Genomic Health, Inc.
GENOMIC HEALTH INC (Form: 10-Q, Received: 05/09/2018 17:18:20)

Table of Contents  

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 000-51541

 

GENOMIC HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

77-0552594

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

301 Penobscot Drive

Redwood City, California 94063

(Address of principal executive offices, including Zip Code)

 

(650) 556-9300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

Emerging growth company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, was 35,380,653 as of  April  30, 2018.

 

 

 

 


 

Table of Contents  

GENOMIC HEALTH, INC.

INDEX

 

 

 

 

 

 

 

 

    

    

    

Page

 

PART I :

 

FINANCIAL INFORMATION

 

 

 

Item 1.  

 

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

Item 2.  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

Item 3.  

 

Quantitative and Qualitative Disclosures about Market Risk

 

38

 

Item 4.  

 

Controls and Procedures

 

38

 

PART II :

 

OTHER INFORMATION

 

39

 

Item 1.  

 

Legal Proceedings

 

39

 

Item 1A.  

 

Risk Factors

 

39

 

Item 6.  

 

Exhibits

 

58

 

Signatures  

 

 

 

59

 

 

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Table of Contents  

PART  1: FINANCIAL INFORMATIO N

 

Item 1. Financial Statements

GENOMIC HEALTH, INC.

Condensed Consolidated Balance Sheet s

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

ASSETS

    

 

    

    

 

    

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,085

 

$

45,518

 

Short-term marketable securities

 

 

88,302

 

 

84,057

 

Accounts receivable (net of allowance for doubtful accounts; 2018—$2,636,  2017—$3,884)

 

 

46,567

 

 

31,161

 

Prepaid expenses and other current assets

 

 

14,035

 

 

13,524

 

Total current assets

 

 

190,989

 

 

174,260

 

Property and equipment, net

 

 

40,824

 

 

46,440

 

Other assets

 

 

11,126

 

 

10,917

 

Total assets

 

$

242,939

 

$

231,617

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,744

 

$

156

 

Accrued compensation and employee benefits

 

 

21,913

 

 

24,953

 

Accrued expenses and other current liabilities

 

 

11,648

 

 

14,084

 

Other current liabilities

 

 

343

 

 

323

 

Total current liabilities

 

 

38,648

 

 

39,516

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

3,899

 

 

3,810

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

 

 3

 

 

 3

 

Additional paid-in capital

 

 

466,424

 

 

464,637

 

Accumulated other comprehensive loss

 

 

(148)

 

 

(294)

 

Accumulated deficit

 

 

(235,777)

 

 

(245,945)

 

    Treasury stock, at cost

 

 

(30,110)

 

 

(30,110)

 

Total stockholders’ equity

 

 

200,392

 

 

188,291

 

Total liabilities and stockholders’ equity

 

$

242,939

 

$

231,617

 

 

See accompanying notes.

 

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GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2018

 

2017

 

 

Product revenues

 

$

92,625

 

$

83,979

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

18,733

 

 

13,672

 

 

Research and development

 

 

16,807

 

 

14,874

 

 

Selling and marketing

 

 

41,755

 

 

41,507

 

 

General and administrative

 

 

19,718

 

 

16,751

 

 

Total operating expenses

 

 

97,013

 

 

86,804

 

 

Loss from operations

 

 

(4,388)

 

 

(2,825)

 

 

Interest income

 

 

417

 

 

158

 

 

Gain on sale of equity securities

 

 

 —

 

 

2,807

 

 

Unrealized gain on equity securities

 

 

127

 

 

 —

 

 

Other income, net

 

 

309

 

 

95

 

 

Income (loss) before income taxes

 

 

(3,535)

 

 

235

 

 

Income tax expense

 

 

240

 

 

1,041

 

 

Net loss

 

$

(3,775)

 

$

(806)

 

 

Basic and diluted net loss per share

 

$

(0.11)

 

$

(0.02)

 

 

Shares used in computing basic and diluted net loss per share

 

 

35,198

 

 

34,009

 

 

 

See accompanying notes.

 

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GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Comprehensive Incom e (Loss)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2018

 

2017

 

 

Net loss

    

$

(3,775)

 

$

(806)

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized loss, net, on available-for-sale marketable securities, net of tax of $0 for both of the quarters ended March 31, 2018 and 2017

 

 

(34)

 

 

(94)

 

 

Reclassification adjustment for net gain on sale of equity securities included in net loss

 

 

 —

 

 

(1,126)

 

 

Comprehensive loss

 

$

(3,809)

 

$

(2,026)

 

 

 

See accompanying notes.

 

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GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

Operating activities

    

 

 

 

 

 

 

Net loss

 

$

(3,775)

    

$

(806)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,155

 

 

2,407

 

Employee stock-based compensation

 

 

5,186

 

 

5,105

 

Write-off of previously capitalized software costs

 

 

2,368

 

 

 —

 

Impairment of long-lived assets

 

 

2,154

 

 

 —

 

Gain on disposal of property and equipment

 

 

 —

 

 

35

 

Outside director restricted stock awarded in lieu of fees

 

 

50

 

 

50

 

Gain on sale of equity securities

 

 

 —

 

 

(2,807)

 

Unrealized gain on revaluation of equity investment

 

 

(127)

 

 

 —

 

Accretion of discount on convertible promissory note

 

 

(62)

 

 

 —

 

Deferred tax benefit from unrealized gain on available-for-sale marketable securities, net

 

 

 —

 

 

820

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,283)

 

 

586

 

Prepaid expenses and other assets

 

 

(786)

 

 

722

 

Accounts payable

 

 

4,591

 

 

2,218

 

Accrued compensation and employee benefits

 

 

(3,040)

 

 

(8,791)

 

Accrued expenses and other liabilities

 

 

(2,151)

 

 

1,231

 

Net cash provided by operating activities

 

 

6,280

 

 

770

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,236)

 

 

(5,144)

 

Proceeds from sale of property and equipment

 

 

 —

 

 

10

 

Purchases of marketable securities

 

 

(24,043)

 

 

(20,599)

 

Maturities of marketable securities

 

 

20,019

 

 

13,250

 

Proceeds from sales of marketable securities

 

 

 —

 

 

10,155

 

Net cash used in investing activities

 

 

(6,260)

 

 

(2,328)

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock under stock plans

 

 

1,152

 

 

6,069

 

Withholding taxes related to restricted stock units net share settlement

 

 

(4,601)

 

 

(4,136)

 

Net cash (used in) provided by financing activities

 

 

(3,449)

 

 

1,933

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(3,429)

 

 

375

 

Cash, cash equivalents and restricted cash at the beginning of period

 

 

45,708

 

 

40,585

 

Cash, cash equivalents and restricted cash at the end of period

 

$

42,279

 

$

40,960

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

533

 

$

2,486

 

Change in fair value of investment

 

$

200

 

$

 —

 

 

See accompanying notes.

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GENOMIC HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited)

 

Note 1. Organization and Summary of Significant Accounting Policies

 

The Company

 

Genomic Health, Inc. (the “Company”) is a global healthcare company that provides actionable genomic information to personalize cancer treatment decisions. The Company develops and globally commercializes genomic based clinical laboratory services that analyze the underlying biology of cancer, allowing physicians and patients to make individualized treatment decisions. The Company was incorporated in Delaware in August 2000. The Company’s first product, the Oncotype DX breast cancer test, was launched in 2004 and is used for early stage invasive breast cancer patients to predict the likelihood of breast cancer recurrence and the likelihood of chemotherapy benefit. In January 2010, the Company launched its second product, the Oncotype DX colon cancer test, which is used to predict the likelihood of colon cancer recurrence in patients with stage II disease. The tests for invasive breast and colon cancers result in a quantitative score referred to as a Recurrence Score. In December 2011, the Company made Oncotype DX available for patients with ductal carcinoma in situ (“DCIS”), a pre-invasive form of breast cancer. This test provides a DCIS Score that is used to predict the likelihood of local recurrence. In June 2012, the Company began offering the Oncotype DX colon cancer test for use in patients with stage III disease treated with oxaliplatin containing adjuvant therapy. In May 2013, the Company launched the Oncotype DX prostate cancer test, which provides a Genomic Prostate Score (“GPS”) to predict disease aggressiveness in men with low risk prostate cancer and to improve treatment decisions for prostate cancer patients, in conjunction with the Gleason score, or tumor grading. In July 2017, the Oncotype DX AR-V7 Nucleus Detect test, for men with metastatic castration-resistant prostate cancer (“mCRPC”) became commercially available as part of a clinical utility program.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. The Company had two wholly-owned subsidiaries at March 31, 2018: Genomic Health International Holdings, LLC, which was established in Delaware in 2010 and supports the Company’s international sales and marketing efforts; and Oncotype Laboratories, Inc., which was established in 2012, and is inactive. Genomic Health International Holdings, LLC has eight wholly-owned subsidiaries. The functional currency for the Company’s wholly-owned subsidiaries incorporated outside the United States is the U.S. dollar. All significant intercompany balances and transactions have been eliminated.

