade fixtures to be billed to and paid
directly by Tenant; (d) resulting from Landlord Work, Tenant Work or Tenant Alterations to the
Premises, whether title thereto is in Landlord or Tenant; or (e) upon this transaction. Taxes
paid by Tenant pursuant to this Section 4.05 shall not be included in any computation of Taxes as
part of Operating Expenses.
ARTICLE FIVE
SECURITY
(a) Tenant, at Tenants sole cost and expense, concurrently with execution of this Lease,
shall either (1) pay Landlord in cash or immediately available funds or (2) provide Landlord the
Letter of Credit (defined below) as more particularly described below, in each case in the amount
of the Security specified in Section 1.01 as security (Security) for the full and faithful
performance by Tenant of each and every term, provision, covenant, and condition of this Lease. If
Tenant fails timely to perform any of the terms, provisions, covenants and conditions of this
Lease or any other document executed by Tenant in connection with this Lease, including, but not
limited to, the payment of the Monthly Base Rent, Rent Adjustment Deposits, Rent Adjustments or
the repair of damage to the Premises caused by Tenant (excluding normal wear and tear) then
Landlord may use, apply, or retain the whole or any part of the Security for the payment of any
such Monthly Base Rent, Rent Adjustment Deposits or Rent Adjustments not paid when due, for the
cost of repairing such damage, for the cost of cleaning the Premises, for the payment of any other
sum which Landlord may expend or may be required to expend by reason
of Tenants failure to perform,
and otherwise for compensation of Landlord for any other loss or damage to Landlord occasioned by
Tenants failure to perform, including, but not limited to, any loss of future Rent and any damage
or deficiency in the reletting of the Premises (whether such loss, damages or deficiency accrue
before or after summary proceedings or
8
other reentry by Landlord) and the amount of the unpaid past Rent, future Rent loss, and all
other losses, costs and damages that Landlord would be entitled to recover if Landlord were to
pursue recovery under California Civil Code Section 1951.2 or 1951.4. If Landlord so uses,
applies or retains all or part of the Security, Tenant shall within five (5) business days after
demand pay or deliver to Landlord in immediately available funds the sum necessary to replace the
amount used, applied or retained, except as specified in (e) below. If Tenant has fully and
faithfully performed and observed all of Tenants obligations under the terms, provisions,
covenants and conditions of this Lease, the Security (except any amount retained for application
by Landlord as provided herein) shall be returned or paid over to Tenant no later than ninety
(90) days after the latest of: (i) the Termination Date; (ii) the removal of Tenant from the
Premises; or (iii) the surrender of the Premises by Tenant to Landlord in accordance with this
Lease. Provided, however, in no event shall any such return be construed as an admission by
Landlord that Tenant has performed all of its obligations hereunder.
(b) The Security, whether in the form of cash, Letter of Credit (defined below) and/or
Letter of Credit Proceeds (defined below), shall not be deemed an advance rent deposit or an advance payment
of any kind, or a measure of Landlords damages with respect to Tenants failure to perform, nor shall any
action or inaction of Landlord with respect to it or its use or application be a waiver of, or bar or defense to,
enforcement of any right or remedy of Landlord. Landlord shall not be required to keep the Security separate from its
general funds and shall not have any fiduciary duties or other duties (except as set forth in this Section)
concerning the Security. Tenant shall not be entitled to any interest on the Security. In the event of any sale, lease or
transfer of Landlords interest in the Building Landlord shall have the right to transfer the Security, or balance thereof,
to the vendee, transferee or lessee and any such transfer shall release Landlord from all liability for the return of the
Security. Tenant thereafter shall look solely to such vendee, transferee or lessee for the return or payment of the
Security. Tenant shall not assign or encumber or attempt to assign or encumber the Security or any interest in it and
Landlord shall not be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance,
and regardless of one or more assignments of this Lease, Landlord may return the Security to the original
Tenant without liability to any assignee. Tenant hereby waives any and all rights of Tenant under the provisions of
Section 1950.7 of the California Civil Code, and any and all rights of Tenant under all other provisions of law,
now or hereafter enacted, regarding security deposits.
(c) If Tenant fails timely to perform any obligation under this Article Five, such breach
shall constitute a Default by Tenant under this Lease without any right to or requirement of any
further notice or cure period under any other Article of this Lease, except such notice and cure
period expressly provided under this Article Five.
(d) During the first six months after the date on which this Lease has been executed by both
Tenant and Landlord, Tenant shall have the right, at Tenants sole cost and expense, to provide
Landlord with the Letter of Credit (defined below) as the Security required under this Lease in
substitution for the cash then held by Landlord as Security. In the event that Tenant first
delivered the Security in the form of cash or immediately available funds prior to delivering the
Letter of Credit, then, within thirty (30) days after Tenants delivery to Landlord of the Letter
of Credit, Landlord shall refund to Tenant the amount of cash held by Landlord as Security, less
any amounts thereof used, applied or retained by Landlord pursuant to the provisions of Subsection
(a) and not replenished by Tenant.
(e) As used herein Letter of Credit shall mean an unconditional, irrevocable sight draft
letter of credit issued, presentable and payable at the San Francisco, California or San Jose,
California office of a major national bank satisfactory to Landlord in its sole discretion (the
Bank), naming Landlord as beneficiary, in an amount equal to One Hundred Fifty Thousand Nine
Hundred Ninety-five and 00/100 Dollars ($150,995.00). The Letter of Credit shall provide: (i) that
Landlord may make partial and multiple draws thereunder, up to the face amount thereof, and that
Landlord may draw upon the Letter of Credit up to the full amount thereof, as determined by
Landlord, and the Bank will pay to Landlord the amount of such draw upon receipt by the Bank of a
sight draft signed by Landlord without requirement for any additional documents or statements by
Landlord; and (ii) that, in the event of assignment or other transfer of either Landlords interest
in this Lease or of any interest in Landlord (including, without limitation, consolidations,
mergers, reorganizations or other entity changes), the Letter of Credit shall be freely
transferable by Landlord, without charge to Landlord and without recourse, to the assignee or
transferee of such interest and the Bank shall confirm the same to Landlord and such assignee or
transferee. The Letter of Credit shall be in the form attached as
Exhibit H
hereto.
Provided however, if Tenant proposes to use Silicon Valley Bank as the issuer of the Letter of
Credit, the form of Letter of Credit set forth in
Exhibit E
hereto will be acceptable to Landlord.
Landlord may (but shall not be required to) draw upon the Letter of Credit and use the proceeds
therefrom (the Letter of Credit Proceeds) or any portion thereof in any manner Landlord is
permitted to use the Security under this Article Five. In the event Landlord draws upon the Letter
of Credit and elects not to terminate the Lease but to use the Letter of Credit Proceeds, then
within five (5) business days after Landlord gives Tenant written notice specifying the amount of
the Letter of Credit Proceeds so utilized by Landlord, Tenant shall deliver to Landlord an
amendment to the Letter of Credit or a replacement Letter of Credit in an amount equal to one
hundred percent (100%) of the then-required amount of the Letter of Credit. Tenants failure to
deliver such amendment or replacement of the Letter of Credit to Landlord within five (5) business
days after Landlords notice shall constitute a Default by Tenant under this Lease. The Letter of
Credit shall have an initial term of no longer than one (
I) year, shall be evergreen, and shall
be extended, reissued or replaced by Tenant, in each case at least thirty (30) days prior to its
expiration in a manner that fully complies with the requirements of this Article Five, so that in
all events the Letter of Credit required hereunder shall be in full force and effect continuously
until the date (the L/C Expiration Date) for return of the Security described in Subsection (a)
above. No more often than once per year, Landlord shall have the right to require Tenant to
deliver to Landlord, on 15 days prior notice, a replacement Letter of Credit on the same terms and
conditions set forth in this Article Five, in the event that
Landlord determines, in its good faith
judgment, that the issuing Bank is no longer satisfactory to remain as the issuer of the Letter of
Credit. Any advice from the issuer that it intends to withdraw or not extend the Letter of Credit
prior to any scheduled annual expiration or the L/C Expiration Date shall entitle the Landlord to
immediately draw upon the Letter of Credit.
9
ARTICLE SIX
UTILITIES & SERVICES
6.01 LANDLORDS GENERAL SERVICES
Landlord shall provide maintenance and services as provided in Article Eight.
6.02 TENANT TO OBTAIN & PAY DIRECTLY
(a) Tenant shall be responsible for and shall pay promptly all charges for gas,
electricity, sewer, heat, light, power, telephone, refuse pickup (to be performed on a regularly scheduled basis so
that accumulated refuse does not exceed the capacity of Tenants refuse bins), janitorial service and all other
utilities, materials and services furnished directly to or used by Tenant in, on or about the Premises, together with ail
taxes thereon. Tenant shall contract directly with the providing companies for such utilities and services.
(b) Notwithstanding any provision of the Lease to the contrary, without, in each instance,
the prior written consent of Landlord, as more particularly provided in Article Nine, Tenant shall
not: (i) make any alterations or additions to the electric or gas equipment or systems or other Building systems. Tenants
use of electric current shall at no time exceed the capacity of the wiring, feeders and risers providing electric
current to the Premises or the Building. The consent of Landlord to the installation of electric equipment shall not
relieve Tenant from the obligation to limit usage of electricity to no more than such capacity.
6.03 TELEPHONE SERVICES
All telegraph, telephone, and communication connections which Tenant may desire outside the
Premises shall be subject to Landlords prior written approval, in Landlords sole discretion, and
the location of all wires and the work in connection therewith shall be performed by contractors
approved by Landlord and shall be subject to the direction of Landlord, except that such approval
is not required as to Tenants cabling from the Premises in a route designated by Landlord to any
telephone cabinet or panel provided for Tenants connection to the telephone cable serving the
Building, so long as Tenants equipment does not require connections different than or additional
to those to the telephone cabinet or panel provided. As to any such connections or work outside
the Premises requiring Landlords approval, Landlord reserves the right reasonably to approve the
entity or entities providing telephone or other communication cable installation, removal, repair
and maintenance outside the Premises and reasonably to restrict and control access to telephone
cabinets or panels outside the Premises. Tenant shall be responsible for and shall pay all costs
incurred in connection with the installation of telephone cables and communication wiring in the
Premises including any hook-up, access and maintenance fees related to the installation of such
wires and cables in the Premises and the commencement of service therein, and the maintenance
thereafter of such wire and cables; and there shall be included in Operating Expenses for the
Building all installation, removal, hook-up or maintenance costs incurred by Landlord in
connection with telephone cables and communication wiring serving the Building which are not
allocable to any individual users of such service but are allocable to the Building generally. If
Tenant fails to maintain all telephone cables and communication wiring in the Premises and such
failure affects or interferes with the operation or maintenance of any other telephone cables or
communication wiring serving the Building Landlord or any vendor hired by Landlord may enter into
and upon the Premises forthwith and perform such repairs restorations or alterations as Landlord
deems necessary in order to eliminate any such interference (and Landlord may recover from Tenant
all of Landlords costs in connection therewith). No later than the Termination Date, Tenant
agrees to remove all telephone cables and communication wiring installed by Tenant for and during
Tenants occupancy, which Landlord shall request Tenant to remove. Tenant agrees that neither
Landlord nor any of its agents or employees shall be liable to Tenant, or any of Tenants
employees, agents, customers or invitees or anyone claiming through, by or under Tenant, for any
damages, injuries, losses, expenses, claims or causes of action because of any interruption,
diminution, delay or discontinuance at any time for any reason in the furnishing of any telephone
or other communication service to the Premises and the Building.
6.04 FAILURE OR INTERRUPTION OF UTILITY OR SERVICE
To the extent that any equipment or machinery furnished or maintained by Landlord outside the
Premises is used in the delivery of utilities directly obtained by Tenant pursuant to Section 6.02
and breaks down or ceases to function properly. Landlord shall use reasonable diligence to repair
same promptly. In the event of any failure, stoppage or interruption
of, or change in, any
utilities or services supplied by Landlord which are not directly obtained by Tenant, Landlord
shall use reasonable diligence to have service promptly resumed. In either event covered by the
preceding two sentences, if the cause of any such failure, stoppage or interruption of, or change
in, utilities or services is within the control of a public utility, other public or quasi-public
entity, or utility provider outside Landlords control notification to such utility or entity of
such failure, stoppage or interruption and request to remedy the same shall constitute reasonable
diligence by Landlord to have service promptly resumed. Notwithstanding any other provision of
this Section to the contrary, in the event of any failure, stoppage or interruption of, or change
in, any utility or other service furnished to the Premises or the Project resulting from any cause
other than the gross negligence or willful and wrongful act of Landlord or its agents or
contractors, including changes in service provider or Landlords compliance with any voluntary or
similar governmental or business guidelines now or hereafter published or any requirements now or
hereafter established by any governmental agency, board or bureau having jurisdiction over the
operation of the Property: (a) Landlord shall not be liable for, and Tenant shall not be entitled
to, any abatement or reduction of Rent; (b) no such failure, stoppage, or interruption of any such
utility or service shall constitute an eviction of Tenant or relieve Tenant of the obligation to
perform any covenant or agreement of this Lease to be performed by Tenant; (c) Landlord shall not
be in breach of this Lease nor be liable to Tenant for damages or otherwise.
6.05 INTENTIONALLY OMITTED
10
6.06 SIGNAGE
Except as set forth in
Rider 2,
Tenant shall not install any signage within the Project,
the Building or the Premises without obtaining the prior written approval of Landlord, and Tenant
shall be responsible for procurement, installation, maintenance and removal of any such signage
installed by Tenant, and all costs in connection therewith. Any such signage shall comply with
Landlords current Project signage criteria and all Laws.
ARTICLE SEVEN
POSSESSION, USE AND CONDITION OF PREMISES
7.01 POSSESSION AND USE OF PREMISES
(a) Tenant shall occupy and use the Premises only for the uses specified in Section
1.01(17) to conduct Tenants business. Tenant shall not occupy or use the Premises (or permit the
use or occupancy of the Premises) for any purpose or in any manner which: (1) is unlawful or in
violation of any Law or Environmental Law; (2) may be dangerous to persons or property or which may
increase the cost of, or invalidate, any policy of insurance carried on the Building or covering
its operations; (3) is contrary to or prohibited by the terms and conditions of this Lease or the
rules and regulations as provided in Article Eighteen; (4) contrary to or prohibited by the
articles, bylaws or rules of any owners association affecting the Project; (5) would obstruct or
interfere with the rights of other tenants or occupants of the Building or the Project, or injure
or annoy them, or would tend to create or continue a nuisance; or (6) would constitute any waste in
or upon the Premises or Project.
(b) Landlord and Tenant acknowledge that the Americans With Disabilities Act of 1990 (42
U.S.C. §12101 et seq.) and regulations and guidelines promulgated thereunder, as all of the same
may be amended and supplemented from time to time (collectively referred to herein as the ADA)
establish requirements for business operations, accessibility and barrier removal, and that such
requirements may or may not apply to the Premises, the Building and the Project depending on, among
other things: (1) whether Tenants business is deemed a public accommodation or commercial
facility, (2) whether such requirements are readily achievable, and (3) whether a given
alteration affects a primary function area or triggers path of travel requirements. The parties
hereby agree that: (a) Landlord shall be responsible for ADA Title III compliance in the Common
Areas, except as provided below, (b) Tenant shall be responsible for ADA Title III compliance in
the Premises, including any leasehold improvements or other work to be performed in the Premises
under or in connection with this Lease, (c) Landlord may perform, or require that Tenant perform,
and Tenant shall be responsible for the cost of, ADA Title III path of travel requirements
triggered by Tenant Additions in the Premises, and (d) Landlord may perform, or require Tenant to
perform, and Tenant shall be responsible for the cost of, ADA Title III compliance in the Common
Areas necessitated by the Building being deemed to be a public accommodation instead of a
commercial facility as a result of Tenants use of the Premises. Tenant shall be solely
responsible for requirements under Title I of the ADA relating to Tenants employees.
(c) Landlord and Tenant agree to cooperate and use commercially reasonable efforts to
participate in traffic management programs generally applicable to businesses located in or about
the area and Tenant shall encourage and support van and car pooling by, and staggered and flexible
working hours for, its office workers and service employees to the extent reasonably permitted by
the requirements of Tenants business. Neither this Section or any other provision of this Lease
is intended to or shall create any rights or benefits in any other person, firm, company,
governmental entity or the public.
(d) Tenant agrees to cooperate with Landlord and to comply with any and all guidelines or
controls concerning energy management imposed upon Landlord by federal or state governmental
organizations or by any energy conservation association to which Landlord is a party or which is
applicable to the Building.
7.02 HAZARDOUS MATERIAL
(a) Tenant shall not use, generate, manufacture, produce, store, handle, release,
discharge, or dispose of, on, under or about the Premises or any part of the Project, or transport
to or from the Premises or any part of the Project, any Hazardous Material, or allow its
employees, agents, contractors, licensees, invitees or any other person or entity under Tenants
control (Tenant Parties) to do so except to the extent expressly provided below. Provided that
the Premises are used only for the uses specified in Section 1.01(17) above, Tenant shall be
permitted to use and store in, and transport to and from, the Premises Hazardous Material
identified on
Exhibit D
hereto and by this reference incorporated herein (Permitted
Hazardous Material) so long as: (i) each item of the Permitted Hazardous Material is used or
stored in, or transported to and from, the Premises only to the extent necessary for Tenants
operation of its business at the Premises; (ii) at no time shall any Permitted Hazardous Material
be in use or storage at the Premises in excess of the quantity specified therefor in
Exhibit
D;
(iii) Tenant shall not install any underground tanks of any type; and (iv) the conditions
and provisions set forth in this Section 7.02 are complied with. If Tenant desires to add
additional types or quantities of Hazardous Materials to the list of Permitted Hazardous Materials
specified in
Exhibit D
.
Tenant shall give Landlord notice of the Hazardous Materials and
quantities thereof that Tenant desires to use at the Premises and Landlord shall thereafter have
the right to approve or disapprove such additional Hazardous Materials in Landlords sole
discretion within ten (10) days after receipt of such notice. Failure to notify Tenant in writing
of its decision within said ten (10) day period shall be deemed disapproval by Landlord. Tenant
shall comply with and shall cause all Tenant Parties to comply with all Environmental Laws and
other Laws pertaining to Tenants occupancy and use of the Premises and concerning the proper use,
generation, manufacture, production, storage, handling, release, discharge, removal and disposal
of any Hazardous Material introduced to the Premises, the Building or the Property by Tenant or
any of the Tenant Parties. Without limiting the generality of the foregoing:
(1) Tenant shall provide Landlord promptly with copies of: (x) all permits, licenses and
other governmental and regulatory approvals with respect to the use, generation,
manufacture, production, storage, handling, release, discharge, removal and disposal by
Tenant or any of the Tenant Parties of Hazardous Material at the Project; and (y) each
hazardous material management plan or similar document (Plan(s)) with respect
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to use, generation, manufacture, production, storage, handling, release, discharge,
removal or disposal of Hazardous Material by Tenant or any of the Tenant Parties necessary
to comply with Environmental Laws or other Laws prepared by or on behalf of Tenant or any of
the Tenant Parties (whether or not required to be submitted to a governmental agency) and
updates thereof in the event of any change in the Permitted Hazardous Materials used by
Tenant or when otherwise required by Law.
(2) If Tenant is notified of any investigation or violation of any Environmental Laws or
other Laws arising from any activity of Tenant or any of the Tenant Parties at the Properly,
or if Tenant knows, or has reasonable cause to believe, that a Hazardous Material has come
to be located in, on, under or about the Premises or the Project, other than as previously
consented to by Landlord, Tenant shall immediately give written notice of such fact to
Landlord, and provide Landlord with a copy of all reports, notices, claims or other
documentation which it has concerning the presence of such Hazardous Material. In such
event Landlord may conduct, at Tenants expense, such tests and studies as Landlord deems
desirable relating to compliance by Tenant or any of the Tenant Parties with this Lease,
Environmental Laws, other Laws, or relating to the alleged presence of Hazardous Material
introduced to the Premises, the Building or the Property by Tenant or any of the Tenant
Parties. Further, Landlord may conduct, at Landlords expense, such tests and studies as
Landlord deems desirable relating to compliance by Tenant or any of the Tenant Parties with
this Lease, Environmental Laws, other Laws, or relating to the alleged presence of Hazardous
Material introduced to the Premises, the Building or the Property by Tenant or any of the
Tenant Parties. In the event such tests and studies done at Landlords expense reasonably
indicate that Tenant or Tenant Parties have violated Environmental Laws or caused a release
of Hazardous Material, then Tenant shall reimburse Landlord the cost of such tests and
studies.
(3) Neither Tenant nor any of the Tenant Parties shall cause or permit any Hazardous
Material to be released, discharged or disposed of in, on, under, or about the Premises or
the Project (including through the plumbing or sanitary sewer system) and shall promptly, at
Tenants expense, take all investigatory and/or remedial action reasonably recommended,
whether or not formally ordered or required, for the cleanup of any contamination of, and
for the maintenance, security and/or monitoring of the Premises, the Project or neighboring
properties, that was caused or materially contributed to by Tenant, or pertaining to or
involving any Hazardous Material brought onto the Premises or the Project by Tenant or any
of the Tenant Parties.
(4) Tenant shall, no later than the Termination Date, surrender the Premises to Landlord
free of Hazardous Material and with all remedial and/or closure plans completed (and deliver
evidence thereof to Landlord).
