UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 20192022
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 001-36156
VERACYTE, INC.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 20-5455398 | |||||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |||||||||||||
6000 Shoreline Court, Suite 300 South San Francisco, California | ||||||||||||||
( | ( | |||||||||||||
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value, $0.001 per share | VCYT | The Nasdaq Stock Market LLC | ||||||||||||
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Exchange Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2019,2022, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $1.3$1.4 billion, based on the closing price of the common stock as reported on the Nasdaq Global Market for that date.
The number of shares of the registrant's Common Stock outstanding as of February 20, 202024, 2023 was 49,738,822.72,149,636.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant's 20202023 Annual Meeting of Stockholders, to be held on or about June 5, 2020the Proxy Statement, are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statementThe Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2019.2022.
TABLE OF CONTENTS
| Item No. | Page No. | ||||
PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "expects," "anticipates," "intends," "estimates," "plans," "believes," "continuing," "ongoing," and similar expressions are intended to identify forward-looking statements. These are statements that relate to future events and include, but are not limited to, the factors that may impact our financial results; our expectations regarding revenue; our expectations with respect to our future research and development, general and administrative and selling and marketing expenses and our anticipated uses of our funds; the impact of inflation, rising interest rates and foreign exchange fluctuations, as well as the conflict in Ukraine, energy and supply chain disruptions, and market volatility resulting from the above, on our business; the impact of the COVID-19 pandemic and our expectations regarding the return to pre-COVID-19 volume and revenue levels; changes in our executive officers; our beliefs with respect to the optimization of our processes for the analysis of ribonucleic acid, or RNA, samples; our integration of the assets acquired from NanoString Technologies, Inc.;ability to successfully integrate HalioDx and Decipher Biosciences into our business; our ability to deploy the nCounter FLEX Analysis System successfully and run our tests on this platform worldwide; our collaboration with Johnson & Johnson Services, Inc., or Johnson & Johnson;; our belief in the importance of maintaining libraries of clinical evidence; our expectations regarding the Percepta Nasal Swab classifier for early lung cancer detection, the Envisia classifier on the nCounter system and the LymphMark lymphoma subtyping test; our expectations regarding our diagnostic company partnerships; our ability to have the targeted Atlas platform transferred to our pulmonology indications; our expectations regarding capital expenditures; our anticipated cash needs and our estimates regarding our capital requirements; the timing and success of our transition to a single platform for all of our classifiers and tests; our ability to obtainmaintain Medicare coverage for each of our tests; our need for additional financing; potential future sources of cash; our business strategy and our ability to execute our strategy; our ability to achieve and maintain reimbursement from third-party payers at acceptable levels and our expectations regarding the timing of reimbursement; the estimated size of the global markets for our tests; the estimated number of patients who receive uncertain diagnoses who are candidates for our test; the attributes and potential benefits of our tests and any future tests we may develop to patients, physicians and payers; the factors we believe drive demand for and reimbursement of our tests; our ability to sustain or increase demand for our tests; our intent to expand into other clinical areas; our ability to develop new tests, and the timeframes for development or commercialization; our ability to get our data and clinical studies accepted in peer-reviewed publications; our dependence on and the terms of our agreement with Thyroid Cytopathology Partners, or TCP, and on other strategic relationships, and the success of those relationships; our beliefs regarding our laboratory capacity; the potential for future clinical studies to contradict or undermine previously published clinical study results; the applicability of clinical results to actual outcomes; our expectations regarding our international expansion; the occurrence, timing, outcome or success of clinical trials or studies; the ability of our tests to impact treatment decisions; our beliefs regarding our competitive position; our compliance with federal, state and international regulations; the potential impact of regulation of our tests by the Food and Drug Administration, or FDA, or other regulatory bodies; the impact of new or changing policies, regulation or legislation, or of judicial decisions, on our business; the impact of seasonal fluctuations and economic conditions on our business; our belief that we have taken reasonable steps to protect our intellectual property; our belief that our intellectual property will develop and maintain our competitive position; the impact of accounting pronouncements and our critical accounting policies, judgments, estimates, models and assumptions on our financial results; and anticipated trends and challenges in our business and the markets in which we operate. We caution you that the foregoing list does not contain all of the forward-looking statements made in this report.
Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, those risks discussed in Part I, Item 1A of this report. 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.
When used in this report, all references to "Veracyte," the "company," "we," "our" and "us" refer to Veracyte, Inc., together with its consolidated subsidiaries, unless otherwise noted.
Veracyte, Afirma, Percepta, Envisia, Prosigna, LymphMark, and Know by Design,Lymphmark, Decipher, GRID, HalioDx, Brightplex, Immunosign, and the Veracyte Afirma, Percepta, Envisia and Prosigna logoslogo are our trademarks. We also refer toregistered trademarks of other corporationsVeracyte, Inc. and its subsidiaries in the U.S. and selected countries. nCounter is the registered trademark of NanoString Technologies, Inc., or organizationsNanoString, in this report that are the propertyU.S. and selected countries and used by Veracyte under license. Immunoscore is the registered trademark of their respective owners.Institut National de la Santé et de la Recherche Médicale, or Inserm, in the U.S. and selected countries and used by Veracyte under license.
This annual report contains statistical data and estimates that we obtained from industry publications and reports. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Some data contained in this annual report is also based on our
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internal estimates. Although we have not independently verified the third-party data, we are responsible for its inclusion in the annual report and believe it to be reasonable.
General
At Veracyte, we believe that exceptional cancer care begins with exceptional diagnostics. We are a leading genomicglobal diagnostics company that is creating value through innovation. We were foundedempowers clinicians with the high-value insights they need to guide and assure patients at pivotal moments in 2008 with a mission of improving diagnostic accuracy. Today, our growing menu ofthe race to diagnose and treat cancer. Our high-performing tests leverage advances in genomic science and technologyenable clinicians to improve care throughout the patient journey, enablingmake more confident diagnostic, prognostic and treatment decisions, helping patients avoid unnecessary procedures and interventions, and speed time to appropriate treatment, thereby improving outcomes for patients all over the world.
Our high performing tests are developed using our proven framework of identifying an unmet clinical need, determining the combination of appropriate biomarkers utilizing cutting-edge genomic and other technologies, and then tuning our assays with deep scientific and machine learning capabilities.
We currently offer tests in thyroid cancer (Afirma); prostate cancer (Decipher Prostate); breast cancer (Prosigna); interstitial lung diseases (Envisia); and bladder cancer (Decipher Bladder). Our Percepta Nasal Swab test is being run in our CLIA lab in support of clinical studies and our tests for kidney cancer and other challenging diseases. lymphoma are in development, the latter as a companion diagnostic.
We are creating new standardsserve global markets with two complementary models. In the United States, we offer laboratory developed tests, or LDTs, through our centralized, Clinical Laboratory Improvement Amendments of care by enabling more patients to avoid risks of unnecessary invasive procedures and removing costs from the healthcare system, while expediting the time to diagnosis and treatment decisions.
In December 2019,March 2021, we announcedacquired Decipher Biosciences, expanding our genomic testing menu into urologic cancers. The acquisition from NanoString Technologies,also provided us with Decipher GRID (Genomics Resource for Intelligent Discovery), a platform and database that helps drive biopharmaceutical partnerships, key opinion leader, or KOL, engagement and pipeline development in urologic cancers.
In August 2021, we acquired HalioDx SAS and HalioDx Inc., or NanoString,historically a wholly owned subsidiary of an exclusive global diagnostics licenseHalioDx SAS, (collectively referred to as “HalioDx”), giving us the nCounter® FLEX Analysis System, as well as the Prosigna® breast cancer prognostic gene signature assay, which is commercially available,capabilities and the LymphMark™ lymphoma subtyping assay, which is in development. Both tests are designedexpertise to manufacture our own IVD test kits for use on the nCounter system. Analysis System. The acquisition also deepened our scientific expertise and capabilities in the rapidly growing area of immuno-oncology further strengthening our offerings to biopharmaceutical and other partners.
We believe thiswere incorporated in Delaware as Calderome, Inc. in August 2006. Calderome operated as an incubator until early 2008. We changed our name to Veracyte, Inc. in March 2008.
Our Proven Framework for Test Development and Commercialization
We have an established framework to develop and commercialize tests to benefit physicians, patients and payers in the diagnosis, prognosis and treatment of cancer.
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Our process begins with our comprehensive strategic transaction positions us to expand our business globally withplanning approach which identifies unmet clinical needs in oncology through a broad menuexamination of advanced genomic tests that may be offered as distributed kitsthe clinical care spectrum, in collaboration with our physician customers and performed in local laboratories worldwide. We believe our currentKOL partners. Our experienced medical affairs team supports the process by conducting extensive diligence to understand the patient journey – focusing on diagnosis, prognosis and pipeline products address a collective $40 billion global market.
We believeutilize a comprehensive, platform-agnostic, approach to developing our powerful scientific platform provides multiple vectorsdiagnostic tests that leverages innovations in genomic technology, immuno-oncology, and machine learning, and does so, across numerous biological specimen types. Further, our development activities focus on the same type of sample on which it will be used in clinical practice, which are prospectively collected through Institutional Review Board-approved multicenter clinical trials. This enables us to create value for patients, providers and payers, as well as stockholders, and to help advance precision medicine:
We use machine learning algorithms to inform our discovery efforts. Our biorepositories are designedmatch biological patterns with “clinical truth,” or the true diagnosis or clinical outcome, which allows us to encompasspredict the broad spectrumpresence, or absence, of disease that our tests may encounter when usedor a patient’s prognosis in a clinical practice, as well as the wide range of conditions associated with patients who are suspected of having a particular disease. We extract extensive genomic information from these patient samples using our RNA whole-transcriptome sequencing platform.
We then drive adoption and access to our tests by cultivating further KOL support and developing robust clinical evidence in an effort to gain reimbursement, and ultimately guideline inclusion. In addition to publishing the results of clinical validation studies, we also publish analytical validation studies to establish the reproducibility of our tests across lab instruments, operators and samples. We engage KOLs and community physicians in studies to build the clinical utility evidence needed to support coverage policies and reimbursement from Medicare and private payers. Additionally, our clinical and medical affairs teams continue to liaise with physicians on user-experience, decision impact and other studies. To date, we estimate that approximately 200 studies demonstrating the performance and clinical utility of our CLIA-based tests have been published in peer-reviewed medical journals.
Our ability to develop rigorous clinical evidence for our tests has enabled their inclusion in leading clinical practice guidelines, including those from the National Comprehensive Cancer Network, or NCCN. Our CLIA model enables us to develop high-performingmanage the rollout of our tests and bill payers directly, which facilitates test adoption and helps us work directly with payers to secure payment, as well as coverage policies. We employ a team of in-house claims processing and reimbursement specialists who work with payers, physician practices and patients to optimize reimbursement. We have achieved Medicare reimbursement for all our commercially supported tests. We expect to continue to focus on increasing adoption, coverage, and reimbursement of our tests and to build upon our extensive library of clinical evidence.
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Our tests address unmet clinical needs in seven of the 10 most prevalent cancers by U.S. incidence and are sold directly to physicians through our specialized sales teams. Our experienced marketing teams help drive penetration through a range of strategies and tactics, including medical conference participation and events, speaker programs, digital marketing programs, advocacy group engagement and other initiatives.
By leveraging our internal technology and bioinformatics capabilities across our growing database of highly-curated data for more than 375,000 patient samples, we will have the ability to further drive new product development in existing and future indications and offer unique insights to biopharmaceutical researchers. Our data assets and biorepositories may include RNA, DNA, variant, fusion and other genomic classifiers that can answer specificdata, immune-response data, and well-curated clinical, questions. In addition,radiological, outcome and other information.
Serving the U.S. Market Through Our CLIA Labs
Our tests are improving patient care in thyroid, prostate, lung, and bladder cancer, as well as in interstitial lung disease.
Currently all of our bioinformatics pipelinestests in the U.S. are built to extract genomic variant content from the same assay to inform therapeutic selection.
Our Clinical Diagnostic Tests Offered Through Our CLIA lab.Labs
We developed the Afirma® Genomic Sequencing Classifier, or GSC, (itsto determine which patients with indeterminate results are actually benign so that these patients may avoid unnecessary, costly surgery that often leads to the need for lifelong daily thyroid hormone replacement drugs. The test was developed with RNA whole-transcriptome sequencing and machine learning technology to provide physicians with clinically actionable results from the same FNA biopsy used for initial cytopathology.
Strong clinical validation data from a multicenter cohort of prospectively collected patient samples were published in JAMA Surgery. The findings showed that Afirma GSC has a sensitivity of 91% and specificity of 68%, meaning that in a patient population with 24% cancer prevalence – which is what would be expected in clinical practice – the test can identify more than two-thirds of benign thyroid nodules, with a negative predictive value, or NPV, of 96%. A meta-analysis of 13 independent studies assessing the test's performance in a real-world clinical setting found a sensitivity of 97%, a specificity of 88%, and an NPV of 99%, reinforcing Afirma's performance.
Afirma GSC and its predecessor, was the Afirma Gene Expression Classifier, or GEC) for thyroid cancer;are supported by more than 70 peer-reviewed, published studies. These include the Percepta® GSC (its predecessor was the Percepta Bronchial Genomic Classifier) for lung cancer; the Envisia® Genomic Classifier for IPF; the Afirma Xpression Atlas, which provides information on the most common and emerging gene alterations associated with thyroid cancer, enabling physicians to confidently tailor surgical and treatment decisions at time of diagnosis; and the Prosigna breast cancer test for assessing risk of distant recurrence, which is available for use on the nCounter platform in the United States and internationally.
An estimated 288,000 men are diagnosed with prostate cancer each year in the United States. Prior to the utilization of genomics, clinicians relied solely on developingclinical parameters, such as prostate-specific antigen, or PSA, level and pathology to determine the appropriate treatment for each patient. But those factors alone do not always reflect the true biology of the tumor, which often leads to over- and under-treatment of patients with localized prostate cancer. The Decipher Prostate Genomic Classifier test results dramatically improve the physician's ability to personalize therapy for each patient and make more appropriate treatment decisions.
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The Decipher Prostate cancer tests, developed through whole-transcriptome analysis and machine learning, are used across localized disease to predict a patient’s risk of progressing to metastatic disease within five years, which helps physicians determine an appropriate treatment plan. The Decipher Prostate Biopsy test is performed on a prostate biopsy sample following a cancer diagnosis to inform whether the patient is a candidate for active surveillance, needs monotherapy or may benefit from multi-modal or intensified therapy. The Decipher Prostate RP test is performed on surgical tissue to guide decision-making regarding treatment timing following radical prostatectomy and to help determine whether patients undergoing salvage radiotherapy may benefit from the addition of hormone therapy or may safely avoid hormone therapy and its side effects.
The Decipher Prostate Genomic Classifier is currently being investigated in seven National Cancer Institute-sponsored, phase 3, prospective, randomized controlled clinical trials; 24 phase 2/3 prospective trials; and more than 20 retrospective studies of phase 3 randomized controlled trials. Many of these trials require Decipher Prostate testing for study inclusion. The test’s performance and utility has been evaluated in approximately 70 peer-reviewed, published studies.
The NCCN Clinical Practice Guidelines in Oncology, or NCCN Guidelines, for Prostate Cancer (v1.2023) includes a new table (Table 1) in Principles of Risk Stratification summarizing the characteristics of different tools used for initial risk stratification of clinically useful tests that change patient carelocalized prostate cancer. In this table, Decipher Prostate is enabling the companyonly gene expression test with the highest level of evidence (Level 1) for validation. The NCCN Guidelines also uniquely suggest use of the Decipher Prostate RP test to set new standards in genomic test reimbursement. Our genomic classifiers in thyroidinform treatment recommendations, post surgery, based on the patient’s Decipher score. Decipher Prostate is covered by Medicare and commercial payers representing approximately 195 million enrollees.
Lung Cancer - Percepta Nasal Swab Test
Lung cancer has the highest mortality rate of all cancers worldwide, causing approximately 1.8 million deaths each year. Lung nodules are typically the first sign of lung cancer and cannot be ignored – however, most of them are benign. Physicians currently have limited objective tools to help accurately determine which patients with lung nodules found on CT scans have cancer. Approximately 15 million patients are now recommended for annual lung cancer CT screening to detect potentially cancerous lung nodules early. Today, approximately 1 million Americans are screened annually for lung cancer, and about 1.6 million lung nodules are found incidentally. We developed the Percepta Nasal Swab test to help physicians more accurately, quickly and confidently identify lung cancer risk so that patients whose lung nodules are benign may avoid unnecessary invasive procedures and patients whose nodules are likely cancerous may proceed to further diagnostic work-up and, if necessary, treatment.
The Percepta Nasal Swab test is built upon foundational "field of injury" science - through which genomic changes associated with lung cancer in current and former smokers to detect smoking-related damage associated with lung cancer in current or former smokers, but uses a sample collected non-invasively from the nasal passage. Veracyte developed the final classifier using RNA whole-transcriptome sequencing and machine learning on a training set of nasal samples from more than 1,100 patients representing a wide range of lung and tumor biology.
In clinical validation data presented at the 2021 American College of Chest Physicians, or CHEST, Annual Meeting, when the Percepta Nasal Swab test identified patients as low risk, its sensitivity was 97%, providing a negative predictive value, or NPV, of 98% in a population with the 25% cancer prevalence that would be expected in a broad cohort with suspicious lung nodules. This NPV would assist physicians in avoiding unnecessary invasive procedures in these patients with a very small likelihood of missing a cancer. When the test identified patients as high risk, its specificity was 92%, for a positive predictive value, or PPV, of 70% at a malignancy rate of 25%. Given these data, we believe the Percepta Nasal Swab test would assist physicians in directing these patients to further procedures so they could obtain an accurate diagnosis and speed time to treatment, if necessary. Patients in the moderate risk group could be managed according to current clinical guidelines. We are running the Percepta Nasal Swab test in our CLIA lab in support of our clinical utility study, in an effort to demonstrate data to help drive Medicare and private payer coverage, as well as clinical adoption.
ILD/IPF - Envisia Genomic Classifier
Each year in the United States approximately 200,000 patients are suspected of having an interstitial lung disease, or ILD, including idiopathic pulmonary fibrosis, or IPF, which is among the most common and deadly of these lung-scarring diseases. Obtaining an accurate, timely IPF diagnosis is important given the availability of drugs that can slow the progression of this debilitating disease, as well as the Prosigna breast cancer assayneed to avoid inappropriate and potentially harmful treatment. Additionally, prognostic information may help physicians determine treatment plans for patients with ILDs, including IPF.
Limitations in current technologies make IPF notoriously difficult to diagnose, often leading to treatment delays, repeated misdiagnoses, patient distress and added healthcare expenses. Physicians routinely use high-resolution computed tomography, or HRCT, imaging to identify usual interstitial pneumonia, or UIP, the pattern whose presence is essential to IPF diagnosis. This approach, however, frequently provides inconclusive results, with current guidelines recommending consideration of
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surgery to secure a more definitive diagnosis. Such surgeries are risky and expensive, and many patients are too frail to undergo the procedure.
The Envisia classifier is the first test of its kind for improving the diagnosis of ILDs, including IPF, without the need for surgery. The test identifies usual interstitial pneumonia, or UIP, a pattern that is essential to the diagnosis of IPF, with high accuracy on patient samples that are obtained through transbronchial biopsy, a nonsurgical procedure that is commonly used in lung evaluation.
The Envisia classifier is supported by clinical data published in eight peer-reviewed journals, including The LancetRespiratory Medicine and American Journal of Respiratory and Critical Care Medicine. In 2022, an updated global (ATS/ERS/JRS/ALAT) clinical practice guideline highlighted the role of the Envisia Classifier in the diagnosis of IPF with more than 40% of the guideline authors voting to recommend Envisia testing. The guideline points to a newly published meta-analysis in AnnalsATS demonstrating consistently high specificity of 92% across 4 separate studies.
We obtained Medicare coverage for the Envisia classifier through the Molecular Diagnostics Services Program, or MolDX, program in 2019. We estimate that half of the patients evaluated for ILDs/IPF in the United States are covered by Medicare. Our Afirma classifier,
Bladder Cancer - Decipher Bladder Genomic Classifier
Each year in the U.S., nearly 85,000 people are expected to be diagnosed with bladder cancer. Patients diagnosed with non-metastatic muscle-invasive bladder cancer, or MIBC, often undergo neoadjuvant chemotherapy, or NAC, prior to standard-of-care radical cystectomy, even though the absolute survival benefit associated with the addition of NAC to radical cystectomy is just 5-10%. Until recently, there was no reliable way to determine which MIBC tumors would – or would not – respond to chemotherapy.
Decipher Bladder is a genomic test that measures the molecular profile of bladder cancer using gene expression analysis from transurethral resected bladder tumor specimens. The test was developed for use in thyroidbladder cancer diagnosis,patients with high-grade non-muscle-invasive disease who are being considered for treatment and patients with muscle-invasive disease who face the question of immediate cystectomy or systemic treatment in the neoadjuvant setting prior to cystectomy. Decipher Bladder reports the molecular subtype of the tumor specimen as Luminal or Non-Luminal (Luminal Infiltrated, Basal, Basal Claudin-Low or Neuroendocrine-like), with each subtype having distinct biological composition, clinical behavior and predicted benefit from NAC and may have implications for future therapeutic strategies.
The Decipher Bladder test is nowsupported by multiple peer-reviewed clinical studies demonstrating its ability to identify which patients have a higher risk of upstaging to non-organ confined disease at surgery and which patients may benefit the most from neoadjuvant therapy.
We began commercialization of the Decipher Bladder test in the fall of 2021, following final Medicare coverage for the test in July 2021. The Decipher Bladder test is the first genomic test to be covered by every major health planMedicare for patients with bladder cancer.