 

Basis of Presentation and Use of Estimates

 

The accompanying interim period condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated balance sheet as of March 31, 2018, condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2018 and 2017, and condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2017 has been derived from audited financial statements, but it does not include certain information and notes required by GAAP for complete consolidated financial statements.

 

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

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The accompanying interim period condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

During the first quarter of 2018, the Company adopted new accounting guidance related to revenue recognition, accounting for financial instruments and presentation of restricted cash in the statement of cash flows, each of which is described below. There have been no other significant changes in the Company’s accounting policies during the three months ended March 31, 2018 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2017.

 

The Company recast prior period consolidated statement of cash flows to conform with the adoption of the new accounting guidance related to presentation of restricted cash in the statement of cash flows as described below.

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers , the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 2 for further discussion on Revenues.

 

Concentration of Risk

 

The Company is subject to credit risk from its portfolio of cash equivalents and marketable securities. The Company invests in money market funds through a major U.S. bank and is exposed to credit risk in the event of default by the financial institution to the extent of amounts recorded on the consolidated balance sheets. The Company invests in short term, investment grade debt instruments and by policy limits the amount in any one type of investment, except for securities issued or guaranteed by the U.S. government. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The goals of the Company’s investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after tax rate of return.

 

The Company is also subject to credit risk from its accounts receivable related to its product sales. The majority of the Company’s accounts receivable arise from product sales in the United States. Reimbursement on behalf of patients covered by Medicare accounted for 26% of the Company’s product revenues for the three months ended March 31, 2018 and 24% for the three months ended March 31, 2017. Accounts receivable on behalf of patients directly covered by Medicare represented 15% and 23% of the Company’s total accounts receivable at March 31, 2018 and December 31, 2017, respectively. No other third party payor represented more than 10% of the Company’s product revenues or accounts receivable balances for these periods.

 

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Investments in Privately Held Companies

 

The Company determines whether its investments in privately held companies are debt or equity based on their characteristics, in accordance with the applicable accounting guidance for such investments. The Company also evaluates the investee to determine if the entity is a variable interest entity (“VIE”) and, if so, whether the Company is the primary beneficiary of the VIE, in order to determine whether consolidation of the VIE is required in accordance with accounting guidance for consolidations. If consolidation is not required and the Company owns less than 50.1% of the voting interest of the entity, the investment is evaluated to determine if the equity method of accounting should be applied. The equity method applies to investments in common stock or in substance common stock where the Company exercises significant influence over the investee, typically represented by ownership of 20% or more of the voting interests of an entity.

 

Prior to January 1, 2018, if the equity method did not apply, investments in privately held companies determined to be equity securities were accounted for using the cost method. As discussed below, on January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2016-01,  Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which changed the way it accounts for non-marketable securities. The Company adjusts the carrying value of its non-marketable equity securities for changes from observable transactions for identical or similar investments of the same issuer, less impairment. All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net.

 

Investments in privately held companies determined to be debt securities are accounted for as available-for-sale or held-to-maturity securities, in accordance with the applicable accounting guidance for such investments.

 

During the years ended December 31, 2017 and 2016, the Company invested $1.4 million and $6.1 million, respectively, in the subordinated convertible promissory notes of Epic Sciences, Inc. (“Epic Sciences”). See Note 6, “Collaboration and Commercial Technology Licensing Agreements,” for additional information regarding the terms of this investment. On March 8, 2017, all of the Company’s investment in subordinated convertible promissory notes were converted into preferred stock of Epic Sciences representing approximately 9% of Epic Sciences’ voting interests, at which time the Company estimated the fair value of the subordinated convertible promissory notes to be approximately $7.1 million. The preferred stock represents a variable interest in the investee. The Company has concluded it is not the primary beneficiary and thus has not consolidated the investee pursuant to the requirements of FASB ASC 810,   Consolidation . The Company will continue to assess its investment and future commitments to the investee and to the extent its relationship with the investee changes, may be required to consolidate the investee in future periods. The Company determined that the investment is an equity investment for which the Company does not have the ability to exercise significant influence. Prior to the adoption of ASU 2016-01, the Company accounted for such preferred stock using the cost method of accounting and accordingly recorded such preferred stock in other assets. There were no identified events or changes in circumstances that had a significant adverse effect on the fair value of the preferred stock during the remainder of the year ended December 31, 2017. On January 1, 2018, the Company adopted ASU No. 2016-01 which changed the way it accounts for non-marketable equity securities. The Company adjusts the carrying value of its non-marketable equity securities for changes from observable transactions for identical or similar investments of the same issuer, less impairment. All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net. As of March 31, 2018, the carrying value of the preferred stock of Epic Sciences was $7.1 million. There were no realized or unrealized gains or losses recognized during the three months ended March 31, 2018.

 

During the year ended December 31, 2017, the Company invested $2.0 million in a convertible promissory note of Cleveland Diagnostics, Inc. (“Cleveland Diagnostics”). See Note 6, “Collaboration and Commercial Technology Licensing Agreements,” for additional information regarding the terms of this investment. The investment in the convertible promissory note represents a variable interest in the investee. The Company has concluded it is not the primary beneficiary and thus has not consolidated the investee pursuant to the requirements of FASB ASC 810. The Company determined that it does not have the ability to exercise significant influence over the investee company. The Company will continue to assess its investment and future commitments to the investee and to the extent its relationship with the investee changes, may be required to consolidate the investee in future periods.

 

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Derivative Financial Instruments

 

The Company hedges a portion of its foreign currency exposures related to outstanding monetary assets and liabilities using foreign currency forward contracts. The foreign currency forward contracts the Company uses to hedge the exposure are not designated as hedges, and as a result, changes in their fair value are recorded in other income (expense). As of March 31, 2018 and December 31, 2017, the Company had foreign currency contracts with notional amounts of $20.6 million and $16.1 million, respectively.

 

Impairment of Long Lived Assets

 

The Company reviews long lived assets, which include property and equipment, intangible assets and investments in privately held companies, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. For property and equipment and intangible assets, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using undiscounted cash flows. For investments in non-marketable equity securities, evidence of impairment might include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. If the fair value of the investment is determined to be less than the carrying value, the asset is written down to its fair value. During the three months ended March 31, 2018, the Company wrote off $2.2 million and $2.4 million of previously capitalized equipment and software development costs, respectively, due to disposal activities. See Note 11, “Restructuring Costs” for additional information regarding the disposal activities. There was no impairment recorded during the three months ended March 31, 2017.  

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) .   Topic 606 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition , and requires entities to recognize revenue when they transfer control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. The Company recorded an increase to opening accounts receivable, net, and a reduction to opening accumulated deficit of $14.1 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact related to certain payors who were not accrual payors. See Note 2 for additional information.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . This ASU changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company adopted the ASU as of January 1, 2018 using the modified retrospective method for marketable equity securities and the prospective method for non-marketable equity securities. The Company recorded a reduction to accumulated deficit of $180,000 as of January 1, 2018 due to the cumulative impact of adopting the ASU, with the impact related to unrealized loss of Biocartis N.V. (“Biocartis”) common stock at December 31, 2017. The Company has elected to use the measurement alternative for its non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment. The adoption of ASU 2016-01 increases the volatility of other income (expense), net, as a result of the remeasurement of the Company’s equity securities.

 

In November 2016, the FASB issued ASU Nos. 2016-15 and 2016-18 amending the presentation of restricted cash within the statement of cash flows. The guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The ASU became effective retrospectively for reporting periods beginning after December 15, 2017. The Company adopted these standards effective January 1, 2018. 

 

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Recently Issued Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . Topic 842 generally requires entities to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. Topic 842 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, and there are certain optional practical expedients that an entity may elect to apply. Full retrospective application is prohibited and early adoption by public entities is permitted. The Company is currently evaluating the impact that the adoption of Topic 842 will have on its consolidated financial statements and related disclosures.

 

Note 2.  Revenues

 

Adoption of ASC Topic 606, Revenue from Contracts with Customers

 

On January 1, 2018,  the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605. See Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for the Company’s revenue recognition policy under Topic 605.

 

The Company recorded a one-time increase to opening accounts receivable, net, and a reduction to opening accumulated deficit of $14.1 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact related to certain payors who were not accrual payors. 