(b) To the extent permitted by law, Tenant hereby indemnifies and agrees to protect, defend
and hold the Indemnitees harmless against all actions, claims, demands, liability, costs and
expenses, including reasonable attorneys fees and expenses for the defense thereof, arising from
the use, generation, manufacture, production, storage, handling, release, threatened release,
discharge, disposal, transportation to or from, or presence of any Hazardous Material on, under or
about the Premises or any part of the Project caused by Tenant or by any of the Tenant Parties,
whether before, during or after the Term. Tenants obligations under this Section 7.02 shall
survive the expiration or earlier termination of this Lease. In case of any action or proceeding
brought against the Indemnitees by reason of any such claim, upon notice from Landlord, Tenant
covenants to defend such action or proceeding by counsel chosen by Landlord, in Landlords sole
discretion. Landlord reserves the right to settle, compromise or dispose of any and all actions,
claims and demands related to the foregoing indemnity, subject to the prior written approval of
Tenant, which may not unreasonably be withheld.
(c) The right to use and store in, and transport to and from, the Premises the Permitted
Hazardous Material is personal to Genomic Health and may not be assigned or otherwise transferred
by it without the prior written consent of Landlord, which consent may be withheld in Landlords
sole discretion, except (i) to a Permitted Transferee which is an assignee of the Lease and which
has satisfied the requirements of Sections 10.01 and 10.05 of this Lease; and (ii) Genomic Health
may permit a Permitted Transferee which is a sublessee to use and store in, and transport to and
from, the Premises the Permitted Hazardous Material to the same extent as Genomic Health has such
right under this Lease, subject to all the provisions of this Lease. Any consent by Landlord
pursuant to Article Ten to an assignment, transfer, subletting, mortgage, pledge, hypothecation or
encumbrance of this Lease, and any interest therein or right or privilege appurtenant thereto,
shall not constitute consent by Landlord to the use or storage at, or transportation to, the
Premises of any Hazardous Material (including a Permitted Hazardous Material) by any such assignee,
sublessee or transferee unless Landlord expressly agrees otherwise in writing. Provided however, at
the time Tenant requests approval of any proposed assignment or sublease of this Lease by Tenant,
Tenant shall submit to Landlord the proposed Permitted Hazardous Material list of the proposed
assignee or sublessee. Landlord shall have the right, in its sole discretion, to approve the
proposed assignees or sublessees proposed Permitted Hazardous Material list, or to require
modifications to said list. In the event that Landlord does not approve of the proposed assignees
or sublessees Permitted Hazardous Material list, or the proposed assignee or sublessee cannot or
will not modify said list, then it shall be reasonable for purposes of Article Ten hereof for
Landlord to refuse its consent to the proposed assignee or sublessee. In the event that the
proposed Hazardous Material list of the assignee or sublessee includes any Hazardous Material
different from or in greater quantity than those on Tenants Permitted Hazardous Material list,
Tenant shall pay Landlord, whether or not Landlord consents to the proposed list of Permitted
Hazardous Materials and/or to the proposed assignment or sublease, (i) a processing fee of Three
Thousand Dollars ($3,000.00) at the time Tenant submits the request for approval, and (ii) the
reasonable fees and expenses of any consultants retained by Landlord in connection with review of
the proposed Permitted Hazardous Material list and use thereof by the proposed assignee or
sublessee. Any consent by Landlord to the use or storage at, or transportation to or from the
Premises, of any Hazardous Material (including a Permitted Hazardous Material) by an assignee,
sublessee or transferee of Tenant shall not constitute a waiver of Landlords right to refuse such
consent as to any subsequent assignee or transferee.
(d) Tenant acknowledges that the sewer piping at the Project is made of ABS plastic.
Accordingly, without Landlords prior written consent, which may be given or withheld in Landlords
sole discretion, only ordinary domestic sewage is permitted to be put into the drains at the
Premises. UNDER NO CIRCUMSTANCES SHALL
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Tenant EVER DEPOSIT ANY ESTERS OR KETONES (USUALLY FOUND IN SOLVENTS TO CLEAN UP PETROLEUM
PRODUCTS) IN THE DRAINS AT THE PREMISES. If Tenant desires to put any substances other than
ordinary domestic sewage into the drains, it shall first submit to Landlord a complete description
of each such substance, including its chemical composition, and a sample of such substance suitable
for laboratory testing. Landlord shall promptly determine whether or not the substance can be
deposited into the drains and its determination shall be absolutely binding on Tenant. Upon demand,
Tenant shall reimburse Landlord for expenses incurred by Landlord in making such determination. If
any substances not so approved hereunder are deposited in the drains in Tenants Premises, Tenant
shall be liable to Landlord for all damages resulting therefrom, including but not limited to all
costs and expenses incurred by Landlord in repairing or replacing the piping so damaged.
7.03 LANDLORD ACCESS TO PREMISES; APPROVALS
(a) Tenant shall permit Landlord to erect, use and maintain pipes, ducts, wiring and conduits
in and through the Premises, so long as Tenants use, layout or design of the Premises is not
materially affected or altered. Landlord or Landlords agents shall have the right to enter upon the Premises (i) in the event of
an emergency, without prior notice, or (ii) with 24-hour prior notice to inspect the Premises, to
perform janitorial and other services (if any), to conduct safety and other testing in the
Premises and to make such repairs, alterations, improvements or additions to the Premises or the
Building or other parts of the Property as Landlord may deem necessary or desirable (including all
alterations, improvements and additions in connection with a change in service provider or
providers). Janitorial and cleaning services (if any) shall be performed after normal business
hours. Any entry or work by Landlord may be during normal business hours and Landlord may use
reasonable efforts to ensure that any entry or work shall not materially interfere with Tenants
occupancy of the Premises.
(b) If Tenant or its agents shall not be personally present to permit an entry into the
Premises when for any reason an entry therein shall be necessary or permissible, Landlord (or
Landlords agents), after having properly notified Tenant (unless Landlord believes an emergency
situation exists), may enter the Premises without rendering Landlord or its agents liable therefor,
and without relieving Tenant of any obligations under this Lease.
(c) Landlord may enter the Premises for the purpose of conducting such inspections, tests and
studies as Landlord may deem desirable or necessary to confirm Tenants compliance with all Laws
and Environmental Laws or for other purposes necessary in Landlords reasonable judgment to ensure
the sound condition of the Property and the systems serving the Property. Landlords rights under
this Section 7.03 (c) are for Landlords own protection only, and Landlord has not, and shall not
be deemed to have assumed, any responsibility to Tenant or any other party as a result of the
exercise or non-exercise of such rights, for compliance with Laws or Environmental Laws or for the
accuracy or sufficiency of any item or the quality or suitability of any item for its intended use.
(d) Landlord may do any of the foregoing, or undertake any of the inspection or work described
in the preceding paragraphs without such action constituting an actual or constructive eviction of
Tenant, in whole or in part, or giving rise to an abatement of Rent by reason of loss or
interruption of business of the Tenant, or otherwise.
(e) The review, approval or consent of Landlord with respect to any item required or permitted
under this Lease is for Landlords own protection only, and Landlord has not, and shall not be
deemed to have assumed, any responsibility to Tenant or any other party, as a result of the
exercise or non-exercise of such rights, for compliance with Laws or Environmental Laws or for the
accuracy or sufficiency of any item or the quality or suitability of any item for its intended use.
7.04 QUIET ENJOYMENT
Landlord covenants, in lieu of any implied covenant of quiet possession or quiet enjoyment, that
so long as Tenant is in compliance with the covenants and conditions set forth in this Lease,
Tenant shall have the right to quiet enjoyment of the Premises without hindrance or interference
from Landlord or those claiming through Landlord, and subject to the covenants and conditions set
forth in the Lease and to the rights of any Mortgagee or ground lessor.
ARTICLE EIGHT
MAINTENANCE & HVAC
8.01 LANDLORDS MAINTENANCE
Subject to Article Fourteen and Section 8.02, Landlord shall maintain the structural portions of
the Building, the roof, exterior walls and exterior doors, foundation, and underslab standard
sewer system of the Building in good, clean and safe condition. Notwithstanding the foregoing,
Landlord shall have no responsibility to perform preventive maintenance or service for, or to
repair any heating, ventilation and air conditioning equipment and systems serving the Premises
(HVAC), and all such preventive maintenance, service, and repairs shall be performed by Tenant
pursuant to the terms of Section 8.02. Landlord shall also (a) maintain the landscaping, parking
facilities and other Common Areas of the Project, and (b) wash the outside of exterior windows at
intervals determined by Landlord. Except as provided in Article Fourteen and Article Fifteen,
there shall be no abatement of rent, no allowance to Tenant for diminution of rental value and no
liability of Landlord by reason of inconvenience, annoyance or any injury to or interference with
Tenants business arising from the making of or the failure to make any repairs, alterations or
improvements in or to any portion of the Project or in or to any fixtures, appurtenances or
equipment therein. Tenant waives the right to make repairs at Landlords expense under any law,
statute or ordinance now or hereafter in effect.
8.02 TENANTS MAINTENANCE
(a) Subject to the provisions of Article Fourteen, Tenant shall, at Tenants sole cost
and expense, maintain and make all repairs to the Premises and fixtures therein which Landlord is
not required to make pursuant to Section 8.01, including repairs to the interior walls, ceilings
and windows of the Premises, the interior doors, Tenants signage, and the electrical, life-safety,
plumbing and HVAC, and shall maintain the Premises, the fixtures,
13
HVAC and utilities systems therein, and the area immediately surrounding the Premises (including
all garbage enclosures), in a good, clean and safe condition. Tenant shall deliver to Landlord a
copy of any maintenance contract entered into by Tenant with respect to the Premises. Tenant shall
also, at Tenants expense, keep any non-standard heating, ventilating and air conditioning
equipment and other non-standard equipment in the Building in good condition and repair, using
contractors approved in advance, in writing, by Landlord, which approval shall not be unreasonably
withheld. Notwithstanding Section 8.01 above, to the extent that Landlord is not reimbursed by
insurance and no waiver set forth in Section 16.04 is applicable, Tenant will pay for any repairs
to the Building or the Project which are caused by any negligence or willful and wrongful act, of
Tenant or its assignees, subtenants or employees, or of the respective agents of any of the
foregoing persons, or of any other persons permitted in the Building or elsewhere in the Project by
Tenant or any of them. Tenant will maintain the Premises, and will leave the Premises upon
termination of this Lease, in a safe, clean, neat and sanitary condition.
(b) With respect to HVAC, Tenant, at Tenants sole cost and expense, shall enter into
contracts (HVAC Service Contracts) for regularly scheduled inspections and preventive
maintenance and service, as to which the contractors, scope of work, frequency of inspection,
maintenance or service, shall be subject to Landlords prior written approval, in its sole
discretion. Tenant shall cause the contractor for such HVAC Service Contracts
to
deliver written
reports to Landlord within ten (10) days after the date of such inspection, maintenance and/or
service. Tenant shall deliver to Landlord a copy of the initial HVAC Service Contracts within
sixty (60) days after the Commencement Date and of subsequent HVAC Service Contracts entered into
by Tenant within ten (10) days after execution thereof (which subsequent HVAC Service Contracts
shall be subject to the same approval standards and requirements as set forth above with respect
to the initial contract). In the event Tenant fails, in the reasonable judgment of Landlord, to
meet the requirements for such HVAC Service Contracts and cause such inspections, maintenance and
service to be performed, which failure continues at the end of fifteen (15) days following written
notice given by Landlord stating the nature of the failure, Landlord shall have the right (but
shall not be obligated) to obtain such HVAC Service Contracts and to enter the Premises and
perform such inspection, maintenance and service, at Tenants sole cost and expense; provided,
however, if the nature of the maintenance or repair is such that it cannot, with the exercise of
reasonable diligence, be completed within fifteen (15) days of Tenants receipt of Landlords
notice, Landlord shall not undertake such inspection, maintenance and service at Tenants expense
provided Tenant commences such inspection, maintenance and service in the manner required above
within said 15-day period and thereafter diligently and continuously prosecutes the same to
completion and provided further, however, that in the event of an emergency condition, Landlord
shall have the right to make such inspection, maintenance, service and/or repairs on behalf of
Tenant at Tenants sole cost and expense after giving Tenant such notice, if any, as is reasonable
under the circumstances. Landlords right of entry pursuant to Section 7.03 shall include the
right to enter and inspect the Premises for violations of Tenants covenants herein. Tenant shall
maintain written records of HVAC inspection, maintenance, service repairs, and shall use certified
technicians approved in writing by Landlord to perform such maintenance and repairs.
ARTICLE NINE
ALTERATIONS AND IMPROVEMENTS
9.01 TENANT ALTERATIONS
(a) The following provisions shall apply to the completion of any Tenant Alterations:
(1) Tenant shall not, except as provided herein, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld, make or cause to be made any
Tenant Alterations in or to the Premises or any Property systems serving the Premises.
Prior to making any Tenant Alterations, Tenant shall give Landlord ten (10) days prior
written notice (or such earlier notice as would be necessary pursuant to applicable Law) to
permit Landlord sufficient time to post appropriate notices of non- responsibility. Subject
to all other requirements of this Article Nine, Tenant may, without Landlords prior written
consent, undertake (i) Decoration work and/or (ii) any Alterations that (x) do not adversely
affect the roof, structural portions or the systems or equipment of the Building, (y) are
not visible from the exterior of the Building, and (z) do not cost, in the aggregate, over
the Term of the Lease, in excess of $50,000. Tenant shall furnish Landlord with the names
and addresses of all contractors and subcontractors and copies of all contracts. All Tenant
Alterations shall be completed at such time and in such manner as Landlord may from time to
time designate, and only by contractors or mechanics approved by Landlord, which approval
shall not be unreasonably withheld. The contractors, mechanics and engineers who may be used
are further limited to those whose work will not cause or threaten to cause disharmony or
interference with Landlord or other tenants in the Building and their respective agents and
contractors performing work in or about the Building. Landlord may further condition its
consent upon Tenant furnishing to Landlord and Landlord approving prior to the commencement
of any work or delivery of materials to the Premises related to the Tenant Alterations such
of the following as specified by Landlord: architectural plans and specifications, opinions
from Landlords engineers stating that the Tenant Alterations will not in any way adversely
affect the Buildings systems, necessary permits and licenses, certificates of insurance,
and such other documents in such form reasonably requested by Landlord. Landlord may, in the
exercise of reasonable judgment, request that Tenant provide Landlord with appropriate
evidence of Tenants ability to complete and pay for the completion of the Tenant
Alterations such as a performance bond or letter of credit. Upon completion of the Tenant
Alterations, Tenant shall deliver to Landlord an as-built mylar and digitized (if available)
set of plans and specifications for the Tenant Alterations.
(2) Tenant shall pay the cost of all Tenant Alterations and the cost of decorating the
Premises and any work to the Property occasioned thereby. In connection with completion of
any Tenant Alterations, Tenant shall, upon receipt of Landlords itemized invoice therefor,
pay Landlords actual and reasonable costs to review the plans and specifications for such
Tenant Alterations and to monitor the performance thereof, including a construction
administration fee and all elevator and hoisting charges at Landlords then standard rate.
Upon completion of Tenant Alterations, Tenant shall furnish Landlord with contractors
affidavits and full and final waivers of lien and receipted bills covering all labor and
materials expended and
14
used in connection therewith and such other documentation reasonably requested by Landlord
or Mortgagee.
(3) Tenant agrees to complete all Tenant Alterations (i) in accordance with all Laws,
Environmental Laws, all requirements of applicable insurance companies and in accordance
with Landlords standard construction rules and regulations, and (ii) in a good and
workmanlike manner with the use of good grades of materials. Tenant shall notify Landlord
immediately if Tenant receives any notice of violation of any Law in connection with
completion of any Tenant Alterations and shall immediately take such steps as are necessary
to remedy such violation. In no event shall such supervision or right to supervise by
Landlord nor shall any approvals given by Landlord under this Lease constitute any warranty
by Landlord to Tenant of the adequacy of the design, workmanship or quality of such work or
materials for Tenants intended use or of compliance with the requirements of Section
9.01(a)(3)(i) and (ii) above or impose any liability upon Landlord in connection with the
performance of such work.
(b) All Tenant Additions to the Premises whether installed by Landlord or Tenant, shall
without compensation or credit to Tenant, become part of the Premises and the property of Landlord
at the time of their installation and shall remain in the Premises, unless pursuant to Article
Twelve, Tenant may remove them or is required to remove them at Landlords request. Tenants
Personal Properly, as set forth in
Exhibit G
, shall at all times remain the property of
Tenant and Tenant shall remove such property at the expiration or earlier termination of this
Lease.
9.02 LIENS
Tenant shall not permit any lien or claim for lien of any mechanic, laborer or supplier or any
other lien to be filed against the Building, the Land, the Premises, or any other part of the
Property arising out of work performed, or alleged to have been performed by, or at the direction
of, or on behalf of Tenant. If any such lien or claim for lien is filed, Tenant shall within ten
(10) days of receiving notice of such lien or claim (a) have such lien or claim for lien released
of record or (b) deliver to Landlord a bond in form, content, amount, and issued by surety,
satisfactory to Landlord, indemnifying, protecting, defending and holding harmless the Indemnitees
against all costs and liabilities resulting from such lien or claim for lien and the foreclosure
or attempted foreclosure thereof. If Tenant fails to take any of the above actions, Landlord, in
addition to its rights and remedies under Article Eleven, without investigating the validity of
such lien or claim for lien, may pay or discharge the same and Tenant shall, as payment of
additional Rent hereunder, reimburse Landlord upon demand for the amount so paid by Landlord,
including Landlords expenses and reasonable attorneys fees.
ARTICLE TEN
ASSIGNMENT AND SUBLETTING
10.01 ASSIGNMENT AND SUBLETTING
(a) Without the prior written consent of Landlord, which may be withheld in Landlords sole
discretion, Tenant may not sublease, assign, mortgage, pledge, hypothecate or otherwise transfer or
permit the transfer of this Lease or the encumbering of Tenants interest therein in whole or in
part, by operation of Law or otherwise or permit the use or occupancy of the Premises, or any part
thereof, by anyone other than Tenant, provided, however, if Landlord chooses not to recapture the
space proposed to be subleased or assigned as provided in Section 10.02, Landlord shall not
unreasonably withhold its consent to a subletting or assignment under this Section 10.01. Tenant
agrees that the provisions governing sublease and assignment set forth in this Article Ten shall be
deemed to be reasonable. If Tenant desires to enter into any sublease of the Premises or assignment
of this Lease, Tenant shall deliver written notice thereof to Landlord (Tenants Notice),
together with the identity of the proposed subtenant or assignee and the proposed principal terms
thereof and financial and other information sufficient for Landlord to make an informed judgment
with respect to such proposed subtenant or assignee at least sixty (60) days prior to the
commencement date of the term of the proposed sublease or assignment. If Tenant proposes to sublease
less than all of the Rentable Area of the Premises, the space proposed to be sublet and the space
retained by Tenant must each be a marketable unit as reasonably determined by Landlord and
otherwise in compliance with all Laws; provided however, so long as the Tenant is Genomic Health or
a Permitted Transferee which is an assignee of the Lease which has satisfied the requirements of
Sections 10.01 and 10.05 below, the foregoing shall not apply to a sublease for a sublease term of
a year or less, for undemised space in the aggregate (for one or more such subleases in effect at
any one time) up to 3,000 square feet of Rentable Area. Landlord shall notify Tenant in writing of
its approval or disapproval of the proposed sublease or assignment or its decision to exercise its
rights under Section 10.02 within thirty (30) days after receipt of Tenants Notice (and all
required information). In no event may Tenant sublease any portion of the Premises or assign the
Lease to any other tenant of the Project. Tenant shall submit for Landlords approval (which
approval shall not be unreasonably withheld) any advertising which Tenant or its agents intend to
use with respect to the space proposed to be sublet.
(b) With respect to Landlords consent to an assignment or sublease, Landlord may take into
consideration any factors which Landlord may deem relevant, and the reasons for which Landlords
denial shall be deemed to be reasonable shall include, without limitation, the following:
(i) the business reputation or creditworthiness of any proposed subtenant or
assignee is not acceptable to Landlord; or
(ii) in Landlords reasonable judgment the proposed assignee or subtenant would
diminish the value or reputation of the Building or Landlord; or
(iii) any proposed assignees or subtenants use of the Premises would violate
Section 7.01 of the Lease or would violate the provisions of any other leases of tenants in
the Project;
15
(iv) the proposed assignee or subtenant is either a governmental agency, a school or
similar operation, or a medical related practice; or
(v) the proposed subtenant or assignee is a bona fide prospective tenant of Landlord
in the Project as demonstrated by a written proposal dated within ninety (90) days prior to
the date of Tenants request; or
(vi) the proposed subtenant or assignee would materially increase the estimated
pedestrian and vehicular traffic to and from the Premises and the Building.
In no event shall Landlord be obligated to consider a consent to any proposed assignment of the
Lease which would assign less than the entire Premises. In the event Landlord wrongfully withholds
its consent to any proposed sublease of the Premises or assignment of the Lease, Tenants sole and
exclusive remedy therefor shall be to seek specific performance of Landlords obligations to
consent to such sublease or assignment.
(c) Any sublease or assignment shall be expressly subject to the terms and conditions of this
Lease. Any subtenant or assignee shall execute such documents as Landlord may reasonably require to
evidence such subtenant or assignees assumption of the obligations and liabilities of Tenant under
this Lease. Tenant shall deliver to Landlord a copy of all agreements executed by Tenant and the
proposed subtenant and assignee with respect to the Premises. Landlords approval of a sublease,
assignment, hypothecation, transfer or third party use or occupancy shall not constitute a waiver
of Tenants obligation to obtain Landlords consent to further assignments or subleases,
hypothecations, transfers or third party use or occupancy.
(d) For purposes of this Article Ten, an assignment shall be deemed to include a change in the
majority control of Tenant, resulting from any transfer, sale or assignment of shares of stock or
membership interests of Tenant occurring by operation of Law or otherwise, and includes any merger,
acquisition, consolidation or reorganization, except as otherwise provided in this Subsection
below. Notwithstanding any provision of this Section to the contrary, an assignment for purposes
of this Article does not include any transfer of control of the stock or membership interests of
Tenant through (i) any public offering of shares of stock in Tenant in accordance with applicable
State and Federal law, rules, regulations and orders if thereafter the stock shall be listed and
publicly traded through the New York Stock Exchange or the NASDAQ national market; or (ii) public
sale of such stock effected through such Exchange or the NASDAQ national market. If Tenant is a
partnership, any change in the partners of Tenant shall be deemed to be an assignment.