Driving Global Growth with Distributed IVD Tests
Once we have developed robust clinical evidence and physician adoption of our tests in the United States, we typically then drive further patient access by launching them, as appropriate, into global markets as IVD tests that are run on the nCounter Analysis System. This approach enables our tests to be performed locally in laboratories and hospitals worldwide, which collectively insure more than 275 million people.we believe facilitates market access and physician adoption in Europe and other strategic global markets.
In December 2019, we acquired the exclusive worldwide license to the nCounter Analysis System for clinical IVD test use, development and commercialization. We expect this instrument platform to enable a broad range of testing through its ability to simultaneously conduct multiplex evaluation of up to 800 RNA and other targets.
We currently offer IVD testing in breast cancer and, looking forward, we believe we are contracted as an in-network service providerwell positioned to health plans representing over 225 million peopledevelop and deliver a menu of tests for use on the nCounter Analysis System. Our acquisition of HalioDx in August 2021 provides us with a European headquarters to develop, manufacture and supply our own IVD test kits. We plan to transition manufacturing of our tests, currently produced by NanoString in the United States.U.S., to our facility in France, giving us end-to-end control of our IVD test supply chain. We believeanticipate the vertical integration of research, development and manufacturing will enhance our ability to efficiently serve the global market with a broad menu of diagnostic tests.
Breast Cancer - Prosigna Breast Cancer Assay
Breast cancer is the most common cancer and the leading cause of cancer-related death in women worldwide. In 2020, there were an estimated 2.3 million new cases of the disease. Hormone receptor positive breast cancer is the most prevalent type of breast cancer, comprising approximately 70% of cases. Of these, we estimate that our in-network statusthe global early-stage breast cancer recurrence market is significant, with private payers will help facilitate private insurer reimbursementapproximately 750,000 patients potentially eligible for our Percepta and Envisia classifiers. Thethe Prosigna testBreast Cancer Assay
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annually. This is covered by leading private payerscomprised of approximately 280,000 patients in the United States and 270,000 across the major markets in Europe.
Information about individual patients’ prognosis is widely reimbursed by governmentthe foundation of treatment decision-making and private payersrecommendations in the countries where itbreast cancer. However, traditional non-molecular tests are often insufficient to reliably determine patients’ individual risk of recurrence and, therefore, adequately inform therapy decisions.
The Prosigna Breast Cancer Assay is available.
The Prosigna assay is clinically validated in studies published in Annals of Oncology and the Journal of Clinical Oncology. Medicare coverage for Prosigna has been in effect since 2015. The test is cleared byrecommended in guidelines from the FDA for marketingNational Comprehensive Cancer Network and the American Society of Clinical Oncology in the United States. Outside of the United States, the test is included in leading medical guidelines, including from the National Institute for useHealth and Care Excellence in the United Kingdom and the European Society for Medical Oncology, or ESMO.
The Prosigna assay utilizes formalin-fixed and paraffin-embedded breast cancer tissue and is offered as an IVD test that runs on the nCounterDx Analysis System and is available for use when ordered by a physician.System. The test is performed on formalin-fixed and paraffin-embedded, or FFPE, tissue. The Prosigna test has been CE-marked,CE-IVD marked, showing that it conforms with European Union regulations, and is available for use by healthcare professionals in the European Union and other countries that recognize the CE mark, as well as in Canada, Israel, Australia, New Zealand and Hong Kong. The Prosigna test is covered by Medicare and leading private payersFDA 510(k) cleared in the United States and is widely covered by government and private payers in the countries where it is available.
The Prosigna Breast Cancer Assay is sold to makelaboratories by our genomic tests availabledirect sales team, who also lead efforts to physicians and patients worldwide through a distributed platformgain support among KOLs in which customers perform the tests in their local laboratories. This transaction also expands our existing genomic test offerings into new oncology indications of breast cancer oncology.
Biopharmaceutical and lymphoma. Other Revenue
We believe the global market opportunity forhave formed numerous biopharmaceutical partnerships that derive value out of our current andassets or future pipeline products is over $40 billion annually.
Biopharmaceutical customers may be interested in leveraging our data to: first, understand or confirm a drug’s method of action by looking at patients’ gene expression profiles or tumor microenvironment pre- and post-treatment; second, identify predictive or prognostic biomarkers for drug response, toxicity or disease progression, which we believe are importantdefine the ideal patient subpopulation for a given therapy; and/or lastly, identify patient populations with rare genetic variations for clinical trials or existing therapies. We also offer customized biomarker testing and analytical services to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. Further, we believe our expanded global footprint and move into new clinical areas in oncology, enabled by the nCounter FLEX Analysis System acquired from NanoString, will prove highly attractive to biopharmaceutical companies, which need access to patients worldwide forpartners, helping them advance their targeted therapies.
Through the research collaboration with Loxo Oncology,acquisition of HalioDx in 2021, we bolstered our offering to these customers by gaining expertise in immuno-oncology. Our immuno-oncology offerings to biopharmaceutical partners focus on the biopharmaceutical company gained access to data derived from our Afirma Xpression Atlas platform for use in its development of highly selective medicines for patients with genetically defined cancers, including thyroid cancer.
Additionally, we deploy our know-how in IVD test development to develop and Europe. We believe the global market opportunitymanufacture such tests for our currentother diagnostic companies in indications that are noncompetitive to Veracyte.
COVID-19 and pipeline products is over $40 billion annually.
We believe the addressable market opportunity forCOVID-19 outbreak, including its numerous variants, impacted our Afirma solution is $720 milliontotal test volumes primarily during 2020 and 2021. Our customers, third-party contract manufacturers, carriers, suppliers and collaboration partners have been affected by the closure of hospitals, doctors' offices, manufacturing sites, or country borders, among other measures put in place around the world. Layoffs, furloughs and unplanned loss of staff in the United Statesmedical industry and approximately $100 million inotherwise during the European Union. We currently do notpandemic have meaningful operations or sales outsidehad, and will continue to have, negative impacts on the United States.
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In addition, ongoing interest rate increases and inflation in the United States in early 2021. The nCounter system can also run additional tests developed by us, as well as by potential diagnostics or biopharmaceutical partners seeking access to global markets.
operations. We continued to expand our domestic field sales team in 2019 and we expectintend to continue to investmonitor macroeconomic conditions closely and may determine to take certain financial or operational actions in response to such conditions as appropriate. Finally, the measures taken by Russia in response to European support for Ukraine have increased the risk of disruptions to energy supplies in Europe, which may impact our ability to manufacture tests from our facility in Marseille, France.
The extent of the impact of COVID-19 and other macroeconomic factors on our future liquidity and operational performance will depend on certain developments, including the deployment and long-term efficacy of vaccines; the duration and spread of the outbreak particularly in the form of more transmissible variants; the impact on our customers' operations; the impact to our sales and marketing to support our commercial expansion effortsrenewal cycles; changes in the United States. Additionally, through the strategic transaction with NanoString, we hired a small numbercentral bank policies and interest rates; rates of personnel to support Prosigna laboratory customersinflation; and changes in the United States.foreign currency exchange rates. See Risk Factors for further discussion.
Revenue from our tests comes from several sources, including commercial third-party payers, such as insurance companies and health maintenance organizations, government payers, such as Medicare and Medicaid, and patients. The Centers for Medicare & Medicaid Services, or CMS, administers the Medicare and Medicaid programs, which provide health care to almost one in every three Americans. For any particular geographic region, Medicare claims are processed at the local level by Medicare Administrative Contractors, or MACs.
Medicare generally covers molecular diagnostic tests through the individual Medicare Administrative Contracts, or MACs. Medicare coverage for most of Veracyte’s tests is determined through the MolDX program, administered by the MAC Palmetto GBA. Medicare has covered ourThrough Local Coverage Determinations, or LCDs, and associated coverage articles, MolDX covers Afirma classifierGSC, Envisia, Decipher Prostate, Decipher Bladder, and Prosigna. For testing since 2012 and Percepta classifier testing since 2017. We received Medicareservices that do not fall within the scope of the MolDX program, coverage for our Envisia classifier testing in 2019. The Prosignamay be adjudicated by the MAC with jurisdiction over the laboratory that performs the test, achieved Medicare coverage in 2015. We estimate that Medicare covers approximately 20% of patients evaluated for thyroid cancer and approximately 50% of patients evaluated for lung cancer, IPF and breast cancer, respectively.
Since 1984, Medicare has paid for clinical diagnostic laboratory tests, or CDLTs, on the Clinical Laboratory Fee Schedule, or CLFS, under section 1833(h) of the Social Security Act, or the SSA. Section 216(a) of the Protecting Access to Medicare Act of 2014, or PAMA, added section 1834A to the SSA. The statute requiredmade extensive revisions to the Medicare CLFS coding, rate setting processes, and laboratory payment reporting for CDLTs, and createscreated a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests, or ADLTs, with separate reporting and payment requirements.
In 2016, the Centers for Medicare and Medicaid Services, or CMS, issued the final rule to implement the requirements of PAMA, which significantly revised the Medicare payment system for clinical diagnostic laboratory tests.CDLTs. The final rule was implemented on January 1, 2018, for the private payer rate-based fee schedule required by PAMA. Under the final rule, for CDLTs furnished on or after January 1, 2018, the amount Medicare pays is equal to the weighted median of private payer rates for the CDLT.
We submit claims to payers directly for the Afirma GSC, using a unique American Medical Association Current Procedural Terminology, code, or CPT, code 81545. FNA samples are also receivedcodes when they exist for cytopathology, for which we bill both the technicalour products and professional component using establishedservices and use either miscellaneous or common CPT codes.
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When we contract to serve as a contracted provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. Becoming a contracted provider generally results in higher reimbursement for covered indications and lack of reimbursement for non-covered indications. As a result, the United Statesimpact of becoming a contracted provider with a specific payer will vary.
In some cases, third party payers may request audits of the amounts paid to us. This may require us to repay certain amounts to payers as a result of such audits.
Factors that perform Prosigna testing on their own nCounter instruments bill payers directly using the CPT code that is specific to the Prosigna test, 81520. We expect that, when we perform Prosigna testingimpact reimbursement:
•Variability in our own CLIA certified lab that we will bill payers directly for Prosigna testing.
•Network status and claims adjudication as do private payers. We rely on a small numberin-network or out of third-partynetwork and corresponding patient co-pay/coinsurance responsibilities
•Patient financial assistance programs
•Changes to AMA-CPT coding rules and edits
•Medicare clinical laboratory and physician fee schedules
•Government sequestration
•Medicaid fee schedules
•Contracted rates for our diagnostics
•Utilization management or prior authorization processes and steps put in place by commercial payers ensuring medical necessity of services ordered for a significant portion of our revenue, the loss of one or more of which would have a negative effect on our business. patients
•Billing errors
•Claims disputes
For the years ended December 31, 2019, 2018,2022, 2021 and 2017,2020, respectively, revenue was represented by the indicated percent for each payer:
Medicare accounted for 29%31%, 26%30% and 27%24% of our revenue; and
Outside the United States
Outside of the United States, we bill hospital and laboratory customers directly for test kits they order, which currently consist of Prosigna test kits.order. Our customers subsequently bill third-party payers for reimbursement. Prosigna test marketing has initially targeted private and cash-pay markets in Europe. We will continue to drive Prosigna reimbursement efforts in Europe and other global markets through the development of clinical and other evidence to support Prosigna’sthe test’s inclusion in guidelines and coverage programs.
Competition
Our Decipher Prostate test faces competition from companies developing new products or technologies.Myriad Genetics and MDxHealth, which offer genomic testing for prognostic purposes within localized prostate cancer. Additionally, traditional methods used by pathologists and clinicians to estimate risk of disease progression pose competitive threats to our business. Companies combining these traditional methods with artificial intelligence could potentially emerge as competitors, but most of these technologies are currently in the research stage. In bladder cancer, we are not currently aware of a direct competitor offering genomic testing for prognostic purposes that match the intended use population for our test. However, DNA mutational analysis, traditional clinical methods and nomograms are currently in use by physicians for similar purposes.
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Increasing acceptance and knowledge of the importance of earlier screening and diagnostic testing linked with improved patient outcomes and therapy selection is leading to more companies developing genomic testing services and technologies. We may also anticipate facing potentialface competition from companies offeringinforming treatment decisions such as Guardant Health or developing approaches for assessing malignancy risk in patients with lung nodulesFoundation Medicine, Inc. Competition could also emerge from competitors, using alternative samples, such as blood, urine or sputum, including Biodesix, Inc. and Guardant Health, Inc. However, such "liquid biopsies" are predominantly used later in the diagnostic paradigm; for example, to inform treatment decisions for cancer or to gauge risk of recurrence or response to treatment.sputum.
Patents and Proprietary Technology
In order to remain competitive, we must develop and maintain protection of the proprietary aspects of our technologies. To that end, we rely on a combination of patents, copyrights and trademarks, as well as contracts, such as confidentiality, invention assignment and licensing agreements. We also rely upon trade secret laws to protect unpatented know-how and continuing technological innovation. In addition, we have what we consider to be reasonable security measures in place to maintain confidentiality. Our intellectual property strategy is intended to develop and maintain our competitive position.
We apply for and in-license patents covering our products and technologies and uses thereof, as we deem appropriate; however, we may fail to apply for patents on important products and technologies in a timely fashion or at all, or we may fail to apply for patents in potentially relevant jurisdictions. Certain of our issued patents expire between 2024 and 2038 and are related to methods used in thyroid cancer diagnostics, urologic cancers diagnostics, lung cancer and disease diagnostics, breast cancer diagnostics, and immuno-oncology diagnostics.
We intend to file additional patent applications in the United States and abroad to strengthen our intellectual property rights; however, our patent applications may not result in issued patents in a timely fashion or at all, and we cannot assure investors that any patents that have issued or might issue will protect our technology. We may receive notices of claims of potential infringement from third parties in the future.
We hold or in-license registered trademarks in the United States for “Veracyte,” “Afirma,” “Percepta,” “Envisia,” “Prosigna,” “Lymphmark,” “Decipher,” “GRID,” “HalioDx,” “Immunoscore,” “Brightplex,” “Immunosign,” and the Veracyte logo. We also hold registered trademarks in various jurisdictions outside of the United States.
We require all employees and consultants working for us to execute confidentiality agreements, which provide that all confidential information received by them during the course of the employment or consulting relationship be kept confidential, except in specified circumstances. Our agreements with our employees provide that all inventions, discoveries and other types of intellectual property, whether or not patentable or copyrightable, conceived by the individual while he or she is employed by us, are assigned to us. We cannot provide any assurance, however, that employees and consultants will abide by the confidentiality or assignment terms of these agreements. Despite measures taken to protect our intellectual property, unauthorized parties might copy aspects of our technology or obtain and use information that we regard as proprietary.
Environmental Matters
Our operations require the use of hazardous materials (including biological materials) which subject us to a variety of federal, state and local environmental and safety laws and regulations. Some of these regulations provide for strict liability, holding a party potentially liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others’, business operations should contamination of the environment or individual exposure to hazardous substances occur. We cannot predict how changes in laws or new regulations will affect our business operations, or the cost of compliance. Historically, the cost of compliance for these safety laws and regulations related to the protection of the environment has not materially impacted our operations. There were no material capital expenditures related to environmental compliance in the
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year ended December 31, 2022. Similarly, we do not anticipate any significant expenditures for the year ended December 31, 2023.
Raw Materials and Suppliers
We procure reagents, equipment, and other materials that we use to perform our tests from sole suppliers. We also purchase components used in our collection kits from sole-source suppliers. Some of these items are unique to these suppliers and vendors. In addition, we utilize external providers to assemble and distribute our sample collection kits. While we have developed alternate sourcing strategies for these materials and vendors, we cannot be certain whether these strategies will be effective, or the alternative sources will be available when we need them. If these suppliers can no longer provide us with the materials we need to perform the tests and for our collection kits, if the materials do not meet our quality specifications or are otherwise unusable, if we cannot obtain acceptable substitute materials, if materials become unavailable due to COVID-19 related increases in demand for the materials, or if we elect to change suppliers, an interruption in test processing could occur, we may not be able to deliver patient reports and we may incur higher one-time switching costs. Any such interruption may significantly affect our future revenue, cause us to incur higher costs, and harm our customer relationships and reputation. In addition, in order to mitigate these risks, we maintain inventories of these supplies at higher levels than would be the case if multiple sources of supply were available. If our test volume decreases or we switch suppliers, we may hold excess inventory with expiration dates that occur before use which would adversely affect our losses and cash flow position. As we introduce any new test, we may experience supply issues as we ramp test volume.
Legal Proceedings
From time to time, we may be party to lawsuits in the ordinary course of business. We are currently not a party to any material legal proceedings.
Regulation
Clinical Laboratory Improvement Amendments of 1988, or CLIA
As a clinical reference laboratory, we are required to hold certain federal, state and local licenses, certifications and permits to conduct our business. We are subject to CLIA, a federal law that regulates clinical laboratories that test specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. Under CLIA, which is administered by CMS, we are required to hold a certificate applicable to the type of laboratory examinations and tests we perform and to comply with standards covering personnel qualifications, facilities administration, quality systems, inspections, and proficiency testing. We must maintain CLIA compliance and certification to sell our tests and be eligible to bill for diagnostic services provided to Medicare beneficiaries.state and federal healthcare programs, as well as many private third-party payers.
Moreover, if one of our clinical reference laboratories is out of compliance with CLIA requirements, we may be subject to sanctions such as suspension, limitation or revocation of our CLIA certificate, as well as directed plan of correction, state on-site monitoring, civil money penalties, civil injunctive suit or criminal penalties.penalties, or cancellation of our approval to receive payments under Medicare for our services. If we were to be found out of compliance with CLIA requirements and subjected to sanctions, our business could be harmed.
We have historically heldhold CLIA certifications to perform testing at our South San Francisco and San Diego, California; Richmond, Virginia; and Austin, Texas laboratory locations. To renew our CLIA certificates, we are subject to survey and inspection every two years to assess compliance with program standards. Moreover, CLIA inspectors may makeconduct random inspections of our clinical reference laboratories. If we in the future fail to maintain CLIA certificates in our South San Francisco or Austin, Texas laboratory locations, we would be unable to bill for services provided by state and federal healthcare programs, as well as many private third-party payers, which may have an adverse effect on our business, financial condition and results of operations.
State Laboratory Licensing
California Laboratory Licensing
In addition to federal certification requirements of laboratories under CLIA, licensure is required and maintained for our South San Francisco and San Diego, California and Richmond, Virginia clinical reference laboratorylaboratories under California law. Such laws establish standards for the day-to-day operation of a clinical reference laboratory, including the training and skills required of personnel and quality control. In addition, California laws mandate proficiency testing, which involves testing of specimens that have been specifically prepared for the laboratory.
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If our clinical reference laboratory islaboratories are out of compliance with California standards, the California Department of Public Health, or CDPH, may suspend, restrict or revoke our license to operate our clinical reference laboratory,laboratories, assess substantial civil money penalties, or impose specific corrective action plans. Any such actions could materially affect our business. We maintain a current licenselicenses in good standing with CDPH. However, we cannot provide assurance that CDPH will at all times in the future find us to be in compliance with all such laws.
New York Laboratory Licensing
Our clinical reference laboratories are required to be licensed by New York, under New York laws and regulations before we receive specimens from New York. The New York State. The license establisheslaws and regulations establish standards for:
•quality management systems;
•qualifications, responsibilities, and training;
•facility design and resource management;
•pre-analytic, analytic (including validation and quality control), and post-analytic systems; and
•quality assessments and improvements.
New York law also mandates proficiency testing for laboratories licensed under New York state law, regardless of whether such laboratories are located in New York. If a laboratory is out of compliance with New York statutory or regulatory standards, the New York State Department of Health, or NYSDOH, may suspend, limit, revoke or annul the laboratory's New York license, censure the holder of the license or assess civil money penalties. Statutory or regulatory noncompliance may result in a laboratory's operator being found guilty of a misdemeanor under New York law. NYSDOH also must approve the laboratory developed tests or LDTs, before the test is offered in New York; approval has been received for the Afirma GECGSC, Envisia, Decipher Prostate and theDecipher Bladder tests. NYSDOH approval has also been received for Percepta classifier.Nasal Swab in support of our clinical trial. Should we be found out of compliance with New York laboratory standards of practice, we could be subject to such sanctions, which could harm our business. We maintain a current license in good standing with NYSDOH for our South San Francisco and San Diego, California and Austin, Texas laboratories. We cannot provide assurance that the NYSDOH will at all times find us to be in compliance with applicable laws.
Other States' Laboratory Licensing
In addition to New York and California, other states require licensing of in-state and out-of-state laboratories under certain circumstances. For example, Pennsylvania, Maryland and Rhode Island require licenses to test specimens from patients in those states and Florida requires a license to receive specimens from a clinical laboratory in that state.states. We have obtained licenses from states where we believe we are required to be licensed and believe we are in compliance with applicable licensing laws.
From time to time, we may become aware of other states that require in-state or out-of-state laboratories to obtain licensure in order to accept specimens from, or conduct laboratory operations in, the state, and it is possible that other states do have such requirements or will have such requirements in the future. If we identify any other state with such requirements or if we are contacted by any other state advising us of such requirements, we intend to comply with such requirements.