 

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s condensed consolidated balance sheet and statement of operations as of and for the three months ended March 31, 2018 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

 

As Reported

 

Balance Without Adoption of ASC 606

 

Adjustments

 

 

 

 

 

 

(In thousands)

 

 

 

Income statement

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

92,625

    

$

94,040

    

$

(1,415)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

19,718

 

 

20,742

 

 

(1,024)

 

Net loss

 

 

(3,775)

 

 

(3,384)

 

 

(391)

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

46,567

 

 

32,778

 

 

13,789

 

Equity:

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(235,777)

 

 

(249,509)

 

 

13,732

 

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The estimated uncollectible amounts that were historically classified as bad debt expense are now generally considered implicit price concessions that are a direct reduction to accounts receivable rather than allowance for doubtful accounts.

 

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The majority of the Company’s historical product revenues have been derived from the sale of its Oncotype DX breast cancer test. For product revenues, the Company estimates the amount of consideration it expects to be entitled to receive in exchange for providing services based on its historical collection experience using a portfolio approach as a practical expedient to account for patient contracts as collective groups rather than individually. The Company’s performance obligations are satisfied at one point in time when test reports are delivered. The Company also provides services to patients with whom the Company does not have contracts as defined in Topic 606. The Company recognizes revenue for these patients when contracts as defined in Topic 606 are established at the amount of consideration to which it expects to be entitled or when the Company receives substantially all of the consideration subsequent to the performance obligations being satisfied.

 

The following table presents the Company’s product revenues disaggregated by revenue source: 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

 

 

(In thousands)

 

Invasive breast cancer test

 

$

84,551

 

$

78,058

 

Prostate cancer test

 

 

5,840

 

 

3,350

 

Other

 

 

2,234

 

 

2,571

 

Total product revenues

 

$

92,625

 

$

83,979

 

 

Contract revenues are generally derived from studies conducted with biopharmaceutical and pharmaceutical companies. The specific methodology for revenue recognition is determined on a case-by-case basis according to the facts and circumstances applicable to a given contract. The Company typically uses an input method that recognizes revenue based on the Company’s efforts to satisfy the performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. Advance payments received in excess of revenues recognized are classified as deferred revenue until such time as the revenue recognition criteria have been met.

 

Note 3.  Net Loss Per Share

 

Basic net loss per share is calculated by dividing net loss for the period by the weighted-average number of common shares outstanding for the period without consideration of potential common shares. Diluted earnings per share is calculated using the weighted-average number of common shares outstanding including the dilutive effect of stock awards as determined under the treasury stock method. In periods when the Company has a net loss, stock awards are excluded from the calculation of diluted net loss per share as their inclusion would have an antidilutive effect.

 

The following potentially dilutive stock awards were excluded from the computation of diluted net loss per share for the periods presented because they would have been anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

(In thousands)

 

 

 

 

Stock awards excluded from the computation

 

 

790

    

 

758

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Note 4.  Cash and Cash Equivalents, and Marketable Securities

 

The following tables set forth the Company’s cash and cash equivalents, and marketable securities as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

 

   (In thousands) 

Cash and cash equivalents

 

 

 

 

 

 

Cash

 

$

30,584

 

$

35,303

Money market deposits

 

 

11,501

 

 

10,215

Total cash and cash equivalents

 

 

42,085

 

 

45,518

Marketable securities

 

 

 

 

 

 

Commercial paper

 

 

34,945

 

 

30,272

Corporate debt securities

 

 

49,566

 

 

50,260

Corporate equity securities

 

 

3,791

 

 

3,525

Total marketable securities

 

 

88,302

 

 

84,057

Total cash and cash equivalents, and marketable securities

 

$

130,387

 

$

129,575

 

 

 

 

 

 

 

The following tables summarize the Company’s available-for-sale securities that are measured at fair value as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

Cost or

 

Gross

 

Gross

 

Total

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(In thousands)

Commercial paper

    

$

34,996

    

$

 3

    

$

(54)

    

$

34,945

Corporate debt securities

 

 

49,674

 

 

 —

 

 

(108)

 

 

49,566

Total

 

$

84,670

 

$

 3

 

$

(162)

 

$

84,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Cost or

 

Gross

 

Gross

 

Total

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(In thousands)

Commercial paper

    

$

30,315

    

$

 —

    

$

(43)

    

$

30,272

Corporate debt securities

 

 

50,331

 

 

 2

 

 

(73)

 

 

50,260

Corporate equity securities

 

 

4,020

 

 

 —

 

 

(495)

 

 

3,525

Total

 

$

84,666

 

$

 2

 

$

(611)

 

$

84,057

 

All of the Company’s marketable securities had contractual maturities of one year or less as of March 31, 2018 and December 31, 2017.

 

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The following table provides the breakdown of the available-for-sale marketable securities with unrealized losses as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

In a Loss Position for

 

 

Less Than 12 Months

 

 

Gross

 

 

 

 

 

Unrealized

 

Estimated

 

 

Losses

 

Fair Value

 

 

(In thousands)

As of March 31, 2018:

 

 

 

 

 

 

Commercial paper

    

$

(54)

    

$

30,519

Corporate debt securities

 

 

(108)

 

 

49,566

Total

 

$

(162)

 

$

80,085

As of December 31, 2017:

 

 

 

 

 

 

Commercial paper

 

$

(43)

 

$

30,272

Corporate debt securities

 

 

(73)

 

 

45,110

Corporate equity securities

 

 

(495)

 

 

3,525

Total

 

$

(611)

 

$

78,907

 

Marketable Equity Securities

 

Prior to January 1, 2018, the Company accounted for its marketable equity securities at fair value with unrealized gains and losses recognized in accumulated other comprehensive income on the balance sheet. Realized gains and losses on marketable equity securities sold or impaired were recognized in other income (expense), net.

 

On January 1, 2018, the Company adopted the ASU No. 2016-01 which changed the way the Company accounts for marketable equity securities. The Company’s marketable equity securities are measured at fair value and starting January 1, 2018, unrealized gains and losses are recognized in other income (expense), net. Upon adoption, the Company reclassified $180,000 of unrealized loss related to marketable equity securities from accumulated other comprehensive income to opening accumulated deficit.

 

In December 2017, the Company invested €3.4 million or $4.0 million in 270,000 shares of the common stock of Biocartis, a public company listed on the Euronext exchange. This corporate equity security investment was accounted for as an available-for-sale marketable security and valued at €3.0 million or $3.5 million at December 31, 2017. During the year ended December 31, 2017, $180,000 of unrealized losses relating to changes in the fair value of this investment were recorded in other comprehensive income. These securities are subject to a lock-up agreement which expires in December 2018. In accordance with ASU No 2016-01, the Company recorded during the three months ended March 31, 2018, a change in fair value of $127,000 and a foreign currency revaluation gain of $139,000 in other income, net.

 

During the three months ended March 31, 2017, the Company sold its remaining shares of the common stock of Invitae Corporation for net proceeds of $10.2 million based on a cost of $6.28 per share, resulting in a realized gain of $2.8 million. There were no shares sold during the three months ended March 31, 2018. During the three months ended March 31, 2017, $1.1 million of unrealized gain, net of tax of $821,000 related to the shares sold was reclassified out of accumulated other comprehensive income into earnings.

 

 Note 5.  Fair Value Measurements

 

Fair Value Hierarchy

 

The Company measures certain financial assets, including cash equivalents and marketable securities, at their fair value on a recurring basis. The fair value of these financial assets was determined based on a hierarchy of three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

Level 1:   Quoted prices in active markets for identical assets or liabilities;

 

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Level 2:   Observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3:   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The Company did not have any non-financial assets or liabilities that were measured or disclosed at fair value on a recurring basis at either March 31, 2018 or December 31, 2017. The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017 by level within the fair value hierarchy: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actively Quoted

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Balance at

 

 

Assets

 

Inputs

 

Inputs

 

March 31,

 

 

Level 1

 

Level 2

 

Level 3

 

2018

 

 

(In thousands)

As of March 31, 2018:

    

 

    

    

 

    

    

 

    

    

 

    

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

11,501

    

$

 —

    

$

 —

    

$

11,501

Commercial paper

 

 

 —

 

 

34,945

 

 

 —

 

 

34,945

Corporate debt securities

 

 

 —

 

 

49,566

 

 

 —

 

 

49,566

Corporate equity securities

 

 

 —

 

 

3,791

 

 

 —

 

 

3,791

Convertible promissory note

 

 

 —

 

 

 —

 

 

1,402

 

 

1,402

Total

 

$

11,501

 

$

88,302

 

$

1,402

 

$

101,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actively Quoted

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Balance at

 

 

Assets

 

Inputs

 

Inputs

 

December 31,

 

 

Level 1

 

Level 2

 

Level 3

 

2017

 

 

(In thousands)

As of December 31, 2017:

    

 

    

    

 

    

    

 

    

    

 

    

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

10,215

    

$

 —

    

$

 —

    

$

10,215

Commercial paper

 

 

 —

 

 

30,272

 

 

 —

 

 

30,272

Corporate debt securities

 

 

 —

 

 

50,260

 

 

 —

 

 

50,260

Corporate equity securities

 

 

 —

 

 

3,525

 

 

 —

 

 

3,525

Convertible promissory note

 

 

 —

 

 

 —

 

 

1,329

 

 

1,329

Total

 

$

10,215

 

$

84,057

 

$

1,329

 

$

95,601

 

The Company’s commercial paper and corporate debt securities are classified as Level 2 as they are valued using multi-dimensional relational pricing models that use observable market inputs, including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. Not all inputs listed are available for use in the evaluation process on any given day for each security evaluation. In addition, market indicators and industry and economic events are monitored and may serve as a trigger to acquire further corroborating market data. The Company’s corporate equity securities are classified as Level 2 while subject to certain restrictions on sale.