(e) For purposes of this Lease, a Permitted Transferee shall mean any Person which: (i) is
an Affiliate of Tenant; or (ii) is the corporation or other entity (the Successor) resulting from
a merger, conversion, consolidation or non-bankruptcy reorganization with Tenant; or (iii) is not a
Successor but is otherwise a deemed assignee due to a change of control under section 10.01(d)
above; or (iv) purchases, leases or acquires by way of exchange all or substantially all the assets
of Tenant as a going concern (the Purchaser). Notwithstanding anything to the contrary in
Sections 10.01(a) and (b), 10.02 and 10.03, provided there is no uncured Default under this Lease,
Tenant shall have the right, without the prior written consent of Landlord, to assign this Lease to
a Permitted Transferee or to sublease the Premises or any part thereof to a Permitted Transferee
provided that: (1) Landlord receives thirty (30) days prior written notice of an assignment or
sublease (including a pending transaction described in subparts (i), (ii), (iii) or (iv) of this
Section 10.01(e)); provided that Tenant may give notice in less than thirty (30) days in connection
with a pending transaction described in subparts (ii) and (iv) of this Section 10.01(e) to the
extent that Tenant is precluded, by the terms of the transaction or, if Tenants stock is publicly
traded, by applicable securities laws, from making disclosure of the transaction itself; (2) with
respect to an assignment of the Lease or a sublease of more than half the Premises to an entity
described in subparts (ii) or (iv) of this Section 10.01(e), the Permitted Transferees net worth
is not less than Tenants net worth (measured as of the most recent date for which financial
statements prepared in accordance with GAAP are available); (3) with respect to an assignment of
the Lease or a sublease of more than half the Premises to an entity described in subparts (i) or
(iii) of this Section 10.01(e), Tenant (as the assignor or sublandord) continues in existence with
a net worth not less than Tenants net worth immediately prior to such assignment or subletting;
(4) the Permitted Transferee expressly assumes (except a Permitted Transferee which is a deemed
assignee under subpart (iii) of this Section 10.01(e) or which is a sublessee in the event of a
sublease under this Section 10.01(e)) in writing reasonably satisfactory to Landlord all of the
obligations of Tenant under this Lease and delivers such assumption to Landlord no later than
fifteen (15) days (or such lesser time as is appropriate in connection with a pending transaction
described in subparts (ii) and (iv) of this Section 10.01(e) to the extent that Tenant is
precluded, by the terms of the transaction or, if Tenants stock is publicly traded, by applicable
securities laws, from making disclosure of the transaction itself) prior to the effective date of
the assignment; (5) Landlord receives no later than five (5) days before the effective date a fully
executed copy of the applicable assignment or sublease agreement between Tenant and the Permitted
Transferee; and (6) promptly after Landlords written request, Tenant and the Permitted Transferee
provide such reasonable documents and information which Landlord reasonably requests for the
purpose of substantiating whether or not the assignment or sublease is to a Permitted Transferee.
All determinations of net worth for purposes of this Subsection shall exclude any value
attributable to goodwill or going concern value. With respect to any proposed assignment under
subparts (ii) or (iv) of this Section 10.01(e), Tenant shall pay Landlord, no later than fifteen
(15) days prior to the effective date of such proposed assignment or sublease, a processing fee of
Three Thousand Dollars ($3,000,00), which shall be Landlords earned fee whether or not the
proposed assignment or sublease is completed by Tenant.
(f) With respect to any sublease to a Permitted Transferee pursuant to Subsection (e) above,
Tenant hereby irrevocably assigns to Landlord, effective upon any such sublease, all rent and other
payments due from subtenant under the sublease, provided however, that Tenant shall have a license
to collect such rent and other payments until the occurrence of a default by Tenant under any of
the provisions of the Lease, and notice to Tenant of such default shall not be a prerequisite to
Landlords right to collect subrent. At any time at Landlords option, Landlord shall have the right
to give notice to the subtenant of such assignment. Landlord shall credit Tenant with any rent
received by Landlord under such assignment but the acceptance of any payment on account of rent
from the subtenant as the result of any such default shall in no manner whatsoever serve to release
Tenant from any liability under the terms, covenants, conditions, provisions or agreement under
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the Lease. No such payment of rent or any other payment by the subtenant directly to Landlord
and/or acceptance of such payment(s) by Landlord, regardless of the circumstances or reasons
therefor, shall in any manner whatsoever be deemed an attornment by the subtenant to Landlord in
the absence of a specific written agreement signed by Landlord to such an effect. For purposes of
this Subsection, any use or occupancy by a Permitted Transferee (unless it is an assignee) without
a formal sublease shall for the purposes of this Subsection be deemed to be a sublease at the same
rental rate as provided in the Lease.
10.02 RECAPTURE
Landlord shall have the option to exclude from the Premises covered by this Lease
(recapture), the space proposed to be sublet or subject to the assignment, so long as (i) the
proposed transfer is not to a Permitted Transferee in accordance with the provisions of Section
10.01(e), and (ii) the proposed sublease is for the remainder of the term of this Lease and
Landlord recaptures the entire portion of the Premises subject to the proposed sublease. If
Landlord elects to recapture, such recapture shall be effective as of the commencement date of such
sublease or assignment, Tenant shall surrender possession of the space proposed to be subleased or
subject to the assignment to Landlord on the effective date of recapture of such space from the
Premises, such date being the Termination Date for such space. Effective as of the date of
recapture of any portion of the Premises pursuant to this section, the Monthly Base Rent, Rentable
Area of the Premises and Tenants Share shall be adjusted accordingly.
10.03 EXCESS RENT
Except with respect to an assignment or sublease to a Permitted Transferee in accordance with
the provisions of Section 10.01(e), Tenant shall pay Landlord on the first day of each month during
the term of the sublease or assignment, fifty percent (50%) of the amount by which the sum of all
rent and other consideration (direct or indirect) due from the subtenant or assignee for such month
exceeds: (i) that portion of the Monthly Base Rent and Rent Adjustments due under this Lease for
said month which is allocable to the space sublet or assigned; and (ii) the following costs and
expenses for the subletting or assignment of such space: (1) brokerage commissions and reasonable
attorneys fees and expenses, (2) the actual costs paid in making any improvements or substitutions
in the Premises required by any sublease or assignment; and (3) free rent periods, costs of any
inducements or concessions given to subtenant or assignee, moving costs, and other amounts in
respect of such subtenants or assignees other leases or occupancy arrangements. All such costs
and expenses shall be amortized over the term of the sublease or assignment pursuant to sound
accounting principles.
10.04 TENANT LIABILITY
In the event of any sublease or assignment, whether or not with Landlords consent, Tenant
shall not be released or discharged from any liability, whether past, present or future, under
this Lease, including any liability arising from the exercise of any renewal or expansion option,
to the extent such exercise is expressly permitted by Landlord. Tenants liability shall remain
primary, and in the event of default by any subtenant, assignee or successor of Tenant in
performance or observance of any of the covenants or conditions of this Lease, Landlord may
proceed directly against Tenant without the necessity of exhausting remedies against said
subtenant, assignee or successor. After any assignment, Landlord may consent to subsequent
assignments or subletting of this Lease, or amendments or modifications of this Lease with
assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining
its or their consent thereto, and such action shall not relieve Tenant or any successor of Tenant
of liability under this Lease. If Landlord grants consent to such sublease or assignment, Tenant
shall pay all reasonable attorneys fees and expenses incurred by Landlord with respect to such
assignment or sublease. In addition, if Tenant has any options to extend the term of this Lease or
to add other space to the Premises, such options shall not be available to any subtenant or
assignee, directly or indirectly without Landlords express written consent, which may be withheld
in Landlords sole discretion.
10.05 ASSUMPTION AND ATTORNMENT
If Tenant shall assign this Lease as permitted herein, the assignee shall expressly assume
all of the obligations of Tenant hereunder in a written instrument satisfactory to Landlord and
furnished to Landlord not later than fifteen (15) days prior to the effective date of the
assignment. If Tenant shall sublease the Premises as permitted herein, Tenant shall, at Landlords
option, within fifteen (15) days following any request by Landlord, obtain and furnish to Landlord
the written agreement of such subtenant to the effect that the subtenant will attorn to Landlord
and will pay all subrent directly to Landlord.
ARTICLE ELEVEN
DEFAULT AND REMEDIES
11.01 EVENTS OF DEFAULT
The occurrence or existence of any one or more of the following shall constitute a material
default and breach of the Lease (a Default) by Tenant under this Lease:
(i) Tenant fails to pay any installment or other payment of Rent, including Rent
Adjustment Deposits or Rent Adjustments, within three business (3) days after written
notice to Tenant of such failure to pay, provided that after Landlord has twice sent such
notice to Tenant for failure to pay, thereafter such failure shall be a Default if Tenant
fails to pay any such installment or other payment of Rent, including Rent Adjustment
Deposits or Rent Adjustments, within three (3) business days after the date when the same
are due;
(ii) Tenant fails to observe or perform any of the other covenants, conditions or
provisions of this Lease or the Workletter and, unless the default involves a hazardous
condition, which shall be cured forthwith or unless the failure to perform is a Default for
which this Lease specifies there is no cure or grace
17
period, fails to cure such default within thirty (30) days after written notice
thereof to Tenant, provided that, if Tenant has exercised reasonable diligence to cure such
failure and such failure cannot reasonably be cured within such thirty (30) day period
despite reasonable diligence, Tenant shall not be in default under this subsection so long
as Tenant diligently and continuously prosecutes the cure to completion;
(iii) the interest of Tenant in this Lease is levied upon under execution or other
legal process;
(iv) a petition is filed by or against Tenant to declare Tenant bankrupt or seeking a
plan of reorganization or arrangement under any Chapter of the Bankruptcy Act, or any
amendment, replacement or substitution therefor, or to delay payment of, reduce or modify
Tenants debts, which in the case of an involuntary action is not discharged within thirty
(30) days;
(v) Tenant is declared insolvent by Law or any assignment of Tenants property is made
for the benefit of creditors;
(vi)
a receiver is appointed for Tenant or Tenants property, which appointment is not
discharged within thirty (30) days;
(vii) any action taken by or against Tenant to reorganize or modify Tenants capital
structure in a materially adverse way which in the case of an involuntary action is not
discharged within thirty (30) days; or
(viii) upon the dissolution of Tenant.
11.02 LANDLORDS REMEDIES
(a) A Default shall constitute a breach of the Lease for which Landlord shall have the rights
and remedies set forth in this Section 11.02 and all other rights and remedies set forth in this
Lease or now or hereafter allowed by Law, whether legal or equitable, and all rights and remedies
of Landlord shall be cumulative and none shall exclude any other right or remedy.
(b) With respect to a Default, at any time Landlord may terminate Tenants right to possession
by written notice to Tenant stating such election. Upon the termination of Tenants right to
possession pursuant to this Section 11.02, Tenants right to possession shall terminate and this
Lease shall terminate, and Tenant shall remain liable as hereinafter provided. Upon such
termination, Landlord shall have the right, subject to applicable Law, to re-enter the Premises
and dispossess Tenant and the legal representatives of Tenant and all other occupants of the
Premises by unlawful detainer or other summary proceedings, or otherwise as permitted by Law,
regain possession of the Premises and remove their property (including their trade fixtures,
personal property and those Tenant Additions which Tenant is required or permitted to remove under
Article Twelve), but Landlord shall not be obligated to effect
such removal, and such property may,
at Landlords option, be stored elsewhere, sold or otherwise dealt with as permitted by Law, at the
risk of, expense of and for the account of Tenant, and the proceeds of any sale shall be applied
pursuant to Law. Landlord shall in no event be responsible for the value, preservation or
safekeeping of any such property. Tenant hereby waives all claims for damages that may be caused by
Landlords removing or storing Tenants personal property pursuant to this Section or Section 12.01,
and Tenant hereby indemnifies, and agrees to defend, protect and hold harmless, the Indemnitees
from any and all loss, claims, demands, actions, expenses, liability and cost (including reasonable
attorneys fees and expenses) arising out of or in any way related to such removal or storage.
Upon such written termination of Tenants right to possession and this Lease, Landlord shall have
the right to recover damages for Tenants Default as provided herein or by Law, including the
following damages provided by California Civil Code Section 1951.2:
(1) the worth at the time of award of the unpaid Rent which had been earned at the time
of termination;
(2) the worth at the time of award of the amount by which the unpaid Rent which would
have been earned after termination until the time of award exceeds the amount of such Rent
loss that Tenant proves could reasonably have been avoided;
(3) the worth at the time of award of the amount by which the unpaid Rent for the
balance of the term of this Lease after the time of award exceeds the amount of such Rent
loss that Tenant proves could be reasonably avoided; and
(4) any other amount necessary to compensate Landlord for all the detriment proximately
caused by Tenants failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom. The word rent as used in
this Section 11.02 shall have the same meaning as the defined term Rent in this Lease. The
worth at the time of award of the amount referred to in clauses (1) and (2) above is
computed by allowing interest at the Default Rate. The worth at the time of award of the
amount referred to in clause (3) above is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%). For the purpose of determining unpaid Rent under clause (3) above, the monthly
Rent reserved in this Lease snail be deemed to be the sum of the Monthly Base Rent, and
monthly Storage Space Rent, if any, and the amounts last payable by Tenant as Rent
Adjustments for the calendar year in which Landlord terminated this Lease as provided
hereinabove.
(c) Even if Tenant is in Default and/or has abandoned the Premises, this Lease shall continue
in effect for so long as Landlord does not terminate Tenants right to possession by written notice
as provided in Section 11.02(b) above, and Landlord may enforce
all its rights and remedies under
this Lease, including the right to recover Rent as it becomes due under this Lease. In such event,
Landlord shall have all of the rights and remedies of a landlord under California Civil Code
Section 1951.4 (lessor may continue Lease in effect after Tenants Default and abandonment and
recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to
18
reasonable limitations), or any successor statute. During such time as Tenant is in Default, if
Landlord has not terminated this Lease by written notice and if Tenant requests Landlords consent
to an assignment of this Lease or a sublease of the Premises, subject to Landlords option to
recapture pursuant to Section 10.02, Landlord shall not unreasonably withhold its consent to such
assignment or sublease. Tenant acknowledges and agrees that the provisions of Article Ten shall be
deemed to constitute reasonable limitations of Tenants right to assign or sublet. Tenant
acknowledges and agrees that in the absence of written notice pursuant to Section 11.02(b) above
terminating Tenants right to possession, no other act of Landlord shall constitute a termination
of Tenants right to possession or an acceptance of Tenants surrender of the Premises, including
acts of maintenance or preservation or efforts to relet the Premises or the appointment of a
receiver upon initiative of Landlord to protect Landlords interest under this Lease or the
withholding of consent to a subletting or assignment, or terminating a subletting or assignment, if
in accordance with other provisions of this Lease.
(d) In the event that Landlord seeks an injunction with respect to a breach or threatened
breach by Tenant of any of the covenants, conditions or provisions of this Lease, Tenant agrees to
pay the premium for any bond required in connection with such injunction.
(e) Tenant hereby waives any and all rights to relief from forfeiture, redemption or
reinstatement granted by Law (including California Civil Code of Procedure Sections 1174 and 1179)
in the event of Tenant being evicted or dispossessed for any cause or in the event of Landlord
obtaining possession of the Premises by reason of Tenants Default or otherwise;
(f) When this Lease requires giving or service of a notice of Default or of a failure of
Tenant to observe or perform any covenant, condition or provision of this Lease which will
constitute a Default unless Tenant so observes or performs within any applicable cure period, and
so long as the notice given or served provides Tenant the longer of any applicable cure period
required by this Lease or by statute, then the giving of any equivalent or similar statutory
notice, including any equivalent or similar notices required by California Code of Civil Procedure
Section 1161 or any similar or successor statute, shall replace and suffice as any notice required
under this Lease. When a statute requires service of a notice in a particular manner, service of
that notice (or a similar notice required by this Lease) in the manner required by Article
Twenty-four shall replace and satisfy the statutory service-of-notice procedures, except that any
notice of unlawful detainer required by California Code of Civil Procedure Section 1161 or any
similar or successor statute shall be served as required by Code of Civil Procedure Section 1162 or
any similar or successor statute, and for purposes of Code of Civil Procedure Section 1162 or any
similar or successor statute, Tenants place of residence and usual place of business shall
mean the address specified by Tenant for notice pursuant to Section 1.01 of this Lease, as changed
by Tenant pursuant to Article Twenty-four of this Lease.
(g) The voluntary or other surrender or termination of this Lease, or a mutual termination or
cancellation thereof, shall not work a merger and shall terminate all or any existing assignments,
subleases, subtenancies or occupancies permitted by Tenant, except if and as otherwise specified in
writing by Landlord.
(h) No delay or omission in the exercise of any right or remedy of Landlord upon any default
by Tenant, and no exercise by Landlord of its rights pursuant to Section 26.15 to perform any duty
which Tenant fails timely to perform, shall impair any right or remedy or be construed as a
waiver. No provision of this Lease shall be deemed waived by Landlord unless such waiver is in a
writing signed by Landlord. The waiver by Landlord of any breach of any provision of this Lease
shall not be deemed a waiver of any subsequent breach of the same or any other provision of this
Lease.
11.03 ATTORNEYS FEES
In the event any party brings any suit or other proceeding with respect to the subject matter or
enforcement of this Lease, the prevailing party (as determined by the court, agency or other
authority before which such suit or proceeding is commenced) shall, in addition to such other
relief as may be awarded, be entitled to recover reasonable attorneys fees, expenses and costs of
investigation as actually incurred, including court costs, expert witness fees, costs and expenses
of investigation, and all reasonable attorneys fees, costs and expenses in any such suit or
proceeding (including in any action or participation in or in connection with any case or
proceeding under the Bankruptcy Code, 11 United States Code Sections 101
et seq
. or any successor
statutes, in establishing or enforcing the right to indemnification, in appellate proceedings, or
in connection with the enforcement or collection of any judgment obtained in any such suit or
proceeding).
11.04 BANKRUPTCY
The following provisions shall apply in the event of the bankruptcy or insolvency of Tenant:
(a) In connection with any proceeding under Chapter 7 of the Bankruptcy Code where the trustee
of Tenant elects to assume this Lease for the purposes of assigning it, such election or
assignment, may only be made upon compliance with the provisions of (b) and (c) below, which
conditions Landlord and Tenant acknowledge to be commercially reasonable. In the event the trustee
elects to reject this Lease then Landlord shall immediately be entitled to possession of the
Premises without further obligation to Tenant or the trustee.
(b) Any election to assume this Lease under Chapter 11 or 13 of the Bankruptcy Code by Tenant
as debtor-in-possession or by Tenants trustee (the Electing Party) must provide for:
The Electing Party to cure or provide to Landlord adequate assurance that it will cure all
monetary defaults under this Lease within fifteen (15) days from the date of assumption and
it will cure all nonmonetary defaults under this Lease within thirty (30) days from the
date of assumption. Landlord and Tenant acknowledge such condition to be commercially
reasonable.
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(c) If the Electing Party has assumed this Lease or elects to assign Tenants interest under
this Lease to any other person, such interest may be assigned only if the intended assignee has
provided adequate assurance of future performance (as herein defined), of all of the obligations
imposed on Tenant under this Lease.
For the purposes hereof, adequate assurance of future performance means that Landlord has
ascertained that each of the following conditions has been satisfied:
(i) The assignee has submitted a current financial statement, certified by its chief
financial officer, which shows a net worth and working capital in amounts sufficient to
assure the future performance by the assignee of Tenants obligations under this Lease; and
(ii) Landlord has obtained consents or waivers from any third parties which may be
required under a lease, mortgage, financing arrangement, or other agreement by which
Landlord is bound, to enable Landlord to permit such assignment.
(d) Landlords acceptance of rent or any other payment from any trustee, receiver, assignee,
person, or other entity will not be deemed to have waived, or waive, the requirement of Landlords
consent, Landlords right to terminate this Lease for any transfer of Tenants interest under this
Lease without such consent, or Landlords claim for any amount of Rent due from Tenant.
11.05 LANDLORDS DEFAULT
Landlord shall be in default hereunder in the event Landlord has not begun and pursued with
reasonable diligence the cure of any failure of Landlord to meet its obligations hereunder within
thirty (30) days after the receipt by Landlord of written notice from Tenant of the alleged
failure to perform. In no event shall Tenant have the right to terminate or rescind this Lease as
a result of Landlords default as to any covenant or agreement contained in this Lease. Tenant
hereby waives such remedies of termination and rescission and hereby agrees that Tenants remedies
for default hereunder and for breach of any promise or inducement shall be limited to a suit for
damages and/or injunction. In addition, Tenant hereby covenants that, prior to the exercise of any
such remedies, it will give Mortgagee notice and a reasonable time to cure any default by
Landlord.
ARTICLE TWELVE
SURRENDER OF PREMISES
12.01 IN GENERAL
Upon the Termination Date, Tenant shall surrender and vacate the Premises immediately and deliver
possession thereof to Landlord in a clean, good and tenantable condition, ordinary wear and tear,
and damage caused by Landlord excepted. Tenant shall deliver to Landlord all keys to the Premises.