United States Regulation of Laboratory Testing
Food and Drug Administration: In Vitro Diagnostics and Diagnostic Kits
The FDC Act sets forth for the classifications of medical devices into one of three categories based on the risks associated with the device and prescribes the levels of controls appropriate for each of the three classes to help ensure reasonable assurance of safety and effectiveness. Class I devices are considered to be low risk and are generally exempt from FDA premarket notification requirements. Class I devices are subject to general regulatory controls. When general controls are
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considered insufficient to provide reasonable assurance of safety and effectiveness, but there is sufficient information to establish special controls to provide such assurance, FDA will classify the device as a Class II device. For mostUnless exempt, for Class II devices, the FDC Act requires the submission to FDA of a premarket notification, referred to as a “510(k),” which must provide data and information showing that the device is substantially equivalent to aan already legally marketed device, referred to as a predictivepredicate device, with respect to the indications for use and the product’s technological characteristics. If the data and information are sufficient to show that the device is as safe and effective assubstantially equivalent to the predicate device, FDA issues a Substantially Equivalent letter clearing the device for marketing.
If there is insufficient information to support classifying a device into Class I or Class II and the device is life-sustaining or life-supporting or is substantially important in preventing illness or injuryimpairment of human health or presents a potential unreasonable risk of illness or injury, FDA places the device into Class III. Class III devices are considered the highest risk devices and generally require significant data and information, including testing data and data from nonclinical and clinical studies, to provide reasonable assurance of the device's safety and effectiveness. For Class III devices, requireFDA requires the submission and FDA approval of a premarket application, or PMA, before they can be marketed.
Certain devices are classified as Class III devices automatically, by operation of law, when the device does not have a predicate device or is found to not to be substantially equivalent to a predicate device. If there is sufficient evidence to show that the device is a lower risk device, a manufacturer may ask FDA to reclassify the device into Class II or Class I by submitting a De Novo classification request. When FDA reclassifies a device through the De Novo process, other manufacturers of the same device type do not necessarily have to submit a De Novo request or a PMA in order to legally market the device. Instead, manufacturers can submit a 510(k), unless the device has been classified as 510(k) exempt,-exempt, to legally market their device, because the device that was the subject of the original De Novo request can serve as a predicate device for a substantial equivalence determination. If FDA does not issue an order granting the De Novo request for reclassification, the device will remain a Class III device and be subject to PMA requirements to obtain marketing authorization.
Establishments that manufacture or, in certain situations, distribute FDA-related medical devices, including manufacturers, repackagers and relabelers, specification developers, and initial importers, are required to register and list their device productsdevices with the FDA.FDA, including payment of annual user fees.
Devices that may be legally marketed are subject to numerous regulatory requirements. These include: good manufacturing practice for medical devices as set out in the Quality System Regulation, or QSR, labeling regulations, restrictions on promotion and advertising, the Medical Device Reporting regulation, or MDR (which requires manufacturers to report certain adverse events and product malfunctions to the FDA), and the Reports of Corrections and Removals regulation (which requires manufacturers to report certain recalls and field actions to the FDA). Certain corrections and market removals may also be subject to FDA’s recall regulation and procedures.
The FDA has issued a regulation outlining specific requirements for "specimen transport and storage containers." "Specimen transport and storage containers" are medical devices "intended to contain biological specimens, body waste, or body exudate during storage and transport" so that the specimen can be destroyed or used effectively for diagnostic examination. A specimen transport and storage container that is not labeled or otherwise represented as sterile is classified as a Class I exempt device, which means that the device is exempt from the 510(k) premarket notification requirement and, if not labeled or otherwise represented as sterile, the QSR, except for recordkeeping and complaint handling requirements. These 510(k) exempt devices are still subject to general controls, including MDR requirements, the reporting of corrections and removals, and establishment registration and product listing.
In our FDA registration, we have registration, we have listed the containers we provide for collection and transport of Afirma GEC or GSC and PerceptaEnvisia samples from a physician to our clinical reference laboratory as Class I devices in accordance with the classification of regulation for the specimen transport and storage container . We also plan to list our sample collection containers for Envisia samples with the FDA as Class I devices.container. If the FDA were to determine that our sample collection containers are not Class I devices, we wouldmay be required to file 510(k) applicationspremarket notifications and obtain FDA clearance to manufacture and market the containers, which could be time consuming and expensive.
The FDA enforces the requirements described above by various means, including inspection and market surveillance. If the FDA finds a violation, it can institute a wide variety of enforcement actions, ranging from an Untitled Letter or Warning Letter to more severe sanctions such as:
•fines, injunctions, and civil money penalties;
•recall or seizure of products;
•operating restrictions, partial suspension or total shutdown of production; and
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•criminal prosecution.
Federal Oversight of Laboratory Developed Tests and Research Use Only Products
Clinical laboratory tests like our proprietary genomic tests are regulated under CLIA, as administered by CMS, as well as by applicable state laws. Clinical laboratory tests that are developed and validated byrun within a single CLIA-certified laboratory are referred to as laboratory developed tests, or LDTs, by the FDA. Currently, the FDA believes these tests meet the definition of a device under the FDC Act; however,Act and that it has the authority to regulate them. However, the FDA is currently exercising enforcement discretion for LDTs, meaning thatthe FDA is not currently enforcing the device regulations that the FDA has statedwould apply to clinical laboratories performing a LDT ,such tests, although the FDA may continue to enforce device regulations with respect to certain reagents, instruments, software or components provided by third parties and used to perform LDTs. We believe that the Afirma Percepta and Envisia classifiers, as well as our Decipher Prostate and Bladder tests, have been developed and are LDTs for which FDA is currently exercising itsperformed in a manner consistent with the FDA’s enforcement discretion. discretion policy.
In October 2014, the FDA published a draft guidance document proposing a framework for the regulation of LDTs. In November 2016, the FDA announced that it would not finalize guidance and would instead work with the new Administration, Congress and stakeholders on an updated framework. In January 2017, the FDA issued a discussion paper on LDTs in which it synthesized stakeholder feedback and outlined a substantially revised "possible approach" to the oversight of LDTs, which did not represent a formal position of the FDA and is not enforceable. In a December 2018 statement, the FDA said that there is a need for “a unified approach to the regulation of in vitro clinical tests to protect patient safety, support innovation, and keep pace with the rapidly evolving technology that’s helping us find new treatments for disease,” and listed key principles of an approach it would support. However, FDA’sThe FDA has not exercised enforcement discretion policy is expectedover all LDTs. For example, in response to the COVID-19 pandemic, the FDA required LDTs for SARS-CoV-2 to undergo premarket review and obtain Emergency Use Authorization (EUA) in order to remain on the market. The extent to which the FDA will continue to exercise enforcement discretion over other LDTs is unclear. Various legislative proposals have been introduced in place unless and untilrecent years to clarify the FDA’s regulatory authority over clinical diagnostic tests. Even in the absence of a legislative change, it is possible that the FDA announces and implements a different approachwill promulgate regulations, issue guidance, or take other action to the regulation ofexert additional oversight over LDTs.
Some of the materials we use for our tests and that we may use for future tests are in vitro diagnosticIVD products intended and labeled for research use only, or RUO, or investigational use only, or IUO. An RUO product cannot be used for any human clinical purpose and must be labeled "For Research Use Only. Not for use in diagnostic procedures." RUOs are a separate regulatory category and include in vitro diagnosticIVD devices that are in the laboratory research phase of development. They are therefore not subject to most FDA regulatory requirements, so long as they are properly labeled and used in accordance with such labeling. RUOs cannot be marketed with any claims, or in a manner indicating, that the device is safe, effective, or has diagnostic utility, or is intended for human clinical diagnostic or prognostic use. In November 2013, the FDA issued final guidance titled “Distribution of In-VitroIn Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” regarding the distribution, use, and labeling of in vitro diagnosticIVD products labeled RUO or IUO. The FDA has advised that if evidence demonstrates that a product is inappropriately labeled for research or investigational use only, the device would be considered misbranded and adulterated within the meaning of the FDC Act. In the guidance, the FDA stated that the manufacturer’s objective intent for an RUO or IUO product’s intended use will be determined by examining the totality of circumstances, including advertising, instructions for clinical interpretation, presentations that describe clinical use, and specialized technical support, surrounding the distribution of the product in question.
We cannot predict the ultimate form or impact of any such RUO/IUO, LDT or other guidance and the potential effect on our solutions or materials used to perform or develop our diagnostic services. While we qualify all materials used in our diagnostic services according to CLIA regulations, we cannot be certain that the FDA might not promulgate rules or issue guidance documents that could affect our ability to purchase materials necessary for the performance of our diagnostic services. Should any of the reagents obtained by us from vendors and used in conducting our diagnostic services be affected by future regulatory actions, our business could be adversely affected by those actions, including increasing the cost of service or delaying, limiting or prohibiting the purchase of reagents necessary to perform the service.
We cannot provide any assurance that FDA premarket review or other requirements will not be imposed in the future for our diagnostic services, whether through additional guidance or regulations issued by the FDA, new enforcement policies adopted by
the FDA or new legislation enacted by Congress. Legislative proposals addressing oversight of LDTs were introduced in recent years, most recentlyincluding the Verifying Accurate Leading-edge IVCT Development (VALID) Act of 2018 in December 2018, the most recent version of which was released in July 2022, and we expect that new legislative proposals will be introduced from time to time. It is possible that legislation could be enacted into law or regulations, or guidance could be
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issued by the FDA which may result in new or increased regulatory requirements for us to continue to offer our tests or to develop and introduce new tests.
If premarket review, clearance, or approval is required for the tests that we market as LDTs, our business could be negatively affected until such review is completed and clearance or approval to market is obtained, and the FDA could require that we stop selling our tests pending premarket clearance or approval. If our tests are allowed to remain on the market but there is uncertainty about the legal status of our services, if we are required by the FDA to label them investigational, or if the FDA limits the use and corresponding labeling claims, order levels may decline, and reimbursement may be adversely affected. The regulatory process may involve, among other things, successfully completing additional clinical studies and submitting to the FDA a premarket notification to obtain clearance or submitting aDe Novo classification request or PMA to obtain approval to market the device. If clearance or approval is required by the FDA, there can be no assurance that our tests will be cleared or approved on a timely basis, if at all, nor can there be any assurance that approved labeling claims or labeling claims subject to cleared indications for use will be consistent with our current claims or adequate to support continued adoption of and reimbursement for our solutions. Ongoing compliance with FDA regulations would increase the cost of conducting our business, and subject us to heightened requirements of the FDA and penalties for failure to comply with these requirements. We may also decide voluntarily to pursue FDA premarket review of our tests to obtain marketing clearance or approval if we determine that doing so would be appropriate.
European Union Regulation of Laboratory Testing
Directive 98/79/EC
In the European Union, or EU, IVDs were previously regulated under EU-Directive 98/79/EC, or the IVDD, and corresponding national provisions.
The IVDD requires that IVDs meet certain essential requirements, which are set out in an annex of the IVDD. To demonstrate compliance with the essential requirements, IVDs must undergo a conformity assessment procedure. As a general rule, demonstration of conformity of IVDs and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use.
IVDs must bear the CE marking of conformity when they are placed on the market, unless a specific exemption applies. Compliance with the IVDD essential requirements is a prerequisite for a manufacturer to be able to affix a CE mark, which is a declaration by the manufacturer that the IVD meets all the appropriate requirements under the IVDD and corresponding national provisions, as applicable.
Under the IVDD, for most IVDs manufacturers used to “self-declare” the conformity of their IVDs with the essential requirements of the IVDD. For some types of IVDs listed in Annex II of the IVDD, a conformity assessment procedure required the intervention of a notified body. Notified regulatory bodies are independent organizations designated by Member States to assess the conformity with the essential requirements of medical devices, including IVDs when required, before a CE mark is affixed to the device and the device is placed on the market. The notified body would typically audit and examine the device’s technical file and the manufacturer’s quality system, though conformity with the relevant harmonized standards – which is ISO 13485:2016 for Quality Management Systems – can be used to demonstrate compliance with these requirements. If satisfied that the IVD conforms to the relevant essential requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity.
In Vitro Diagnostic Medical Device Regulations (2017/746)
The EU regulatory landscape concerning medical devices and IVDs is significantly changing. The IVDD was replaced with the full implementation of the In Vitro Diagnostic Medical Device Regulations (2017/746), or IVDR, in the EU on 26 May 2022. This is, however, subject to relevant transitional periods, as amended.
The main aims of the IVDR are to standardize diagnostic procedures throughout the EU, increase reliability of diagnostic analysis and enhance patient safety. As such, IVDs will be subject to additional regulatory scrutiny once the IVDR has come into force fully.
The IVDR introduces a rule-based classification system, whereby IVDs must be classified into one of four classes: A, B, C or D. Class A is the lowest risk, and Class D is the highest. These take into account the intended purpose of the IVD and its inherent risks. The IVDR also introduces new requirements for conformity assessments. In particular, substantially more IVDs
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will require the involvement of a notified body to be able to affix a CE mark to the IVD. In addition, under the IVDR there is a greater emphasis on post-market surveillance and submission of post-market performance follow-up reports.
Many LDTs, or in-house tests, were not regulated by the IVDD. However, the IVDR sets out a number of provisions that apply to such tests, and requirements that must be met in order to be able to place the test on the market in the EU. The IVDR also introduces a new classification system for companion diagnostics which are now specifically defined. Companion diagnostics have to undergo a conformity assessment by a notified body. Before it can issue a certificate of conformity, the notified body has to seek a scientific opinion from the European Medicines Agency or the relevant national competent authority on the suitability of the companion diagnostic to the medicinal product concerned.
IVDs with existing valid notified body-issued CE certificates may currently continue to place those devices on the market (if unchanged) until 27 May 2024 or until their certificate expires, whichever occurs first. However, it is estimated that 80-90% of IVDs will not qualify for this grace period because they are self-certified under the IVDD but will require the involvement of a notified body to obtain a CE mark and demonstrate compliance with the IVDR. Due to the lack of capacity on the part of EU notified regulatory bodies to deal with the volume of IVDs requiring their input, the EU Commission adopted a proposal to amend the transitional provisions of the IVDR. This proposal would extend certain transitional provisions where IVDs can continue to be placed on the market under the IVDD for a certain period of time. The applicable amended transitional periods are based on the risk class of the IVD, with higher risk IVDs needing to be fully compliant with the IVDR in a shorter time period than lower risk IVDs.
United Kingdom, or UK, Regulation of Laboratory Testing
Following the UK’s departure from the EU, the IVDR will not be implemented in Great Britain (England, Scotland and Wales). The previous UK legislation that implemented the IVDD, the Medical Devices Regulations 2002 (SI 2002 No 618, as amended), or the 2002 Regulations, remains applicable. As such, the regulatory regime for IVDs in Great Britain will continue to be based on the requirements derived from the IVDD, though the UK is currently conducting a consultation on the medical device and IVD regime, including whether to align with the IVDR going forward.
Since January 1, 2021, new regulations require medical devices and IVDs to be registered with the Medicines and Healthcare products Regulatory Agency, or MHRA, before being placed on Great Britain market (but manufacturers were given a grace period of four to 12 months to comply with the new registration process). The MHRA will only register devices where the manufacturer or their UK Responsible Person has a registered place of business in the UK. As such, manufacturers based outside the UK need to appoint a UK Responsible Person that has a registered place of business in the UK to register devices with the MHRA in line with the grace periods.
In addition, a new route to market and accompanying mark, the UKCA, has been introduced to enable manufacturers to place medical devices and IVDs on the market in Great Britain. The requirements for this route to market are based on the requirements derived from EU law as currently implemented in the UK. CE marks and certificates issued by EU-designated notified regulatory bodies will continue to be valid for the Great Britain market until June 30, 2023. For medical devices, including IVDs, placed on the market in Great Britain after this period, the UKCA marking will be mandatory. In contrast, UKCA marking and certificates issued by UK notified regulatory bodies are not recognized on the EU market.
The position in Northern Ireland is different to Great Britain. The rules for placing medical devices and IVDs on the Northern Ireland market align with the rules in the EU and, as such, the IVDR will apply in Northern Ireland and will take effect in accordance with EU timeframes and transitional periods. Therefore, devices marketed in Northern Ireland will require assessment according to the EU regulatory regime. Such assessment may be conducted by an EU notified body, in which case a CE mark will be required before placing the device on the market in the EU or Northern Ireland. Alternatively, if a UK notified body conducts such assessment, a “UKNI” mark will be applied, and the device may only be placed on the market in Northern Ireland and not the EU.
Privacy and Fraud and Abuse Compliance
Health Insurance Portability and Accountability Act and State Data Privacy Laws
Under the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, the U.S. Department of Health and Human Services, or HHS, has issued regulations to protect the privacy and security of protected health information used or disclosed by covered entities, which include health care providers, such as us. HIPAA also regulates standardization of data content, codes and formats used in health care transactions and standardization of identifiers for health plans and providers. In
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2009, Congress amended HIPAA through the Health Information Technology for Economic and Clinical Health Act, or HITECH. The implementing regulations of HIPAA, as amended by HITECH, were last modified in 2013 and resulted in significant changes to the privacy, security, breach notification, and enforcement requirements with which we must comply. Among these changes, covered entities are now vicariously liable for violations of HIPAA resulting from acts or omissions of their business associates where the business associate is an agent of the covered entity and was acting within the scope of its agency, regardless of whether the covered entity and business associate entered into a business associate agreement in compliance with HIPAA. Penalties for violations of HIPAA regulations include civil and criminal penalties. Additionally, HHS on January 21, 2021 and November 28, 2022 issued notices of proposed rulemaking that contain proposed modifications to the HIPAA regulations in relation to substance use disorder records as well as efforts to encourage coordination of care for patients. In the event that HHS issues final changes to the HIPAA regulations based on its proposals in the notices of proposed rulemaking, we would be required in the future to comply with the HIPAA regulations as amended.
We have developed and implemented policies and procedures designed to comply with HIPAA’s privacy, security, and breach notification requirements. We may not use or disclose protected health information in any form, including electronic, written, or oral, in a manner that is not permitted under HIPAA, and we are required to implement security measures to ensure the confidentiality, integrity, and availability of the electronic protected health information that we create, receive, maintain, or transmit. While we have some flexibility in determining which security safeguards are reasonable and appropriate to implement for our operations, it nonetheless requires significant effort and expense to ensure continuing compliance with the HIPAA security rule. We are also required to comply with the administrative simplification standards under HIPAA when we conduct the electronic transactions regulated by HIPAA, including by using standard code sets and formats and standardized identifiers for health plans and providers. The requirements under HIPAA and its implementing regulations may change periodically and could have an effect on our business operations if compliance becomes substantially costlier than under current requirements.
In addition to federal privacy regulations, there are a number of state laws governing confidentiality of health information that are applicable to our business. In particular, we are subject to the California Confidentiality of Medical Information Act, which is similar to but in some ways more restrictive than the HIPAA regulations, and the California Consumer Privacy Act, or CCPA, which was enacted in California in 2018 and components of which went into effect on January 1, 2020.substantially amended and expanded thereafter, most significantly by a ballot initiative adopted in November 2020 that enacted the California Privacy Rights Act. The California Privacy Rights Act amends and substantially expands the CCPA. The CCPA, among other things, requires covered companies to provide disclosures to California consumers concerning the collection and sale of personal information, and gives such consumers the right to opt-out of certain sales of personal information. AmendmentsThe amendments to the CCPA that were adopted by ballot initiative include provisions creating a new category of “sensitive personal information” that is subject to more stringent protections than other personal information, and new requirements regarding sharing personal information for advertising purposes. In addition, the amendments established a new California Privacy Protection Agency, which has authority both to implement and enforce the CCPA. The new agency is currently drafting implementing regulations that are expected to become effective July 1, 2023, and is anticipated to be vigorous in its enforcement actions. At the same time, other states, including Colorado and Virginia, have been made since itsenacted CCPA-like laws, and other states are expected to follow suit. Monitoring the development, enactment and it remains unclear what,implementation of these laws and regulations issued pursuant to them adds to our compliance costs and we face penalties if any, further amendments will be madewe fail to this legislation or how it will be interpreted.adopt comprehensive compliance measures, including documenting the steps we have taken to comply.
The processing of personal data, from Europe. For example,including patients’ personal health data, in the European Economic Area, or EEA, and the UK is governed by the General Data Protection Regulation, or the GDPR. The GDPR which became effectiveapplies to any company established in the EEA and to companies established outside the EEA that process personal data in connection with the offering of goods or services to data subjects in the EEA or the monitoring of the behavior of data subjects in the EEA. The GDPR enhances data protection obligations for data controllers of personal data, including inter alia stringent requirements relating to lawful and legitimate basis and purposes for the processing of personal data, the consent of data subjects, expanded disclosures about how personal data is used, requirements to conduct privacy impact assessments for “high risk” processing, limitations on retention of personal data, appointment of data protection officers, conclusion of data processing agreements, mandatory data breach notification and “privacy by design” requirements, and creates direct obligations on service providers acting as data processors.
The GDPR also imposes strict rules on the transfer of personal data outside of the EEA to countries that do not ensure an adequate level of protection. Until recently, one such data transfer mechanism was the EU-US Privacy Shield, but the Privacy Shield was invalidated for international transfers of personal data in July 2020 by the Court of Justice of the European Union, or CJEU. Following the CJEU’s decision and an executive order issued by President Biden on May 25, 2018, appliesOctober 7, 2022, the European Commission on December 13, 2022 announced that it had begun the process of adopting a new adequacy decision that would permit data transfers to ourthe United States under an updated EU-US Data Privacy Framework and attempt to address the
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shortcomings of the Privacy Shield identified in the CJEU’s decision. If the new adequacy decision is ultimately adopted by the European Commission, some uncertainty would remain as it is widely expected that the new adequacy decision will also be challenged before the CJEU. Separately, the CJEU upheld the validity of standard contractual clauses, or SCCs, as a legal mechanism to transfer personal data but companies relying on SCCs will, subject to additional guidance from regulators in the EEA, need to evaluate and implement supplementary measures that provide privacy protections additional to those provided under SCCs. It remains to be seen whether SCCs will remain available.