 

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The Company estimated its investment in a convertible promissory note of Cleveland Diagnostics to be approximately $1.4 million and $1.3 million at March 31, 2018 and December 31, 2017, respectively. The convertible promissory note is classified as Level 3 as it is valued using unobservable inputs that are primarily based on the Company’s estimate of the fair value of the underlying preferred stock into which the note  is convertible. During the three months ended March 31, 2018, the Company recorded the unrealized gain due to the change in the fair value to accumulated other comprehensive income.

 

 

Note 6. Collaboration and Commercial Technology Licensing Agreements

 

The Company has entered into a variety of collaboration and specimen transfer agreements relating to its development efforts. The Company recorded collaboration expenses of $573,000 and $935,000 for the three months ended March 31, 2018 and 2017, respectively, relating to services provided in connection with these agreements. In addition to these expenses, some of the agreements contain provisions for royalties from inventions resulting from the collaborations. The Company has specified options and rights relating to joint inventions arising out of these collaborations.

 

The Company is a party to various agreements under which it licenses technology on a non-exclusive basis in the field of human diagnostics. Access to these licenses enables the Company to process its tests. While certain agreements contain provisions for fixed annual payments, license fees are generally calculated as a percentage of product revenues, with rates that vary by agreement and may be tiered, and payments that may have annual minimum or maximum amounts. The Company recognized costs recorded under these agreements totaling $69,000 and $95,000 for the three months ended March 31, 2018 and 2017, respectively, which were included in cost of product revenues.

 

In June 2016, the Company entered into a collaboration agreement with Epic Sciences, under which the Company was granted exclusive distribution rights to commercialize Epic Sciences’ AR-V7 Nucleus Detect test in the United States, which is marketed as Oncotype DX AR-V7 Nucleus Detect. The Company has primary responsibility, in accordance with applicable laws and regulations, for marketing and promoting the test, order fulfillment, billing and collections of receivables, claims appeals,  customer support, and providing and maintaining order management systems for the test. Epic Sciences is responsible for performing all tests, performing studies, including analytic and clinical validation studies, and seeking Medicare coverage and a Medicare payment rate from the Centers for Medicare and Medicaid Services (“CMS”) for the test. Future revenues generated from the test will be shared by the Company and Epic Sciences in accordance with the terms of the agreement. During 2016 and 2017, the Company invested $7.5 million in subordinated convertible promissory notes of Epic Sciences that converted into shares of Epic Sciences preferred stock in March 2017. The subordinated convertible promissory notes had been recognized at fair value, which the Company estimated to be approximately $7.1 million while the difference of $375,000 was deferred as of December 31, 2017 and will be recognized as an additional cost of future purchases of Oncotype DX AR-V7 Nucleus Detect tests, which the Company believes will be at a discount to fair value. Additional terms of the agreement include the Company’s obligation to pay Epic Sciences $4.0 million upon achievement of certain milestones. Also, the Company has agreed, upon achievement of one of the milestones, to invest an additional $2.5 million in Epic Sciences preferred stock. The collaboration agreement has a term of 10 years, unless terminated earlier under certain circumstances.

 

In September 2017, the Company entered into an exclusive license and development agreement with Biocartis, a molecular diagnostics company based in Belgium, to develop and commercialize an in vitro diagnostic (“IVD”) version of the Oncotype DX breast cancer test on Biocartis’ Idylla platform that can be performed locally by laboratory partners and in hospitals around the world. Under the terms of the license and development agreement, the Company has an exclusive, worldwide, royalty-bearing license to develop and commercialize an IVD version of the Oncotype DX breast cancer tests on the Biocartis Idylla platform, and an option to expand the collaboration to include additional tests in oncology and urology. The Company has primary responsibility for developing, validating and obtaining regulatory authorizations and registrations for IVD Oncotype DX tests to be performed on the Idylla platform. The Company is also responsible for manufacturing and commercialization activities with respect to such tests. Pursuant to the license and development agreement, the Company recorded a one-time upfront license and option fee of €2.8 million, or $3.2 million, which is included in research and development expenses in the year ended December 31, 2017. In December 2017, the Company purchased 270,000 ordinary shares of Biocartis at the market price of €12.50 for a total cost of €3.4 

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million or $4.0 million. This investment is subject to a lock-up agreement that expires in December 2018. The investment has been recognized at fair value, which the Company believes to be $3.8 million and $3.5 million at March 31, 2018 and December 31, 2017, respectively. Additional terms of the license and development agreement include the Company’s obligation to pay Biocartis an aggregate of €6.5 million in cash upon achievement of certain milestones, and royalties based primarily on the future sales volumes of the Company’s test performed on the Idylla platform.

 

In November 2017, the Company entered into an exclusive licensing agreement with Cleveland Diagnostics to develop and commercialize new prostate cancer tests based on Cleveland Diagnostics' IsoPSA reagents and technology. Initial efforts under this agreement will focus on the Company’s development of a high-PSA (prostate specific antigen) reflex test to accurately predict the presence of high-grade cancer (Gleason score > 7) prior to prostate biopsy. During the year ended December 31, 2017, the Company invested $2.0 million in a convertible promissory note of Cleveland Diagnostics. The convertible promissory note has been recognized at fair value, which the Company estimated to be approximately $1.4 million and $1.3 million at March 31, 2018 and December 31, 2017, respectively, based on the Company’s estimate of the fair value of the underlying preferred stock into which the note  is convertible. The Company records an accretion of the discount of the convertible promissory note in other income, net of consolidated statement of operations. Additional terms of the license agreement include the Company’s obligation to pay Cleveland Diagnostics up to an aggregate of $18.5 million in cash upon achievement of certain future milestones, a potential future investment in a convertible promissory note of Cleveland Diagnostics in the amount of $3.0 million upon achievement of certain future milestones, and royalties based primarily on the future sales volume of tests performed by the Company utilizing technology licensed from Cleveland Diagnostics.

 

Note 7. Commitments and Contingencies

 

Lease Obligations

 

The Company has entered into non-cancellable operating leases for laboratory and office facilities. Rental expense under operating lease agreements was $1.6 million for each of the three months ended March 31, 2018 and 2017.

 

Future non‑cancelable commitments under these operating leases at March 31, 2018 were as follows:

 

 

 

 

 

 

    

Annual

 

 

Payments

 

 

(In thousands)

Years Ending December 31,

 

 

 

2018 (remainder of year)

 

$

4,638

2019

 

 

6,753

2020

 

 

7,082

2021

 

 

4,825

2022

 

 

4,082

2023 and thereafter

 

 

1,035

Total minimum payments

 

$

28,415

 

Contingencies

From time to time, the Company may be subject to various legal proceedings and claims arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. An estimated loss contingency is accrued in the consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal proceedings, including litigation, government investigations and enforcement actions, could result in material costs, occupy significant management resources and entail civil and criminal penalties, even if the Company ultimately prevails.  Any of the foregoing consequences could result in serious harm to the Company’s business, results of operations and financial condition.

 

 

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Note 8. Stock-Based Compensation

 

Stock Options

 

The following table summarizes the activities for stock options for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding Options

 

 

 

Number of

 

Weighted-Average

 

 

 

Shares

 

Exercise Price

 

 

 

(In thousands)

 

 

 

Balance at December 31, 2017

 

3,460

 

$

26.42

 

Options granted

 

599

 

$

33.21

 

Options exercised

 

(65)

 

$

17.66

 

Options forfeited

 

(77)

 

$

29.44

 

Options expired

 

 —

 

$

 —

 

Balance at March 31, 2018

 

3,917

 

$

27.54

 

Exercisable at March 31, 2018

 

2,493

 

$

26.02

 

Vested and expected to vest at March 31, 2018

 

3,799

 

$

27.44

 

 

Restricted Stock Units

 

The following table summarizes the activities for restricted stock units (“RSU”s) for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

 

 

Number of

 

Grant Date Fair

 

 

Shares

 

Value

 

 

(In thousands)

 

 

 

Balance at December 31, 2017

 

964

 

$

28.25

RSUs granted

 

503

 

$

33.34

RSUs vested

 

(383)

 

$

28.32

RSUs cancelled

 

(123)

 

$

30.12

Balance at March 31, 2018

 

961

 

$

30.64

 

Restricted Stock in Lieu of Directors’ Fees

 

Outside members of the Company’s Board of Directors may elect to receive fully-vested restricted stock in lieu of cash compensation for services as a director. During the three months ended March 31, 2018, the Company issued 1,460 shares of restricted stock to outside directors, with a grant date fair value of $50,000 and a weighted-average grant date fair value of $34.20 per share. 