Tenant shall remove from the Premises all movable personal property of Tenant and Tenants trade
fixtures, including, subject to Section 6.04, cabling for any of the foregoing. Tenant shall be
entitled to remove such Tenant Additions which at the time of their installation Landlord and
Tenant agreed may be removed by Tenant. Tenant shall also remove such other Tenant Additions as
required by Landlord, including any Tenant Additions containing Hazardous Material. Tenant
immediately shall repair all damage resulting from removal of any of
Tenants property,
furnishings, Tenants Personal Property or Tenant Additions, shall close all floor, ceiling and
roof openings and shall restore the Premises to a tenantable condition as reasonably determined by
Landlord. If any of the Tenant Additions which were installed by Tenant involved the lowering of
ceilings, raising of floors or the installation of specialized wall
or floor coverings or lights,
then Tenant shall also be obligated to return such surfaces to their condition prior to the
commencement of this Lease. Tenant shall also be required to close any staircases or other
openings between floors. Notwithstanding any of the foregoing to the contrary, if so requested by
Tenant in writing (and prominently in all capital and bold lettering which also states that such
request is pursuant to Section 12.01 of the Lease) at the time Tenant requests approval of any
Tenant Work or subsequent Tenant Alterations, Landlord shall advise Tenant at the time of
Landlords approval of such Tenant Work or Tenant Alterations as to whether Landlord will require
that such Tenant Work or Tenant Alterations be removed by Tenant from the Premises; provided,
however, regardless of the foregoing, in any event, Landlord may require removal of any Tenant
Additions containing Hazardous Material and all Tenants trade fixtures, and, subject to Section
6.03, cabling and wiring installed for Tenants personal property or trade fixtures. In the event
possession of the Premises is not delivered to Landlord when required hereunder, or if Tenant
shall fail to remove those items described above, Landlord may (but shall not be obligated to), at
Tenants expense, remove any of such property and store, sell or otherwise deal with such property
as provided in Section 11.02(b), including the waiver and indemnity obligations provided in that
Section, and undertake, at Tenants expense, such restoration work as Landlord deems necessary or
advisable.
12.02 LANDLORDS RIGHTS
All property which may be removed from the Premises by Landlord shall be conclusively presumed to
have been abandoned by Tenant and Landlord may deal with such property as provided in Section
11.02(b), including the waiver and indemnity obligations provided in that Section. Tenant shall
also reimburse Landlord for all costs and expenses incurred by Landlord in removing any of Tenant
Additions required to be removed pursuant to Section 12.01 above and in restoring the Premises to
the condition required by this Lease at the Termination Date.
ARTICLE THIRTEEN
HOLDING OVER
Tenant shall pay Landlord the greater of (i) 150% of the monthly Rent payable for the month
immediately preceding the holding over (including increases for Rent Adjustments which Landlord
may reasonably estimate) or, (ii) 150% of the fair market rental value of the Premises as
reasonably determined by Landlord for each month or portion thereof that Tenant retains possession
of the Premises, or any portion thereof, after the Termination Date (without reduction for any
partial month that Tenant retains possession). Tenant shall also pay all damages sustained by
20
Landlord by reason of such retention of possession. The provisions of this Article shall not
constitute a waiver by Landlord of any re-entry rights of Landlord and Tenants continued occupancy
of the Premises shall be as a tenancy in sufferance.
ARTICLE FOURTEEN DAMAGE BY FIRE
OR OTHER CASUALTY
14.01 SUBSTANTIAL UNTENANTABILITY
(a) If any fire or other casualty (whether insured or uninsured) renders all or a substantial
portion of the Premises or the Building untenantable, Landlord shall, with reasonable promptness
after the occurrence of such damage, estimate the length of time that will be required to
substantially complete the repair and restoration and shall by notice advise Tenant of such
estimate (Landlords Notice). If Landlord estimates that the amount of time required to
substantially complete such repair and restoration will exceed one hundred eighty (180) days from
the date such damage occurred, then Landlord, or Tenant if all or a substantial portion of the
Premises is rendered untenantable, shall have the right to terminate this Lease as of the date of
such damage upon giving written notice to the other at any time within twenty (20) days after
delivery of Landlords Notice, provided that if Landlord so chooses, Landlords Notice may also
constitute such notice of termination.
(b) In the event that the Building is damaged or destroyed to the extent of more than
twenty-five percent (25%) of its replacement cost or to any extent if no insurance proceeds or
insufficient insurance proceeds are receivable by Landlord, or if the buildings at the Project
shall be damaged to the extent of fifty percent (50%) or more of the replacement value or to any
extent if no insurance proceeds or insufficient insurance proceeds are receivable by Landlord, and
regardless of whether or not the Premises be damaged, Landlord may elect by written notice to
Tenant given within thirty (30) days after the occurrence of the casually to terminate this Lease
in lieu of so restoring the Premises, in which event this Lease shall terminate as of the date
specified in Landlords notice, which date shall be no later than sixty (60) days following the
date of Landlords notice.
(c) Unless this Lease is terminated as provided in the preceding Subsections 14.01 (a) and
(b), Landlord shall proceed with reasonable promptness to repair and restore the Premises to its
condition as existed prior to such casualty, subject to reasonable delays for insurance adjustments
and Force Majeure delays, and also subject to zoning Laws and building codes then in effect.
Landlord shall have no liability to Tenant, and Tenant shall not be entitled to terminate this
Lease if such repairs and restoration are not in fact completed within the time period estimated by
Landlord so long as Landlord shall proceed with reasonable diligence to complete such repairs and
restoration.
(d) Tenant acknowledges that Landlord shall be entitled to the full proceeds of any insurance
coverage, whether carried by Landlord or Tenant, for damages to the Premises, except for those
proceeds of Tenants insurance of its own personal property and equipment which would be removable
by Tenant at the Termination Date. All such insurance proceeds shall be payable to Landlord whether
or not the Premises are to be repaired and restored, provided, however, if this Lease is not
terminated and the parties proceed to repair and restore Tenant Additions at Tenants cost, to the
extent Landlord received proceeds of Tenants insurance covering Tenant Additions, such proceeds
shall be applied to reimburse Tenant for its cost of repairing and restoring Tenant Additions.
(e) Notwithstanding anything in this Article Fourteen to the contrary: (i) Landlord shall
have no duty pursuant to this Section to repair or restore any portion of any Tenant Additions or
to expend for any repair or restoration of the Premises or Building amounts in excess of insurance
proceeds paid to Landlord and available for repair or restoration; and (ii) Tenant shall not have
the right to terminate this Lease pursuant to this Section if any damage or destruction was caused
by the gross negligence or willful and wrongful act of Tenant, its agent or employees. Whether or
not the Lease is terminated pursuant to this Article Fourteen, in no event shall Tenant be entitled
to any compensation or damages for loss of the use of the whole or any part of the Premises or for
any inconvenience or annoyance occasioned by any such damage, destruction, rebuilding or
restoration of the Premises or the Building or access thereto.
(f) Any repair or restoration of the Premises performed by Tenant shall be in accordance with
the provisions of Article Nine hereof.
14.02 INSUBSTANTIAL UNTENANTABILITY
Unless this Lease is terminated as provided in the preceding Subsections 14.01 (a) and (b), then
Landlord shall proceed to repair and restore the Building or the Premises other than Tenant
Additions, with reasonable promptness, unless such damage is to the Premises and occurs during the
last six (6) months of the Term, in which event either Tenant or Landlord shall have the right to
terminate this Lease as of the date of such casualty by giving written notice thereof to the other
within twenty (20) days after the date of such casualty. Notwithstanding the foregoing, Landlords
obligation to repair shall be limited in accordance with the provisions of Section 14.01 above.
14.03 RENT ABATEMENT
Except for (i) the willful and wrongful act of Tenant or its agents, employees, contractors or
invitees, or (ii) the gross negligence of Tenant or its agents, employees, contractors or invitees
only if and to the extent Landlord receives rental abatement insurance proceeds covering abatement
of the Rent hereunder, then, if all or any part of the Premises are rendered untenantable by fire
or other casualty and this Lease is not terminated, Monthly Base Rent and Rent Adjustments shall
abate for that part of the Premises which is untenantable on a per diem basis from the date of the
casualty until Landlord has Substantially Completed the repair and restoration work in the
Premises which it is required to perform, provided, that as a result of such casualty, Tenant does
not occupy the portion of the Premises which is untenantable during such period.
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14.04 WAIVER OF STATUTORY REMEDIES
The provisions of this Lease, including this Article Fourteen, constitute an express agreement
between Landlord and Tenant with respect to any and all damage to, or destruction of, the Premises
or the Property or any part of either, and any Law, including Sections 1932(2), 1933(4), 1941 and
1942 of the California Civil Code, with respect to any rights or obligations concerning damage or
destruction shall have no application to this Lease or to any damage to or destruction of all or
any part of the Premises or the Property or any part of either, and are hereby waived.
ARTICLE FIFTEEN
EMINENT DOMAIN
15.01 TAKING OF WHOLE OR SUBSTANTIAL PART
In the event the whole or any substantial part of the Building or of the Premises is taken or
condemned by any competent authority for any public use or purpose (including a deed given in lieu
of condemnation) and is thereby rendered untenantable, this Lease shall terminate as of the date
title vests in such authority or any earlier date on which possession is required to be
surrendered to such authority, and Monthly Base Rent and Rent Adjustments shall be apportioned as
of the Termination Date. Further, if at least twenty-five percent (25%) of the rentable area of
the Project is taken or condemned by any competent authority for any public use or purpose
(including a deed given in lieu of condemnation), and regardless of whether or not the Premises be
so taken or condemned, Landlord may elect by written notice to Tenant to terminate this Lease as
of the date title vests in such authority or any earlier date on which possession is required to
be surrendered to such authority, and Monthly Base Rent and Rent Adjustments shall be apportioned
as of the Termination Date. Landlord may, without any obligation to Tenant, agree to sell or
convey to the taking authority the Premises, the Building, Tenants Phase, the Project or any
portion thereof sought by the taking authority, free from this Lease and the right of Tenant
hereunder, without first requiring that any action or proceeding be instituted or, if instituted,
pursued to a judgment. Notwithstanding anything to the contrary herein set forth, in the event the
taking of the Building or Premises is temporary (for less than the remaining term of the Lease),
Landlord may elect either (i) to terminate this Lease or (ii) permit Tenant to receive the entire
award attributable to the Premises in which case Tenant shall continue to pay Rent and this Lease
shall not terminate.
15.02 TAKING OF PART
In the event a part of the Building or the Premises is taken or condemned by any competent
authority (or a deed is delivered in lieu of condemnation) and this Lease is not terminated, the
Lease shall be amended to reduce or increase, as the case may be, the Monthly Base Rent and
Tenants Share to reflect the Rentable Area of the Premises or Building, as the case may be,
remaining after any such taking or condemnation. Landlord, upon receipt and to the extent of the
award in condemnation (or proceeds of sale) shall make necessary repairs and restorations to the
Premises (exclusive of Tenant Additions) and to the Building to the extent necessary to constitute
the portion of the Building not so taken or condemned as a complete architectural and economically
efficient unit. Notwithstanding the foregoing, if as a result of any taking, or a governmental
order that the grade of any street or alley adjacent to the Building is to be changed and such
taking or change of grade makes it necessary or desirable to substantially remodel or restore the
Building or prevents the economical operation of the Building, Landlord shall have the right to
terminate this Lease upon ninety (90) days prior written notice to Tenant.
15.03 COMPENSATION
Landlord shall be entitled to receive the entire award (or sale proceeds) from any such taking,
condemnation or sale without any payment to Tenant, and Tenant hereby assigns to Landlord Tenants
interest, if any, in such award; provided, however, Tenant shall have the right separately to
pursue against the condemning authority a separate award in respect of the loss, if any, to Tenant
Additions paid for by Tenant without any credit or allowance from Landlord, for fixtures or
personal property of Tenant, or for relocation or business interruption expenses, so long as there
is no diminution of Landlords award as a result.
ARTICLE SIXTEEN
INSURANCE
16.01 TENANTS INSURANCE
Tenant, at Tenants expense, agrees to maintain in force, with a company or companies acceptable
to Landlord, during the Term: (a) Commercial General Liability Insurance on a primary basis and
without any right of contribution from any insurance carried by Landlord covering the Premises on
an occurrence basis against all claims for personal injury, bodily injury, death and property
damage, including contractual liability covering the indemnification provisions in this Lease.
Such insurance shall be for such limits that are reasonably required by Landlord from time to time
but not less than a combined single limit of Five Million and No/100 Dollars ($5,000,000.00); (b)
Workers Compensation and Employers Liability Insurance to the extent required by and in
accordance with the Laws of the State of California; (c) All Risks property insurance in an
amount adequate to cover the full replacement cost of all Tenant Additions to the Premises,
equipment, installations, fixtures and contents of the Premises in the event of loss; (d) In the
event a motor vehicle is to be used by Tenant in connection with its business operation from the
Premises, Comprehensive Automobile Liability Insurance coverage with limits of not less than Three
Million and No/100 Dollars ($3,000,000.00) combined single limit coverage against bodily injury
liability and property damage liability arising out of the use by or on behalf of Tenant, its
agents and employees in connection with this Lease, of any owned, non-owned or hired motor
vehicles; and (e) such other insurance or coverages as Landlord reasonably requires.
16.02 FORM OF POLICIES
Each policy referred to in 16.01 shall satisfy the following requirements. Each policy shall (i)
name Landlord and the Indemnitees as additional insureds (except Workers Compensation and
Employers Liability Insurance), (ii) be
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issued by one or more responsible insurance companies licensed to do business in the State of
California reasonably satisfactory to Landlord, (iii) where applicable, provide for deductible
amounts satisfactory to Landlord and not permit co-insurance, (iv) shall provide that such
insurance may not be canceled or amended without thirty (30) days prior written notice to the
Landlord, and (v) each policy of All-Risks property insurance shall provide that the policy shall
not be invalidated should the insured waive in writing prior to a loss, any or all rights of
recovery against any other party for losses covered by such policies. Tenant shall deliver to
Landlord, certificates of insurance and at Landlords request, copies of all policies and renewals
thereof to be maintained by Tenant hereunder, not less than ten (10) days prior to the Commencement
Date and not less than ten (10) days prior to the expiration date of each policy.
16.03 LANDLORDS INSURANCE
Landlord agrees to purchase and keep in full force and effect during the Term hereof, including any
extensions or renewals thereof, insurance under policies issued by insurers of recognized
responsibility, qualified to do business in the State of California on the Building in amounts not
less than the greater of eighty (80%) percent of the then full replacement cost (without
depreciation) of the Building (above foundations and excluding Tenant Additions to the Premises) or
an amount sufficient to prevent Landlord from becoming a co-insurer under the terms of the
applicable policies, against fire and such other risks as may be included in standard forms of all
risk coverage insurance reasonably available from time to time. Landlord agrees to maintain in
force during the Term, Commercial General Liability Insurance covering the Building on an
occurrence basis against all claims for personal injury, bodily injury, death and property damage.
Such insurance shall be for a combined single limit of Five Million and No/100 Dollars
($5,000,000.00). Neither Landlords obligation to carry such insurance nor the carrying of such
insurance shall be deemed to be an indemnity by Landlord with respect to any claim, liability,
loss, cost or expense due, in whole or in part, to Tenants negligent acts or omissions or willful
misconduct. Without obligation to do so, Landlord may, in its sole discretion from time to time,
carry insurance in amounts greater and/or for coverage additional to the coverage and amounts set
forth above.
16.04 WAIVER OF SUBROGATION
(a) Landlord agrees that, if obtainable at no, or minimal, additional cost, and so long as the
same is permitted under the laws of the State of California, it will include in its All Risks
policies appropriate clauses pursuant to which the insurance companies (i) waive all right of
subrogation against Tenant with respect to losses payable under such policies and/or (ii) agree
that such policies shall not be invalidated should the insured waive in writing prior to a loss any
or all right of recovery against any party for losses covered by such policies.
(b) Tenant agrees to include, if obtainable at no, or minimal, additional cost, and so long as
the same is permitted under the laws of the State of California, in its All Risks insurance
policy or policies on Tenant Additions to the Premises, whether or not removable, and on Tenants
furniture, furnishings, fixtures and other property removable by Tenant under the provisions of
this Lease appropriate clauses pursuant to which the insurance company or companies (i) waive the
right of subrogation against Landlord and/or any tenant of space in the Building with respect to
losses payable under such policy or policies and/or (ii) agree that such policy or policies shall
not be invalidated should the insured waive in writing prior to a loss any or all right of recovery
against any party for losses covered by such policy or policies. If Tenant is unable to obtain in
such policy or policies either of the clauses described in the preceding sentence, Tenant shall, if
legally possible and without necessitating a change in insurance carriers, have Landlord named in
such policy or policies as an additional insured. If Landlord shall be named as an additional
insured in accordance with the foregoing, Landlord agrees to endorse promptly to the order of
Tenant, without recourse, any check, draft, or order for the payment of money representing the
proceeds of any such policy or representing any other payment growing out of or connected with said
policies, and Landlord does hereby irrevocably waive any and all rights in and to such proceeds and
payments.
(c) Provided that Landlords right of full recovery under its policy or policies aforesaid is
not adversely affected or prejudiced thereby, Landlord hereby waives any and all right of recovery
which it might otherwise have against Tenant, its servants, agents and employees, for loss or
damage occurring to the Real Property and the fixtures, appurtenances and equipment therein, except
Tenant Additions, to the extent the same is covered by Landlords insurance, notwithstanding that
such loss or damage may result from the negligence or fault of Tenant, its servants, agents or
employees. Provided that Tenants right of full recovery under its aforesaid policy or policies is
not adversely affected or prejudiced thereby, Tenant hereby waives any and all right of recovery
which it might otherwise have against Landlord, its servants, and employees and against every other
tenant in the Real Property who shall have executed a similar waiver as set forth in this Section
16.04 (c) for loss or damage to Tenant Additions, whether or not removable, and to Tenants
furniture, furnishings, fixtures and other properly removable by Tenant under the provisions hereof
to the extent the same is covered or coverable by Tenants insurance required under this Lease,
notwithstanding that such loss or damage may result from the negligence or fault of Landlord, its
servants, agents or employees, or such other tenant and the servants, agents or employees thereof.
(d) Landlord and Tenant hereby agree to advise the other promptly if the clauses to be
included in their respective insurance policies pursuant to subparagraphs (a) and (b) above cannot
be obtained on the terms hereinbefore provided and thereafter to furnish the other with a
certificate of insurance or copy of such policies showing the naming of the other as an additional
insured, as aforesaid. Landlord and Tenant hereby also agree to notify the other promptly of any
cancellation or change of the terms of any such policy which would affect such clauses or naming.
All such policies which name both Landlord and Tenant as additional insureds shall, to the extent
obtainable, contain agreements by the insurers to the effect that no act or omission of any
additional insured will invalidate the policy as to the other additional insureds.
16.05 NOTICE OF CASUALTY
Tenant shall give Landlord notice in case of a fire or accident in the Premises promptly after
Tenant is aware of such event.
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ARTICLE SEVENTEEN
WAIVER OF CLAIMS AND INDEMNITY
17.01 WAIVER OF CLAIMS
To the extent permitted by Law, Tenant releases the Indemnitees from, and waives all claims for,
damage to person or property sustained by the Tenant or any occupant of the Premises or the
Property resulting directly or indirectly from any existing or future condition, defect, matter or
thing in and about the Premises or the Property, or any part of either, or any equipment or
appurtenance therein, or resulting from any accident in or about the
Premises or the Property, or
resulting directly or indirectly from any act or neglect of any tenant or occupant of the Property
or of any other person, including Landlords agents and servants, except to the extent caused by
the gross negligence or willful and wrongful act of any of the Indemnitees, If any such damage,
whether to the Premises or the Property or any part of either, or whether to Landlord or to other
tenants in the Property, results from any act or neglect of Tenant, its employees, servants,
agents, contractors, invitees or customers, Tenant shall be liable therefor and Landlord may, at
Landlords option, repair such damage and Tenant shall, upon demand by Landlord, as payment of
additional Rent hereunder, reimburse Landlord within ten (10) days of demand for the total cost of
such repairs, in excess of amounts, if any, paid to Landlord under insurance covering such damages.
Tenant shall not be liable for any such damage caused by its acts or neglect to the extent that
Landlord or a tenant has recovered any amount of the damage from proceeds of insurance policies and
the insurance company has waived its right of subrogation against Tenant.
17.02 INDEMNITY BY TENANT
To the extent permitted by Law, Tenant hereby indemnifies, and agrees to protect, defend and hold
the Indemnitees harmless, against any and all actions, claims, demands, liability, costs and
expenses, including reasonable attorneys fees and expenses for the defense thereof, arising from
Tenants occupancy of the Premises, from the undertaking of any Tenant Additions or repairs to the
Premises, from the conduct of Tenants business on the Premises, or from any breach or default on
the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be
performed pursuant to the terms of this Lease, or from any willful act or negligence of Tenant, its
agents, contractors, servants, employees, customers or invitees, in or about the Premises or the
Property or any part of either. In case of any action or proceeding brought against the Indemnitees
by reason of any such claim, upon notice from Landlord, Tenant covenants to defend such action or
proceeding by counsel chosen by Landlord, in Landlords sole discretion. Landlord reserves the
right to settle, compromise or dispose of any and all actions, claims and demands related to the
foregoing indemnity. The foregoing indemnity shall not operate to relieve an Indemnitee of
liability to the extent such liability is caused by the gross negligence or willful and wrongful
act of such Indemnitee. Further, the foregoing indemnity is subject to and shall not diminish any
waivers in effect in accordance with Section 16.04 by Landlord or its insurers to the extent of
amounts, if any, paid to Landlord under its All-Risks property insurance.
17.03 WAIVER OF CONSEQUENTIAL DAMAGES
To the extent permitted by law, Tenant hereby waives and releases the Indemnitees from any
consequential damages, compensation or claims for inconvenience or loss of business, rents or
profits as a result of any injury or damage, whether or not caused by the willful and wrongful act
of any of the Indemnitees.