Failure to comply with the requirements of the GDPR and the related national data protection laws of the EEA Member States may result in fines up to €20 million or 4% of a company’s global annual revenues for the preceding financial year, whichever is higher. Moreover, the GDPR grants data subjects the right to claim material and non-material damages resulting from infringement of the GDPR. In June 2021, the CJEU issued a ruling that expanded the scope of the “one stop shop” under the GDPR. According to the ruling, the competent authorities of EU Member States may, under certain strict conditions, bring claims to their national courts against a company for breaches of the GDPR, including unlawful cross-border processing activities, conducted fromeven if such company does not have an establishment in the EU or relatedmember state in question and the competent authority bringing the claim is not the lead supervisory authority.
In addition, further to products and services that we offerthe UK’s exit from the EU on January 31, 2020, the GDPR ceased to apply in the UK at the end of the transition period on December 31, 2020. However, as of January 1, 2021, the UK’s European Union users.(Withdrawal) Act 2018 incorporated the GDPR (as it existed on December 31, 2020, but subject to certain UK-specific amendments) into UK law, referred to as the UK GDPR. The UK GDPR creates new compliance obligations applicableand the UK Data Protection Act 2018 set out the UK’s data protection regime, which is independent from but aligned to our business, which could cause us to change our
Other Privacy Laws
New laws governing privacy may be adopted in the future from time to time. We have taken steps to comply with health information privacy requirements to which we are aware that we are subject. For example, the Personal Information Protection Law, or PIPL, was recently implemented in China, and broadly regulates the processing of personal information and imposes compliance obligations and penalties comparable to those of the GDPR. However, we can provide no assurance that we are or will remain in compliance with diverse privacy requirements in all of the jurisdictions in which we do business. Failure to comply with privacy requirements could result in civil or criminal penalties, which could have a materially adverse effect on our business.
Corporate Practice of Medicine
Numerous states, including California and Texas, have enacted laws prohibiting corporations such as us from practicing medicine and employing or engaging physicians to practice medicine. These laws are designed to prevent interference in the medical decision-making process by anyone who is not a licensed physician. This prohibition is generally referred to as the prohibition against the corporate practice of medicine. Violation of this prohibition may result in civil or criminal fines, as well as sanctions imposed against us or the professional through licensing proceedings. The pathologists who review and classify thyroid FNA cytopathology results for Afirma are employed by TCP, a Texas professional association, pursuant to services agreement between us and TCP. Pursuant to the agreement, we pay TCP a monthly fee on a per FNA basis, and TCP manages and supervises the pathologists who perform the cytopathology services as a component of the Afirma solution.
Federal and State Physician Self-Referral Prohibitions
We are subject to the federal physician self-referral prohibitions, commonly known as the Stark Law, and to similar restrictions under the self-referral prohibitions of certain states in which we operate, including California's Physician Ownership and Referral Act, or PORA. Together these restrictions generally prohibit us from billing a patient or any governmental or private payer for any diagnostic services when the physician ordering the service, or any member of such physician's immediate family, has an investment interest in or compensation arrangement with us, unless the arrangement meets an exception to the prohibition.
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Both the Stark Law and PORA contain an exception for compensation paid to a physician for personal services rendered by the physician meeting certain contractual requirements. We have compensation arrangements with a number of physicians for personal services, such as speaking engagements and consulting activities. We have structured these arrangements with terms intended to comply with the requirements of the personal services exception to Stark and PORA.
However, we cannot be certain that regulators would find these arrangements to be in compliance with Stark, PORA or similar state laws. We would be required to refund any payments we receive pursuant to a referral prohibited by these laws to the patient, the payer or the Medicare program, as applicable.
Sanctions for a violation of the Stark Law include the following:
•denial of payment for the services provided in violation of the prohibition;
•refunds of amounts collected by an entity in violation of the Stark Law;
•a civil penalty of up to $15,000 for each service arising out of the prohibited referral;
•possible exclusion from federal healthcare programs, including Medicare and Medicaid; and
•a civil penalty of up to $100,000 against parties that enter into a scheme to circumvent the Stark Law's prohibition.
These prohibitions apply regardless of the reasons for the financial relationship and the referral. No finding of intent to violate the Stark Law is required for a violation. In addition, knowing violations of the Stark Law may also serve as the basis for liability under the Federal False Claims Act which prohibits knowingly presenting, or causing to be presented, a false, fictitious, or fraudulent claim for payment to the U.S. Government.
Further, a violation of PORA is a misdemeanor and could result in civil penalties and criminal fines. Finally, other states have self-referral restrictions with which we have to comply that differ from those imposed by federal and California law. While we have attempted to comply with the Stark Law, PORA and similar laws of other states, it is possible that some of our financial arrangements with physicians could be subject to regulatory scrutiny at some point in the future, and we cannot provide assurance that we will be found to be in compliance with these laws following any such regulatory review.
Federal and State Anti-Kickback Laws
The federal Anti-kickback LawStatute makes it a felony for aany person or entity, including a laboratory, to knowingly and willfully offer, pay, solicit or receive remuneration, directly or indirectly, in orderexchange for or to induce businesseither the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, under anyin whole or in part, by a federal health care program. A violation of the Anti-kickback LawStatute may result in imprisonment for up to fiveten years and criminal fines of up to $250,000 in the case of individuals and $500,000 in the case of organizations.$100,000. Convictions under the Anti-kickback LawStatute result in mandatory exclusion from federal health care programs for a minimum of five years. In addition, HHS has the authority to impose civil assessments and fines and to exclude health care providers and others engaged in prohibited activities from Medicare, Medicaid and other federal health care programs. Actions which violate the Anti-kickback LawStatute can also incurlead to liability under the Federal False Claims Act, which prohibits, among other things, knowingly presenting, or causing to be presented, a false fictitious, or fraudulent claim for payment to the U.S. Government.
Although the federal Anti-kickback LawStatute applies only to federal health care programs, a number of states, including California, have passed statutes substantially similar to the Anti-kickback LawStatute pursuant to which similar types of prohibitions are made applicable to all other health plans and third- partythird-party payers. California's fee-splitting and Anti-kickback statute,Statute, Business and Professions Code Section 650, and its Medi-Cal Anti-kickback statute, Welfare and Institutions Code Section 14107.2, have been interpreted by the California Attorney General and California courts in substantially the same way as HHS and the courts have interpreted the federal Anti-kickback Law.Statute. A violation of Section 650 is punishable by imprisonment and fines of up to $50,000. A violation of Section 14107.2 is punishable by imprisonment and fines of up to $10,000.
Federal and state law enforcement authorities scrutinize arrangements between health care providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to induce patient care referrals or induce the purchase or prescribing of particular products or services. The law enforcement authorities, the courts and Congress have also demonstrated a willingness to look behind the formalities of a transaction to determine the underlying purpose of payments between health care providers and actual or potential referral sources. Generally, courts have taken a broad interpretation of the scope of the Anti-kickback Law,Statute, holding that the statute may be violated if merely one purpose of a payment arrangement is to induce or reward referrals or purchases.
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The federal Anti-kickback LawStatute includes statutory exceptions and provides for a number of regulatory safe harbors. If an arrangement meets the provisions of a safe harbor, it is deemed not to violate the Anti-kickback Law.Statute. An arrangement must fully comply with each element of an applicable safe harbor in order to qualify for protection. Many state anti-kickback statutes have analogous exceptions or safe harbors to those of the federal Anti-kickback Law.Statute. These state anti-kickback statutes have generally been interpreted consistently with the Anti-kickback Law.Statute.
Among the safe harbors that may be relevant to us is the discount safe harbor. The discount safe harbor potentially applies to discounts provided by providers and suppliers, including laboratories, to physicians or institutions. If the terms of the discount safe harbor are met, the discounts will not be considered prohibited remuneration under the Anti-kickback Law.Statute. California does not have a discount safe harbor. However, as noted above, Section 650 has generally been interpreted consistent with the Anti-kickback Law.Statute.
The personal services safe harbor to the Anti-kickback LawStatute provides that remuneration paid to a referral source for personal services will not violate the Anti-kickback LawStatute provided all of the elements of that safe harbor are met. One element is that if the agreement is intended to provide for the services of the physician on a periodic, sporadic or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals. Our personal services arrangements with some physicians and other parties may not meet the specificeach requirement of this safe harbor that the agreement specify exactly the schedule of the intervals of time to be spent on the services because the nature of the services, such as speaking engagements, does not lend itself to exact scheduling and therefore meeting this element of the personal services safe harbor is impractical.harbor. Failure to meet the terms of thethis, or any other, safe harbor does not necessarily render an arrangement illegal. Rather, the government may evaluate such arrangements on a case-by-case basis under the language of the statute, taking into account all facts and circumstances.
While we believe that we are in compliance with the Anti-kickback Law,Statute, Section 650, and Section 14107.2, there can be no assurance that our relationships with physicians, academic institutions and other customers or parties will not be subject to investigation or challenge under such laws. If imposed for any reason, sanctions under the Anti-kickback Law,Statute, Section 650, or Section 14107.2 could have a negative effect on our business.
Other Federal and State Fraud and Abuse Laws
In addition to the requirements discussed above, several other health care fraud and abuse laws could have an effect on our business. For example, provisions of the Social Security Act permit Medicare and Medicaid to exclude an entity that charges the federal health care programs substantially in excess of its usual charges for its services. The terms "usual charge" and "substantially
in excess" are ambiguous and subject to varying interpretations, though the Department of Health and Human Services’HHS’ Office of the Inspector General, or HHS-OIG, has provided some guidance on the topic.
Further, the federal False Claims Act prohibits a person from knowingly presenting or causing to be presented a false or fraudulent claim to, making a false record or statement in order to secure payment from or retaining an overpayment by the federal government. In addition to actions initiated by the government itself, the statute authorizes actions to be brought on behalf of the federal government by a private party, known as a relator or commonly referred to as a whistleblower, having knowledge of the alleged fraud. Because the complaint is initially filed under seal, the action may be pending for some time before the defendant is even made aware of the action. If the government is ultimately successful in obtaining redress in the matter or if the plaintiffrelator succeeds in obtaining redress without the government's involvement, then the plaintiffrelator will receive a percentage of the recovery. Finally, the Social Security Act includes its own provisions that prohibit the filing of false claims or submitting false statements in order to obtain payment. Violation of these provisions may result in up to treble damages, substantial civil penalties, fines, imprisonment or combination of the above, and possible exclusion from Medicare or Medicaid programs. California has an analogous state false claims act applicable to all payers, as do many other states; however, we may not be aware of all such rules and statutes and cannot provide assurance that we will be in compliance with all such laws and regulations.
In general, in recent years U.S. Attorneys’ Offices have increased scrutiny of the healthcare industry, as have Congress, the Department of Justice, the Department of Health and Human Services’ Office of the Inspector GeneralHHS-OIG and the Department of Defense. These bodies have all issued subpoenas and other requests for information to conduct investigations of, and commenced civil and criminal litigation against, healthcare companies based on financial arrangements with health care providers, regulatory compliance, product promotional practices and documentation, and coding and billing practices. Whistleblowers have filed numerous qui tam lawsuits against healthcare companies under the federal and state False Claims Acts in recent years, in part because the whistleblower can receive a portion of the government’s recovery under such suits.
In addition, in October 2018, the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, was enacted as part of the SUPPORT for Patients and Communities Act (P.L 115-271). This law prohibits the solicitation, receipt, payment or offering of any remuneration in return for referring a patient or patronage to a recovery home, clinical treatment facility, or laboratory for services covered by both government and private payers. EKRA also applies to the payment or offering of remuneration in
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exchange for an individual using the services of a recovery home, clinical treatment facility, or laboratory. To date, neither the Department of Justice nor the Department of Health and Human ServicesHHS has issued guidance further interpreting or implementing EKRA.
Finally, under the Protecting Access to Medicare Act of 2014, or PAMA, laboratories are required to report to CMS the private payer payment rates and test volumes paid by private payers based on final payments made during a specific “data collection period.” This data reporting requirement is triennial for most clinical diagnostic laboratory tests (annual for ADLTs), with the first data reporting period occurring in 2017 for final payments made in January through June 2016. The next data reporting period will be in 20212024 for final payments made in January through June 2019. When reporting data under PAMA, the President, CEO, or CFO of a reporting entity, or an individual who has been delegated authority to sign for, and who reports directly to, such an officer, must sign the certification statement and be responsible for assuring that the data provided are accurate, complete, and truthful, and meets all the required reporting parameters. Failure to report or misrepresentation or omission in reporting can result in civil penalties of up to $10,000 per day for each violation and other penalties. We believe we are in compliance with the PAMA reporting requirements, but there can be no assurance that our reporting practices will not be scrutinized under the PAMA regulations.
International
Many countries in which we may offer any of our tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. The IVDD and IVDR prohibit the offer of inducements, particularly financial, that might influence the judgement of notified regulatory bodies and their personnel to carry out their conformity assessment activities. The IVDD and IVDR do not address the question of inducements offered to healthcare professionals or other third parties, though Member States may implement their own national laws in this regard. For example, Sapin II is the French anti-corruption law, which imposes regulations to prevent and detect bribery and corruption through increased corporate transparency, reinforced internal monitoring, and enhanced whistleblower protection. In the UK, the 2002 Regulations do not address the question of inducements offered to healthcare professionals to prescribe, sell, supply or recommend use of a particular medical device or IVD or to offer the relevant device company any other benefit. These activities are, however, prohibited by the Bribery Act 2010, which provides general offenses relating to bribery and receiving a bribe.
In addition, the largest medical device manufacturer’s industry association, MedTech Europe, issues a Code of Business Practice, or the MedTech Code, which is obligatory for its member associations and member companies, and regulates their interactions with the medical community and other stakeholders. The MedTech Code prevents member companies from offering and providing educational grants to individual health care providers with certain exceptions and has phased out the provision of financial or in-kind support directly to individual health care providers to cover costs for their attendance at third-party organized educational events (with the exception of procedure training). It also sets out transparency obligations with regard to all interactions with health care providers, in terms of notification to the health care provider’s superiors or relevant health institutions before the interaction may take place, disclosure of payments (made as educational grants) and a centralized platform for the approval of conferences and other events.
In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the United States Foreign Corrupt Practices Act, or FCPA.
The FCPA prohibits any U.S. individual, business entity or employee of a U.S. business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the SEC to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors' activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions.
The standard of intent and knowledge in the Anti-BriberyFCPA anti-bribery cases is minimal-intentminimal -- intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA's anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000$250,000 and imprisonment for up to five years. Other countries, including the United Kingdomother Organisation for Economic Co-operation and other OECDDevelopment Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-bribery Act.regulations.
When marketing our tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our tests or restrictions on the export of
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tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required.
People. At December 31, 2019,2022, we had 354 employees, of which 60 work in laboratory operations, 33 in research and development and clinical development, 175 in selling and marketing, and 86 in general and administrative, including 59 in billing and client services, 10 in information technology and 9 in finance.787 employees. None of our U.S. employees are the subject of collective bargaining arrangements, and our management considers its relationships with employees to be good.
We pride ourselves on our strong culture, which encourages innovation, collaboration, and mutual respect. We were named a Bay Area “Top Workplace” by the Bay Area News Group in 2022, marking the ninth consecutive year we received this distinction. This award is based solely on employee feedback gathered through an anonymous, third-party survey. In 2022, we defined a new set of core values across the company: Patients; Innovation; Results; Collaboration; and Compassion. Individual members of our leadership team have volunteered to sponsor each aspirational value to ensure the values are embedded into our culture.
Corporate and Other information
We were incorporated in Delaware as Calderome, Inc. in August 2006. Calderome operated as an incubator until early 2008. We changed our name to Veracyte, Inc. in March 2008. Our principal executive offices are located at 6000 Shoreline Court, Suite 300, South San Francisco, California 94080, and our phone telephone number is (650) 243-6300. We completed our initial public offering in October 2013, and our common stock is listed on The Nasdaq Global Market under the symbol “VCYT.”
Our operations requirewebsite address is www.veracyte.com. Through a link on the use of hazardous materials (including biological materials) which subject us to a variety of federal, state and local environmental and safety laws and regulations. Some of these regulations provide for strict liability, holding a party potentially liable without regard to fault or negligence. We could be held liable for damages and fines as a resultInvestor Relations section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or others’, business operations should contaminationfurnished to the Securities and Exchange Commission (SEC): our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the environment or individual exposure to hazardous substances occur. We cannot predict how changes in laws or new regulations will affectExchange Act. All such filings are available free of charge. The information posted on our business, operations or the cost of compliance.
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ITEM 1A. RISK FACTORS
Summary of Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully review the “Risk Factors” section before you invest in shares of our common stock. Listed below are some of the more significant risks relating to an investment in our common stock.
Risks Related to Our Business
•We have a history of losses, and we expect to incur net losses for the foreseeable future and may never achieve or sustain profitability.
•Our financial results currently depend mainly on sales of our Afirma and Decipher Prostate tests, and we will need to generate sufficient revenue from these and our other diagnostic tests to grow our business.
•If we are unable to grow sales of our portfolio of tests including Prosigna, Envisia, and Decipher Bladder, or we are unable to launch or commercialize our new tests, our business may suffer.
•We depend on a few payers for a significant portion of our revenue and if one or more significant payers stops providing reimbursement or decreases the amount of reimbursement for our tests, our revenue could decline.
•If payers do not provide reimbursement, rescind or modify their reimbursement policies, delay payments for our tests, recoup past payments, or if we are unable to successfully negotiate additional reimbursement contracts, our commercial success could be compromised.
•We may experience limits on our revenue if physicians decide not to order our tests or if patients decide not to use our tests as a result of increased costs, fees or changing insurer policies.
•If we fail to comply with federal, state and foreign licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.
•Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts for various reasons, including in response to the way we recognize revenue and/or the amount of cash we generate, which may cause our stock price to fluctuate or decline.
•If our general strategy of seeking growth through acquisitions and collaborations is not successful, or if we do not successfully integrate companies or assets that we acquire into our business, our prospects and financial condition will suffer.
•Our future success and international growth depends, in part, on our ability to adapt and manufacture select tests to be performed on the nCounter Analysis System.
•The growth that we are expecting in our biopharma services business may not transpire.
•The COVID-19 pandemic has had, and may continue to have, an adverse effect on certain of our business, results of operations and financial condition.
•We rely on sole suppliers for some of the reagents, equipment, and other materials used to perform our tests, and we may not be able to find replacements or transition to alternative suppliers.
•We depend on a specialized cytopathology practice to perform the cytopathology component of our Afirma test, and our ability to perform our diagnostic solution would be harmed if we were unexpectedly unable to secure a replacement.
•We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
•If we are unable to support demand for our commercial tests, services or products, our business could suffer.
•Changes in healthcare policy, including legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition and operations.
•Because of Medicare billing rules, we may not receive reimbursement for all tests provided to Medicare patients.
•If the FDA or foreign authorities were to begin regulating those of our tests that they do not currently regulate, we could incur substantial costs and delays associated with trying to obtain premarket clearance, approval or certification.
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•Obtaining marketing authorization or certification by the FDA and foreign regulatory authorities or notified regulatory bodies for our diagnostic tests will take significant time and require significant research, development and clinical study expenditures and ultimately may not succeed.
•If we are unable to compete successfully, we may be unable to increase or sustain our revenue or achieve profitability.
•We depend on our senior management team, and the loss of one or more of our executive officers, or the inability to attract and retain highly-skilled employees or other key personnel could adversely affect our business.
•Billing for our diagnostic tests is complex, and we must dedicate substantial time and resources to the billing process to be paid.
•If our internal sales force is less successful than anticipated, our business expansion plans could suffer and our ability to generate revenue could be diminished.
•Developing new products involves a lengthy and complex process, and if we do not achieve our projected development and commercialization goals in the time frames we announce and expect, our business will suffer and our stock price may decline.
•We must successfully integrate the HalioDx and Decipher Biosciences businesses to realize the financial goals that we currently anticipate.
•Aspects of our international business expose us to business, personnel, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States.
•Our operating results may be adversely affected by unfavorable macroeconomic and market conditions.
•Security breaches, loss of data and other disruptions to our or our third-party service providers' data systems could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
•If we are unable to protect our intellectual property effectively, our business would be harmed.
•We may be involved in litigation related to intellectual property, which could be time-intensive and costly and may adversely affect our business, operating results or financial condition.
Risks Related to Being a Public Company
•If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our reported financial information and the market price of our common stock may be negatively affected.
Risks Related to Our Common Stock
•Our stock price may be volatile, and you may not be able to sell shares of our common stock at or above the price you paid.
Risks Related to Our Business
We have a history of losses, and we expect to incur net losses for the foreseeable future and may never achieve or sustain profitability.
We have incurred net losses since our inception. For the year ended December 31, 2019,2022, we had a net loss of $12.6$36.6 million and as of December 31, 2019,2022, we had an accumulated deficit of $246.7$393.7 million. We expect to incur additional losses in the future, and we may never achieve revenue sufficient to offset our expenses. OverWe have experienced and may continue to experience decreases in total test volume due to the next coupleimpact of years, weCOVID-19, including as a result of additional COVID-19 variants. Additionally, in 2022, widespread inflationary pressures in the U.S. and across global economies resulted in higher costs for our raw materials, non-material costs, labor and other business costs, and significant increases in the future could adversely affect our results of operations. We expect to continue to devote substantially all of our resources to increase adoption of and reimbursement for our Afirma, Percepta and Envisia classifiers and Prosigna test,molecular diagnostic portfolio of tests, and the development of additional tests. We may never achieve or sustain profitability, and our failure to achieve and sustain profitability in the future could cause the market price of our common stock to decline.
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Our financial results currently depend mainly on sales of our Afirma and Decipher Prostate tests, and we will need to generate sufficient revenue from thisthese and our other diagnostic solutionstests to grow our business.