 

Employee Stock Purchase Plan

 

There were no shares issued pursuant to the Employee Stock Purchase Plan (“ESPP”) during the three months ended March 31, 2018. As of March 31, 2018, there was $210,000 of unrecognized compensation expense related to the ESPP, which is expected to be recognized over a period of two months.

 

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Employee Stock-Based Compensation Expense

 

Share-based compensation expense recognized and included in the condensed consolidated statements of operations was allocated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2018

 

2017

 

 

 

 

(In thousands)

 

 

Cost of product revenues

 

$

228

    

$

191

 

 

Research and development

 

 

1,263

 

 

1,389

 

 

Selling and marketing

 

 

1,287

 

 

1,511

 

 

General and administrative

 

 

2,408

 

 

2,014

 

 

Total

 

$

5,186

 

$

5,105

 

 

 

 

 

Note 9. Segment Information

 

The Company operates in one business segment, which primarily focuses on the development and global commercialization of genomic-based clinical laboratory services that analyze the underlying biology of cancer, allowing physicians and patients to make individualized treatment decisions. The Company’s Oncotype DX breast, colon and prostate cancer tests have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment. As of March 31, 2018, the majority of the Company’s product revenues have been derived from sales of one product, the Oncotype DX breast cancer test.

 

The Company adopted the requirements of Topic 606 on January 1, 2018 using the modified retrospective method, therefore there is a lack of comparability to the prior period presented. See Recently Adopted Accounting Pronouncements in Note 1 for additional information.

 

The following table summarizes total revenue from customers by geographic region. Product revenues are attributed to countries based on ship-to location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

 

 

(In thousands)

 

United States

 

$

78,867

 

$

70,587

 

Outside of the United States

 

 

13,758

 

 

13,392

 

Total revenues

 

$

92,625

 

$

83,979

 

 

 

 

Note 10. Income Taxes  

 

The Company recognized income tax expense of $240,000 and $1.0 million for the three months ended March 31, 2018 and 2017, respectively, which was computed using the “discrete” (or “cut-off”) method. The income tax expense for the three months ended March 31, 2018 was primarily comprised of foreign income tax expense. The income tax expense for the three months ended March 31, 2017 was primarily comprised of the intraperiod tax allocation of the deferred tax impact for available for sale marketable securities and foreign income tax expense.

 

Based on all available objective evidence, the Company believes that it is still more likely than not that its net deferred tax assets will not be fully realized. Accordingly, the Company maintains a valuation allowance against all of its net deferred tax assets as of both March 31, 2018 and December 31, 2017. The Company will continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.

 

The Company had $2.5 million and $2.4 million of unrecognized tax benefits at March 31, 2018 and December 31, 2017, respectively. The Company does not anticipate a material change to its unrecognized tax benefits over the next 12

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months that would affect its effective tax rate. Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.

 

Accrued interest and penalties related to unrecognized tax benefits are recognized as part of the Company’s income tax provision in its condensed consolidated statements of operations. The statute of limitations remains open for the years 2001 through 2018 in U.S. federal and state jurisdictions, and for the years 2012 through 2018 in foreign jurisdictions.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Act) was signed into law. Accounting Standards Codification 740, Income Taxes , requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118, which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. The Company adjusted its deferred tax assets and liabilities based on the reduction of the U.S. federal corporate tax rate from 35% to 21% as of December 31, 2017 and assessed the realizability of its deferred tax assets based on the current understanding of the provisions of the new law. As of March 31, 2018, the Company still considers its accounting for the impacts of the new law to be provisional and will continue to assess the impact of the recently enacted tax law on its business and condensed consolidated financial statements over the next nine months.

 

Note 11.  Restructuring Costs 

 

On March 8, 2018, the Company announced its decision to no longer provide its commercial offering of Oncotype SEQ Liquid Select or any further investment in next generation sequencing (NGS) panels due to a decision to focus the Company’s efforts to develop in vitro diagnostic test solutions and other tests with more predictable reimbursement, higher proprietary value and better prospects for global adoption. With this shift in strategic direction, the Company announced a reduction of its workforce of approximately 10%.  

 

During the three months ended March 31, 2018, the Company recorded charges of $8.5 million consisting of $4.8 million in non-cash asset impairments and $3.7 million in employee separation charges, all of which were recorded as operating expenses in the condensed consolidated statements of operations. Of the $3.7 million of employee separation charges, the Company paid $628,000 during the three months ended March 31, 2018.

 

The Company expects to pay the remaining $3.0 million of employee separation costs primarily during the three months ending June 30, 2018. There were no restructuring costs for the three months ended March 31, 2017.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSI S OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” and similar expressions are intended to identify forward looking statements. These are statements that relate to future periods and include statements about our expectation that, for the foreseeable future, a significant amount of our revenues will be derived from our Oncotype DX invasive breast cancer test; the factors that may impact our financial results; our ability to achieve sustained profitability; our business strategy and our ability to achieve our strategic goals; our expectations regarding product revenues and the sources of those revenues; the amount of future revenues that we may derive from Medicare patients or categories of patients; our belief that we may become more dependent on Medicare reimbursement in the future; our plans to pursue reimbursement on a case-by-case basis; our ability, and expectations as to the amount of time it will take, to achieve reimbursement from third-party payors and government insurance programs for new indications of tests, new tests or in new markets; the potential impact of changes in reimbursement levels for our tests; our expectations regarding our international expansion and opportunities; the potential effects of foreign currency exchange rate fluctuations and our efforts to hedge such effects; our beliefs with respect to the benefits and attributes of our tests or collaborations or tests we may seek to develop or collaborate on in the future; the factors we believe drive demand for our tests and our ability to sustain or increase such demand; our success in increasing patient and physician demand as a result of our direct sales approach and our salesforce’s capacity to sell our tests; plans for, and the timeframe for the development or commercial launch of future tests, test enhancements or new technologies; the factors that we believe will drive reimbursement and the establishment of coverage policies; the capacity of our clinical reference laboratory to process tests and our expectations regarding capacity; our dependence on collaborative relationships to develop tests and the success of those relationships; whether any additional tests will result from our collaborations or license agreements; the applicability of clinical results to actual outcomes; our estimates and assumptions with respect to disease incidence and potential market opportunities; the occurrence, timing, outcome or success of clinical trials or studies; our expectations regarding timing of the announcement or publication of research results; the benefits of our technology platform; the economic benefits of our tests to the healthcare system; the ability of our tests to impact treatment decisions; our beliefs regarding our competitive position; our expectations regarding new and future technologies, including non-invasive test technology, and their potential benefits; our belief that multi gene analysis provides superior analytical information; our beliefs regarding the benefits of genomic analysis in various patient populations; our expectations regarding our research and development, general and administrative and sales and marketing expenses and our anticipated uses of our funds; our expectations regarding capital expenditures; our ability to comply with the requirements of being a public company; our expectations regarding billing and collections; our ability to attract and retain experienced personnel; the adequacy of our product liability insurance; our anticipated cash needs and our estimates regarding our capital requirements; our expected future sources of cash; our compliance with federal, state and foreign regulatory requirements; the potential impact resulting from the regulation of our tests by the U.S. Food and Drug Administration, or FDA, and other similar non-U.S. regulators; our belief that our tests are properly regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA; the impact of new or changing policies, regulation or legislation, or of judicial decisions, on our business and reimbursement for our tests; the impact of seasonal fluctuations on our business; our belief that we have taken reasonable steps to protect our intellectual property; the impact of changing interest rates; our beliefs regarding unrecognized tax benefits or our valuation allowance; the impact of accounting pronouncements and our critical accounting policies, judgments, estimates, models and assumptions on our financial results; the impact of the economy on our business, patients and payors; and anticipated trends and challenges in our business and the markets in which we operate.