ARTICLE EIGHTEEN
RULES AND REGULATIONS
18.01 RULES
Tenant agrees for itself and for its subtenants, employees, agents, and invitees to comply with
all reasonable rules and regulations for use of the Premises, the Building, the Phase and the
Project imposed by Landlord, as the same may be revised from time to time, including the
following: (a) Tenant shall comply with all of the requirements of Landlords emergency response
plan, as the same may be amended from time to time; and (b) Tenant shall not place any furniture,
furnishings, fixtures or equipment in the Premises in a manner so as to obstruct the windows of
the Premises to cause the Building, in Landlords good faith determination, to appear unsightly
from the exterior. Such rules and regulations are and shall be imposed for the cleanliness, good
appearance, proper maintenance, good order and reasonable use of the Premises, the Building, the
Phase and the Project and as may be necessary for the enjoyment of the Building and the Project by
all tenants and their clients, customers, and employees.
18.02 ENFORCEMENT
Nothing in this Lease shall be construed to impose upon the Landlord any duty or obligation to
enforce the rules and regulations as set forth above or as hereafter adopted, or the terms,
covenants or conditions of any other lease as against any other tenant, and the Landlord shall not
be liable to the Tenant for violation of the same by any other tenant, its servants, employees,
agents, visitors or licensees. Landlord shall use reasonable efforts to enforce the rules and
regulations of the Building in a uniform and non-discriminatory manner.
ARTICLE NINETEEN
LANDLORDS RESERVED RIGHTS
Landlord shall have the following rights exercisable without notice to Tenant and without
liability to Tenant for damage or injury to persons, property or business and without being deemed
an eviction or disturbance of Tenants use or possession of the Premises or giving rise to any
claim for offset or abatement of Rent: (1) to change the Buildings name or street address upon
thirty (30) days prior written notice to Tenant; (2) to install, affix and maintain all signs on
the exterior and/or interior of the Building; (3) to designate and/or approve prior to
installation, all types of signs, window shades, blinds, drapes, awnings or other similar items,
and all internal lighting that may be visible from the exterior of the Premises; (4) upon
reasonable notice to Tenant, to display the Premises to
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prospective purchasers at reasonable hours at any time during the Term and to prospective tenants
at reasonable hours during the last twelve (12) months of the Term; (5) to grant to any party the
exclusive right to conduct any business or render any service in or to the Building, provided such
exclusive right shall not operate to prohibit Tenant from using the Premises for the purpose
permitted hereunder; (6) to change the arrangement and/or location of entrances or passageways,
doors and doorways, corridors, elevators, stairs, washrooms or public portions of the Building, and
to close entrances, doors, corridors, elevators or other facilities, provided that such action
shall not materially and adversely interfere with Tenants access to the Premises or the Building;
(7) to have access for Landlord and other tenants of the Building to any mail chutes and boxes
located in or on the Premises as required by any applicable rules of the United States Post Office;
and (8) to close the Building after Standard Operating Hours, except that Tenant and its employees
and invitees shall be entitled to admission at all times, under such regulations as Landlord
prescribes for security purposes.
ARTICLE TWENTY
ESTOPPEL CERTIFICATE
20.01 IN GENERAL
Within fifteen (15) days after request therefor by Landlord, Mortgagee or any prospective
mortgagee or owner, Tenant agrees as directed in such request to execute an Estoppel Certificate
in recordable form, binding upon Tenant, certifying (i) that this Lease is unmodified and in full
force and effect (or if there have been modifications, a description of such modifications and
that this Lease as modified is in full force and effect); (ii) the dates to which Rent has been
paid; (iii) that Tenant is in the possession of the Premises if that is the case; (iv) that
Landlord is not in default under this Lease, or, if Tenant believes Landlord is in default, the
nature thereof in detail; (v) that Tenant has no offsets or defenses to the performance of its
obligations under this Lease (or if Tenant believes there are any offsets or defenses, a full and
complete explanation thereof); (vi) that the Premises have been completed in accordance with the
terms and provisions hereof, that Tenant has accepted the Premises and the condition thereof and
of all improvements thereto and has no claims against Landlord or any other party with respect
thereto; (vii) that if an assignment of rents or leases has been served upon the Tenant by a
Mortgagee, Tenant will acknowledge receipt thereof and agree to be bound by the provisions
thereof; (viii) that Tenant will give to the Mortgagee copies of all notices required or permitted
to be given by Tenant to Landlord; and (ix) to any other information reasonably requested.
20.02 ENFORCEMENT
In the event that Tenant fails to deliver an Estoppel Certificate within three (3) business days
after Tenant has received notice from Landlord of Tenants failure to deliver an Estoppel
Certificate within the time prescribed in Section 20.01 above, then such failure shall be a
Default for which there shall be no additional cure or grace period. In addition to any other
remedy available to Landlord, Landlord may impose a charge equal to $500.00 for each day that
Tenant fails to deliver an Estoppel Certificate and Tenant shall be deemed to have irrevocably
appointed Landlord as Tenants attorney-in-fact to execute and deliver the subject Estoppel
Certificate that Tenant has failed to deliver.
ARTICLE TWENTY-ONE
INTENTIONALLY OMITTED
ARTICLE TWENTY-TWO
REAL ESTATE BROKERS
Landlord and Tenant represent to each other that in connection with this Lease they are
represented by Tenants Broker identified in Section 1.01(19) and Landlords Broker identified in
Section 1.01(19), and that except for Tenants Broker and Landlords Broker, neither has dealt
with any real estate broker, sales person, or finder in connection with this Lease, and no such
person initiated or participated in the negotiation of this Lease. Landlord and Tenant hereby
indemnify and agree to protect, defend and hold the other harmless from and against all claims,
losses, damages, liability, costs and expenses (including, without limitation, reasonable
attorneys fees and expenses) by virtue of any broker, agent or other person claiming a commission
or other form of compensation by virtue of alleged representation of, or dealings or discussions
with, Landlord or Tenant, as applicable, with respect to the subject matter of this Lease, except
for Landlords Broker and except for a commission payable to Tenants Broker to the extent
provided for in a separate written agreement between Tenants Broker and Landlords Broker. Tenant
is not obligated to pay or fund any amount to Landlords Broker, and Landlord hereby agrees to pay
such commission, if any, to which Landlords Broker is entitled in connection with the subject
matter of this Lease pursuant to Landlords separate written agreement with Landlords Broker.
Such commission shall include an amount to be shared by Landlords Broker with Tenants Broker to
the extent that Tenants Broker and Landlords Broker have entered into a separate agreement
between themselves to share the commission paid to Landlords Broker by Landlord. The provisions
of this Section shall survive the expiration or earlier termination of the Lease.
ARTICLE TWENTY-THREE
MORTGAGEE PROTECTION
23.01 SUBORDINATION AND ATTORNMENT
This Lease is and shall be expressly subject and subordinate at all times to (i) any ground or
underlying lease of the Real Property, now or hereafter existing, and all amendments, extensions,
renewals and modifications to any such lease, and (ii) the lien of any mortgage or trust deed now
or hereafter encumbering fee title to the Real Property and/or the leasehold estate under any such
tease, and all amendments, extensions, renewals, replacements and modifications of such mortgage
or trust deed and/or the obligation secured thereby, unless such ground lease or ground lessor, or
mortgage, trust deed or Mortgagee, expressly provides or elects that the Lease shall be superior
to such lease or mortgage or trust deed. If any such mortgage or trust deed is foreclosed
(including any sale of the Real Property pursuant to a power of sale), or if any such lease is
terminated, upon request of the Mortgagee or
25
ground lessor, as the case may be, Tenant shall attorn to the purchaser at the foreclosure sale or
to the ground lessor under such lease, as the case may be, provided, however, that such purchaser
or ground lessor shall not be (i) bound by any payment of Rent for more than one month in advance
except payments in the nature of security for the performance by Tenant of its obligations under
this Lease; (ii) subject to any offset, defense or damages arising out of a default of any
obligations of any preceding Landlord; or (iii) bound by any amendment or modification of this
Lease made without the written consent of the Mortgagee or ground lessor; or (iv) liable for any
security deposits not actually received in cash by such purchaser or ground lessor. This
subordination shall be self-operative and no further certificate or instrument of subordination
need be required by any such Mortgagee or ground lessor. In confirmation of such subordination,
however, Tenant shall execute promptly any reasonable certificate or instrument that Landlord,
Mortgagee or ground lessor may request. Tenant hereby constitutes Landlord as Tenants
attorney-in-fact to execute such certificate or instrument for and on behalf of Tenant upon Tenants
failure to do so within fifteen (15) days of a request to do so. Upon request by such successor in
interest, Tenant shall execute and deliver reasonable instruments confirming the attainment
provided for herein.
23.02 MORTGAGEE PROTECTION
Tenant agrees to give any Mortgagee or ground lessor, by registered or certified mail, a
copy of any notice of default served upon the Landlord by Tenant, provided that prior to such
notice Tenant has received notice (by way of service on Tenant of a copy of an assignment of rents
and leases, or otherwise) of the address of such Mortgagee or ground lessor. Tenant further agrees
that if Landlord shall have failed to cure such default within the time provided for in this
Lease, then the Mortgagee or ground lessor shall have an additional thirty (30) days after receipt
of notice thereof within which to cure such default or if such default cannot be cured within that
time, then such additional notice time as may be necessary, if, within such thirty (30) days, any
Mortgagee or ground lessor has commenced and is diligently pursuing the remedies necessary to cure
such default (including commencement of foreclosure proceedings or other proceedings to acquire
possession of the Real Property, if necessary to effect such cure). Such period of time shall be
extended by any period within which such Mortgagee or ground lessor is prevented from commencing
or pursuing such foreclosure proceedings or other proceedings to acquire possession of the Real
Property by reason of Landlords bankruptcy. Until the time allowed as aforesaid for Mortgagee or
ground lessor to cure such defaults has expired without cure, Tenant shall have no right to, and
shall not, terminate this Lease on account of default. This Lease may not be modified or amended
so as to reduce the Rent or shorten the Term, or so as to adversely affect in any other respect to
any material extent the rights of the Landlord, nor shall this Lease be canceled or surrendered,
without the prior written consent, in each instance, of the ground lessor or the Mortgagee.
ARTICLE TWENTY-FOUR
NOTICES
(a) Ail notices, demands or requests provided for or permitted to be given pursuant to
this Lease must be in writing and shall be personally delivered, sent by Federal Express or other reputable
overnight courier service, or mailed by first class, registered or certified United States mail, return receipt
requested, postage prepaid.
(b) All notices, demands or requests to be sent pursuant to this Lease shall be deemed to have
been properly given or served by delivering or sending the same in accordance with this Section,
addressed to the parties hereto at their respective addresses listed in Sections 1.01(2) and (3).
(c) Notices, demands or requests sent by mail or overnight courier service as described above
shall be effective upon deposit in the mail or with such courier service. However, the time period
in which a response to any such notice, demand or request must be given shall commence to run from (i) in the case of
delivery by mail, the date of receipt on the return receipt of the notice, demand or request by the addressee
thereof, or (ii) in the case of delivery by Federal Express or other overnight courier service, the date of acceptance of
delivery by an employee, officer, director or partner of Landlord or Tenant. Rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice was given, as indicated by advice from Federal
Express or other overnight courier service or by mail return receipt, shall be deemed to be receipt of notice,
demand or request sent. Notices may also be served by personal service upon any officer, director or partner of
Landlord or Tenant, and shall be effective upon such service.
(d) By giving to the other party at least thirty (30) days written notice thereof, either
party shall have the right from time to time during the term of this Lease to change their respective addresses for
notices, statements, demands and requests, provided such new address shall be within the United States of America.
ARTICLE TWENTY-FIVE
EXERCISE FACILITY
Tenant agrees to inform all employees of Tenant of the following: (i) the exercise facility
is available for the use of the employees of tenants of the Project only and for no other person;
(ii) use of the facility is at the risk of Tenant or Tenants employees, and all users must sign a
release; (iii) the facility is unsupervised; and (iv) users of the facility must report any needed
equipment maintenance or any unsafe conditions to the Landlord immediately. Landlord may
discontinue providing such facility at Landlords sole option at any time without incurring any
liability. As a condition to the use of the exercise facility, Tenant and each of Tenants
employees that uses the exercise facility shall first sign a written release in form and substance
acceptable to Landlord. Landlord may change the rules and/or hours of the exercise facility at any
time, and Landlord reserves the right to deny access to the exercise facility to anyone due to
misuse of the facility or noncompliance with rules and regulations of the facility. To the extent
permitted by Law, Tenant hereby indemnifies, and agrees to protect, defend and hold the
Indemnitees harmless, against any and all actions, claims, demands, liability, costs and expenses,
including reasonable attorneys fees and expenses for the defense thereof, arising from use of the
exercise facility in the Project by Tenant, Tenants employees or invitees, except to the extent
due to the gross negligence or willful and wrongful act of Landlord or Indemnitees. In case of any
action or proceeding brought against the Indemnitees by reason of any such claim, upon notice from
Landlord, Tenant covenants to defend such action or proceeding by counsel chosen
26
by Landlord, in Landlords sole discretion. Landlord reserves the right to settle, compromise or
dispose of any and all actions, claims and demands related to the foregoing indemnity.
ARTICLE TWENTY-SIX
MISCELLANEOUS
26.01 LATE CHARGES
(a) The Monthly Base Rent, Rent Adjustments and Rent Adjustment Deposits shall be due when and
as specifically provided above. Except for such payments and late charges described below,
which late charge shall be due when provided below (without notice or demand), all other payments required
hereunder to Landlord shall be paid within ten (10) days after Landlords demand therefor. All Rent and charges,
except late charges, not paid when due shall bear interest from the date due until the date paid at the Default Rate in
effect on the date such payment was due.
(b) In the event Tenant is more than five (5) days late in paying any installment of Rent due
under this Lease, Tenant shall pay Landlord a late charge equal to five percent (5%) of the delinquent
installment of Rent. The parties agree that (i) such delinquency will cause Landlord to incur costs and expenses not
contemplated herein, the exact amount of which will be difficult to calculate, including the cost and expense that will
be incurred by Landlord in processing each delinquent payment of rent by Tenant, and (ii) the amount of such late charge
represents a reasonable estimate of such costs and expenses and that such late charge shall be paid to
Landlord for each delinquent payment in addition to all Rent otherwise due hereunder. The parties further agree
that the payment of late charges and the payment of interest provided for in subparagraph (a) above are distinct
and separate from one another in that the payment of interest is to compensate Landlord for its inability to use the
money improperly withheld by Tenant, while the payment of late charges is to compensate Landlord for its
additional administrative expenses in handling and processing delinquent payments.
(c) Payment of interest at the Default Rate and/or of late charges shall not excuse or cure
any default by Tenant under this Lease, nor shall the foregoing provisions of this Article or any such
payments prevent Landlord from exercising any right or remedy available to Landlord upon Tenants failure to pay Rent
when due, including the right to terminate this Lease.
26.02 NO JURY TRIAL; VENUE; JURISDICTION
Each party hereto (which includes any assignee, successor, heir or personal representative of a
party) shall not seek a jury trial, hereby waives trial by jury, and hereby further waives any
objection to venue in the County in which the Project is located, and agrees and consents to
personal jurisdiction of the courts of the State of California, in any action or proceeding or
counterclaim brought by any party hereto against the other on any matter whatsoever arising out of
or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenants use or
occupancy of the Premises, or any claim of injury or damage, or the enforcement of any remedy
under any statute, emergency or otherwise, whether any of the foregoing is based on this Lease or
on tort law. No party will seek to consolidate any such action in which a jury has been waived
with any other action in which a jury trial cannot or has not been waived. It is the intention of
the parties that these provisions shall be subject to no exceptions. By execution of this Lease
the parties agree that this provision may be filed by any party hereto with the clerk or judge
before whom any action is instituted, which filing shall constitute the written consent to a
waiver of jury trial pursuant to and in accordance with Section 631 of the California Code of
Civil Procedure. No party has in any way agreed with or represented to any other party that the
provisions of this Section will not be fully enforced in all instances. The provisions of this
Section shall survive the expiration or earlier termination of this Lease.
26.03 DEFAULT UNDER OTHER LEASE
It shall be a Default under this Lease if Tenant or any Affiliate holding any other lease with
Landlord for premises in the Project defaults under such lease and as a result thereof such lease
is terminated or terminable.
26.04 OPTION
This Lease shall not become effective as a lease or otherwise until executed and delivered by both
Landlord and Tenant. The submission of the Lease to Tenant does not constitute a reservation of or
option for the Premises, but when executed by Tenant and delivered to Landlord, the Lease shall
constitute an irrevocable offer by Tenant in effect for fifteen (15) days to lease the Premises on
the terms and conditions herein contained.
26.05 TENANT AUTHORITY
Tenant represents and warrants to Landlord that it has full authority and power to enter into and
perform its obligations under this Lease, that the person executing this Lease is fully empowered
to do so, and that no consent or authorization is necessary from any third party. Landlord may
request that Tenant provide Landlord evidence of Tenants authority.
26.06 ENTIRE AGREEMENT
This Lease, the Exhibits and Riders attached hereto contain the entire agreement between Landlord
and Tenant concerning the Premises and there are no other agreements, either oral or written, and
no other representations or statements, either oral or written, on
which Tenant has relied. This
Lease shall not be modified except by a writing executed by Landlord and Tenant.
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26.07 MODIFICATION OF LEASE FOR BENEFIT OF MORTGAGEE
If Mortgagee of Landlord requires a modification of this Lease which shall not result in any
increased cost or expense to Tenant or in any other material and adverse change in the rights and
obligations of Tenant hereunder, then Tenant agrees that the Lease may be so modified.
26.08 EXCULPATION
Tenant agrees, on its behalf and on behalf of its successors and assigns, that any liability or
obligation of Landlord in connection with this Lease shall only be enforced against Landlords
equity interest in the Property up to a maximum of Five Million
Dollars ($5,000,000.00) and in no
event against any other assets of the Landlord, or Landlords officers or directors or partners,
and that any liability of Landlord with respect to this Lease shall be so limited and Tenant shall
not be entitled to any judgment in excess of such amount.
26.09 ACCORD AND SATISFACTION
No payment by Tenant or receipt by Landlord of a lesser amount than any installment or payment of
Rent due shall be deemed to be other than on account of the amount due, and no endorsement or
statement on any check or any letter accompanying any check or payment of Rent shall be deemed an
accord and satisfaction, and Landlord may accept such check or payment without prejudice to
Landlords right to recover the balance of such installment or payment of Rent or pursue any other
remedies available to Landlord. No receipt of money by Landlord from Tenant after the termination
of this Lease or Tenants right of possession of the Premises shall reinstate, continue or extend
the Term. Receipt or acceptance of payment from anyone other than Tenant, including an assignee of
Tenant, is not a waiver of any breach of Article Ten, and Landlord may accept such payment on
account of the amount due without prejudice to Landlords right to pursue any remedies available
to Landlord.
26.10 LANDLORDS OBLIGATIONS ON SALE OF BUILDING
In the event of any sale or other transfer of the Building, Landlord shall be entirely freed and
relieved of all agreements and obligations of Landlord hereunder accruing or to be performed after
the date of such sale or transfer (provided, however, that Landlord shall not be freed and
relieved of its obligation for reimbursement of the Security to Tenant unless Landlord has
transferred to such transferee the unapplied balance of Tenants Security held by Landlord at such
time), and any remaining liability of Landlord with respect to this Lease shall be limited to Five
Million Dollars ($5,000,000.00) and Tenant shall not be entitled to any judgment in excess of such
amount.
26.11 BINDING EFFECT
Subject to the provisions of Article Ten, this Lease shall be binding upon and inure to the
benefit of Landlord and Tenant and their respective heirs, legal representatives, successors and
permitted assigns.
26.12 CAPTIONS
The Article and Section captions in this Lease are inserted only as a matter of convenience and in
no way define, limit, construe, or describe the scope or intent of such Articles and Sections.
26.13 TIME; APPLICABLE LAW; CONSTRUCTION
Time is of the essence of this Lease and each and all of its provisions. This Lease shall be
construed in accordance with the Laws of the State of California. If more than one person signs
this Lease as Tenant, the obligations hereunder imposed shall be joint and several. If any term,
covenant or condition of this Lease or the application thereof to any person or circumstance
shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application
of such term, covenant or condition to persons or circumstances other than those as to which it is
held invalid or unenforceable, shall not be affected thereby and each item, covenant or condition
of this Lease shall be valid and be enforced to the fullest extent permitted by Law. Wherever the
term including or includes is used in this Lease, it shall have the same meaning as if
followed by the phrase but not limited to. The language in all parts of this Lease shall be
construed according to its normal and usual meaning and not strictly for or against either
Landlord or Tenant.
26.14 ABANDONMENT
In the event Tenant vacates or abandons the Premises but is otherwise in compliance with all the
terms, covenants and conditions of this Lease, Landlord shall (i) have the right to enter into the
Premises in order to show the space to prospective tenants, (ii) have the right to reduce the
services provided to Tenant pursuant to the terms of this Lease to such levels as Landlord
reasonably determines to be adequate services for an unoccupied premises and (iii) during the last
six (6) months of the Term, have the right to prepare the Premises for occupancy by another tenant
upon the end of the Term. Tenant expressly acknowledges that in the absence of written notice
pursuant to Section 11.02(b) or pursuant to California Civil Code Section 1951.3 terminating
Tenants right to possession, none of the foregoing acts of Landlord or any other act of Landlord
shall constitute a termination of Tenants right to possession or an acceptance of Tenants
surrender of the Premises, and the Lease shall continue in effect.
26.15 LANDLORDS RIGHT TO PERFORM TENANTS DUTIES
If Tenant fails timely to perform any of its duties under this Lease, Landlord shall have the
right (but not the obligation), to perform such duty on behalf and at the expense of Tenant
without prior notice to Tenant, and all sums expended or expenses incurred by Landlord in
performing such duty shall be deemed to be additional Rent under this Lease and shall be due and
payable upon demand by Landlord.