Most of our revenue to date has been derived from the sale of our Afirma tests, which are used in the diagnosis of thyroid cancer. We also derive significant revenue from our Decipher urological tests. Over the next few years, we expect to continue to derive a substantial portion of our revenue from sales of our Afirma and Decipher tests. In the third quarter of 2017, we began recognizing revenue from the sale of our Percepta test, used in the diagnosis of lung cancer. We also launched our Envisia test to help improve the diagnosis of interstitial lung disease, specifically IPF, and began recognizing revenue from Envisia in the second quarter of 2019. In December 2019, we acquired the rights to the Prosigna test from NanoString Technologies, Inc. and commenced marketing and selling Prosigna test kits to U.S. and international customers. Once genomic tests are clinically validated and commercially available for patient testing, we must continue to develop and publish evidence that our tests are informing clinical decisions in order for them to receive positive coverage decisions by payers. Without coverage policies, our tests may not be reimbursed and we will not be able to recognize revenue. We cannot guarantee that tests we commercialize will gain and maintain positive coverage decisions and therefore, we may never realize revenue from tests we commercialize. In addition, we are in various stages of research and development for other diagnostic solutionstests that we may offer, but there can be no assurance that we will be able to identify other diseases that can be effectively addressed or, if we are able to identify such diseases, whether or when we will be able to successfully commercialize solutions for these diseases and obtain the evidence and coverage decisions from payers. If we are unable to increase sales and expand reimbursement for our Afirma Percepta, Envisia and ProsignaDecipher Prostate tests, or develop and commercialize other solutions,tests, our revenue and our ability to achieve and sustain profitability would be impaired, and the market price of our common stock could decline.
Although Prosigna, Envisia, and Decipher Bladder have not contributed significant revenue to date, we expect them to grow and become an increasingly important component of our strategic focus, as well as our results of operations. We plan to introduce new tests going forward as well. There can be no assurance that we will be successful in our launch or commercialization of new tests, nor that physicians will request our new tests be performed in sufficient volumes for our revenue to meet our projections. Additionally, we anticipate expanding the reach of our tests to international markets through the distribution of the nCounter Analysis System; if our distribution of this platform is unsuccessful, or if our products are not widely adopted internationally, our business and results of operations couldmay be adversely effected and our reputation and competitive position could be harmed.affected.
We depend on a few payers for a significant portion of our revenue and if one or more significant payers stops providing reimbursement or decreases the amount of reimbursement for our tests, our revenue could decline.
Federal Medicare funding and state budgets are limited and have been placed under tremendous strain in recent years, which is likely to be further exacerbated as a result of reduced tax receipts and greater deficit spending as a result of the COVID-19 pandemic. Such budgetary pressures may force Medicare or state agencies to reduce payment rates or change coverage policies. If there is a decrease in Medicare or other payers’ payment rates for our tests, our revenue from Medicare and such payers will decrease and the payment rates for some of our commercial payers may also decrease if they tie their allowable rates to the Medicare rates. These changes could have an adverse effect on our business, financial condition and results of operations.
Revenue for tests performed on patients covered by Medicare and UnitedHealthcare Group was 26%31% and 11%10%, respectively, of our revenue for the twelve monthsyear ended December 31, 2019,2022, compared with 29%30% and 12%10%, respectively, for the twelve monthsyear ended December 31, 2018.2021. The percentage of our revenue derived from significant payers is expected to fluctuate from period to period as our revenue fluctuates, as additional payers provide reimbursement for our tests or if one or more payers were to stop reimbursing for our tests or change their reimbursed amounts. Effective January 2012, Palmetto GBA, the regional Medicare Administrative Contractor, or MAC, that handled claims processing for Medicare services over our jurisdiction at that time, issued coverage and payment determinations for our Afirma Classifiers now covered by Noridian Healthcare Solutions, the current MAC for our jurisdiction, through the Molecular Diagnostics Services Program, or MolDX program, administered by Palmetto GBA, under a Local Coverage Determination, oran LCD.
On March 1, 2015, an American Medical Association Current Procedural Terminology code, or CPT code 81545 for the Afirma GEC was issued. On January 1, 2018, the Medicare Clinical Laboratory Fee Schedule payment rate for the Afirma classifier increased from $3,220 to $3,600. This rate is based on the volume-weighted median of private payer payment rates based on final payments made between January 1 and June 30, 2016, which we reported to the Centers for Medicare & Medicaid Services or CMS, in 2017 as required under the Protecting Access to Medicare Act of 2014, or PAMA. In December 2019, through the Further Consolidated Appropriations Act of 2020, Congress delayed the next data reporting period from 2020 to 2021 for final payments made between January 1 and June 30, 2019, extending the applicability of the payment rates based on 2017 reporting by one year through December 31, 2021. Afirma will continueIn March 2020, through the CARES Act, Congress further delayed the next reporting period to be paid at $3,600 through that date. The volume-weighted median of private payer rates2022 for final payments made between January 1 and June 30, 2019,
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extending the applicability for the payment rates based on 2017 reporting through December 31, 2022. In December 2021, through the Protecting Medicare and American Farmers from JanuarySequester Cuts Act, Congress further delayed the next reporting period to 2023. In December 2022, through June 2019 (and now reported January through March 2021) will set the Medicare payment rateConsolidated Appropriations Act of 2023, Congress further delayed the next reporting period to 2024. As a result of the transition from Afirma GEC to Afirma GSC, a new CPT Category I code (81546) was established for the Afirma classifier, fromeffective January 1, 20222021. This code went through December 31, 2024.the national payment determination process for Medicare in 2020, through which CMS priced 81546 at the same rate of $3,600 as 81545. Since the Afirma GSC code 81546 was newly issued in 2021, the first PAMA data collection period for 81546 under the current triennial data collection and reporting process would be January 2026 through June 2026. There can beis no assuranceguarantee that the Afirma or Prosigna ratesGSC Medicare rate will not decrease during thisbe negatively impacted starting in 2028 based on the reported weighted median of private commercial payers.
Decipher Prostate Biopsy and Decipher Prostate RP are currently reimbursed by Medicare pursuant to LCDs issued by Palmetto GBA and adopted by Noridian Healthcare Solutions, each acting as a MAC, as well as by a number of commercial payers. However, there are many commercial payers who currently do not provide reimbursement for our prostate genomic tests, or provide only limited reimbursement, and we have contracts for reimbursement with only a limited number of commercial payers for our prostate tests. Our Decipher Prostate tests were assigned a new American Medical Association Current Procedural Terminology code, or CPT code, 81542, for 2020. CPT code changes can result in a risk of an error being made in the claim adjudication process. Such errors can occur with claims submission, third-party transmission or in the processing of the claim by the payer. Claim adjudication errors may result in a delay in payment processing or a subsequent reporting cycle under PAMA.reduction in the amount of the payment we receive.
We submit claims to Medicare for PerceptaDecipher Prostate Biopsy and EnvisiaDecipher Prostate RP using unlisted codesCPT code 81542. CMS assigned 81542 to the gapfilling process in 2020, under which the MolDX program. Specific CPT codes assignedindividual MACs set the payment rate for the test based on the following four factors: 1) charges for the test and routine discounts to Perceptacharges; 2) resources required to perform the test; 3) payment amounts determined by other payers; and Envisia4) charges, payment amounts, and resources required for other tests that may be required to gocomparable or otherwise relevant. 81542 has been priced at $3,873 since January 1, 2021, based on CMS’ revision of the median of payment rates set by the MACs through the national payment determination process, and theregapfilling process. There can be no assurance that the Medicare payment rates the tests receive through this processfor Decipher Prostate Biopsy and Decipher Prostate RP will not be lower than their current payment rates.decrease during a future reporting cycle under PAMA.
An LCD was issued for Prosigna by Palmetto GBA in August 2015, which has been in effect since October 1, 2015. There can alsobe no assurance that the Prosigna payment rate will not decrease during subsequent reporting cycles under PAMA.
Noridian Healthcare Solutions provided Medicare coverage for the Envisia Genomic Classifier on April 11, 2019.
We submit claims to Medicare for Envisia using CPT code 81554, which became effective January 1, 2021. We applied for New ADLT designation for Envisia, and the test was approved as a New ADLT on September 17, 2020. Effective October 1, 2020 through June 30, 2021, the Medicare payment rate for Envisia was set at $5,500, the actual list charge as defined under the ADLT regulations for the test. Veracyte reported private payer rates for Envisia in March 2021, reflecting final payments between October 1, 2020 and February 28, 2021. The volume-weighted median of these reported rates, which was $5,500, set the payment rate for Envisia from July 1, 2021 through December 31, 2022, after which Envisia will be priced based on private payer rates collected and reported annually. Effective January 1, 2023, the Medicare payment rate for 81554 is $5,520. There can be no assurance that the Medicare payment ratesrate for the testsEnvisia will not be reduced when they areit is set based on the volume-weighted mediansmedian of private payer rates when we are required to report thoseprivate payer rates for Envisia under PAMA.PAMA in subsequent reporting cycles.
We will submit claims to Medicare for Decipher Bladder using CPT code 0016M. CMS assigned 0016M to the gapfilling process in 2021. Since January 1, 2022, the payment rate for 0016M has been $3,489.63, based on the median of payment rates set by the AMCs through the gapfilling process. There is no assurance that the Medicare payment rate for our tests, our revenue from MedicareDecipher Bladder will not decrease and the payment rates for someduring a future reporting cycle under PAMA.
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Although we have entered into contracts with certain third-party payers that establish in-network allowable rates of reimbursement for many of our Afirma tests, payers may suspend or discontinue reimbursement at any time, with or without notice, for technical or other reasons, may require or increase co-payments from patients, or may reduce the reimbursement rates paid to us. Reductions in private payer amounts could decrease the Medicare payment rates for our tests under PAMA. In addition, private payers have begun requiring prior authorization for molecular diagnostic tests. Potential reductions in reimbursement rates or increases in the difficulty of achieving payment could have a negative effect on our revenue.
If payers do not provide reimbursement, rescind or modify their reimbursement policies, delay payments for our tests, recoup past payments, or if we are unable to successfully negotiate additional reimbursement contracts, our commercial success could be compromised.
Physicians might not order our tests unless payers reimburse a substantial portion of the test price. There is significant uncertainty concerning third-party reimbursement of any test incorporating new technology, including our tests. Reimbursement by a payer may depend on a number of factors, including a payer’s determination that these tests are:
•not experimental or investigational;
•pre-authorized and appropriate for the specific patient;
•supported by peer-reviewed publications; and
•included in clinical practice guidelines.
Since each payer makes its own decision as to whether to establish a coverage policy or enter into a contract to reimburse our tests, seeking these approvals is a time-consuming and costly process.
We are an out-of-network provider with some commercial payers in the U.S. and thus, we do not have acontrol over rates or terms of reimbursement. Without contracted rate of reimbursement with some payers for our tests. Without a contracted raterates for reimbursement, our claims are often denied upon submission, and we must appeal the claims. The appeals process is time consuming and expensive and may not result in payment. In cases where there is no contracted rate for reimbursement,we are out-of-network, there is typically a greater patient co-insurance or co-payment requirementcost-share responsibility which may result in further delay delays and/or decreased likelihood of collection. Payers may attempt to recoup prior payments after review, sometimes after significant time has passed, which would impact future revenue.
We expect to continue to focus substantial resources on increasing adoption, coverage and reimbursement for the Afirma, PerceptaDecipher Prostate, Prosigna, Envisia and Envisia classifiers, Prosigna,Decipher Bladder and any other future tests we may develop. We believe it will take several years to achieve coverage and contracted reimbursement with a majority of third-party payers. However, weWe cannot predict whether, under what circumstances, or at what payment levels payers will reimburse for our tests. Also, payer consolidation is underway and creates uncertainty as to whether coverage and contracts with existing payers will remain in effect. Finally, if there is a decrease in the Medicare payment rates for our tests, the payment rates for some of our commercial payers may also decrease if they tie their allowable rates to the Medicare rates. Reductions in private payer amounts could decrease the Medicare payment rates for our tests under PAMA. Our failure to establish broad adoption of and reimbursement for our tests, or our inability to maintain existing reimbursement from payers, will negatively impact our ability to generate revenue and achieve profitability, as well as our future prospects and our business.
We may experience limits on our revenue if physicians decide not to order our tests.
If we are unable to create or maintain demand for our tests in sufficient volume, we may not become profitable. To generate demand, we will need to continue to educate physicians about the benefitsclinical utility and cost-effectiveness of our tests through published papers, presentations at scientific conferences, marketing campaigns and one-on-one education by our sales force. In addition, our ability to obtain and maintain adequate reimbursement from third-party payers will be critical to generating revenue. Moreover, certain patients have been deferring elective procedures and medical visits as a result of the COVID-19 pandemic, and we have experienced, and expect to continue to experience, a reduction in patient demand or physician recommendations, which has and may continue to adversely affect our business.
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The Afirma genomic classifier is included in most physician practice guidelines in the United States for the assessment of patients with thyroid nodules. However, historical practice recommended a full or partial thyroidectomy in cases where cytopathology results were indeterminate to confirm a diagnosis.
The strength of the clinical data supporting the use of the Decipher Prostate Biopsy and Decipher Prostate RP tests have led to the tests’ inclusion in national guidelines. For example, in the 2020 NCCN Practice Guidelines for Prostate Cancer, the Decipher Prostate RP test is “recommended” for use to improve therapy decision making. It is the only test to achieve this designation for post-surgery patients with localized prostate cancer. Further, in September 2021, the 2022 NCCN guidelines were released and recommend specific treatment decisions for patients based on their Decipher Prostate RP score. Subsequently, Decipher also received a “Level 1” evidence designation in the NCCN’s update to the 2023 prostate cancer guidelines.
Although Decipher Prostate Biopsy and Decipher Prostate RP have been integrated into the NCCN guidelines, if we are unsuccessful in maintaining and increasing the level of recommendation of our genomic tests within these guidelines, are unable to cause any new genomic tests we develop to be included in these guidelines, are unable to cause our genomic tests to be included in other influential guidelines, or if our competitors are successful at achieving similar or more extensive guidelines for their tests, we may be at a disadvantage in gaining market acceptance and market share relative to our competitors.
Our lung products are not yet integrated into practice guidelines and physicians may be reluctant to order tests that are not recommended in these guidelines. The Prosigna test is included in practice guidelines in the United States and internationally but faces competition from other products. products globally.
Because our Afirma, PerceptaDecipher Prostate Biopsy, Decipher Prostate RP, Envisia, and EnvisiaDecipher Bladder testing services are performed by our certified laboratorylaboratories under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, rather than by the local laboratory or pathology practice, pathologists may be reluctant to support our testing services as well. Guidelines that include our tests currently may subsequently be revised to recommend another testing protocol, and these changes may result in physicians deciding not to use our tests. Lack of guideline inclusion could limit the adoption of our tests and our ability to generate revenue and achieve profitability. To the extent international markets have existing practices and standards of care that are different than those in the United States, we may face challenges with the adoption of our tests in international markets.
We may experience limits on our revenue if patients decide not to use our tests.tests as a result of increased costs, fees or changing insurer policies.
Some patients may decide not to use our tests because of price, all or part of which may be payable directly by the patient if the patient’s insurer denies reimbursement in full or in part. There is a growing trend among insurers to shift more of the cost of healthcare to patients in the form of higher co-payments or premiums, and this trend is accelerating which puts patients in the position of having to pay more for our tests. In addition, rising interest rates and ongoing inflation in the U.S. and globally may put further pressure on insurers and other providers to raise prices or reduce reimbursement, increasing the cost to the patient. We expect to continue to see pressure from payers to limit the utilization of tests,
generally, and we believe more payers are deploying costs containment tactics, such as pre-authorization and employing laboratory benefit managers to reduce utilization rates. Implementation of provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively the ACA, has also resulted in increases in premiums and reductions in coverage for some patients. In addition, Congressional efforts to repeal the ACA could result in an increase in uninsured patients. These events may result in patients delaying or forgoing medical checkups or treatment due to their inability to pay for our tests, which could have an adverse effect on our revenue. Many patients have been deferring elective procedures and medical visits as a result of the COVID-19 pandemic, and we have experienced, and may continue to experience, a significant reduction in patient demand, which has and may continue to adversely affect our business.
If we fail to comply with federal and state licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.
We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA regulations mandate specific personnel qualifications, facilities administration, quality systems, inspections, and proficiency testing. CLIA certification is also required for us to be eligible to bill state and federal healthcare programs, as well as many private third-party payers. To renew these certifications, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may makeconduct random inspections of our clinical reference laboratories. If we in the future fail to maintain CLIA certificates in our
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South San Francisco, orCalifornia, San Diego, California, Austin, Texas or Richmond, Virginia laboratory locations, we would be unable to bill for services provided by state and federal healthcare programs, as well as many private third-party payers, which may have an adverse effect on our business, financial condition and results of operations.
We are also required to maintain state licenses to conduct testing in our laboratories. California, New York, and Texas, among other states’ laws, require that we maintain a license and comply with state regulation as a clinical laboratory. Other states may have similar requirements or may adopt similar requirements in the future. In addition, bothall of our clinical laboratories are required to be licensed on a test-specific basis by New York State.York. We have received approval for the Afirma, PerceptaDecipher Prostate, Envisia and EnvisiaDecipher Bladder tests. We will be required to obtain approval for other tests we may offer in the future. If we were to lose our CLIA certificate or California license for our South San Francisco laboratory,or San Diego laboratories, whether as a result of revocation, suspension, limitation or limitation,otherwise, we would no longer be able to perform our molecular tests, which would eliminate our primary source of revenue and harm our business. If we fail to meet the state licensing requirements for our Austin laboratory, we would need to move the receipt and storagewhether as a result of FNAs, as well as the slide preparation for cytopathology, to South San Francisco, whichrevocation, suspension, limitation or otherwise, it could result in a delay in processing tests during that transition and increased costs. If we were to lose our licenses issued by New York or by other states where we are required to hold licenses, we would not be able to test specimens from those states. New tests we may develop may be subject to new approvals by regulatory bodies such as the New York State Department of Health, and we may not be able to offer our new tests until such approvals are received.
Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts for various reasons, including in response to the way we recognize revenue and/or the amount of cash we generate, which may cause our stock price to fluctuate or decline.
Our quarterly financial and operating results depend on sales of our products in the markets we operate and are sensitive to a number of factors, including patient and clinician demand, market conditions in the US and globally, and the prevalence of the indications we seek to address. In addition, we cannot be sure that we will be able to successfully complete development of or commercialize any of our planned future products, or that they will prove to be capable of reliably being used. Before we can successfully develop and commercialize any of our currently planned or other new diagnostic solutions, we will need to:
•conduct substantial research and development;
•obtain the necessary testing samples and related data;
•conduct analytical and clinical validation studies, as well as clinical utility studies;
•expend significant funds;
•expand and scale-up our laboratory processes;
•expand and train our sales force;
•gain acceptance from ordering clinicians at a larger number of hospitals;
•gain acceptance from ordering laboratories; and
•seek and obtain regulatory clearances, approvals or certifications of our new solutions, as required by applicable regulatory bodies.
This process involves a high degree of risk and may take up to several years or more. Our test development and commercialization efforts may be delayed or fail for many reasons, including:
•failure of the test at the research or development stage;
•difficulty in accessing suitable testing samples, especially testing samples with known clinical results;
•lack of analytical and clinical validation data to support the effectiveness of the test, or lack of clinical utility data to support the value of the test;
•delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-effective manner;
•failure to obtain or maintain necessary clearances, approvals or certifications to market the test;
•manufacturing constraints due to limited energy supply in Europe or other supply constraints; or
•lack of commercial acceptance by patients, clinicians or third-party payers.
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Few research and development projects result in commercial products, and success in early clinical studies often is not replicated in later studies. At any point, we may abandon development of new diagnostic tests, or we may be required to expend considerable resources repeating clinical studies, which would adversely impact the timing for generating potential revenue from those new diagnostic tests. In addition, as we develop diagnostic tests, we will have to make additional investments in our sales and marketing operations, which may be prematurely or unnecessarily incurred if the commercial launch of a test is abandoned or delayed. If a clinical validation study fails to demonstrate the prospectively defined endpoints of the study, we would likely abandon the development of the test or test feature that was the subject of the clinical study, which could harm our business. If a clinical utility study fails to demonstrate the value of a particular test, we may not be able to obtain reimbursement for the test.
In addition, we recognize test revenue upon delivery of the patient report to the prescribing physician based on the amount we expect to ultimately realize. We determine the amount we expect to ultimately realize based on payer reimbursement history, contracts, and coverage. Upon ultimate collection, the amount received is compared to the estimates and the amount accrued is adjusted accordingly. We cannot be certain as to when we will receive payment for our diagnostic tests, and we must appeal negative payment decisions, which delays collections. Should judgments underlying estimated reimbursement change or be incorrect at the time we accrued such revenue, our financial results could be negatively impacted in future quarters. Furthermore, most of our European sales are denominated in Euros, and as the U.S. dollar has strengthened in recent periods relative to the Euro, our results of operations may be adversely affected even where our underlying business is performing as anticipated. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. In addition, these fluctuations in revenue may make it difficult for us, for securities analysts and for investors to accurately forecast our revenue and operating results. If our revenue or operating results fall below expectations, the price of our common stock would likely decline.
If we are not successful in integrating the assets acquired from NanoString or if our general strategy of seeking growth through such acquisitions and collaborations is not successful, or if we do not successfully integrate companies or assets that we acquire into our business, our prospects and financial condition will suffer.
To finance any acquisitions or investments, we have previously issued and may choose in the future to issue shares of our stock as consideration, which would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies for stock. Alternatively, it may be necessary for us to raise additional funds for these activities through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all. If these funds are raised through the sale of equity or convertible debt securities, dilution to our stockholders could result.