 

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, those risks discussed in Item 1A of this report, as well as our ability to develop and commercialize new products and product enhancements; the risk of unanticipated delays in research and development efforts; the risk that we may not obtain or maintain reimbursement for our existing tests or any future tests we may develop, including the risk that we may lose Medicare coverage for our tests; the risk that reimbursement pricing or coverage for our tests may change; the risks and uncertainties associated with the regulation of our tests by the FDA or regulatory agencies outside of the U.S.; risks associated with the outcome

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of any legal proceeding, including litigation, government investigations and enforcement actions against us; the success of our new technology; the results of clinical studies; the applicability of clinical results to actual outcomes; the impact of new legislation or regulations, or of judicial decisions, on our business; our ability to compete against third parties; the success of our collaborations; our ability to obtain capital when needed; the economic environment; and our history of operating losses. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

In this report, all references to “Genomic Health,” “we,” “us,” or “our” mean Genomic Health, Inc.

 

Genomic Health, the Genomic Health logo, Oncotype, Oncotype DX, Recurrence Score, DCIS Score, Genomic Prostate Score, Oncotype SEQ, Oncotype IQ, Oncotype DX AR-V7 Nucleus Detect and Genomic Intelligence Platform are trademarks or registered trademarks of Genomic Health, Inc. We also refer to trademarks of other corporations and organizations in this report.

 

Business Overview

 

We are a global healthcare company that provides clinically-actionable genomic information to personalize cancer treatment. We develop and globally commercialize genomic-based clinical laboratory services that analyze the underlying biology of cancer, allowing physicians and patients to make individualized treatment decisions. We are translating significant amounts of genomic data that will be useful for treatment planning throughout the cancer patient’s journey, from diagnosis to treatment selection and monitoring. We offer our Oncotype tests as a clinical laboratory service, where we analyze the expression levels of genes in tumor tissue samples and provide physicians with a quantitative gene expression profile expressed as a single quantitative score, which we call a Recurrence Score for invasive breast cancer and colon cancer, a DCIS Score for ductal carcinoma in situ, or DCIS, and a Genomic Prostate Score, or GPS, for prostate cancer.

In January 2004, we launched our first Oncotype DX test, which is used to predict the likelihood of cancer recurrence and the likelihood of chemotherapy benefit in early stage invasive breast cancer patients. In January 2010, we launched our second Oncotype DX test, the first multigene expression test developed to assess risk of recurrence in stage II colon cancer patients. In late December 2011, we made Oncotype DX available for patients with DCIS, a pre-invasive form of breast cancer. In June 2012, we extended our offering of the Oncotype DX colon cancer test to patients with stage III disease treated with oxaliplatin-containing adjuvant therapy. In May 2013, we launched our Oncotype DX prostate cancer test, which is used to predict disease aggressiveness in men with low and intermediate risk disease. In July 2017, the Oncotype DX AR-V7 Nucleus Detect test for men with metastatic castration-resistant prostate cancer, or mCPRC, became commercially available as part of a clinical utility program, and we commercially launched the test in February 2018. As of April 30, 2018, the list price of our Oncotype DX breast cancer tests in the United States was $4,620, the list price of our Oncotype DX colon cancer test was $4,420, the list price of our Oncotype DX prostate cancer test was $4,520, and the list price of the Oncotype DX AR-V7 Nucleus Detect test was $3,950. The substantial majority of our historical revenues have been derived from the sale of Oncotype DX breast cancer tests ordered by physicians in the United States.

For the three months ended March 31, 2018, more than 32,440 Oncotype test reports were delivered for use in treatment planning, compared to more than 31,580 test reports delivered for the same period in 2017. All of our internally-developed tests are conducted at our clinical reference laboratory in Redwood City, California, which is accredited under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and certified by the College of American Pathologists, or CAP. Our clinical reference laboratory processing capacity is currently approximately 150,000 tests annually, and has significant expansion capacity with incremental increases in laboratory personnel and equipment. The Oncotype DX breast, colon, and prostate cancer tests analyze different genes. However, all of the tests are based on a similar Oncotype DX reverse transcription polymerase chain reaction, or RT-PCR, platform and require both histology and pathology assessments. We believe that we currently have sufficient capacity to process current demand for our tests.

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We have expanded our clinical laboratory facilities and processing capacity to accommodate future test processing, research and development and general use office space. We expect our continued commercialization efforts of our tests will result in increased costs for laboratory testing, including staffing-related costs, incremental sales and marketing personnel to introduce our products to physicians and patients, costs for clinical utility studies and costs associated with obtaining reimbursement coverage.

We depend upon third-party payors, both public and private, to provide reimbursement for our tests. Accordingly, we have and expect to continue to focus substantial resources on obtaining and maintaining reimbursement coverage from third-party payors. Sales of our tests in the United States and other countries are dependent upon the coverage decisions and reimbursement policies established by government healthcare programs and private health insurers. Market acceptance of our tests has and will continue to depend upon the ability to obtain an appropriate level of coverage for, and reimbursement from, third-party payors for our tests. We have had Medicare coverage for our Oncotype DX invasive breast cancer test since 2006 and for our Oncotype DX colon cancer test since 2011. In October 2015, we obtained Medicare coverage for our Oncotype DX prostate cancer test for patients with low and very-low risk as defined by National Comprehensive Cancer Network, or NCCN, guidelines. Under the terms of the coverage determination for our prostate cancer test, reimbursement is limited to tests ordered by physicians who agree to participate in a Certification Training Registry and to provide certain information about Medicare beneficiaries who receive our test, also referred to as Coverage with Data Development, or CDD. In August 2017, Palmetto GBA, a Medicare Administrative Contractor that processes Medicare claims and sets Medicare coverage and payment policies for certain tests performed by our laboratory, issued its final local coverage determination, or LCD, recommending Medicare coverage for use of our prostate cancer test in qualified patients with favorable intermediate-risk prostate cancer. Effective October 2017, Palmetto expanded their reimbursement coverage of our Oncotype DX prostate cancer test to include qualified patients with favorable intermediate-risk prostate cancer.

On December 16, 2015, Palmetto informed us that they believe it was appropriate to establish a unique identifier code and independent coverage for the Oncotype DX DCIS test. We have obtained a unique identifier code for the Oncotype DX DCIS test, and we submitted to Palmetto additional validation and clinical utility data generated since its previous decision in May 2013, to cover the Oncotype DX DCIS test for all qualified Medicare patients with DCIS. On January 19, 2017, Palmetto announced that it would cover the Oncotype DX DCIS test under a new LCD with CDD, for services furnished beginning March 6, 2017.

We have expanded our business in both the United States and International markets. Operational requirements generally vary from country to country, and different countries may have a public healthcare system, a combination of public and private healthcare system or a cash-based payment system. We have a direct commercial presence with employees in Canada, Japan and certain European countries, including our European headquarters in Geneva, Switzerland. Additionally, we have exclusive distribution agreements for the sale of our breast and colon cancer tests with distributors covering more than 90 countries outside of the United States.

As our international business expands, our financial results become more sensitive to the effect of fluctuations in foreign currency exchange rates. For example, in countries where we have a direct commercial presence, our tests are sold in local currency, which results in foreign currency exchange rate fluctuations affecting our U.S.-dollar reported revenues. In other markets where we sell our tests in U.S. dollars to distribution partners, the demand for our tests may be impacted by the change in U.S. dollar exchange rates affecting partners’ costs or local market price adjustments.

We expect that international sales of our Oncotype tests will be heavily dependent on the availability of reimbursement and sample access. In many countries, governments are primarily responsible for reimbursing diagnostic tests. Governments often have significant discretion in determining whether a test will be reimbursed at all, and if so, on what conditions, for which other competing products, and how much will be paid. In addition, certain countries, such as China, have prohibitions against exporting tissue samples which will limit our ability to offer our tests in those countries without local laboratories or a method of test delivery which does not require samples to be transported to our U.S. laboratory.

The majority of our international Oncotype DX breast and colon cancer test revenues come from direct payor reimbursement, payments from our distributors, patient self-pay, and clinical collaborations in various countries. We

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have obtained some coverage, which varies substantially from country to country, for our breast cancer test outside of the United States, including in Argentina, Canada, the Czech Republic, Germany, Greece, Hungary, Ireland, Israel, Saudi Arabia, Spain, Switzerland and the United Kingdom. In 2013, we announced that the National Institute for Health and Care Excellence, or NICE, in the United Kingdom issued its final guidance recommending Oncotype DX as the only multi-gene breast cancer test for use in clinical practice to guide chemotherapy treatment decisions for certain patients.

We established reimbursement with NHS England following NICE’s recommendation for our breast cancer test, and in 2015 we began to receive payments from NHS England trusts with whom we have completed contractual arrangements. In 2014, the Gynecologic Oncology Working Group in Germany updated their guidelines to recommend Oncotype DX as the only breast cancer gene expression test to predict chemotherapy benefit in early-stage, hormone receptor-positive invasive breast cancer. We expect that it will take several years to establish broad coverage and reimbursement for our Oncotype DX breast, colon and prostate cancer tests with payors in countries outside of the United States and there can be no assurance that our efforts will be successful.