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26.16 SECURITY SYSTEM
Landlord shall not be obligated to provide or maintain any security patrol or security system.
Landlord shall not be responsible for the quality of any such patrol or system which may be
provided hereunder or for damage or injury to Tenant, its employees, invitees or others due to the
failure, action or inaction of such patrol or system.
26.17 NO LIGHT, AIR OR VIEW EASEMENTS
Any diminution or shutting off of light, air or view by any structure which may be erected on
lands of or adjacent to the Project shall in no way affect this Lease or impose any liability on
Landlord.
26.18 RECORDATION
Neither this Lease, nor any notice nor memorandum regarding the terms hereof, shall be recorded by
Tenant. Any such unauthorized recording shall be a Default for which there shall be no cure or
grace period. Tenant agrees to execute and acknowledge, at the request of Landlord, a memorandum
of this Lease, in recordable form.
26.19 SURVIVAL
The waivers of the right of jury trial, the other waivers of claims or rights, the releases and
the obligations of Tenant under this Lease to indemnify, protect, defend and hold harmless
Landlord and/or Indemnitees shall survive the expiration or termination of this Lease, and so
shall all other obligations or agreements which by their terms survive expiration or termination
of the Lease.
26.20 EXHIBITS OR RIDERS
All exhibits, riders and/or addenda referred to in this Lease as an exhibit, addenda or rider
hereto or attached hereto, are hereby incorporated into and made a part of this Lease.
IN WITNESS WHEREOF, this Lease has been executed as of the date set forth in Section 1.01(4) hereof.
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TENANT:
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LANDLORD:
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Genomic Health, Inc.,
a Delaware corporation
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Metropolitan Life Insurance Company,
a New York corporation
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By
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/s/ Randal Scott
Randal Scott
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By
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/s/ Greg H. Hill
Greg
H. Hill
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Print name
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Print
name
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Its
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Chairman and CEO
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Its
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Director
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(Chairman of Board, President or Vice President)
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By
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/s/ G. Bradley Cole
G. Bradley Cole
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Print name
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Its
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Exec. VP and CFO
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(Secretary, Assistant Secretary, CFO or Assistant Treasurer)
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EXHIBIT A
PLAN OF PREMISES
Exhibit A - Page 1
EXHIBITS B
WORKLETTER AGREEMENT
This Workletter Agreement (Workletter) is attached to and a part of a certain Lease by
and between Metropolitan Life Insurance Company, a New York corporation, as Landlord, and Genomic
Health, Inc., a Delaware corporation, as Tenant, for the Premises (the Lease). Terms used herein
and not defined herein shall have the meaning of such terms as defined elsewhere in the Lease. For
purposes of this Workletter, references to State and City shall mean the State and City in
which the Building is located.
1.
Base Building.
All work performed during the Buildings initial course of construction and modifications
thereto, excluding all original and modified build-outs of any tenant spaces, shall be referred to
as the Base Building Work or Base Building, as applicable. Neither Landlord nor Landlords
representatives have made any representations or promises with respect to the Premises or the Base
Building except as herein expressly set forth. Provided however, Landlord agrees that the Building
Systems (defined in Section 3.2 below) which are part of the Base Building, except to the extent
of any to be removed, demolished or altered by Tenant, will be delivered by Landlord in good
working order and condition.
2.
Landlord Work.
There shall be no Landlord Work.
3.
Tenants Plans.
3.1.
Description.
At its expense, Tenant shall employ:
(i) one or more architects reasonably satisfactory to Landlord and licensed by the
State (Tenants Architect) to prepare architectural drawings and specifications for all
layout and Premises improvements not included in, or requiring any change or addition to,
the AS IS condition and Landlord Work, if any.
(ii) one or more engineers reasonably satisfactory to Landlord and licensed by the
State (Tenants Engineers) to prepare structural, mechanical and electrical working
drawings and specifications for all Premises improvements not included in, or requiring any
change or addition to, the AS IS condition and Landlord Work, if any.
All such drawings and specifications are referred to herein as Tenants Plans. Tenants Plans
shall be in form and detail sufficient to secure all applicable governmental approvals. Tenants
Architect shall be responsible for coordination of all engineering work for Tenants Plans and
shall coordinate with any consultants retained by Tenant in connection with the design and
installation of improvements to the Premises (the use of such consultants is subject to Landlords
consent), and Landlords architect or other representative to assure the consistency of Tenants
Plans with the Base Building Work and Landlord Work (if any).
Tenant shall pay Landlord, within ten (10) days of receipt of each invoice from Landlord, the cost
incurred by Landlord for Landlords architects and engineers to review Tenants Plans for
consistency of same with the Base Building Work and Landlord Work, if any. Tenants Plans shall
also include the following:
(a) Final Space Plan: The Final Space Plan for the Premises shall include a full and
accurate description of room titles, floor loads, alterations to the Base Building or
Landlord Work (if any) or requiring any change or addition to the AS IS condition, and the dimensions and location
of all partitions, doors, aisles, plumbing (and furniture and equipment to the extent same affect floor
loading). The Final Space Plan shall (i) be compatible with the design, construction, systems and equipment
of the Base Building and Landlord Work, if any; (ii) specify only materials, equipment and
installations which are new and of a grade and quality no less than existing components of the Building when they
were originally installed (collectively, (i) and (ii) may be referred to as Building Standard or
Building Standards); (iii) comply with Laws, (iv) be capable of logical measurement and construction, and (v)
contain all such information as may be required for the preparation of the Mechanical and Electrical
Working Drawings and Specifications (including, without limitation, a capacity and usage report, from
engineers designated by Landlord pursuant to Section 3.1{b). below, for all mechanical and electrical systems in
the Premises).
(b) Mechanical and Electrical Working Drawings and Specifications: Tenant shall employ
engineers approved by Landlord to prepare Mechanical and Electrical
Working Drawings and Specifications showing complete plans for electrical, life safety, automation, plumbing,
water, and air cooling, ventilating, heating and temperature control and shall employ engineers
designated by Landlord to prepare for Landlord a capacity and usage report (Capacity Report) for all mechanical
and electrical systems in the Premises.
(c) Issued for Construction Documents: The Issued for Construction Documents shall
consist of all drawings (1/8 scale) and specifications necessary to construct all
Premises improvements including, without limitation, architectural and structural working drawings and
specifications and Mechanical and Electrical Working Drawings and Specifications and all applicable
governmental authorities plan check corrections.
3.2.
Approval by Landlord.
Tenants Plans and any revisions thereof shall be subject to Landlords
approval, which approval or disapproval:
Exhibit B - Page 1
(i) shall not be unreasonably withheld, provided however, that Landlord may
disapprove Tenants Plans in its sole and absolute discretion if they (a) adversely affect
the structural integrity of the Building, including applicable floor loading capacity; (b)
adversely affect any of the Building Systems (as defined below), the Common Areas or any
other tenant space (whether or not currently occupied); (c) fail to fully comply with Laws,
(d) affect the exterior appearance of the Building; (e) provide for improvements which do
not meet or exceed the Building Standards; or (f) involve any installation on the roof, or
otherwise affect the roof, roof membrane or any warranties regarding either. Building
Systems collectively shall mean the structural, electrical, mechanical (including, without
limitation, heating, ventilating and air conditioning), plumbing, fire and life-safety
(including, without limitation, fire protection system and any fire alarm), communication,
utility, gas (if any), and security (if any) systems in the Building.
(ii) shall not be delayed beyond ten (10) business days with respect to initial
submissions and major change orders (those which impact Building Systems or any other item
listed in subpart (i) of Section 3.2 above) and beyond five (5) business days with respect
to required revisions and any other change orders.
If Landlord disapproves of any of Tenants Plans, Landlord shall advise Tenant of what Landlord
disapproves in reasonable detail. After being so advised by Landlord, Tenant shall submit a
redesign, incorporating the revisions required by Landlord, for Landlords approval. The approval
procedure shall be repeated as necessary until Tenants Plans are ultimately approved. Approval by
Landlord shall not be deemed to be a representation or warranty by Landlord with respect to the
safety, adequacy, correctness, efficiency or compliance with Laws of Tenants Plans. Tenant shall
be fully and solely responsible for the safety, adequacy, correctness and efficiency of Tenants
Plans and for the compliance of Tenants Plans with any and all Laws.
3.3.
Landlord Cooperation
. Landlord shall cooperate with Tenant and make good faith
efforts to coordinate Landlords construction review procedures to expedite the planning, commencement,
progress and completion of Tenant Work. Landlord shall complete its review of each stage of Tenants Plans
and any revisions thereof and communicate the results of such review within the time periods set forth in
Section 3.2 above.
3.4.
City Requirements
. Any changes in Tenants Plans which are made in response to
requirements of the applicable governmental authorities and/or changes which affect the Base Building Work
shall be immediately submitted to Landlord for Landlords review and approval.
3.5.
As-Built Drawings and Specifications
. A CADD-DXF diskette file and a set of
mylar reproductibles of all as-built drawings and specifications of Tenants Work in the Premises (reflecting all
field changes and including, without limitation, architectural, structural, mechanical and electrical drawings
and specifications) prepared by Tenants Architect and Engineers or by Contractors (defined below) shall be
delivered by Tenant at Tenants expense to the Landlord within thirty (30) days after completion of the Tenant Work.
If Landlord has not received such drawings and diskette(s) within thirty (30) days, Landlord may give Tenant
written notice of such failure. If Tenant does not produce the drawings and diskette(s) within ten (10) days after
Landlords written notice, Landlord may, at Tenants sole cost which may be deducted from the Allowance, produce the
drawings and diskette(s) using Landlords personnel, managers, and outside consultants and contractors.
Landlord shall receive an hourly rate reasonable for such production.
4.
Tenant Work
.
4.1.
Tenant Work Defined
. All tenant improvement work required by the Issued for
Construction Documents (including, without limitation, any approved changes, additions or alterations
pursuant to Section 7 below) is referred to in this Workletter as Tenant Work.
4.2.
Tenant to Construct
. Tenant shall construct all Tenant Work pursuant to this
Workletter, and except to the extent modified by or inconsistent with express provisions of this Workletter,
pursuant with the provisions of the terms and conditions of Article Nine of the Lease, governing Tenant
Alterations (except to the extent modified by this Workletter) and all such Tenant Work shall be considered Tenant
Alterations for purposes of the Lease.
4.3.
Construction Contract
. All contracts and subcontracts for Tenant Work shall
include any terms and conditions reasonably required by Landlord.
4.4.
Contractor
. Tenant shall select one or more contractors to perform the Tenant
Work (Contractor) subject to Landlords prior written approval, which shall not unreasonably be withheld.
4.5.
Division of Landlord Work and Tenant Work
. Tenant Work is defined in Section
4.1. above and Landlord Work, if any, is defined in Section 2.
5.
Tenants Expense
.
Tenant agrees to pay for all Tenant Work, including, without limitation, the costs of design
thereof, whether or not all such costs are included in the Permanent Improvement Costs (defined
below). Subject to the terms and conditions of this Workletter, Tenant shall apply the Allowance
(defined below) to payment of the Permanent Improvement Costs. Landlord shall provide Tenant a
tenant improvement allowance (Allowance) in the amount equal to Two Hundred Eighty-three
Thousand One Hundred Sixteen and no/100 Dollars ($283,116.00). The Allowance shall be used solely
to reimburse Tenant for the Permanent Improvement Costs. The term Permanent Improvement Costs
shall mean the actual and reasonable costs of construction of that Tenant Work which constitutes
permanent improvements to the Premises, actual and reasonable costs of design thereof and
governmental permits therefor, costs incurred by Landlord for Landlords architects and engineers
pursuant to Section 3.1, and Landlords construction administration fee (defined in Section 8.10
below). Provided, however, Permanent Improvement Costs shall exclude costs of Tenants FF&E
(defined
Exhibit B Page 2
below). For purposes of this Workletter, Tenants FF&E shall mean Tenants furniture,
furnishings, telephone systems, computer systems, equipment, any other personal property or
fixtures, and installation thereof, including, without limitation, Tenants Personal Properly
described on
Exhibit G
hereto. If Tenant does not utilize one hundred percent (100%) of the
Allowance for Permanent Improvement Costs no later than December 31, 2007, Tenant shall have no
right to the unused portion of the Allowance.
6.
Application and Disbursement of the Allowance
.
6.1. Tenant shall prepare a budget for all Tenant Work, including the Permanent Improvement
Costs and all other costs of the Tenant Work (Budget), which Budget shall be subject to the
reasonable approval of Landlord. Such Budget shall be supported by a guaranteed maximum price construction contract
and such other documentation as Landlord may require to evidence the total costs. To the extent the Budget
exceeds the available Allowance (Excess Cost), Tenant shall be solely responsible for payment of such
Excess Cost. Further, prior to any disbursement of the Allowance by Landlord, Tenant shall pay and disburse
its own funds for all that portion of the Permanent Improvement Costs equal to the sum of (a) the Permanent
Improvement Costs in excess of the Allowance; plus (b) the amount of Landlords Retention (defined below).
Landlords Retention shall mean an amount equal to fifteen percent (15%) of the Allowance, which
Landlord shall retain out of the Allowance and shall not be obligated to disburse unless and until after Tenant has
completed the Tenant Work and complied with Section 6.4 below. Further, Landlord shall not be obligated to make any
disbursement of the Allowance unless and until Tenant has provided Landlord with (i) bills and invoices
covering all labor and material expended and used in connection with the particular portion of the Tenant Work for
which Tenant has requested reimbursement, (ii) an affidavit from Tenant stating that all of such bills and
invoices have either been paid in full by Tenant or are due and owing, and all such costs qualify as Permanent
Improvement Costs, (iii) contractors affidavit covering all labor and materials expended and used, (iv) Tenant,
contractors and architectural completion affidavits (as applicable), and (v) valid mechanics lien releases
and waivers pertaining to any completed portion of the Tenant Work which shall be conditional or unconditional, as
applicable, all as provided pursuant to Section 6.2 and 6.4 below.
6.2. Upon Tenants full compliance with the provisions of Section 6, and if Landlord
determines that there are no applicable or claimed stop notices (or any other statutory or equitable liens of
anyone performing any of Tenant Work or providing materials for Tenant Work) or actions thereon, Landlord shall
disburse the applicable portion of the Allowance as follows:
(a) In the event of conditional releases, to the respective contractor, subcontractor,
vendor, or other person who has provided labor and/or services in connection with the
Tenant Work, upon the following terms and conditions: (i) such costs are included in the
Budget, are Permanent Improvement Costs, are covered by the Allowance, and Tenant has
completed and delivered to Landlord a written request for payment, in form reasonably
approved by Landlord, setting forth the exact name of the contractor, subcontractor or
vendor to whom payment is to be made and the date and amount of the bill or invoice, (ii)
the request for payment is accompanied by the documentation set forth in Section 6.1; and
(iii) Landlord, or Landlords appointed representative, has inspected and approved the work
for which Tenant seeks payment; or
(b) In the event of unconditional releases, directly to Tenant upon the following
terms and conditions: (i) Tenant seeks reimbursement for costs of Tenant Work which have
been paid by Tenant, are included in the Budget, are Permanent Improvement Costs, and are
covered by the Allowance; (ii) Tenant has completed and delivered to Landlord a request for
payment, in form reasonably approved by Landlord, setting forth the name of the contractor,
subcontractor or vendor paid and the date of payment, (iii) the request for payment is
accompanied by the documentation set forth in Section 6.1; and (iv) Landlord, or Landlords
appointed representative, has inspected and approved the work for which Tenant seeks
reimbursement.
6.3. Tenant shall provide Landlord with the aforementioned documents by the 15th of the month
and payment shall be made by the 30th day of the month following the month in which such
documentation is provided.
6.4. Prior to Landlord disbursing the Landlords Retention to Tenant, Tenant shall submit to
Landlord the following items within thirty (30) days after completion
of the Tenant Work: (i) As
Built drawings and specifications pursuant to Section 3.5 above, (ii) all unconditional lien releases from all
general contractor(s) and subcontractor(s) performing work, (iii) a Certificate of Completion prepared by Tenants
Architect, and (iv) a final budget with supporting documentation detailing all costs associated with the Permanent
Improvement Costs.
7.
Changes, Additions or Alterations
.
If Tenant desires to make any non-de minimis change, addition or alteration or desires to
make any change, addition or alteration to any of the Building Systems after approval of the
Issued for Construction Documents, Tenant shall prepare and submit to Landlord plans and
specifications with respect to such change, addition or alteration. Any such change, addition or
alteration shall be subject to Landlords approval in accordance with the provisions of Section
3.2 of this Workletter. Tenant shall be responsible for any submission to and plan check and
permit requirements of the applicable governmental authorities. Tenant shall be responsible for
payment of the cost of any such change, addition or alteration if it would increase the Budget and
Excess Cost previously submitted and approved pursuant to Section 6 above.
8.
Miscellaneous
.
8.1.
Scope
. Except as otherwise set forth in the Lease, this Workletter shall not
apply to any space added to the Premises by Lease option or otherwise.
Exhibit B Page 3
8.2. Tenant Work shall include (at Tenants expense subject to application of the
Allowance towards the costs of such items) for all of the Premises:
(a) Landlord approved lighting sensor controls as necessary to meet applicable Laws;
(b) Building Standard fluorescent fixtures in all Building office areas;
(c) Building Standard meters for each of electricity and chilled water used by Tenant
shall be connected to the Buildings system and shall be tested and certified prior to
Tenants occupancy of the Premises by a State certified testing company;
(d) Building Standard ceiling systems (including tile and grid) and;
(e) Building Standard air conditioning distribution and Building Standard air
terminal units.
8.3.
Sprinklers
. Subject to any terms, conditions and limitations set forth herein,
Landlord shall provide an operative sprinkler system consisting of mains, laterals, and heads AS IS on the date of
delivery of the Premises to Tenant. Tenant shall pay for piping distribution, drops and relocation of, or
additional, sprinkler system heads and Building firehose or firehose valve cabinets, if Tenants Plans and/or any
applicable Laws necessitate such.
8.4.
Floor Loading
. Floor loading capacity shall be within building design capacity.
Tenant may exceed floor loading capacity with Landlords consent, at Landlords sole discretion and must, at
Tenants sole cost and expense, reinforce the floor as required for such excess loading.
8.5.
Work Stoppages
. If any work on the Real Property other than Tenant Work is
delayed, stopped or otherwise affected by construction of Tenant Work, Tenant shall immediately take those actions
necessary or desirable to eliminate such delay, stoppage or effect on work on the Real Property other than
Tenant Work.
8.6.
Life Safety
. Tenant (or Contractor) shall employ the services of a fire and
life-safety subcontractor reasonably satisfactory to Landlord for all fire and life-safety work at the Building.
8.7.
Locks
. Tenant may purchase locks, cylinders and keys for the Premises from its
own vendor, provided that (a) such vendor and the locks, cylinders and keys to be used are subject to
Landlords prior written approval; (b) of a make and model which are functional, operable and compatible with
Landlords master key system; (c) a master key or keys are provided to Landlord, of which Landlord may place one
such master key in the knox box for use by the fire department and emergency personnel in the event of an emergency
and may retain another key for Landlords use for entry permitted under the Lease; and (d) the contact
information for Tenants vendor for locks, cylinders and keys used in the Premises shall be provided to Landlord with
Tenants request for approval.
8.8.
Authorized Representatives
. Tenant has designated David Quinn to act as Tenants
representative with respect to the matters set forth in this Workletter. Such representative(s) shall have
full authority and responsibility to act on behalf of Tenant as required in this Workletter. Tenant may add or
delete authorized representatives upon five (5) business days notice to Landlord.
8.9.
Access to Premises
. After Landlord has recovered possession of the Premises from
any prior Tenant, prior to delivery of possession to Tenant. Tenant and its architects, engineers,
consultants, and contractors shall have access at reasonable times and upon advance notice and coordination
with the Building management, to the Premises for the purpose of planning Tenant Work. Such access shall not in
any manner interfere with Landlord Work, if any. Such access, and all acts and omissions in connection
with it, shall be subject to and governed by all other provisions of the Lease, including, without limitation,
Tenants indemnification obligations, insurance obligations, etc, except for the payment of Base Rent
and Additional Rent. To the extent that such access by Tenant delays the Substantial Completion of the Landlord
Work (if any), such delay shall be a Tenant Delay and the Landlord Work shall be deemed Substantially Complete on
the date such Landlord Work would have been completed but for such access.
8.10.
Fee
. Landlord shall receive a fee equal to two percent (2.0%) of the Allowance for Landlords
review and supervision of construction of the Tenant Work, which fee shall be paid by Landlord
applying two percent (2.0%) of the Allowance in payment thereof. Such fee is in addition to Tenants
reimbursement of costs incurred by Landlord pursuant to other provisions hereof, including, without limitation, for
Landlords architects and engineers to review Tenants Plans.
9.
Force and Effect
.
The terms and conditions of this Workletter shall be construed to be a part of the Lease and
shall be deemed incorporated in the Lease by this reference. Should any inconsistency arise
between this Workletter and the Lease as to the specific matters which are the subject of this
Workletter, the terms and conditions of this Workletter shall control.
Exhibit B Page 4
Exhibit C
Site Plan Showing Project
Phase III, its Buildings & square footages are not a part of
the Project as defined in this Lease, & are shown in this Exhibit for Illustration only.