Our Loanfuture success and Security Agreement with Silicon Valley Bank contains covenants that could limitinternational growth depends, in part, on our ability to sell debt securities or obtain additional debt financing arrangements, which could affectadapt and manufacture select tests to be performed on the nCounter Analysis System.
Our strategy to expand into international markets depends on our ability to finance acquisitions or investments other than throughsuccessfully acquire and distribute the issuancenCounter Analysis System, adapt our menu of stock.
diagnostic tests for the platform, and secure necessary regulatory approvals. Currently, the Prosigna breast cancer assay is the only commercially-available test on the platform. If we are not successful in advancingable to adapt our collaborations with Johnson & Johnson and others,other current or future genetic tests to be performed on the nCounter Analysis System, or if our general strategy of seeking growth through such collaborations is not successful,the nCounter Analysis System fails to be competitive against other diagnostic platforms, our prospects for growth could suffer. In addition, to the extent
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international markets have existing practices and financial condition will suffer.standards of care that are different than those in the United States, we may face challenges with the adoption of the nCounter Analysis System in international markets.
The growth that we are expecting in our biopharma services business may not transpire.
We have previously entered into technology licensing and collaboration arrangements, such as our collaborationcollaborations with Johnson & Johnson in December 2018, and with Acerta Pharma, the hematology research and development arm of AstraZeneca, in December 2019 reflectingand with CareDx in May 2020, which reflect an important elementselement of our business strategy. We also may pursue additional strategic alliances that leverage our core technologyWith the acquisition of Decipher Biosciences and industry experienceHalioDx, we continue to seek to expand the range of our biopharma services offerings to pharmaceutical partners with services such as clinically relevant biomarker identification, patient stratification for clinical trials, and development of companion diagnostics. The success of our biopharma services business depends in part on our ability to identify and successfully negotiate with appropriate pharma partners. We cannot guarantee that we will be successful in the identification of appropriate pharma partners or distribution,the successful and timely negotiation with such partners.
The COVID-19 pandemic has had, and may continue to have, an adverse effect on certain of our business, results of operations and financial condition.
The COVID-19 pandemic and the ongoing emergence of new variants has caused, and continues to cause, significant volatility in global financial markets. Public health problems resulting from COVID-19 and precautionary measures instituted by governments and businesses to mitigate its spread, including travel restrictions and quarantines, have contributed to a general slowdown in the global economy, adversely impacted patients, physicians, customers, suppliers, third-party contract manufacturers, and collaboration partners, and disrupted our operations. The global COVID-19 pandemic continues to evolve. Certain jurisdictions have begun re-opening only to return to restrictions due to increases in new COVID-19 cases and the emergence of new variant strains of COVID-19. Changes in our operations in response to COVID-19 or make investmentsemployee illnesses resulting from the pandemic may result in other companies. However, we have limited experience with respectinefficiencies or delays, including in sales and product development efforts, timing to receive patient sample shipments and additional costs related to business continuity initiatives, that cannot be fully mitigated through succession planning, employees working remotely or teleconferencing technologies. To date, the formationFDA has approved several vaccines, certain of strategic allianceswhich are subject to an Emergency Use Authorization, or EUA, for certain uses. Although vaccines are increasingly available in the United States and joint ventures. ThereEurope, and certain countries in South America, Asia and Oceania, there can be no assuranceguarantee that the vaccines will be effective against new strains of the virus or that the vaccines will be broadly accepted. Also there can be no guarantee that federal, state, local and foreign agencies will not continue to take other cautionary steps to combat the virus to reduce the incidence of new cases, which could negatively impact our volumes and revenue and limit our ability to reliably forecast our test volumes and levels of revenue.
COVID-19 and related governmental reactions have had and may continue to have a negative impact on our business, liquidity, results of operations, and stock price due to the occurrence of some or all of the following events or circumstances among others:
•Inability of healthcare providers to deliver anticipated total test volumes due to temporary or permanent staff attrition.
•We may not be able to manage our business effectively due to key employees becoming ill, working from home inefficiently and being unable to travel to our facilities.
•We and our customers, suppliers, third-party contract manufacturers, and collaboration partners may be prevented from operating worksites, including manufacturing facilities, due to employee illness, reluctance to appear at work or “stay-at-home” regulations.
•Interruptions in manufacturing (including the sourcing of reagents or supplies) and shipment of our products. We believe the rapid increase in daily testing volumes is consuming reagents and supplies otherwise available to genomic testing companies like ours across the United States. When not limited by the expiration date of products and when we feel it reasonable and feasible to do so, we are taking steps to increase our level of supplies and inventory reserves, to develop alternative sources of supply and to implement procedures to mitigate the impact on our supply chain or our ability to process samples in our laboratories. Though we are in regular contact with our key suppliers, we do not have, nor expect to have, the necessary insight into our vendors’ supply chain issues that we may need to know to effectively mitigate the impact to our business. Though we attempt to mitigate the impact to our business, these interruptions in manufacturing (including the sourcing of reagents or supplies) may negatively impact our total test volumes or levels of revenue.
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•Reduced patient demand for, or provider capacity to deliver, diagnostic testing and elective procedures generally (which may impact our ability to deliver to our revenue estimates).
•Disruptions of the operations of our third-party contract manufacturers and suppliers, which could impact our ability to purchase components at efficient prices and in sufficient amounts.
•We may need to raise capital, and if we raise capital by issuing equity securities, our common stock may be diluted.
•The market price of our common stock may drop or remain volatile.
•We may incur significant employee health care costs under our insurance programs.
•Inability or delay of regulatory bodies to conduct inspections/surveys, review or clear/approve our regulatory filings and submissions, and perform other activities necessary for us to conduct our business.
The extent of the impact of COVID-19 on our business and financial results will successfully identify or complete these transactions in a timely manner,depend largely on a cost-effective basis, orfuture developments, including the deployment, efficacy, availability and utilization of vaccines, the emergence of new variant strains of COVID-19, the impact on capital and financial markets and the related impact on the financial circumstances of patients, physicians, suppliers, third-party contract manufacturers, and collaboration partners, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that we are not aware of at all, and we may not realize the anticipated benefits of any technology license, strategic alliance, joint venture or investment.this time.
We rely on sole suppliers for some of the reagents, equipment chips and other materials used to perform our tests, and we may not be able to find replacements or transition to alternative suppliers.
We rely on sole suppliers for critical supply of reagents, equipment chips and other materials and services that we use to perform our tests, and for the manufacture of the nCounter FLEX Dx systemsAnalysis System for diagnostic use and Prosigna test kits sold to customers. We also purchase components used in our sample collection kits from sole-source suppliers. Some of these items are unique to these suppliers and vendors. In addition, we utilize a sole source to assemble and distribute our sample collection kits.
We rely on NanoString for the supply of the nCounter FLEX DxAnalysis System for diagnostic use and Prosigna test kits. As part of the HalioDx Acquisition we intended to, and have begun to migrate manufacture of the test kits for the nCounter from NanoString to HalioDx. In the future, we may need to transition the manufacture of the nCounter Analysis System for diagnostic use from NanoString to Veracyte. While we are preparing for such transition, we cannot be certain that we will be successful in effectively manufacturing the system or acquiring or retaining the talent, skillset, or suppliers required to manufacture the system.
While we have developed alternate sourcing strategies for these materials and vendors, we cannot be certain whether these strategies will be effective or the alternative sources will be available when we need them. Moreover, the supply of key reagents and testing materials has been severely challenged by the COVID-19 pandemic. Periodically, as a result of the COVID-19 pandemic and other challenges to global supply chains, we experienced supply chain disruptions in the supply of plastic materials used in the processing of samples, although this has not resulted in delays in our ability to timely return test results. If these suppliers can no longer provide us with the materials we need to perform the tests and for our sample collection kits, if the materials do not meet our quality specifications or are otherwise unusable, if we cannot obtain acceptable substitute materials, or if we elect to change suppliers, an interruption in test processing or system and test kit deliveries could occur, we may not be able to deliver tests to physicians or deliver patient reports and we may incur higher one-time switching costs. Carriers responsible for transporting samples to us are currently operating at lower than usual capacity because of COVID-19, causing delays in the timeliness of our receipt of samples. Any such interruption may significantly affect our future revenue, cause us to incur higher costs, and harm our customer relationships and reputation. In addition, in order to mitigate these risks, we maintain inventories of these supplies at higher levels than would be the case if multiple sources of supplies were available. If our total test volume decreases or we switch suppliers, we may hold excess supplies with expiration dates that occur before use which would adversely affect our losses and cash flow position. As we introduce any new test, we may experience supply issues as we ramp test volume. Moreover, the COVID-19 pandemic has disrupted supply chains globally, and could adversely affect our ability to source essential reagents, equipment and other materials in a timely manner or at all.
We depend on a specialized cytopathology practice to perform the cytopathology component of our Afirma test, and our ability to perform our diagnostic solution would be harmed if we were requiredunexpectedly unable to secure a replacement.
We rely on TCP to provide cytopathology professional diagnoses on thyroid FNA samples pursuant to a pathology services agreement. Pursuant to this agreement, as amended, TCP has the exclusive right to provide our cytopathology diagnoses on FNA samples at a fixed price per test. Until February 2019, TCP also previously subleased a portion of our
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facility in Austin, Texas. Our agreement with TCP is effective through October 31, 2022,2023, and thereafter automatically renews every year unless either party provides notice of intent not to renew at least 12 months prior to the end of the then-current term.
If TCP were not ableunexpectedly unable to support our current test volume or future increases in total test volume or to provide the quality of services we require, or if we were unable to agree on commercial terms and our relationship with TCP were to terminate, our business wouldcould be harmed until we were able to secure the services of another cytopathology provider. There can be no assurance that we would be successful in finding a replacement that would be able to conduct cytopathology diagnoses at the same volume or with the same high-quality results as TCP. Locating another suitable cytopathology provider could be time consuming and would result in delays in processing Afirma tests until a replacement was fully integrated with our test processing operations.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
In addition to the need to scale our testing capacity, future growth, including our transition to a multi-product company with international operations, will impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees with the necessary skills to support the growing complexities of our business. Rapid and significant growth may place strain on our administrative, financial and operational infrastructure. Our ability to manage our business and growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We have implemented an internally-developed data warehouse, which is critical to our ability to track our diagnostic services and patient reports delivered to physicians, as well as to support our financial reporting systems. The time and resources required to optimize these systems is uncertain, and failure to complete optimization in a timely and efficient manner could adversely affect our operations. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.
If we are unable to support demand for our commercial tests, services or products, our business could suffer.
As demand for our tests, grows,services and products grow, we will need to continue to scale our testing capacity, and processing technology, expand customer service, billing and systems processes, and enhance our internal quality assurance program.program and expand our manufacturing capacity. We will also need additional certified laboratory scientists andas well as other scientific and technical personnel to process higher volumes of our tests.volumes. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that appropriate personnel will be available.available and able to be hired. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result in higher costs of processing tests, quality control issues or inability to meet demand. There can be no assurance that we will be able to perform our testing or fulfill our product, testing, or service commitments on a timely basis at a level consistent with demand, or that our efforts to scale our operations will not negatively affect the quality of test results. If we encounter difficulty meeting market demand or quality standards, our reputation could be harmed and our future prospects and our business could suffer.
Changes in healthcare policy, including legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition and operations.
The ACA, enacted in March 2010, made changes that significantly affected the pharmaceutical and medical device industries and clinical laboratories. Along with the now-repealed 2.3% excise tax on the sale of certain medical devices sold outside of the retail setting, other significant measures contained in the ACA include, for example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The ACA also includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties for such violations.
In the beginning of 2017, the U.S. Congress and the Administration took actions to repeal the ACA and indicated an intent to replace it with another act andaddition, various efforts to repeal or amend the ACA are ongoing. We cannot predict if, or when, the ACA will be repealed or amended, and cannot predict the impact that an amendment or repeal of the ACA will have on our business.
In addition to the ACA, various healthcare reform proposals have also periodically emerged from federal and state governments. For example, in February 2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012, which in part reset the clinical laboratory payment rates on the Medicare Clinical Laboratory Fee Schedule, or CLFS, by 2% in 2013. In addition, under the Budget Control Act of 2011, which is effective for dates of service on or after April 1, 2013, Medicare payments, including payments to clinical laboratories, are subject to a reduction of 2% due to the automatic expense reductions (sequester) until fiscal year 2024. In March 2020, Congress passed the CARES Act, which suspended the 2%
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reduction in Medicare fee-for-service payments from May 1, 2020 through December 31, 2020. To account for this temporary suspension, the legislation also extends the effect of sequestration by a year (now through fiscal year 2031). Reductions resulting from the Congressional sequester are applied to total claims payment made; however, they do not currently result in a rebasing of the negotiated or established Medicare or Medicaid reimbursement rates. In December 2020, Congress passed the Consolidated Appropriations Act of 2021, or CAA, which extended the suspension through March 31, 2021. Legislation enacted April 14, 2021 further extended the suspension through December 31, 2021. The Protecting Medicare and American Farmers from Sequester Cuts Act, enacted on December 10, 2021, extends the suspension through March 31, 2022, after which a 1.0% sequestration would apply for Medicare payments made between April 1, 2022 and June 30, 2022. The legislation also applies a 2.25% sequestration to Medicare payments made during the first six months of fiscal year 2030, and a 3% reduction to payments made during the last six months of fiscal year 2030.
State legislation on reimbursement applies to Medicaid reimbursement and managed Medicaid reimbursement rates within that state. Some states have passed or proposed legislation that would revise the reimbursement methodology for clinical laboratory payment rates under those Medicaid programs. For example, effective July 2015, California’s Department of Health Care Services implemented a new rate methodology for clinical laboratories and laboratory services. This methodology involvesinvolved the use of a range of rates that fell between zero and 80% of the calculated California-specific Medicare rate and the calculation of a weighted average (based on units billed) of such rates. Effective for dates of service on or after July 1, 2022, the cap at 80% of the Medicare rate has been replaced with a cap at 100% of the lowest maximum allowance established by the federal Medicare program for the same or similar services.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we do or may do business, or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation, cost reduction measures and the expansion in the role of the U.S. government in the healthcare industry may result in decreased revenue, lower reimbursement by payers for our tests or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. In addition, sales of our tests outside the United States subject our business to foreign regulatory requirements and cost-reduction measures, which may also change over time.
Ongoing calls for deficit reduction at the federal government level and reforms to programs such as the Medicare program to pay for such reductions may affect the pharmaceutical, medical device and clinical laboratory industries. Currently, clinical laboratory services are excluded from the Medicare Part B co-insurance and co-payment as preventative services. Any requirement for clinical laboratories to collect co-payments from patients may increase our costs and reduce the amount ultimately collected.
CMS bundles payments for clinical laboratory diagnostic tests together with other services performed during hospital outpatient visits under the Hospital Outpatient Prospective Payment System. CMS currently maintains an exemption for molecular pathology tests and “Criterion A” ADLTs from this bundling provision. It is possible that this exemption could be removed by CMS in future rule making, which might result in lower reimbursement for tests performed in this setting.
PAMA includes a substantial new payment system for clinical laboratory tests under the CLFS. Under PAMA, laboratories that receive the majority of their Medicare revenuesrevenue from payments made under the CLFS and the Physician Fee Schedule would report on a triennial basesbasis (or annually for advanced diagnostic laboratory tests, or ADLTs), private payer rates and volumes for their tests with specific CPT codes based on final payments made during a set data collection period (the first of which was January 1 through June 30, 2016). We believe that PAMA and its implementing regulations are generally favorable to us. We reported to CMS the data required under PAMA before the March 31, 2017 deadline. The new payment rate for the Afirma genomic classifier based on the volume-weighted median of private payer rates took effect January 1, 2018, increasing from $3,220 to $3,600 through December 31, 2020. In December 2019, through the Further Consolidated Appropriations Act of 2020, Congress delayed the next data reporting period from 2020 to 2021 for final payments made between January 1 and June 30, 2019, extending the applicability of the current rate for Afirma through December 31, 2021. The volume-weighted median ofIn March 2020, through the private payer ratesCARES Act, Congress further delayed the next reporting period to 2022 for final payments made between January 1 and June 30, 2019, will now setextending the applicability of the payment rates based on 2017 reporting through December 31, 2022. In December 2021, through the Protecting Medicare payment rate forand American Farmers from Sequester Cuts Act, Congress further delayed the Afirma classifier from January 1,next reporting period to 2023. In December 2022, through December 31,the Consolidated Appropriations Act of 2023, Congress further delayed the next reporting period to 2024. There can be no assurance that the payment rate for Afirma or Prosigna will not decrease in the future or that the payment rates for PerceptaDecipher Prostate Biopsy, Decipher Prostate RP or EnvisiaDecipher Bladder will not be adversely affected by the PAMA law and regulations.
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Our Envisia classifier was approved by CMS as well as our Percepta and Envisia classifiers would be considered ADLTs under PAMA.a New ADLT on September 17, 2020. The initial payment rate (for a period not to exceed nine months) under PAMA for a newNew ADLT (an ADLT for which payment has not been made under the CLFS prior to January 1, 2018) will be set at the “actual list charge” for the test as reported by the laboratory. Insofar as the actual list charge substantially exceedsEffective July 1, 2021, Envisia is priced based on private payer rates (by more than 30%), CMS will have the ability to recoup excess payments made during the initial nine-month payment period.collected and reported annually. We can determine whether to seek ADLT status for our tests, but there can be no assurance that our tests will be designated ADLTs or that the payment rates for our tests, including Envisia, will not be adversely affected by such designation.
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 on performance metrics similar to three existing incentive programs (i.e., 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.
In December 2016, Congress passed the 21st Century Cures Act, which, among other things, revised the process for LCDs. Additionally, effective June 11, 2017, a MAC is required to, among other things, publish a summary of the evidence that it considered when developing an LCD, including a list of sources, and an explanation of the rationale that supports the MAC’s determinations. In October 2018, CMS issued additional guidance revising the requirements for the development of LCDs. We cannot predict whether these revisions will delay future LCDs and result in impeded coverage for our test products, which could have a material negative impact on revenue.
Because of Medicare billing rules, we may not receive reimbursement for all tests provided to Medicare patients.
Under previous Medicare billing rules, hospitals were required to bill for our molecular pathology tests when performed on Medicare beneficiaries who were hospital outpatients at the time of tissue specimen collection when these tests were ordered less than 14 days following the date of the patient's discharge.
Effective January 1, 2018, CMS revised its billing rules to allow the performing laboratory to bill Medicare directly for molecular pathology tests and Criterion A ADLTs performed on specimens collected from hospital outpatients, even when those tests are ordered less than 14 days after the date of discharge, if certain conditions are met. We believe that our Afirma, Percepta,Decipher Prostate Biopsy, Decipher Prostate RP, Envisia, and EnvisiaDecipher Bladder classifiers, along with Prosigna, should be covered by this policy. Accordingly, we bill Medicare for these tests when we perform them on specimens collected from hospital outpatients and meet the conditions set forth in CMS's revised billing rules.
This change does not apply to tests performed on specimens collected from hospital inpatients. We will continue to bill hospitals for tests performed on specimens collected from hospital inpatients when the test was ordered less than 14 days after the date of discharge.
In the CY 2020 Hospital Outpatient Prospective Payment System Proposed Rule, CMS solicited comments on potential revisions to these billing rules that could have impacted our ability to bill Medicare directly for our Afirma, Percepta,Decipher Prostate Biopsy, Decipher Prostate RP, Envisia, and EnvisiaDecipher Bladder classifiers, as well as for Prosigna, when performed on specimens collected from hospital outpatients. Although these changes were not finalized, if CMS makes similar changes in the future, it could negatively impact our business.
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In addition, we must maintain CLIA compliance and certification to sell our tests and be eligible to bill for diagnostic services provided to Medicare beneficiaries.
If the FDA or foreign authorities were to begin regulating those of our tests that arethey do not currently regulated,regulate, we could incur substantial costs and delays associated with trying to obtain premarket clearance, approval or approval.certification.
Clinical laboratory tests have long been subject to comprehensive regulations under CLIA, as well as by applicable state laws. Most clinical diagnostic tests developed and run within a single CLIA-certified clinical laboratory (known as “laboratory developed tests,tests” or LDTs,“LDTs”), are not currently subject to regulation under the FDA's enforcement discretion policy although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to regulation.concerning LDTs. While the FDA maintains its authority to regulate LDTs, it has chosencontinues to exercise its enforcement discretion not to enforce the premarket review, quality system/current Good Manufacturing Practices regulations, and other applicable medical device requirements for LDTs.against most LDT developers and users. Certain reagents, instruments, software or components manufactured and sold by third parties and used by their customers to manufacture or perform diagnostic tests may be subject to regulation under certain circumstances. We believe that the Afirma, PerceptaDecipher Prostate Biopsy, Decipher Prostate RP, Envisia, and EnvisiaDecipher Bladder classifiers, have been developed and are LDTs that fall under the FDA'sperformed in a manner consistent with FDA’s enforcement discretion policy. policy concerning LDTs.
In October 2014, the FDA issued draft guidance, entitled "Framework for Regulatory Oversight of LDTs," proposing a risk-based framework of oversight and a phased-in enforcement of premarket review requirements for most LDTs. In 2016, the FDA announced that it would not be finalizing the guidance.