Oncotype DX Breast Cancer Tests

We expect to continue to focus substantial resources on pursuing global adoption of and reimbursement for our Oncotype DX breast cancer test. We believe increased demand for our Oncotype DX breast cancer test resulted from our ongoing commercial efforts, expanded utility for new breast cancer patient groups, continued publication of peer-reviewed articles on studies we sponsored, conducted or collaborated on that support the use of and reimbursement for the test, clinical presentations at major symposia, and the inclusion of our breast cancer test in clinical practice guidelines for, node negative, or N−, estrogen receptor positive, ER+, invasive disease. However, this increased demand is not necessarily indicative of future growth rates, and we cannot provide assurance that this level of increased demand can be sustained or that publication of articles, future appearances or presentations at medical conferences, increased commercial efforts or expansion of utility to new breast cancer patient groups will have a similar impact on demand for our breast cancer test in the future. Sequential quarterly demand for our breast cancer test may also be impacted by other factors, including the economic environment and seasonal variations that have historically impacted physician office visits, any shift in commercial focus, patient enrollment in Oncotype DX clinical studies and the number of clinical trials in process by cooperative groups or makers of other tests conducting experience studies.

Most national and regional third-party payors in the United States, along with the designated regional Medicare Administrator Contractor for our tests, have issued positive coverage determinations for our Oncotype DX breast cancer test for patients with N−, ER+ invasive disease through contracts, agreements or policy decisions. The local carrier with jurisdiction for claims submitted by us for Medicare patients also provides coverage for our invasive breast cancer test for ER+ patients with N+ disease (up to three positive lymph nodes) and invasive breast cancer patients where a lymph node status is unknown or not accessible due to a prior surgical procedure, or when the test is used to guide a neoadjuvant treatment decision. Additionally, some payors provide policy coverage for the use of our test in ER+ patients with N+ disease, including lymph node micro metastasis. However, we may not be able to obtain reimbursement coverage from other payors for our test for breast cancer patients with N+, ER+ disease.

We have established limited reimbursement coverage for the use of our Oncotype DX DCIS test for some private third-party payors. In many instances our test is covered under existing breast cancer coverage policies with the addition of the indicated diagnosis code for DCIS. We have also received a new LCD with CDD for our Oncotype DX DCIS test beginning March 6, 2017. We intend to continue to devote resources to expanding private reimbursement for our Oncotype DX DCIS test in this patient population. We believe it may take several years to achieve reimbursement with a majority of third-party payors for the use of our test for DCIS patients. However, we cannot predict whether, or under what circumstances, payors will reimburse for this test.

We have established coverage for our Oncotype DX invasive breast cancer test in more than 90% of state Medicaid programs for N− disease. In addition, the Veterans Administration and the Department of Defense hospitals have processes in place that provide coverage for this test.

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Oncotype DX Colon Cancer Test

We expect to continue to pursue global adoption of and reimbursement for our Oncotype DX colon cancer test. We believe the key factors that will drive adoption of this test include results from studies we sponsor, conduct or collaborate on that support the use of and increased coverage and reimbursement for the test, clinical presentations at major symposia, publications, inclusion of the test in clinical guidelines and our ongoing commercial efforts.

We are working with public and private payors and health plans to secure coverage for our Oncotype DX colon cancer test based upon our published and presented results in clinical validation studies and the completed and ongoing studies designed to demonstrate the treatment decision impact of the test in clinical practice. In September 2011, the local carrier with jurisdiction for claims submitted by us for Medicare patients established coverage for our colon cancer test for patients with stage II colon cancer. Additionally, the Veterans Administration, Department of Defense hospitals and a few additional private payors provide coverage and reimbursement. We are continuing to speak with state Medicaid providers regarding coverage and reimbursement for our Oncotype DX colon cancer test. We intend to pursue reimbursement while seeking to obtain formal coverage policies with payors and expect that this test will continue to be reviewed on a case by case basis until policy decisions have been established. We may need to hire additional commercial, scientific, technical and other personnel to support this process. We believe it may take several years to achieve additional reimbursement with third-party payors for our colon cancer test. However, we cannot predict whether, or under what circumstances, payors will reimburse for this test.

Oncotype DX Prostate Cancer Test

We expect to continue to focus substantial resources on pursuing global adoption of and reimbursement for our Oncotype DX prostate cancer test. We believe the key factors that will drive adoption of this test include publication of the clinical validation study conducted in collaboration with the University of California, San Francisco and other studies we sponsored, conducted or collaborated on that support the use of and reimbursement for the test, clinical presentations at major symposia and our ongoing commercial efforts.

In August 2015, Palmetto issued its final LCD, approving nationwide coverage of our prostate cancer test for qualified male Medicare patients with low and very-low risk disease, as defined by NCCN guidelines, throughout the United States. The LCD includes specific requirements for certification and training of physicians who order the test and requirements for collection and reporting of specific data elements related to the use of our test and patient outcomes. Effective October 2015, Palmetto initiated reimbursement of the Oncotype DX prostate cancer test.

In August 2017, Palmetto issued its final LCD, recommending Medicare coverage for use of our prostate cancer test in qualified patients with favorable intermediate-risk prostate cancer. Effective October 2017, Palmetto expanded their reimbursement coverage of our Oncotype DX prostate cancer test to include qualified patients with favorable intermediate-risk prostate cancer.

Other than Medicare coverage, we have obtained limited reimbursement coverage from third-party payors for our Oncotype DX prostate cancer test. Our prostate cancer test may be considered investigational by payors and therefore may not be covered under their reimbursement policies. Consequently, we intend to pursue case by case reimbursement and expect that this test will continue to be reviewed on this basis until policy decisions have been made by individual payors. We plan to work with public and private payors and health plans to secure coverage for our Oncotype DX prostate cancer test based upon clinical evidence demonstrating the utility of the test. We believe it may take several years to achieve reimbursement with a majority of third-party payors for our prostate cancer test. However, we cannot predict whether, or under what circumstances, payors will reimburse for this test. We may continue to hire additional commercial, scientific, technical and other personnel to support this process.

Oncotype DX AR-V7 Nucleus Detect Test

In June 2016, we entered into a collaboration agreement with Epic Sciences, Inc., or Epic Sciences, under which we have been granted exclusive distribution rights to commercialize the Oncotype DX AR-V7 Nucleus Detect test in the United States.

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The Oncotype DX AR-V7 Nucleus Detect test is performed by Epic Sciences in its centralized laboratory in San Diego, California, which is accredited under CLIA and certified by CAP. This blood-based test detects the V7 variant of the androgen receptor, or AR, protein in the nucleus of CTCs, and provides information to help guide treatment selection in patients with metastatic castration-resistant prostate cancer, or mCRPC.

In January 2017, investigators from Memorial Sloan Kettering Cancer Center and Epic Sciences published findings in European Urology , that only nuclear localization of AR-V7 protein in CTCs from mCRPC patient blood samples is predictive of therapeutic benefit. Previous work by the same team, reported in JAMA Oncology , demonstrated that nuclear localized AR-V7 protein in CTCs was predictive of a 76% reduction of risk of death for mCRPC patients who received taxane chemotherapy versus Androgen Receptor Signaling Inhibitors. We began making the Oncotype DX AR-V7 Nucleus Detect test available through a clinical utility program in July 2017 and commercially available in February 2018.

We believe that this collaboration is complementary to our product development efforts for our other Oncotype tests and allows us to leverage our commercial channel in a way that we believe may generate growth across our business in the United States. We may also pursue additional collaboration opportunities that are intended to complement our expanding product portfolio.

Commercial Collaborations

In September 2017, we entered into an exclusive license and development agreement with Biocartis N.V., or Biocartis, a molecular diagnostics company based in Belgium, to develop and commercialize an in vitro diagnostic, or IVD, version of the Oncotype DX breast cancer test on Biocartis' Idylla platform that can be performed locally by laboratory partners and in hospitals around the world. The Idylla platform offers a unique solution in the localization of complex molecular diagnostics. Using the sample-to-answer, real-time PCR-based cartridge of the Idylla platform, we intend to enable local pathology labs to generate Oncotype DX breast recurrence score results. Under the terms of the license and development agreement, we have an exclusive, worldwide, royalty-bearing, license to develop and commercialize an IVD version of our Oncotype DX breast cancer test on Biocartis’ Idylla platform, and an option to expand the collaboration to include additional tests in oncology and urology. We have primary responsibility for developing, validating and registering IVD tests to be performed on the Idylla platform, and are also responsible for manufacturing and commercialization activities with respect to such tests.