EXHIBIT D
PERMITTED HAZARDOUS MATERIAL
Permitted Hazardous Material includes insignificant amounts of substances listed below so long
as (i) such substances are maintained only in such quantities as are reasonably necessary for
Tenants operations in the Premises, or such other specific quantity limit as specified below, (ii)
such substances are used, stored and handled strictly in accordance with the manufacturers
instructions, industry standards and all applicable laws, (iii) such substances are not disposed of
in or about the Building or the Project in a manner which would constitute a release or discharge
thereof, and (iv) all such substances are removed from the Building and the Project by Tenant no
later than the Termination Date.
|
|
|
Type:
|
|
Quantity:
|
|
|
|
Substances typically found or used in general office applications, to
|
|
|
the extent the Premises is used for general offices
|
|
as noted above
|
|
|
|
|
|
|
|
|
|
|
|
HazMat Classification
|
|
Common Chemical or Trade Name
|
|
Tot.
|
|
Unit
|
CL-II
|
|
Combustible Liquid
|
|
Acetic Acid
|
|
|
4
|
|
|
L
|
CL-II
|
|
Combustible Liquid
|
|
Isoamyl Alcohol
|
|
|
1
|
|
|
L
|
CL-II;
CORR-L
|
|
Combustible Liquid;
Corrosive Liquid
|
|
1,3-Diaminopropane
|
|
|
2
|
|
|
L
|
CL-II;
CORR-L
|
|
Combustible Liquid;
Corrosive Liquid
|
|
Ethylenediamine
|
|
|
1
|
|
|
L
|
CL-IIIA
|
|
Combustible Liquid
|
|
Diethylpyrocarbonate
|
|
|
0.5
|
|
|
L
|
CL-IIIA
|
|
Combustible Liquid
|
|
Dimethylsulfoxide
|
|
|
2
|
|
|
L
|
CL-IIIA
|
|
Combustible Liquid
|
|
RNaseZap
|
|
|
3.5
|
|
|
L
|
CL-IIIA
|
|
Combustible Liquid
|
|
Triethylamine/Acetate buffer
|
|
|
0.5
|
|
|
L
|
CORR-L
|
|
Corrosive Liquid
|
|
Ammonium Hydroxide solution
|
|
|
0.5
|
|
|
L
|
CORR-L
|
|
Corrosive Liquid
|
|
Bradford Reagent (protein dye reagent)
|
|
|
0.5
|
|
|
L
|
CORR-L
|
|
Corrosive Liquid
|
|
Formic Acid
|
|
|
1
|
|
|
L
|
CORR-L
|
|
Corrosive Liquid
|
|
Hydrochloric Acid
|
|
|
6
|
|
|
L
|
CORR-L
|
|
Corrosive Liquid
|
|
N,N-Dimethylethylenediamine
|
|
|
0.025
|
|
|
kg
|
CORR-L
|
|
Corrosive Liquid
|
|
Phosphoric Acid
|
|
|
4
|
|
|
L
|
CORR-L
|
|
Corrosive Liquid
|
|
RNaseZap wipes
|
|
|
1
|
|
|
kg
|
CORR-L
|
|
Corrosive Liquid
|
|
Sodium Hydroxide solution
|
|
|
2
|
|
|
L
|
CORR-L
|
|
Corrosive Liquid
|
|
Spermidine
|
|
|
0.5
|
|
|
kg
|
CORR-L
|
|
Corrosive Liquid
|
|
Trifluoroacetic Acid
|
|
|
1
|
|
|
L
|
CORR-L;
CL-IIIA
|
|
Corrosive
Liquid;
Combustible
Liquid
|
|
Monoethanolamine
|
|
|
4
|
|
|
L
|
CORR-L; HI
TOX-L
|
|
Corrosive
Liquid; Highly Toxic
Liquid
|
|
Phenol/chloroform solution (TRizol)
|
|
|
6
|
|
|
L
|
CORR-L; HI
TOX-L; CL-III
|
|
Corrosive
Liquid; Highly Toxic
Liquid; Combustible
Liquid
|
|
Phenol
|
|
|
4
|
|
|
L
|
CORR-S
|
|
Corrosive Solid
|
|
Sodium Hydroxide, Pellets
|
|
|
2
|
|
|
kg
|
CORR-S
|
|
Corrosive Solid
|
|
Tris(2-carboxyethyl)-phosphine hydrochloride
|
|
|
0.01
|
|
|
kg
|
CRYO
|
|
Cryogenic Solid
|
|
Carbon Dioxide, solid
|
|
|
250
|
|
|
Ibs
|
CRYO
|
|
Cryogenic Liquid
|
|
Nitrogen, Liquid
|
|
|
400
|
|
|
L
|
FL-1B
|
|
Flammable Liquid
|
|
Acetone
|
|
|
4
|
|
|
L
|
FL-1B
|
|
Flammable Liquid
|
|
Acetonitrile
|
|
|
16
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
(±)-2-Butanol
|
|
|
2
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Ethyl Alcohol, 70-100%, blends
|
|
|
150
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Buffer RW1, Wash Buffer (guanidinium
thiocyanate (2.5-10%); ethanol (2.5-10%)), Buffer
Kit
|
|
|
1
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Cytoseal XYL, Mounting Medium, Xylene-based
|
|
|
1
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Eosin Y
|
|
|
0.05
|
|
|
kg
|
FL-IB
|
|
Flammable Liquid
|
|
Eosin Y, 1% Alcoholic Solution
|
|
|
6
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
EZ-DeWax, Tissue Deparaffinization
Solution, Ready-to-Use
|
|
|
1
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Harris Hematoxylin
|
|
|
15
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Isopropyl Alcohol
|
|
|
20
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Methyl Alcohol
|
|
|
8
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Triethylamine
|
|
|
2.5
|
|
|
L
|
FL-IB
|
|
Flammable Liquid
|
|
Xylenes
|
|
|
50
|
|
|
L
|
FL-IC
|
|
Flammable Liquid
|
|
Isoamyl Acetate
|
|
|
1
|
|
|
L
|
FL-IC
|
|
Flammable Liquid
|
|
n-Butanol
|
|
|
2
|
|
|
L
|
Exhibit D Page 1
|
|
|
|
|
|
|
|
|
|
|
HazMat Classification
|
|
Common Chemical or Trade Name
|
|
Tot.
|
|
Unit
|
HI TOX-L
|
|
Highly Toxic Liquid
|
|
Chloroform
|
|
|
6
|
|
|
L
|
HI TOX-L
|
|
Highly Toxic Liquid
|
|
Chloroform/lsoamyl Alcohol (24:1)
|
|
|
1
|
|
|
L
|
HI TOX-L
|
|
Highly Toxic Liquid
|
|
Ethidium Bromide solution
|
|
|
0.1
|
|
|
L
|
HI TOX-L
|
|
Highly Toxic Liquid
|
|
Tetramethylammonium Chloride solution
|
|
|
2.5
|
|
|
L
|
HI TOX-S
|
|
Highly Toxic Solid
|
|
Sodium Azide
|
|
|
0.1
|
|
|
kg
|
NFG
|
|
Non-Flammable
Compressed Gas
|
|
Air, Compressed Gas
|
|
|
2000
|
|
|
cu ft
|
NFG
|
|
Non-Flammable
Compressed Gas
|
|
Carbon Dioxide, Compressed Gas
|
|
|
300
|
|
|
Ibs
|
NFG
|
|
Non-Flammable
Compressed Gas
|
|
Helium, Compressed Gas
|
|
|
450
|
|
|
cu ft
|
OXY-L
|
|
Oxidizing Liquid
|
|
Hydrogen Peroxide, <30%
|
|
|
0.1
|
|
|
L
|
OXY-L;
CORR-L
|
|
Oxidizing
Liquid; Corrosive
Liquid
|
|
Bleach, Household (5-10%
sodium hypochlorite)
|
|
|
20
|
|
|
L
|
OXY-L;
CORR-L
|
|
Oxidizing
Liquid; Corrosive
Liquid
|
|
Nitric Acid
|
|
|
4
|
|
|
L
|
OXY-S
|
|
Oxidizing Solid
|
|
Sodium Perchlorate
|
|
|
1
|
|
|
kg
|
TOX-L
|
|
Toxic Liquid
|
|
1,4-Dithiothreitol
|
|
|
0.1
|
|
|
L
|
TOX-L
|
|
Toxic Liquid
|
|
Formalin, Neutral Buffered
|
|
|
10
|
|
|
L
|
TOX-L
|
|
Toxic Liquid
|
|
2-Mercaptoethanol
|
|
|
1
|
|
|
L
|
TOX-L
|
|
Toxic Liquid
|
|
Formamide
|
|
|
2
|
|
|
L
|
TOX-L
|
|
Toxic Liquid
|
|
N,N-Dimethylformamide
|
|
|
0.2
|
|
|
kg
|
TOX-S
|
|
Toxic Solid
|
|
Diethytenetriaminepentaacetic Acid
|
|
|
0.01
|
|
|
kg
|
TOX-S
|
|
Toxic Solid
|
|
Hexadecyltrimethylammonium Bromide
|
|
|
1
|
|
|
kg
|
TOX-S
|
|
Toxic Solid
|
|
Lithium Chloride
|
|
|
0.5
|
|
|
kg
|
TOX-S
|
|
Toxic Solid
|
|
o-Phenylenediamine
|
|
|
0.25
|
|
|
L
|
CL-II
|
|
Combustible Liquid
|
|
(+/-) limonene
|
|
|
10
|
|
|
gallon
|
Exhibit D Page 2
EXHIBIT E
FORM OF LETTER OF CREDIT ACCEPTABLE FROM SILICON VALLEY BANK
IRREVOCABLE STANDBY LETTER OF CREDIT NO.
SVBSF
DATED:
, 20
BENEFICIARY:
METROPOLITAN LIFE INSURANCE COMPANY
REAL ESTATE INVESTMENTS
400 SOUTH EL CAMINO REAL, 8
TH
FLOOR
SAN MATEO, CA 94402
APPLICANT:
GENOMIC HEALTH, INC.
301 PENOBSCOT DRIVE
REDWOOD CITY, CA 94063
|
|
|
AMOUNT:
|
|
US$150,995.00
(ONE HUNDRED FIFTY THOUSAND NINE HUNDRED NINETY-FIVE AND NO/100 U.S. DOLLARS)
|
EXPIRATION DATE:
, 200
LOCATION: AT OUR COUNTERS IN SANTA CLARA, CALIFORNIA
DEAR SIR/MADAM:
WE HEREBY ESTABLISH THIS IRREVOCABLE STANDBY LETTER OF CREDIT IN FAVOR OF THE AFORESAID ADDRESSEE
(BENEFICIARY) FOR DRAWINGS UP TO US$150,995.00 (ONE HUNDRED FIFTY THOUSAND NINE HUNDRED
NINETY-FIVE AND NO/100 U.S. DOLLARS) EFFECTIVE IMMEDIATELY. THIS LETTER OF CREDIT IS ISSUED,
PRESENTABLE AND PAYABLE AT OUR OFFICE AT: 3003 TASMAN DRIVE, MAIL SORT HF210, SANTA CLARA, CA 95054
ATTENTION: GLOBAL FINANCIAL SERVICES STANDBY LETTER OF CREDIT DEPARTMENT (THE BANKS OFFICE), AND
EXPIRES WITH OUR CLOSE OF BUSINESS ON
, 200
.
THE TERM BENEFICIARY INCLUDES ANY SUCCESSOR BY OPERATION OF LAW OF THE NAMED BENEFICIARY
INCLUDING, WITHOUT LIMITATION, ANY LIQUIDATOR, REHABILITATOR, RECEIVER OR CONSERVATOR.
WE HEREBY UNDERTAKE TO PROMPTLY HONOR YOUR SIGHT DRAFT(S) DRAWN ON US, INDICATING
OUR CREDIT NO. SVBSF
, FOR ALL OR ANY PART OF THIS CREDIT IF PRESENTED AT OUR
OFFICE SPECIFIED IN PARAGRAPH ONE ON OR BEFORE THE EXPIRY DATE OR ANY AUTOMATICALLY EXTENDED EXPIRY
DATE TOGETHER WITH THE ORIGINAL LETTER OF CREDIT AND ALL AMENDMENTS, IF ANY.
EXCEPT AS EXPRESSLY STATED HEREIN, THIS UNDERTAKING IS NOT SUBJECT TO ANY AGREEMENT, CONDITION OR
QUALIFICATION. THE OBLIGATION OF SILICON VALLEY BANK UNDER THIS LETTER OF CREDIT IS THE INDIVIDUAL
OBLIGATION OF SILICON VALLEY BANK, AND IS IN NO WAY CONTINGENT UPON REIMBURSEMENT WITH RESPECT
THERETO.
IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT IS DEEMED TO BE AUTOMATICALLY EXTENDED WITHOUT
AMENDMENT FOR ONE YEAR FROM THE EXPIRY DATE HEREOF, OR ANY FUTURE EXPIRATION DATE, UNLESS AT LEAST
THIRTY (30) DAYS PRIOR TO AN EXPIRATION DATE WE NOTIFY YOU BY REGISTERED MAIL/COURIER THAT WE
ELECT NOT TO CONSIDER THIS LETTER OF CREDIT EXTENDED FOR ANY SUCH ADDITIONAL PERIOD.
PARTIAL DRAWS ARE ALLOWED.
THIS ORIGINAL LETTER OF CREDIT MUST ACCOMPANY ANY DRAWINGS HEREUNDER FOR ENDORSEMENT OF THE
DRAWING AMOUNT AND WILL BE RETURNED TO THE BENEFICIARY UNLESS IT IS FULLY UTILIZED.
THIS LETTER OF CREDIT MAY BE TRANSFERRED ONE OR MORE TIMES BUT IN EACH INSTANCE TO A SINGLE
BENEFICIARY AND ONLY IN THE FULL AMOUNT AVAILABLE TO BE DRAWN UNDER THIS LETTER OF CREDIT. ANY
SUCH TRANSFER MAY BE EFFECTED ONLY UPON PRESENTATION TO US, THE ISSUING BANK, AT THE BANKS OFFICE
SPECIFIED IN THE FIRST PARAGRAPH ABOVE, OF THE ATTACHED EXHIBIT A DULY COMPLETED AND EXECUTED BY
THE BENEFICIARY AND ACCOMPANIED BY THE ORIGINAL LETTER OF CREDIT AND ALL AMENDMENT(S), IF ANY. ANY
TRANSFER OF THIS LETTER OF CREDIT MAY NOT CHANGE THE PLACE OF EXPIRATION OF THE LETTER OF CREDIT
FROM OUR SPECIFIED OFFICE. EACH TRANSFER SHALL BE EVIDENCED BY OUR ENDORSEMENT ON THE REVERSE OF
THE ORIGINAL LETTER OF CREDIT AND WE SHALL FORWARD THE ORIGINAL LETTER OF CREDIT SO ENDORSED TO
THE TRANSFEREE. EACH SUCH TRANSFER WILL BE EFFECTED AT NO COST TO THE BENEFICIARY OR TRANSFEREE.
OUR TRANSFER FEE
1
/
4
OF 1% OF THE TRANSFER
Exhibit E Page 1
AMOUNT (MINIMUM US$250.00) WILL BE FOR THE ACCOUNT OF THE APPLICANT. HOWEVER, ANY TRANSFER IS NOT
CONTINGENT UPON APPLICANTS ABILITY TO PAY OUR TRANSFER FEE.
DRAFT(S) AND DOCUMENTS MUST INDICATE THE NUMBER AND DATE OF THIS LETTER OF CREDIT.
THIS LETTER OF CREDIT IS SUBJECT TO AND GOVERNED BY THE UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 AND THE
LAWS OF THE STATE OF NEW YORK AND, IN THE EVENT OF ANY CONFLICT, THE LAWS OF THE STATE OF NEW YORK
WILL CONTROL. IF THIS CREDIT EXPIRES DURING AN INTERRUPTION OF BUSINESS AS DESCRIBED IN ARTICLE 17
OF SAID PUBLICATION 500, THE BANK HEREBY SPECIFICALLY AGREES TO EFFECT PAYMENT IF THIS CREDIT IS
DRAWN AGAINST WITHIN 30 DAYS AFTER THE RESUMPTION OF BUSINESS.
|
|
|
|
|
|
|
SILICON VALLEY BANK,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUTHORIZED SIGNATURE
|
|
|
Exhibit E Page 2
EXHIBIT A
DATE:
|
|
|
TO:
|
|
SILICON VALLEY BANK
|
|
|
3003 TASMAN DRIVE
|
|
|
SANTA CLARA, CA 95054
|
|
|
ATTN: GLOBAL FINANCIAL SERVICES
|
|
|
|
RE:
|
|
SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA
|
|
|
IRREVOCABLE STANDBY LETTER OF CREDIT NO. SVBSF
|
|
|
DATED
, 20
AMOUNT: US$
.
|
GENTLEMEN:
FOR VALUE RECEIVED, THE UNDERSIGNED BENEFICIARY HEREBY IRREVOCABLY TRANSFERS TO:
(NAME OF TRANSFEREE)
(ADDRESS)
ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF CREDIT UP TO ITS
AVAILABLE AMOUNT AS SHOWN ABOVE AS OF THE DATE OF THIS TRANSFER.
BY THIS TRANSFER, ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY IN SUCH LETTER OF CREDIT ARE
TRANSFERRED TO THE TRANSFEREE. TRANSFEREE SHALL HAVE THE SOLE RIGHTS AS BENEFICIARY THEREOF,
INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS, WHETHER INCREASES OR EXTENSIONS OR OTHER
AMENDMENTS, AND WHETHER NOW EXISTING OR HEREAFTER MADE. ALL AMENDMENTS ARE TO BE ADVISED DIRECT TO
THE TRANSFEREE WITHOUT NECESSITY OF ANY CONSENT OF OR NOTICE TO THE UNDERSIGNED BENEFICIARY.
THE ORIGINAL OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH, AND WE ASK YOU TO ENDORSE THE TRANSFER
ON THE REVERSE THEREOF, AND FORWARD IT DIRECTLY TO THE TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF
TRANSFER.
SINCERELY,
METROPOLITAN LIFE INSURANCE COMPANY
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(SIGNATURE OF BENEFICIARY)**
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**
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THIS TRANSFER FORM, EXHIBIT A, MUST BE NOTARIZED BY A NOTARY PUBLIC
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Exhibit E Page 3
EXHIBIT F
FAIR MARKET RENTAL RATE
1.
Definition of Fair Market Rental Rate
. Fair Market Rental Rate shall mean
the Monthly Base Rent equal to the monthly base rental per rentable square foot which a tenant
would pay and which a willing landlord would accept for space comparable to the Premises in the
Building and in other buildings of class A standards in Seaport Centre and along the Highway 101
corridor in Redwood City, Redwood Shores, San Carlos and Belmont (Applicable Market) for the
period for which such rental is to be paid and for a lease on terms substantially similar to those
of the Lease (including, without limitation, those applicable to Taxes, Operating Expenses and
exclusions, but also considering so-called net and triple net leases, and leases utilizing
operating expense stops or base years, and making appropriate adjustment between such leases and
this Lease, as described below), based on prevailing market conditions in the Building and in other
buildings of class A standards in the Applicable Market at the time such determination is made
(Comparable Transactions). Without limiting the generality of the foregoing, Comparable
Transactions shall be for a term similar to the term of tenancy and for space comparable in use,
floor levels, square footage and location within the Building and in other buildings of class A
standards in the Applicable Market as the transaction for which Fair Market Rental Rate is being
determined; however, leases of unusual or odd shaped spaces shall not be considered. In any
determination of Fair Market Rental Rate, the stated or contract monthly net or base rental in
Comparable Transactions shall be appropriately adjusted to take into account the different terms
and conditions prevailing in such transactions and those present in the Lease, including, without
limitation: (a) the extent to which average annual expenses and taxes per rentable square foot
payable by tenants in Comparable Transactions vary from those payable by Tenant under the Lease,
and so, for example, if the Lease provides for payment of Rent Adjustments and/or certain Operating
Expenses on the basis of increases over a base year, then the rate of Monthly Base Rent under the
Lease shall be based upon a step-up to change the calendar year which serves as the base year for
calculation of the base for such Operating Expenses for the Option Term to be the full calendar
year in which the Option Term commences, and such step-up shall be considered in the determination
of the Fair Market Rental Rate; (b) tenant improvements, value of existing tenant improvements, the
concessions, if any, being given by landlords in Comparable Transactions, such as parking charge
abatement, free rent or rental abatement applicable after substantial completion of any tenant
improvements (and no adjustment shall be made for any free or abated rent during any construction
periods), loans at below-market interest rates, moving allowances, space planning allowances, lease
takeover payments and work allowances, as compared to any tenant improvement, refurbishment or
repainting allowance given to Tenant under the Lease for the space for which Fair Market Rental
Rate is being determined; (c) the brokerage commissions, fees and bonuses payable by landlords in
Comparable Transactions (whether to tenants agent, such landlord or any person or entity
affiliated with such landlord), as compared to any such amounts payable by Landlord to the
broker(s) identified with respect to the transaction for which Fair Market Rental Rate is being
determined; (d) the time value of money; (e) any material difference between the definition of
rentable area and the ratio of project rentable to useable square feet in Comparable Transactions,
as compared to such figures applicable to the space for which Fair Market Rental Rate is being
determined; and (f) the extent to which charges for parking by tenants in Comparable Transactions
vary from those payable by Tenant under the Lease.
2.
Sealed Estimates
. In the event the Lease requires Fair Market Rental Rate to be
determined in accordance with this Exhibit, Landlord and Tenant shall meet within ten (10) business
days thereafter and each simultaneously submit to the other in a sealed envelope its good faith
estimate of Fair Market Rental Rate (the Estimates). If the higher Estimate is not more than one
hundred five percent (105%) of the lower Estimate, then Fair Market Rental Rate shall be the
average of the two Estimates. If such simultaneous submission of Estimates does not occur within
such ten (10) business day period, then either party may by notice to the other designate any
reasonable time within five (5) business days thereafter and any reasonable place at or near the
Building for such meeting to take place. In the event only one party submits an Estimate at that
meeting, such Estimate shall be Fair Market Rental. In the event neither party submits an
Estimate at that meeting, the transaction for which Fair Market Rental Rate is being determined
shall be deemed cancelled and of no further force or effect.
3.