In March 2017, a draft bill on the regulation of LDTs, entitled "The Diagnostics Accuracy and Innovation Act", or DAIA, was released for discussion. In December 2018, the sponsors of DAIA released a new version of the legislation called the “Verifying Accurate, Leading-edge IVCT Development Act,Act", or VALID Act. The VALID Act proposes a risk-based approach to regulate LDTs and creates a new in vitro clinical test category, which includes LDTs, and a new regulatory structure under the FDA. Similar versions of the VALID Act have since been introduced. The most recent version was included in the Food and Drug Administration (FDA) Safety and Landmark Advancements Act (FDASLA) reported to the Senate on July 13, 2022. As proposed, the bill would create a precertification program for lower risk tests not otherwise required to go through premarket review. It would grandfather certain existing tests from some requirements but would allow the FDA to subject otherwise grandfathered tests to premarket review under certain conditions. Similarly, the Verified Innovative Testing in American Laboratories (VITAL) Act was introduced in December 2020 and re-introduced in May 2021. In contrast with the VALID Act, the VITAL Act would prevent FDA from regulating LDTs and would instead assign regulatory authority over LDTs entirely to CMS. We cannot predict whether thiseither of these or other draft billbills governing LDTs will become legislation and cannot quantify the effect of thissuch draft billbills on our business.
In addition, changes in the way the European Union, or EU, regulates LDTs could result in additional expenses for offering our current and any future tests or possibly delay or suspend development, or commercialization of such tests. The EU Regulation (EU) 2017/746 of April 5, 2017, repealing the IVDD, referred to as the IVD Medical Devices Regulation, or IVDR, became applicable on May 26, 2022 (subject to certain transition provisions). Under the IVDR, the general safety and performance requirements set out in Annex I are also applicable to devices that are not placed on the market but used in the context of a commercial activity. If our tests do not qualify for an exemption, we may be subject to the full application of the IVDR with respect to some or all of our existing, as well as future, tests, and we would be required to expend additional time and resources to complying with the requirements of the IVDR. Following Brexit, the IVDR will not be applicable in Great Britain (although it will apply in Northern Ireland), but the UK government is currently undertaking a consultation on the
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regime applicable to in vitro diagnostics in the UK, and it is anticipated that similar provisions will be introduced as under the IVDR.
If the FDA or foreign authorities were to require us to seek clearance, approval or approvalcertification for our existing tests that are not currently cleared, approved, or certified or any of our future products for clinical use, we may not be able to obtain such clearances, approvals or certifications on a timely basis, or at all. While we believeit is possible that our Afirma, PerceptaDecipher Prostate Biopsy, Decipher Prostate RP, Envisia, and EnvisiaDecipher Bladder classifiers, would likely qualify for thebe “grandfathered” tests treatment,and therefore exempted from some new regulatory requirements, there can be no assurance of what the FDA might ultimately require if it issued final guidance.issues a rule or if legislative reforms are enacted. If premarket reviews wereor certifications are required, our business could be negatively impacted if we wereare required to stop selling our products pending their clearance, approval or approval.certification. In addition, the launch of any new products that we develop or modifications we make to existing products could be delayed by the implementation of future FDA guidance.or foreign regulations. The cost of complying with premarket review or certification requirements, including obtaining clinical data, could be significant. In addition, any future regulation by the FDA or foreign authorities could subject our business to further regulatory risks and costs. Failure to comply with applicable regulatory requirements of the FDA could result in enforcement action, including receiving untitled or warning letters, fines, injunctions, or civil or criminal penalties. Any such enforcement action would have a material adverse effect on our business, financial condition and operations. In addition,For example, our sample collection containerskits are listed as Class I devices with the FDA. If the FDA were to determine that they are not Class I devices or otherwise not exempt from 510(k) clearance requirements, we would be required to file 510(k) applicationspremarket notifications and obtain FDA clearance to use the containers, which could be time consuming and expensive.
Failure to comply with applicable regulatory requirements of the FDA or foreign authorities could result in enforcement action, including receiving untitled or warning letters, fines, injunctions, or civil or criminal penalties. Any such enforcement action would have a material adverse effect on our business, financial condition and operations.
Obtaining marketing authorization or certification by the FDA and foreign regulatory authorities or notified regulatory bodies for our diagnostic tests will take significant time and require significant research, development and clinical study expenditures and ultimately may not succeed.
Before we begin to label and market some of our products for use as clinical diagnostics in the United States, unless an exemption applies, we are required to obtain clearance from the FDA by submitting a premarket notification under section 510(k) of the FDC Act or 510(k), or approval from the FDA by submitting a premarket approval, or PMA. WeAlternatively, we may also be able to obtain marketing authorization through a de novoDe Novo classification process rather than through a PMA for class I or class II devices if the 510(k) pathway is not available. In September 2013, Prosigna obtainedwas granted FDA 510(k) clearance as a prognostic indicator for distant recurrence-free survival at ten years in post-menopausal
women with Stage I/II lymph node-negative or Stage II lymph node-positive (1-3 positive nodes), hormone receptor-positive breast cancer to be treated with adjuvant endocrine therapy alone, when used in conjunction with other clinicopathological factors after theyhave undergone surgery in conjunction with locoregional treatment and consistent with the standard of care.
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The FDA issued a final guidance document titled In"In Vitro Companion Diagnostic Devices. In the guidance, FDADevices" that defined an IVD companion diagnostic device as an in vitro diagnostic device that provides information that is essential for the safe and effective use of a corresponding therapeutic product. The use of an IVD companion diagnostic device with a therapeutic product is stipulated in the instructions for use in the labeling of both the diagnostic device and the corresponding therapeutic product, including the labeling of any generic equivalents of the therapeutic product. The FDA stated that an IVD companion diagnostic should be submitted for review and approvedcleared or clearedapproved through an appropriate device submission contemporaneously with the review and approval of the therapeutic product to facilitate concurrent review. The FDA guidance also stated that while there may be cases when a companion diagnostic could come to market through the 510(k) pathway, the FDA expects that most companion diagnostics will be Class III devices. Class III devices generally require the approval of a PMA before they can be marketed. An IVD diagnostic device that is not a companion diagnostic device, because it is not essential for the safe and effective use of a corresponding therapeutic product, may still be beneficial for use with a therapeutic product, but may not be identified in the labeling of the therapeutic product. It is possible that revenue from a cleared or approved beneficial or complementary IVD diagnostic device may be less than revenue from a cleared or approved IVD companion diagnostic device. There
The FDA issued another draft guidance in December 2018 specific to oncology companion diagnostic tests, which it finalized in April 2020. The guidance explained that some oncology companion diagnostic tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. However, there is no assurance that we would be able to obtain clearance or approval for any of our diagnostic devices in development as a companion diagnostic device.device or that any such clearance or approval will occur without significant delay.
Any marketing authorization we obtain for any future device product would be subject to regulatory requirements that would affect how we are able to market and sell the device. The FDC Act and FDA regulations place considerable requirements on our products,medical devices, including, but not limited to, compliance with the quality system regulation, or QSR, establishment registration and product listing with the FDA, and compliance with labeling, marketing, complaint handling, medical device reporting requirements, and reporting certain corrections and removals. Obtaining FDA clearance or approval for diagnostics can be expensive and uncertain, generally may take several months to several years, and generally requires detailed and comprehensive scientific and clinical data, as well as compliance with FDA regulations for investigational devices. In addition, we have limited experience in obtaining PMA, 510(k) clearance, or De Novo authorization approval from the FDA and are therefore supplementing our operational capabilities to manage the more complex processes needed to obtain and maintain PMAs.marketing authorization. Notwithstanding the expense, these efforts may never result in FDA clearance or approval. Even if we were to obtain marketing authorization, it may not be for the uses we believe are important or commercially attractive, in which case we would not market our product for those uses.
Sales of our diagnostic productstests outside the United States are subject to foreign regulatory requirements governing clinical studies, vigilance reporting, marketing approval, manufacturing, regulatory inspections, product licensing, pricing and reimbursement. These regulatory requirements vary greatly from country to country. As a result, the time required to obtain approvals or certifications outside the United States may differ from that required to obtain FDA marketing authorization, and we may not be able to obtain foreign regulatory approvals on a timely basis or at all. Marketing authorization from the FDA does not ensure approval or certification by regulatory authorities in other countries, and approval or certification by any foreign regulatory authority does not ensure marketing authorization or certifications by regulatory authorities in other countries or by the FDA. Foreign regulatory authorities could require additional testing beyond what the FDA requires. In addition, the FDC Act imposes requirements on the export of medical devices, such as labeling requirements, and foreign governments impose requirements on the import of medical devices from the United States. Failure to comply with these regulatory requirements or to obtain required approvals, clearances, and export certifications could impair our ability to commercialize our diagnostic products outside of the United States.
For instance, in order to sell some of our products in the EU, those products must comply with the General Safety and Performance Requirements of the IVDR. Compliance with these requirements is a prerequisite to place IVD products on the EU market. All medical devices placed on the market in the EU must meet the General Safety and Performance Requirements laid down in Annex I to the IVDR, including the requirement that an IVD MD must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. In addition, the device must achieve the performances intended by the manufacturer and be designed, manufactured, and packaged in a suitable manner. To demonstrate compliance with the General Safety and Performance Requirements we must undergo a conformity assessment procedure, which varies according to the type of medical device and its (risk) classification. As a general rule, demonstration of conformity of IVD MDs and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions
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of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence.
The EU regulatory landscape concerning medical devices has significantly changed, and the new IVDR governing IVD MDs became applicable on May 26, 2022 (subject to certain transitional provisions meaning that were such transitional provisions apply, the products can continue to be placed on the market under the IVDD for a certain period of time). The new requirements in the IVDR have a significant effect on the way we conduct our business in the EU and the EEA. In particularly, substantially more IVDs require the involvement of a notified body to be able to affix a CE Mark to the product, which may lead to delay in being able to place such products on the market.
On April 5, 2017, the IVDR was adopted to establish a modernized and more robust EU legislative framework, with the aim of ensuring better protection of public health and patient safety. Unlike directives, the IVDR does not need to be transposed into national law and therefore reduces the risk of discrepancies in interpretation across the different European markets. The IVDR increases the regulatory requirements applicable to IVD MDs in the EU and would require that we re-classify and obtain new certificates of conformity for our existing CE-marked IVD MDs by May 25, 2022, unless a transitional provision applies to the product, meaning that where such transitional provisions apply, the products can continue to be placed on the market under the IVDD for a certain period of time. For most IVD MDs, the manufacturer used to self-declare the conformity of its products with the essential requirements of the IVDD. Under the IVDR, the majority of IVD MDs require now the intervention of a notified body for conformity assessment. Notified bodies are independent organizations designated by EU member states to assess the conformity of devices before being placed on the market. The notified body audits and examines the product’s technical documentation and the manufacturer’s quality system. If satisfied that the relevant product conforms to the General Safety and Performance Requirements, the notified body issues a certificate of conformity. The manufacturer may then apply the CE Mark to the device, which allows the device to be placed on the market throughout the EU. If we fail to remain in compliance with applicable EU laws and directives, we would be unable to continue to affix the CE mark to our products, which would prevent us from selling them within the EU and European Economic Area, or EEA (which consists of the 27 EU member states plus Norway, Liechtenstein and Iceland).
The IVDR will not be implemented in Great Britain, and since January 1, 2021, the Medicines and Healthcare products Regulatory Agency, or MHRA, has become the sovereign regulatory authority responsible for the Great Britain (i.e., England, Wales and Scotland) medical device market according to the requirements provided in the Medical Devices Regulations 2002 (SI 2002 No 618, as amended). The UK regulation implemented the three pre-existing EU directives, including the IVDD. Following the end of the Brexit transitional period on January 1, 2021, new regulations require medical devices to be registered with the MHRA before being placed on the Great Britain market. The MHRA only registers devices where the manufacturer or their United Kingdom, or UK, Responsible Person has a registered place of business in the UK. Manufacturers based outside the UK need to appoint a UK Responsible Person that has a registered place of business in the UK to register devices with the MHRA. By July 1, 2023, in Great Britain, all medical devices will require a UK Conformity Assessed, or UKCA, mark but CE marks issued by EU notified regulatory bodies will remain valid until this time. Manufacturers may choose to use the UKCA mark on a voluntary basis until June 30, 2023.
For the time being, the regulatory regime for medical devices and IVD MDs in Great Britain (England, Scotland and Wales) continues to be based on the requirements derived from current EU legislation. An MHRA public consultation was opened until end of November 2021 on the post-Brexit regulatory framework for medical devices and diagnostics. The MHRA seeks to amend the UK Medical Devices Regulations 2002, in particular to create a new access pathway to support innovation, create an innovative framework for regulating software and artificial intelligence as medical devices, reform IVD MD regulation, and foster sustainability through the reuse and remanufacture of medical devices. The regime is expected to come into force in July 2023, coinciding with the end of the acceptance period for EU CE marks in Great Britain, subject to appropriate transitional arrangements. The consultation indicated that the MHRA will publish guidance in relation to the changes to the regulatory framework and may rely more heavily on guidance to add flexibility to the regime.
Subject to the outcome of the MHRA public consultation on the post-Brexit regulatory framework for medical devices and diagnostics, the UK may choose to retain regulatory flexibility or align with the EU Medical Devices Regulation and the IVDR going forward. EU CE markings will continue to be recognized in the UK, and certificates issued by EU-registered notified regulatory bodies will be valid in the UK, until June 30, 2023. For medical devices, including IVD MDs, placed on the
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market in Great Britain after this period, the UKCA marking will be mandatory. In contrast, UKCA marking and certificates issued by UK notified regulatory bodies are not recognized on the EU market.
The rules for placing medical devices on the Northern Ireland market differ from those in Great Britain, and the IVDR will apply in Northern Ireland. Under the terms of the Northern Ireland Protocol of the Withdrawal Agreement between the EU and UK, Northern Ireland follows EU rules on medical devices, including the IVDR when applicable. Therefore, devices marketed in Northern Ireland will require assessment according to the EU regulatory regime. Such assessment may be conducted by an EU notified body, in which case a CE mark is required before placing the device on the market in the EU or Northern Ireland. Alternatively, if a UK notified body conducts such assessment, a ‘UKNI’ mark is applied and the device may only be placed on the market in Northern Ireland and not the EU.
A mutual recognition agreement (MRA) aligning in vitro diagnostic (IVD) regulations between the European Union and Switzerland has officially expired following the In Vitro Diagnostic Medical Devices Regulation’s (IVDR) May 26, 2022 date of application, impacting certification and authorized representation requirements for manufacturers. The Swiss government has issued its own Ordinance on In Vitro Diagnostic Medical Devices (IvDO). The Swiss regulation aligns closely with the IVDR in terms of requirements for manufacturers, and follows the IVDR’s transitional timelines regarding compliance deadlines according to IVD risk classifications as well as designations of Swiss Authorized Representatives.
These modifications may have an effect on the way we intend to conduct our business in these countries.
If we are unable to obtain marketing authorizations or certifications, approvals, clearances or certifications to market Prosigna or our other assays on the nCounter Analysis System in additional countries or if regulatory limitations are placed on our diagnostic kit products, our business and growth will be harmed.
The FDA cleared the Prosigna test for marketing in the United States;States. Prosigna also has ais CE markmarked which permits us to market the test in the European Union;EU and Prosigna received marketing authorizations in selected other jurisdictions. We intend to seek regulatory authorizations or certifications for Prosigna in other jurisdictions and, potentially, for other indications.
In addition, pursuant to our collaborations with pharmaceutical companies for the development of companion diagnostic tests for use with their drugs, we are responsible for obtaining regulatory authorizations or certifications to use the companion diagnostic tests in clinical trialsstudies as well as the marketing authorizations or certifications to sell the companion diagnostic tests following completion of such trials.studies. Some of the compensation we expect to receive pursuant to these collaborations is based on the receipt of marketing authorizations.authorizations or certifications. Any failure to obtain marketing authorizations or certifications for our diagnostic kits in a particular jurisdiction may also reduce sales of our
the nCounter systemsAnalysis System for clinical use in that jurisdiction, as the lack of a robust menu of available diagnostic tests would make those systems less attractive to testing laboratories.
In the EU, the IVDR has introduced a new classification system for companion diagnostics which are now specifically defined as a device which is essential for the safe and effective use of a corresponding medicinal product to: (a) identify, before and/or during treatment, patients who are most likely to benefit from the corresponding medicinal product; or (b) identify, before and/or during treatment, patients likely to be at increased risk of serious adverse reactions as a result of treatment with the corresponding medicinal product. Companion diagnostics have to undergo a conformity assessment by a notified body. Before it can issue a certificate of conformity, the notified body will have to seek a scientific opinion from the European Medicines Agency or the relevant national competent authority on the suitability of the companion diagnostic to the medicinal product concerned.
We cannot assure investors that we will be successful in obtaining or maintaining regulatory clearances, certifications, approvals, or marketing authorizations. If we do not obtain or maintain regulatory clearances, certifications, approvals, or marketing authorizations for future diagnostic kit products or expand future indications for diagnostic purposes, if additional regulatory limitations are placed on our diagnostic kit products or if we fail to successfully commercialize such products, the market potential for our diagnostic kit products would be constrained, and our business and growth prospects would be adversely affected.
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We are subject to ongoing and increasingly extensive regulatory requirements, which may be subject to change, and our failure to comply with these requirements could substantially harm our business.
Certain of our products are regulated as in vitro diagnostic medical devices,IVD MDs, including Prosigna and the nCounter FLEX Analysis System. Accordingly, we and certain of our contract manufacturers are subject to ongoing International Organization for Standardization, or ISO, obligations as well as requirements under CLIA and state laboratory quality statutes and regulations, the FDC Act and devicerelated FDA regulations, enforced by the FDA and other statutory and regulatory requirements enforced by other government authorities. These may include routine inspections by Notified Bodies,notified bodies, FDA, CMS, and other health authorities, of our manufacturing facilities and our records for compliance with standards such as ISO 13485 and the QSR, regulations, which establish extensive requirements for quality assurance and control as well as manufacturing and change control procedures, among other things. These inspections may include the manufacturing facilities of any suppliers. In the event that a supplier fails to maintain compliance with regulatory or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. We are also subject to other regulatory obligations, such as registration of our company offices and facilities and the listing of our devices with the FDA;FDA (and similar listings and certifications in certain other countries); continued adverse event and malfunction reporting; reporting certain corrections and removals; and labeling and promotional requirements.
The IVDR increases the regulatory requirements applicable to in vitro diagnostics in the EU and would require that we re-classify and obtain new certificates of conformity for our existing CE-marked IVD products by May 25, 2022, unless a transitional provision applies to the product. Failure to secure these re-certifications in time will halt our ability to commercialize our products in relevant countries. Currently Prosigna is our only test that will require recertification. Moreover, complying with the stricter regulatory requirements of the IVDR, including with respect to clinical evaluation requirements, quality systems, and post-market surveillance, may require us to incur significant expenditures. Failure to meet these requirements could adversely impact our business in the EU and EEA and other regions that tie their product registrations or regulations to the EU requirements.
The IVDR became applicable five years after publication on May 26, 2022 and once applicable to a particular product, the IVDR will among other things:
•strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
•establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;
•establish explicit provisions on importers’ and distributors’ obligations and responsibilities;
•impose an obligation to identify a responsible person who is ultimately responsible for all aspects of compliance with the requirements of the new regulation;
•improve the traceability of medical devices throughout the supply chain to the end-user or patient through the introduction of a unique identification number, to increase the ability of manufacturers and regulatory authorities to trace specific devices through the supply chain and to facilitate the prompt and efficient recall of medical devices that have been found to present a safety risk;
•set up a central database (Eudamed) to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU;
•establish recourse for damage caused by a defective device; and
•strengthen rules for the assessment of certain high-risk devices that may have to undergo an additional check by experts before they are placed on the market.
Other regulatory bodies may also issue guidelines and regulations that could impact the development of our products, including companion diagnostic tests. For example, the European Medicines Agency a European Union agency which is responsible for the scientific evaluation of medicines used in the European Union, recently launched an initiative to determine guidelines for the use of genomic biomarkers in the development and life-cyclelifecycle of drugs. On April 5, 2017,The guidelines may impose greater requirements for demonstrating the European Union Parliament passed Regulation (EU) 2017/746, referredclinical validity and utility of our biomarker-based tests and may interfere with our ability to as the IVD Device Regulation,develop companion diagnostics or IVDR, which increases the regulatory requirements applicable to in vitro diagnostics in the EU and would require that we re-classify andotherwise obtain approval, registration, or clearancemaintain marketing authorization or certifications for our existing CE-marked IVD products within a five-year grace period (by May 25, 2022).diagnostic tests.
We may also be subject to additional FDA or globalforeign regulatory authority post-marketing obligations or requirements by the FDA or globalforeign regulatory authority to change our current product classifications which would impose additional regulatory obligations on us. For example, FDA has issued a proposed rule to revise the QSR to more closely align with ISO 13485:2016
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but that also includes proposed clarifications and additional definitions and requirements. The promotional claims we can make for Prosigna in the United States are limited to the indications for use in the United States as cleared by the FDA or outside the United States as authorized or certified by the applicable regulatory authority. If we are not able to maintain regulatory compliance, we may not be permitted to market our medical device products and/or may be subject to enforcement actions by the FDA or other governmental authorities such as the issuance of warning or untitled letters, fines, injunctions, and civil penalties; recall or seizure of products; operating restrictions; and criminal prosecution. In addition, we may be subject to similar regulatory regimes of foreign jurisdictions as we continue to commercialize our products in new markets outside of the United States and Europe. Adverse Notified Body,notified body, EU Competent Authoritycompetent authority or FDA or global regulatory authority action in any of these areas could significantly increase our expenses and limit our revenue and profitability.
If we are unable to compete successfully, we may be unable to increase or sustain our revenue or achieve profitability.