 

In November 2017, we entered into an exclusive license agreement with Cleveland Diagnostics, Inc., or Cleveland Diagnostics, a biotechnology company based in Cleveland, Ohio, whereby we were granted exclusive global rights to develop and commercialize early- and late-stage cancer diagnostic tests based on Cleveland Diagnostics’ proprietary IsoPSA reagent and solvent interaction analysis technology platform.  We intend to develop and commercialize our first test based on the IsoPSA technology as an IVD blood-based test that can be integrated into the workflow of any urology laboratory practice to distinguish cancer-related PSA isoforms from benign isoforms to detect prostate cancer more precisely than standard PSA testing alone.

 

See Note 6 in the Notes to Condensed Consolidated Financial Statements for additional information regarding the financial terms of our commercial collaboration agreements.

 

Product Development Opportunities

In addition to developing products to address new cancer areas, we seek to expand the clinical utility and addressable patient populations for our existing tests, including expanding our current test offerings to include tests that are performed as IVDs. These development efforts may lead to a variety of possible new products covering various treatment decisions, including risk assessment, screening and prevention, early disease diagnosis, adjuvant and/or neoadjuvant disease treatment, metastatic disease treatment selection and patient monitoring.

Potential new products may address a variety of specific clinical needs by leveraging one or multiple technological capabilities including next-generation sequencing, or NGS, and digital PCR. Additionally, we believe potential new

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products can be implemented in the form of non‑invasive tests performed on blood or urine, similar to the Oncotype DX AR-V7 Nucleus Detect test.

We have also begun development of an IVD version of the Oncotype DX breast cancer test on Biocartis' Idylla platform that can be performed locally by laboratory partners and in hospitals around the world. Finally, we also plan to continue to expand our product footprint through collaborations, including the development of additional prostate tests using technology licensed to us from our collaboration with Cleveland Diagnostics.

As new clinical evidence continues to be introduced, we intend to incorporate such evidence into additional iterations of these tests, which could include additional genes or updated interpretations of genes already included in such tests.

Technology

Next Generation Technologies

When the presence of tumor-derived DNA in blood or urine is high and persists or increases over time, the cancer is likely growing and a new course of treatment may be appropriate. We plan on monitoring this tumor-derived DNA through a variety of technologies to expand our focus beyond early‑stage treatment decision support toward patients with later‑stage disease to help guide therapeutic choices, monitor progression and response to therapeutics, and monitor disease recurrence. We may pursue additional research and development opportunities and leverage our existing and future collaborations using other analytes such as circulating tumor cells, or CTCs, RNA, and proteins. Additionally, we may also use a number of other technologies across our various development programs and to implement our products. While early‑stage cancer continues to represent a significant opportunity with near‑term revenue potential, we believe we also have an opportunity to expand our business further along the patient’s cancer journey, both through our research and development process and strategic collaborations.

Advanced Information Technology

We have developed computer programs to automate our RT-PCR assay processes. We have also developed and optimized laboratory information management systems 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 development studies. We are investigating methods to further automate our workflow.

We are also working with a number of different technologies, such as digital PCR and detection and capture methods for CTCs, and circulating tumor DNA, or ctDNA, to expand our capabilities, and continue to develop methods to enable genomic testing using a variety of biological materials such as blood and urine.  

Economic Environment

Continuing concerns over entitlement and health care reform efforts, including efforts to repeal the Affordable Care Act, or ACA, regulatory changes and taxation issues, and geopolitical issues have contributed to uncertain expectations both for the U.S. and global economies. These factors, combined with uncertainties in business and consumer confidence and continued concerns regarding the stability of some European Union member countries, have contributed to the expectations of slower domestic and global economic growth in the near term. We periodically evaluate the impact of the economic environment on our cash management, cash collection activities and volume of tests delivered.

As of the date of this report, we have not experienced a loss of principal on any of our short-term marketable securities, and we expect that we will continue to be able to access or liquidate these investments as needed to support our business activities. We periodically monitor the financial position of our significant third-party payors, which include Medicare and managed care companies. As of the date of this report, we do not expect the current economic environment to have a material negative impact on our ability to collect payments from third-party payors in the foreseeable future. We believe the economic environment and changes in the healthcare system continued to impact product payment cycles, growth in tests delivered and product revenue generated during the three months ended March 31, 2018. We

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intend to continue to assess the impact of the economic environment on our business activities. If the economic environment does not improve or deteriorates, our business including our patient population, government and third-party payors and our distributors and suppliers could be negatively affected, resulting in a negative impact on our product revenues.

U.S. Healthcare Reimbursement and Regulatory Environment

The healthcare industry has undergone significant change driven by various efforts to reduce costs, both in the U.S. and in many foreign countries. The effect of the implementation of the ACA or any future changes to the ACA on our business is uncertain and, could among other things limit the use of our tests and reduce reimbursement. We also expect that pricing of medical products and services will remain under pressure as alternative payment models such as bundling, value-based purchasing and accountable care organizations develop in the United States. Additionally, the ACA requires medical device manufacturers to pay a 2.3% excise tax on U.S. sales of certain medical devices that are listed with the FDA starting in January 2013; this tax has been suspended through 2019, but is scheduled for re-imposition in 2020. Various proposals have been put forth, including by the FDA to regulate laboratory developed tests, or LDTs, as medical devices. Although none of our LDTs, such as our Oncotype DX breast, colon and prostate cancer tests, are currently listed with the FDA, we cannot assure you that the tax will not apply to services such as ours in the future.

In addition, the Protecting Access to Medicare Act of 2014, or PAMA, requires CMS to implement a substantial new payment system for certain clinical laboratory tests which became effective in 2018. Under PAMA, laboratories that receive the majority of their Medicare revenues from payments made under the Clinical Laboratory Fee Schedule, or CLFS, or the Physician Fee Schedule will be required to report every three years (or annually for “advanced diagnostic laboratory tests”), private payor payment rates and volumes for their tests. CMS will use the rates and volumes reported by laboratories to develop Medicare payment rates for the tests equal to the volume-weighted median of the private payor payment rates for the tests. As a result, effective January 1, 2018, our Medicare reimbursement rate increased by more than 10%. This rate will be reassessed every three years.

There have also been recent and substantial changes to the payment structure for physicians, including those passed as part of the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which was signed into law on April 16, 2015. MACRA created the Merit-Based Incentive Payment System which, beginning in 2019, more closely aligns physician payments with composite performance for the Physician Quality Reporting System, the Value-based modifier program and the Electronic Health Record Meaningful Use program, and incentivizes physicians to enroll in alternative payment methods. At this time, we do not know whether these changes to the physician payment systems will have any impact on orders or payments for our tests.

Changes in Medicare Administrative Contractor (MAC) services

On a five-year rotational basis, Medicare requests bids for its regional MAC services. In September 2013, the claims processing function for our jurisdiction transitioned from Palmetto GBA, to Noridian, our current MAC. Palmetto GBA under their MolDx Program is continuing to establish coverage and coding policies for molecular diagnostic tests performed in our jurisdiction, including our tests, which is not subject to the same five-year rotation as for regional MAC services. The elimination of the MolDx Program or a change in the administrator of that program could impact the current coverage for our existing tests and our ability to obtain Medicare coverage for products for which we do not yet have coverage or any products we may launch in the future, or delay payments for our tests.

Critical Accounting Policies and Significant Judgments and Estimates

 

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts in the financial statements and related disclosures. On an ongoing basis, management evaluates its significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates. Estimates are assessed each period and updated to reflect current information. A summary of our critical accounting policies is presented in Part II, Item 7 of our

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Table of Contents  

Annual Report on Form 10-K for the year ended December 31, 2017. During the first quarter of 2018, we adopted new accounting guidance related to revenue recognition, accounting for financial instruments and presentation of restricted cash in the statement of cash flows, each of which is described below at “Recently Adopted Accounting Pronouncements.” There have been no other significant changes in our accounting policies during the three months ended March 31, 2018 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Results of Operations

 

Three months ended March 31, 2018 and 2017

 

We recognized a net loss of $3.8 million for the three months ended March 31, 2018 compared to a net loss of $806,000 for the three months ended March 31, 2017. On a basic and diluted per share basis, net loss per share was $0.11 for the three months ended March 31, 2018 compared to a net loss of $0.02 for the three months ended March 31, 2017. We may incur net losses in future periods due to future spending and fluctuations in our business, and we may not achieve or maintain sustained profitability in the future.

 

Revenues

 

We derive our revenues primarily from product sales and, in some periods, from contract research arrangements. We operate in one industry segment. As of March 31, 2018, the substantial majority of our product revenues have been derived from the sale of our Oncotype DX breast cancer test. Payors are billed upon generation and delivery of test results to the ordering physician.

 

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

March 31,

 

 

 

2018