Selection of Arbitrators
. If the higher Estimate is more than one hundred five
percent (105%) of the lower Estimate, then either Landlord or Tenant may, by written notice to the
other within five (5) business days after delivery of Estimates at the meeting, require that the
disagreement be resolved by arbitration. In the event neither party gives such notice, the
transaction for which Fair Market Rental Rate is being determined shall be deemed cancelled and of
no further force or effect. Within five (5) business days after such notice, the parties shall
select as arbitrators three (3) mutually acceptable independent MAI appraisers with experience in
real estate activities, including at least five (5) years experience in appraising comparable space
in the Applicable Market (Qualified Appraisers). If the parties cannot timely agree on such
arbitrators, then within the following five (5) business days, each shall select and inform the
other party of one (1) Qualified Appraiser and within a third period of five (5) business days, the
two appraisers (or if only one (1) has been duly selected, such single appraiser) shall select as
arbitrators a panel of three additional Qualified Appraisers, which three arbitrators shall proceed
to determine Fair Market Rental Rate pursuant to Section 4 of this Exhibit. Both Landlord and
Tenant shall be entitled to present evidence supporting their respective positions to the panel of
three arbitrators.
4.
Arbitration Procedure.
Once a panel of arbitrators has been selected as provided
above, then as soon thereafter as practicable each arbitrator shall select one of the two Estimates
as the one which, in its opinion, is closer to Fair Market Rental Rate. Upon an Estimates
selection by two (2) of the arbitrators, it shall be the applicable Fair Market Rental Rate and
such selection shall be binding upon Landlord and Tenant. If the arbitrators collectively determine
that expert advice is reasonably necessary to assist them in determining Fair Market Rental Rate,
then they may retain one or more qualified persons, including but not limited to legal counsel,
brokers, architects or engineers, to provide such expert advice. The party whose Estimate is not
chosen by the arbitrators shall pay the costs of the arbitrators and any experts retained by the
arbitrators. Any fees of any counsel or expert engaged directly by Landlord or Tenant, however,
shall be borne by the party retaining such counsel or expert.
Exhibit F Page 1
5.
Rent Pending Determination of Fair Market Rental Rate
. In the event that the
determination of Fair Market Rental Rate has not been concluded prior to commencement of the
applicable rental period for the applicable space for which the Fair Market Rental Rate is being
determined, Tenant shall pay Landlord Monthly Base Rent and Rent Adjustment Deposits as would apply
under Landlords Estimate pursuant to Section 2 of this Exhibit until the Fair Market Rental Rate
is determined. In the event that the Fair Market Rental Rate subsequently determined is different
from the amount paid for the applicable period, then within thirty (30) days after such
determination, Tenant shall pay Landlord any greater amounts due and Landlord shall credit Tenant
(against the next Monthly Base Rent installments due) for any reduction in the amounts due.
Exhibit F Page 2
EXHIBIT G
TENANTS PERSONAL PROPERTY
Tenants Personal Property shall mean the following items belonging to Tenant, it being
acknowledged that if any of the following are affixed to the Premises in the normal manner for such
item, it shall still be deemed to be Tenants Personal Property:
1.
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Water deionization/purification systems;
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2.
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Facility vacuum system;
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3.
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Facility clean dry air system;
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4.
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Telecommunications systems;
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5.
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Computer network systems;
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6.
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Waste neutralization and monitoring systems;
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7.
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Trash compactor system;
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8.
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Satellite and/or radio frequency signal receivers/transmitters;
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9.
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Compressed gas distribution system;
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10.
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Audio-visual equipment;
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11.
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Electronic security and monitoring systems;
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12.
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Back-up and emergency electrical power equipment;
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13.
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Laboratory casework including fume hoods;
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14.
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Moveable benches and tables;
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15.
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Office furniture and equipment;
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16.
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Bicycle lockers;
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17.
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Shower room lockers;
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18.
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Laboratory equipment including autoclaves, glass washers, ice makers, cage washers,
dryers, environmental chambers;
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19.
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Servery equipment (
i.e.
equipment used in food service, in the break area or kitchen
area)
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20.
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Fermentation system equipment;
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21.
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Such other items installed in the Premises by Tenant at Tenants expense during the term of
the Lease as are agreed to in writing by Tenant and Landlord to be Tenants Personal Property.
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Exhibit G Page 1
EXHIBIT H
FORM OF LETTER OF CREDIT
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FOR INTERNAL IDENTIFICATION PURPOSES ONLY
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Our No.
Other
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Applicant
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TO:
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Metropolitan Life Insurance Company
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[Address]
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Attention: Director, EIM
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IRREVOCABLE LETTER OF CREDIT NO.
We hereby establish this irrevocable Letter of Credit in favor of the aforesaid addressee
(Beneficiary) for drawings up to United States $150,995.00 effective immediately. This Letter of
Credit is issued, presentable and payable at our office at
[issuing banks address in either
San Francisco or San Jose]
and expires with our close of business on
, 20
.
The term Beneficiary includes any successor by operation of law of the named Beneficiary
including, without limitation, any liquidator, rehabilitator, receiver or conservator.
We hereby undertake to promptly honor your sight draft(s) drawn on us, indicating our Credit
No.
, for all or any part of this Credit if presented at our office specified in paragraph one on
or before the
expiry date or any automatically extended expiry date.
Except as expressly stated herein, this undertaking is not subject to any agreement,
condition or qualification. The obligation of
[issuing bank]
under this Letter of Credit
is the individual obligation of
[issuing bank]
, and is in no way contingent upon
reimbursement with respect thereto.
It is a condition of this Letter of Credit that it is deemed to be automatically extended
without amendment for one year from the expiry date hereof, or any future expiration date, unless
at least thirty (30) days prior to an expiration date we notify you by registered mail that we
elect not to consider this Letter of Credit renewed for any such additional period.
This Letter of Credit is transferable by the Beneficiary and by any successive transferees at
no charge or cost to Beneficiary or any transferee. Transfers of this Letter of Credit are subject
to receipt of Beneficiarys (and subsequently, transferees) instructions in the form attached
hereto as Schedule 1 accompanied by the original Letter of Credit and amendments(s) if any.
This Letter of Credit is subject to and governed by the Laws of the State of New York and the
1993 revision of the Uniform Customs and Practice for Documentary Credits of the International
Chamber of Commerce (Publication 500) and, in the event of any conflict, the Laws of the State of
New York will control. If this Credit expires during an interruption of business as described in
article 17 of said Publication 500, the bank hereby specifically agrees to effect payment if this
Credit is drawn against within 30 days after the resumption of business.
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Very truly yours,
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[issuing bank]
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Exhibit H Page 1
Schedule 1 to Letter of Credit
[Bank then current issuer of Letter of Credit]
Re: Irrevocable Letter of Credit No.
Ladies & Gentlemen:
The undersigned acknowledges receipt of your advice No.
of a credit issued in our
favor, the terms of which are satisfactory. We now irrevocably transfer the said credit and all
amendments and extensions thereof, if any, to:
[Name of Transferee]
[Address]
You are to inform the transferee of this transfer and such transferee shall have sole rights
as beneficiary under the credit, including any amendments, extension or increases thereof, without
notice to or further assent from us.
This transfer is at no charge or cost to Beneficiary or the transferee.
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Yours very truly,
Beneficiary
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By:
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Exhibit H Page 2
RIDER 1
COMMENCEMENT DATE AGREEMENT
Metropolitan Life Insurance Company, a New York corporation (Landlord), and Genomic Health, Inc.,
a Delaware corporation (Tenant), have entered into a certain Lease dated as of
(the Lease).
WHEREAS, Landlord and Tenant wish to confirm and memorialize the Commencement Date and Expiration
Date of the Lease as provided for in Section 2.02(b) of the Lease;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein and in
the Lease, Landlord and Tenant agree as follows:
1. Unless otherwise defined herein, all capitalized terms shall have the same meaning ascribed
to them in the Lease.
2. The Commencement Date of the Term of the Lease is
.
3. The Expiration Date of the Term of the Lease is
.
4. Tenant hereby confirms the following:
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(a)
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That it has accepted possession of the premises pursuant to the terms of the
Lease;
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(b)
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That the Landlord Work, if any, is Substantially Complete; and
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(c)
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That the Lease is in full force and effect.
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5. Except as expressly modified hereby, all terms and provisions of the Lease are hereby
ratified and confirmed and shall remain in full force and effect and binding on the parties hereto.
6. The Lease and this Commencement Date Agreement contain all of the terms, covenants,
conditions and agreements between the Landlord and the Tenant relating to the subject matter
herein. No prior other agreements or understandings pertaining to such matters are valid or of any
force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Commencement Date Agreement and
such execution and delivery have been duly authorized.
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TENANT
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LANDLORD
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Genomic Health, Inc.,
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Metropolitan Life Insurance Company,
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a Delaware corporation
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a New York corporation
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By
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By
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Print name
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Print name
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Its
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Its
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(Chairman of Board, President or Vice President)
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By
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Print name
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Its
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(Secretary, Assistant Secretary, CFO or Assistant Treasurer)
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Rider 1 Page 1
RIDER 2
ADDITIONAL PROVISIONS
This Rider 2 (Rider) is attached to and a part of a certain Lease by and between
Metropolitan Life Insurance Company, a New York corporation, as Landlord, and Genomic Health, Inc.,
a Delaware corporation (for purposes of this Rider, Genomic), as Tenant, for the Premises as
described therein (the Lease).
SECTION 1. DEFINED TERMS; FORCE AND EFFECT
Capitalized terms used in this Rider shall have the same meanings set forth in the Lease except as
otherwise specified herein and except for terms capitalized in the ordinary course of punctuation.
This Rider forms a part of the Lease. Should any inconsistency arise between this Rider and any
other provision of the Lease as to the specific matters which are the subject of this Rider, the
terms and conditions of this Rider shall control.
SECTION 2. PREMISES; CONDITION; DELIVERY; CONSTRUCTION PERIOD; COMMENCEMENT DATE
2.1.
AS-IS Condition
. Tenant hereby leases and Landlord shall deliver the Premises to
Tenant in its AS IS condition, without any express or implied representations or warranties of any
kind by Landlord, its brokers, manager or agents, or the employees of any of them regarding the
Premises; and Landlord shall not have any obligation to construct or install any tenant
improvements or alterations or to pay for any such construction or installation except to the
extent of the Allowance, all as specifically provided in the Workletter. Any Tenant Work and
Landlord Work, if any, shall be subject to and governed by the Workletter and other applicable
provisions of this Lease.
2.2.
Projected Delivery Date: Delivery Date: Commencement Date: Tenants Obligations
During Construction Period
.
(a) Landlord shall tender to Tenant possession of the Premises in its AS IS condition
described in Section 2.1 (but free of all prior occupants and their personal property) no later
than 2 business days after execution of this Lease (the Projected Delivery Date). On the date
Landlord actually tenders to Tenant possession of the Premises (the Delivery Date), the Premises
shall be subject to, and Tenant shall observe and perform, all the conditions and covenants
applicable to Tenant under this Lease, except as otherwise expressly provided in this Rider.
During the period (the Construction Period) from the Delivery Date until the Commencement Date,
in recognition of Tenants construction and installations in, and preparation of, the Premises for
the use and occupancy permitted by this Lease, Tenant shall not be obligated to pay Monthly Base
Rent, Rent Adjustment Deposits or Rent Adjustments. The Term of this Lease shall be as shown in
Section 1.01(5) of the Basic Lease Provisions and the Commencement Date of the Term shall be the
date set forth in Section 1.01(6) To the extent permitted by Law and that Tenant obtains any and
all necessary approvals and permits for such use, during the Construction Period Tenant may use
part of the Premises for the conduct of business by up to thirty (30) employees of Tenant without
obligation to pay Monthly Base Rent for the space so used (Temporary Space), but Tenant shall be
obligated to pay its pro rata share of Rent Adjustment Deposits and Rent Adjustment with respect to
the Temporary Space based upon the number of square feet of Rentable Area of the Temporary Space to
the Rentable Area of the Building, Phase and Project.
(b) Within thirty (30) days following the occurrence of the Commencement Date, upon request by
Landlord or Tenant, Tenant and Landlord shall enter into an agreement (which is attached to this
Lease as Rider 1) confirming the Commencement Date and the Expiration Date. If Tenant fails to
enter into such agreement, then the Commencement Date and the Expiration Date shall be the dates
designated by Landlord in such agreement.
(c) If Landlord shall be unable to give possession of the Premises on the Projected
Delivery Date by reason of the following: (i) the holding over or retention of possession of any
tenant, tenants or occupants, or (ii) for any other reason beyond Landlords reasonable control,
then Landlord shall not be subject to any liability for the failure to give possession on said
date. Under such circumstances, the Commencement Date shall be delayed by a number of days equal
to the days of delay in Landlords delivery of possession to Tenant. No such failure to deliver
possession on the originally scheduled Projected Delivery Date shall affect the validity of this
Lease or the obligations of the Tenant hereunder.
SECTION 3. MONUMENT SIGNAGE.
(a)
Grant of Right
. Notwithstanding any provision of Section 6.06 of the Lease to
the contrary, Tenant shall have the right to place Tenant identification on one line of the
existing, exterior monument sign (located on Galveston Drive) for the Building, subject to the
terms and conditions set forth in this Section (Exterior Sign Right).
(b)
General Conditions & Requirements
. The size, type, style, materials, color,
method of installation and exact location of the sign, and the contractor for and all work in
connection with the sign, contemplated by this Section shall (i) be subject to Tenants compliance
with all applicable laws, regulations and ordinances and with any covenants, conditions and
restrictions of record which affect the Property; (ii) be subject to Tenants compliance with all
requirements of Landlords current Project signage criteria at the time of installation; (iii) be
consistent with the design of the Building and the Project; (iv) be further subject to Landlords
prior written consent. Tenant shall, at its sole cost and expense, procure, install, maintain in
first class appearance and condition, and remove such sign.
(c)
Removal & Restoration
. Upon the expiration or termination of the Exterior Sign
Right, but in no event later than the expiration of the Term or earlier termination of the Lease,
Tenant shall, at its sole cost and
Rider 2 Page 1
expense, remove such sign and shall repair and restore the area in which the sign was located
to its condition prior to installation of such sign.
(d)
Right Personal
. The Exterior Sign Right under this Section is personal to Genomic
Health, Inc., and may not be used by, and shall not be transferable or assignable (voluntarily or
involuntarily) to any person or entity.
SECTION 4. OPTION TO EXTEND.
(a) Landlord hereby grants Tenant a single option to extend the Term of the Lease for an
additional period of five (5) years (such period may be referred to as the Option Term), as to
the entire Premises as it then exists, upon and subject to the terms and conditions of this Section
(the Option To Extend), and provided that at the time of exercise of such option (and each
Option, if more than one Option is granted): (i) Tenant or a Permitted Transferee which has
satisfied the requirements of Sections 10.01 and 10.05 of the Lease must be conducting regular,
active, ongoing business in, and be in occupancy (and occupancy by a subtenant, licensee or other
party permitted or suffered by Tenant shall not satisfy such condition) of the entire Premises; and
(ii) there has been no material adverse change in Tenants financial position from such position as
of the date of execution of the Lease, as certified by Tenants independent certified public
accountants, and as supported by Tenants certified financial statements, copies of which shall be
delivered to Landlord with Tenants written notice exercising its right hereunder. Without
limiting the generality of the foregoing, Landlord may reasonably conclude there has been a
material adverse change if Tenants independent certified public accountants do not certify there
has been no such change.
(b) Tenants election (the Election Notice) to exercise the Option To Extend must be given
to Landlord in writing no earlier than the date which is twelve (12) months prior to the Expiration
Date and no later than the date which is nine (9) months prior to the Expiration Date. If Tenant
either fails or elects not to exercise the Option to Extend by not timely giving its Election
Notice, then the Option to Extend shall be null and void, including, if more than one Option is
granted, the then applicable Option to Extend and all further Options to Extend.
(c) The Option Term (and each Option Term, if more than one Option is granted) shall commence
immediately after the expiration of the preceding Term of the Lease. Tenants leasing of the
Premises during the Option Term shall be upon and subject to the same terms and conditions
contained in the Lease except that (i) Tenant shall pay the Option Term Rent, defined and
determined in the manner set forth in the immediately following Subsection; (ii) the Security shall
be increased to an amount that is the same percentage or proportion of Option Term Rent as the
prior amount of Security was in relation to Rent for the Term prior to the Option Term, but in no
event shall the Security be decreased; and (iii) Tenant shall accept the Premises in its as is
condition without any obligation of Landlord to repaint, remodel, repair, improve or alter the
Premises or to provide Tenant any allowance therefor, except to the extent tenants leasing space in
Comparable Transactions receive an allowance pursuant to the definition of Fair Market Rental Rate
defined in
Exhibit F
hereto, provided, however, Landlord by notice given to Tenant within
thirty (30) days after final determination of the Fair Market Rental Rate, may elect to provide, in
lieu of such allowance for alterations to the Offer Space, a rent credit equal to the amount of the
allowance that would have otherwise been given, credited toward the rents applicable only to the
Offer Space and due starting after such rent obligation commences. If Tenant timely and properly
exercises the Option To Extend, references in the Lease to the Term shall be deemed to mean the
preceding Term as extended by the Option Term unless the context clearly requires otherwise.
(d) The Option Term Rent shall mean the sum of the Monthly Base Rent at the Fair Market Rental
Rate (as defined in
Exhibit F
) plus Rent Adjustments and/or certain Operating Expenses (if
applicable, based upon a step-up to change the base year or base amount for calculation of
Operating Expenses in connection with determination of the Fair Market Rental Rate) plus other
charges pursuant to the Lease payable to Landlord.
The determination of Fair Market Rental Rate and Option Term Rent shall be made by Landlord, in
the good faith exercise of Landlords business judgment. Within forty-five (45) days after
Tenants exercise of the Option To Extend, Landlord shall notify Tenant of Landlords
determination of the Fair Market Rental Rate and Option Term Rent for the Premises. Tenant may,
within fifteen (15) days after receipt thereof, deliver to Landlord a written notice either: (i)
accepting Landlords determination, in which case the extension shall be effective and binding
(subject to Subsection (f) below) at the accepted rate; or (ii) setting forth Tenants good faith
estimate, in which case Landlord and Tenant will promptly confer and attempt to agree upon the
Fair Market Rental Rate and Option Term Rent. Tenants failure to timely deliver such notice
within such fifteen (15) day period shall be deemed its cancellation of the Option. In the event
Tenant has delivered notice setting forth Tenants different estimate, but no agreement in writing
between Tenant and Landlord on Fair Market Rental Rate and Option Term Rent is reached within
thirty (30) days after Landlords receipt of Tenants estimate, the Fair Market Rental Rate shall
be determined in accordance with the terms of
Exhibit F
. Notwithstanding any of the
foregoing to the contrary, at no time during the Option Term shall the Option Term Rent be less
than the Preceding Rent (defined below). The Preceding Rent shall mean the sum of the Monthly
Base Rent payable by Tenant under this Lease calculated at the rate applicable for the last full
month of the Term preceding the Option Term plus the Rent Adjustments payable by Tenant under the
Lease (if applicable, using the base year for calculation of Base Operating Expenses applicable
for the last full month of the Term preceding the Option Term), plus other charges pursuant to the
Lease payable to Landlord. To the extent that Tenant pays directly the utility or service provider
for utilities or services which Tenant is to obtain directly pursuant to the Lease, Tenant shall
continue to pay such amounts, but such amounts shall not be counted as part of the Preceding Rent
or the Fair Market Rental Rate as used herein.
Further, in the event that Landlord notifies Tenant that the Option Term Rent shall equal the
Preceding Rent, such determination shall be conclusive and binding to set the Preceding Rent as
the Option Term Rent for the Option Term, Tenant shall not be entitled to dispute or contest such
determination, and the extension shall be effective and binding (subject to Subsection (f) below).
(e) Promptly after final determination of the Fair Market Rental Rate, Landlord shall prepare
a memorandum confirming the specific dates, amounts and terms of the extension for the Option Term
in
Rider 2 Page 2
accordance with the terms and conditions of this Option to Extend, in the form of an amendment to
the Lease, and Tenant shall execute such amendment within five (5) business days after Landlord
and Tenant agree to the form of the proposed amendment and Landlord shall execute it promptly
after Tenant. Notwithstanding any of the foregoing to the contrary, the failure of Landlord to
prepare such amendment or of either party to execute an amendment shall not affect the validity
and effectiveness of the extension for the Option Term in accordance with the terms and conditions
of this Option to Extend.
(f) Upon the occurrence of any of the following events, Landlord shall have the option,
exercisable at any time prior to commencement of the Option Term, to terminate all of the
provisions of this Section with respect to the Option to Extend, whereupon any prior or subsequent
exercise of this Option to Extend shall be of no force or effect:
(i) Tenants failure to timely exercise or timely to perform the Option to Extend in
strict accordance with the provisions of this Section.
(ii) The existence at the time Tenant exercises the Option to Extend or at the
commencement of the Option Term of a Default on the part of Tenant under the Lease or of
any state of facts which with the passage of time or the giving of notice, or both, would
constitute such a Default.
(iii) Tenants third Default under the Lease prior to the commencement of the Option
Term, notwithstanding that all such Defaults may subsequently be cured.
(g) Without limiting the generality of any provision of the Lease, time shall be of the
essence with respect to all of the provisions of this Section.
(h) This Option to Extend is personal to Genomic Health and may not be used by, and shall not
be transferable or assignable (voluntarily or involuntarily) to any person or entity other than a
Permitted Transferee which is an assignee of the Lease and which has satisfied the requirements of
Sections 10.01 and 10.05 of this Lease, and such Permitted Transferee may exercise the right
without Tenant joining in or consenting to such exercise, and notwithstanding anything to the
contrary, Tenant shall remain liable for all obligations under the Lease, including those
resulting from any such exercise with the same force and effect as if Tenant had joined in such
exercise.
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