Our Decipher Prostate test faces competition from Myriad Genetics and MDx Health, which offer genomic testing for prognostic purposes within localized prostate cancer. Additionally, traditional methods used by pathologists and clinicians to estimate risk of disease progression pose competitive threats to our business in addition to new technologies such as artificial intelligence and digital pathology. In bladder cancer, we are not currently aware of a direct competitor offering genomic testing for prognostic purposes that match the intended use population for the Decipher Bladder test. However, DNA mutational analysis and traditional clinical methods and nomograms are currently in use by physicians for similar purposes.
We believe our primary competition in pulmonology with our Percepta and Envisia classifiers will similarly come from traditional methods used by physicians to diagnose the related diseases. For the Percepta Nasal Swab test, we expect competition from companies
focused on lung cancer such as Oncocyte Corporation and Biodesix, Inc. We believe our principal competitor in the breast cancer diagnostics market is Exact Sciences, Inc. (having combined with Genomic Health, Inc.), which currently commands a substantial majority of the market. Other competitors in the breast cancer diagnostics market include Myriad Genetics, Inc. and Agendia, Inc.
As we expand our portfolio of tests, to address clinical questions across the clinical care continuum, we may also face competition from companies focused on screening at-risk patients for cancer or companies informing treatment decisions such as Guardant Health or GRAIL.Foundation Medicine, Inc. Competition could also emerge using alternative samples, such as blood, urine or sputum. However, such “liquid biopsies” are currently being used to gauge risk of recurrence or response to treatment in patients already diagnosed with lung cancer.
In general, we also face competition from commercial laboratories, such as Laboratory Corporation of America Holdings and Sonic Healthcare USA, with strong infrastructure to support the commercialization of diagnostic services. We face potential competition from companies such as Illumina, Inc. and Thermo Fisher Scientific Inc., both of which have entered the clinical diagnostics market. Other potential competitors include companies that develop diagnostic products, such as Roche Diagnostics, a division of Roche Holding Ltd, Siemens AG and Qiagen N.V., and we also may face competition from competitors of our biopharma services such as Neogenomics, Adapative, Tempus and Akoya.
In addition, competitors may develop their own versions of our solutions in countries we may seek to enter where we do not have patents or where our intellectual property rights are not recognized, and compete with us in those countries, including encouraging the use of their solutions by physicians in other countries.
To compete successfully, we must be able to demonstrate, among other things, that our diagnostic test results are accurate and cost effective, and we must secure a meaningful level of reimbursement for our products.
Many of our potential competitors have widespread brand recognition and substantially greater financial, technical and research and development resources, and selling and marketing capabilities than we do. Others may develop products with prices lower than ours that could be viewed by physicians and payers as functionally equivalent to our solutions or offer solutions at prices designed to promote market penetration, which could force us to lower the list price of our solutions and affect our ability to achieve profitability. If we are unable to change clinical practice in a meaningful way or compete successfully against current and future competitors, we may be unable to increase market acceptance and sales of our products,
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which could prevent us from increasing our revenue or achieving profitability and could cause the market price of our common stock to decline. As we add new tests, products and services, we will face many of these same competitive risks for these new tests.risks.
Our success depends largelyin part on the skills, experience and performance of key members of our executive management team and others in key management positions. The efforts of each of these persons together willWe have in the past and may in the future experience changes in our executive management, which may be criticaldisruptive to us as we continueour business. Executive transitions may impact our ability to developimplement our technologiesbusiness strategy and test processes and focuscould have a material adverse effect on our growth. If we were to lose one or more of these key employees, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategy.business.
In addition, our research and development programs and commercial laboratory operations depend on our ability to attract and retain highly skilled scientists. We may not be able to attract or retain qualified scientists and technicians in the future due to the intense competition for qualified personnel among life science businesses, particularly in the San Francisco Bay Area.businesses. Our success in the development and commercialization of advanced diagnostics requires a significant medical and clinical staff to conduct studies and educate physicians and payers on the merits of our tests in order to achieve adoption and reimbursement. We are in a highly competitive industry to attract and retain this talent.talent, and the labor market in our industry is becoming increasingly competitive. Additionally, our success depends on our ability to attract and retain qualified sales people. We recently significantly expanded our sales force as we invest in our multi-product sales strategy, which includes assignment of a single contact to successfully develop and implement relationships with our customers. salespeople.
There can be no assurance that we will be successful in maintaining and growing our business. Additionally, as we increase our sales channels for new tests we commercialize, including the Percepta and Envisia tests, or acquire, such as Prosigna, we may have difficulties recruiting and training additional sales personnel or retaining qualified salespeople, which could cause a delay or decline in the rate of adoption of our tests. As a public company located in the San Francisco Bay Area, we also face intense competition for highly skilled finance and accounting personnel. If we are unable to attract and retain finance and accounting personnel experienced in public company financial reporting, we risk being unable to close our books and file our public documents on a timely basis. Finally, our
Our business requires specialized capabilities in reimbursement, billing, and other areas and there may be a shortage of qualified individuals. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that could adversely affect our ability to support our research and development, clinical laboratory,
sales and reimbursement, billing and finance efforts. All of our U.S. employees are at will, which means that either we or the employee may terminate their employment at any time. We do not carry key manperson insurance for any of our employees.
Finally, we rely, in part, on equity awards to compensate and incentivize our employees to drive our further growth. As the equity capital markets have been highly volatile in recent periods and the price of our common stock has declined, certain of our employees’ equity awards have lost some or all of their value, which may limit their effectiveness as retention tools and, in the event we fail to retain such employees, may adversely affect our business, results of operations and financial condition.
Billing for our diagnostic tests is complex, and we must dedicate substantial time and resources to the billing process to be paid.
Billing for clinical laboratory testing services is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payers, including Medicare, commercial insurance companies and patients, all of which have different billing requirements. We generally bill third-party payers for our diagnostic tests and pursue reimbursement on a case-by-case basis where pricing contracts are not in place. To the extent laws or contracts require us to bill patient co-payments or co-insurance, we must also comply with these requirements. We may also face increased risk in our collection efforts, including potential write-offs of accounts receivable and long collection cycles, which could adversely affect our business, results of operations and financial condition.condition including cash collections. Furthermore, third-party payers may reduce or refuse to pay for our tests, with or without notice.
Several factors make the billing process complex, including:
•differences between the list price for our tests and the reimbursement rates of payers;
•compliance with complex federal and state regulations related to billing government payers, such as Medicare and Medicaid, including requirements to have an active CLIA certificate; • |
risk of government audits related to billing Medicare and other government payers;
•disputes among payers as to which party is responsible for payment;
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•differences in coverage and in information and billing requirements among payers, including the need for prior authorization and/or advanced notification;
•the effect of patient co-payments or co-insurance;
•individual payers may argue technical contract noncompliance and withhold payment;
•changes to billing codes used for our tests;
•incorrect or missing billing information; and
•the resources required to manage the billing and claims appeals process.
We use standard industry billing codes, known as CPT codes, to bill for our tests, including cytopathology. In addition,Through December 31, 2020, we useused the CPT code 81545 to bill for our Afirma classifier. Effective January 1, 2021, we began using the new CPT codes do not existcode 81546 to bill for our other proprietary molecular diagnostic tests. Therefore, until such time thatAfirma classifier, and code 81545 was retired. Effective January 1, 2020, we are assigned and are able to use a designatedbegan using CPT code specific81542 to Perceptabill for Decipher Prostate Biopsy and Decipher Prostate RP tests. Effective January 1, 2021, we began using the new CPT code 81554 to bill for our Envisia classifier. Effective October 1, 2020, we use “unlisted” codesbegan using CPT code 0016M to bill for claim submissions, which can lead to delays in payers adjudicating our claims or denying payment altogether. Moreover, theseDecipher Bladder test.
CPT codes can change over time. When codes change, there is a risk of an error being made in the claim adjudication process. These errors can occur with claims submission, third-party transmission or in the processing of the claim by the payer. Claim adjudication errors may result in a delay in payment processing or a reduction in the amount of the payment received. Coding changes, therefore, may have an adverse effect on our revenues.total revenue. Even when we receive a designated CPT code specific to our tests, such as the 81545 code for the Afirma GEC that became effective January 1, 2016, there can be no assurance that payers will recognize these codes in a timely manner or that the process of transitioning to such a code and updating their billing systems and ours will not result in errors, delays in payments and a related increase in accounts receivable balances.
As we introduce new tests, we will need to add new codes to our billing process as well as our financial reporting systems. Failure or delays in effecting these changes in external billing and internal systems and processes could negatively affect our collection rates, revenue and cost of collecting.
Correct coding is subject to the coding policies of the American Medical Association CPT Editorial Panel, or AMA CPT. With respect to claims submitted to Medicare and Medicaid, it is also subject to coding policies developed through the National Correct Coding Initiative, or NCCI. Other payers may develop their own payer-specific coding policies. The broader coding policies of the AMA CPT, NCCI, and other payers are subject to change. For instance, the NCCI recently adopted an update to
its Coding Policy Manual effective January 1, 2019, to limit instances when multiple codes may be billed for molecular pathology testing. Although the NCCI appears to have moderated this change in its updates effective January 1, 2020, such coding policy changes may negatively affect our revenuestotal revenue and cash flow.
Additionally, our billing activities require us to implement compliance procedures and oversight, train and monitor our employees, challenge coverage and payment denials, assist patients in appealing claims, and undertake internal audits to evaluate compliance with applicable laws and regulations as well as internal compliance policies and procedures. Payers also conduct external audits to evaluate payments, which addadds further complexity to the billing process. If the payer makes an overpayment determination, there is a risk that we may be required to return some portion of prior payments we have received. Additionally, the ACA established a requirement for providers and suppliers to report and return any overpayments received from government payers under the Medicare and Medicaid programs within 60 days of identification. Failure to identify and return such overpayments exposes the provider or supplier to liability under federal false claims laws. These billing complexities, and the related uncertainty in obtaining payment for our tests, could negatively affect our revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.
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We rely on a third-party provider to transmit claims to payers, and any delay in transmitting claims could have an adverse effect on our revenue.
While we manage the overall processing of claims, we rely on a third-party provider to transmit the actual claims to payers based on the specific payer billing format. We have previously experienced delays in claims processing when our third-party provider made changes to its invoicing system, and again when it did not submit claims to payers within the timeframe we require. Additionally, coding for diagnostic tests may change, and such changes may cause short-term billing errors that may take significant time to resolve. If claims are not submitted to payers on a timely basis or are erroneously submitted, or if we are required to switch to a different provider to handle claim submissions, we may experience delays in our ability to process these claims and receipt of payments from payers, or possibly denial of claims for lack of timely submission, which would have an adverse effect on our revenue and our business.
If our internal sales force is less successful than anticipated, our business expansion plans could suffer and our ability to generate revenuesrevenue could be diminished. In addition, we have limited history selling our molecular diagnostics tests on a direct basis and our limited history makes forecasting difficult.
Developing new products involves a lengthy and complex process, and if we do not achieve our projected development and commercialization goals in the time frames we announce and expect, our business will suffer and our stock price may decline.
From time to time, we expect to estimate and publicly announce the anticipated timing of the accomplishment of various clinical and other product development goals. The actual timing of accomplishment of these targets could vary dramatically compared to our estimates, in some cases for reasons beyond our control, including the impact of the COVID-19 pandemic. We cannot be certain that we will meet our projected targets and if we do not meet these as publicly announced, the commercialization of our tests may be delayed or may not be able to commercialize on a timely basis, oroccur at all other products we are developing.and, as a result, our business will suffer and our stock price may decline.
We continually seek to develop enhancements to our current test offerings and additional diagnostic solutionstests that requires us to devote considerable resources to research and development. There can be no assurance that we will be able to identify other diseases that can be effectively addressed with our molecular cytology platform. In addition, if we identify such diseases, we may not be able to develop products with the diagnostic accuracy necessary to be clinically useful and commercially successful. We may face challenges obtaining sufficient numbers of samples to validate a genomic signature for a molecular diagnostic product. Afterour products. We must provide sufficient clinical and analytical validity, as well as clinical utility studies that meet individual payer evidence requirements to obtain reimbursement. Even after launching new products, we still must complete additional studies that meet the clinical evidence required by individual payers to obtain reimbursement. Moreover, we may experience delays in the development and introduction of new products due to the effects of the current COVID-19 pandemic.
In order to develop and commercialize diagnostic tests to be run in our CLIA lab, we need to:
•expend significant funds to conduct substantial research and development;
•conduct successful analytical and clinical studies;
•scale our laboratory processes to accommodate new tests; and
•build the commercial, regulatory, and compliance infrastructure to market and sell new products.
Our product development process involves a high degree of risk and may take several years. Our test and product development efforts may fail for many reasons, including:
•failure to identify a genomic signature in biomarker discovery;
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•inability to secure sufficient numbers of samples at an acceptable cost and on an acceptable timeframe to conduct analytical and clinical studies; or
•failure of clinical validation studies to support the effectiveness of the test.
Typically, few research and development projects result in commercial products, and success in early clinical studies often is not replicated in later studies. At any point, we may abandon development of a product candidate, or we may be required to expend considerable resources repeating clinical studies, which would adversely affect the timing for generating potential revenue from a new product and our ability to invest in other products in our pipeline. If a clinical validation study fails to demonstrate the prospectively-definedprospectively defined endpoints of the study or if we fail to sufficiently demonstrate analytical validity, we might choose to abandon the development of the product, which could harm our business. If a clinical utility study fails to demonstrate the value of a particular test, we may not be able to obtain reimbursement for the test. In addition, competitors may develop and commercialize competing products or technologies faster than us or at a lower cost.
If we are unable to develop products to keep pace with rapid technological, medical and scientific change, our operating results and competitive position could be harmed.
In recent years, there have been numerous advances in technologies relating to diagnostics, particularly diagnostics that are based on genomic information. These advances require us to continuously develop our technology and to work to develop new solutions to keep pace with evolving standards of care. Our solutions could become obsolete unless we continually innovate and expand our product offerings to include new clinical applications. If we are unable to develop new products or to demonstrate the applicability of our products for other diseases, our sales could decline, and our competitive position could be harmed.
Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.
Our operations are subject to other extensive federal, state, local, and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among others:
•the Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions, and amendments made to those standards in 2013 pursuant to HIPAA under the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, which strengthenstrengthened and expandexpanded HIPAA privacy and security compliance requirements, increaseincreased penalties for violators, extendextended enforcement authority to state attorneys general, and imposeimposed new requirements for breach notification;
•Medicare billing and payment regulations applicable to clinical laboratories, including requirements to have an active CLIA certificate;
•the Federal Anti-kickback Statute (and state equivalents), which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal healthcare program;
•the Eliminating Kickbacks in Recovery Act of 2018, which prohibits the solicitation, receipt, payment or offering of any remuneration in return for referring a patient or patronage to a recovery home, clinical treatment facility, or laboratory for services covered by both government and private payers;
•the Federal Stark physician self-referral law (and state equivalents), which prohibits a physician from making a referral for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services, unless the financial relationship falls within an applicable exception to the prohibition;
•the Federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state health carehealth-care program beneficiary if the person knows or should know it is likely to
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influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health carehealth-care program, unless an exception applies;
•the Federal False Claims Act, which imposes liability on any person or entity who knowingly presents, or causes to be presented, a false, fictitious, or fraudulent claim for payment to the federal government;
•the Physician Payments Sunshine Act, enacted as part of the ACA, which imposes annual reporting requirements on manufacturers of certain devices, drugs and biologics for certain payments and transfers of value by them and in some cases their distributors to covered recipients, including physicians, as defined by such law, teaching hospitals, and certain healthcare providers as well as ownership or investment interests that physicians or physicians’ immediate family members hold with the reporting entity;
•other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, prohibitions on the provision of products at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payer, including private insurers;
•the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;
•the Protecting Access to Medicare Act of 2014, which requires us to report private payer rates and test volumes for specific CPT codes on a triennial basis and imposes penalties for failures to report, omissions, or misrepresentations;
•the No Surprises Act and its implementing regulations (effective January 1, 2022), which prohibit an out-of-network provider from billing a patient at an amount in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health-care facilities, as well as various state laws restricting balance billing of patients;
•the rules regarding billing for diagnostic tests reimbursable by the Medicare program, which prohibit a physician or other supplier from marking up the price of the technical component or professional component of a diagnostic test ordered by the physician or other supplier and supervised or performed by a physician who does not “share a practice” with the billing physician or supplier;
•state laws that prohibit other specified practices related to billing such as billing physicians for testing that they order, waiving co-insurance, co-payments, deductibles, and other amounts owed by patients, and billing a state Medicaid program at a price that is higher than what is charged to other payers;
•the Foreign Corrupt Practices Act of 1977, and other similar laws, which apply to our international activities;
•unclaimed property (escheat) laws and regulations, which may require us to turn over to governmental authorities the property of others held by us that has been unclaimed for a specified period of time; and
•enforcing our intellectual property rights.rights; and
•foreign laws and regulations equivalent to the above.
We have adopted policies and procedures designed to comply with applicable laws and regulations. In the ordinary course of our business, we conduct internal reviews of our compliance with these laws. Our compliance with some of these laws and regulations is also subject to governmental review. The growth of our business, and sales organization and our expansion outside of the United States may increase the potential of violating these laws or our internal policies and procedures. We believe that we are in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position.
In recent years U.S. Attorneys’ Offices have increased scrutiny of the healthcare industry, as have Congress, the Department of Justice, the Department of Health and Human Services’ Office of the Inspector General and the Department of Defense. These bodies have all issued subpoenas and other requests for information to conduct investigations of, and commenced civil and criminal litigation against, healthcare companies based on financial arrangements with health carehealth-care providers, regulatory compliance, product promotional practices and documentation, and coding and billing practices.
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Whistleblowers have filed numerous qui tam lawsuits against healthcare companies under the federal and state False Claims Acts in recent years, in part because the whistleblower can receive a portion of the government’s recovery under such suits.
Many member states in the EU have adopted specific anti-gift statutes that further limit commercial practices for medical devices (including IVD MDs), in particular vis-à-vis healthcare professionals and organizations. Additionally, there has been a recent trend of increased regulation of payments and transfers of value provided to healthcare professionals or entities and many EU member states have adopted national “Sunshine Acts” which impose reporting and transparency requirements (often on an annual basis), similar to the requirements in the United States, on medical device manufacturers.
These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. If one or more such agencies alleges that we may be in violation of any of these requirements, regardless of the outcome, it could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations and other commercial third-party payers. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, we could be required to refund payments received by us, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.
If we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.
We are subject to federal, state and local laws, rules and regulations governing the use, discharge, storage, handling and disposal of biological material, chemicals and waste. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, remediation costs and any related penalties or fines, and any liability could exceed our resources or any applicable insurance coverage we may have. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could negatively affect our operating results.
Risks we face in connection with the ongoing integration of HalioDx and Decipher Biosciences include:
•We may have difficulties managing acquired products and tests or retaining key personnel from the acquired businesses;
•We may not successfully integrate the acquired businesses as planned (including, for example, systems integration), there could be unanticipated adverse impacts on the acquired businesses, or we may otherwise not realize the expected return on our investments, which could adversely affect our business or operating results and potentially cause impairment to assets that we record as a part of an acquisition including intangible assets and goodwill;
•Our operating results or financial condition may be adversely impacted by (i) claims or liabilities related to the acquired businesses including, among others, claims from U.S. or international regulatory or other governmental agencies, terminated employees, current or former customers or business partners, or other third parties; (ii) pre-existing contractual relationships of the acquired businesses that we would not have otherwise entered into, the termination or modification of which may be costly or disruptive to our business; (iii) unfavorable accounting treatment as a result of the acquired businesses' practices; and (iv) intellectual property claims or disputes;
•Neither HalioDx nor Decipher Biosciences was required to maintain an internal control infrastructure that would meet the standards of a public company, including the requirements of the Sarbanes-Oxley Act of 2002. The costs that we may incur to implement such controls and procedures may be substantial and we could encounter unexpected delays and challenges in this implementation. In addition, we may discover significant deficiencies or material weaknesses in the quality of HalioDx's or Decipher Biosciences' respective financial and disclosure controls and procedures;
•We may experience a failure of development activities on behalf of a HalioDx customer where HalioDx bears development risk resulting in a refund of development fees;
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•We may fail to transition manufacturing of the test kits for the nCounter, currently produced by NanoString, to HalioDx’s manufacturing facility in Marseille, France in a timely manner or at all, or we may experience manufacturing irregularities or challenges in connection with the transition, including rolling blackouts due to energy shortages in Europe;
•We may not realize the anticipated accretion to our gross margins as a result of transitioning manufacturing of test kits to HalioDx;
•We may experience disagreements with the French employee work council; and
•We may have failed to identify or assess the magnitude of certain liabilities, shortcomings or other circumstances prior to acquiring either of the acquired businesses, which could result in unexpected litigation or regulatory exposure, unfavorable accounting treatment, a diversion of management’s attention and resources, and other adverse effects on our business, financial condition, and operating results.
We are exposed to risks associated with transactions denominated in foreign currency.
Changes in the value of the relevant currencies may affect the cost of certain items required in our operations and contractual agreements. Changes in currency exchange rates, such as the recent strengthening of the U.S. dollar relative to the Euro, may also affect the relative prices at which we are able to sell products in the same market. Our revenue from international customers may be negatively impacted as increases in the U.S. dollar relative to our international customers local currency could make our products more expensive, impacting our ability to compete. Our costs of materials from international suppliers may increase if, in order to continue doing business with us, they raise their prices as the value of the U.S. dollar decreases relative to their local currency. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Recent global financial conditions have led to a high level of volatility in foreign currency exchange rates and that level of volatility may continue, which could adversely affect our business, financial condition, or results of operations.
Aspects of our international business exposesexpose us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
Our business strategy currently includes international presence and expansion in select countries and may include developing and maintaining physician outreach and education capabilities outside of the United States, establishing agreements with laboratories, and expanding our relationships with international payers. In 2021, we acquired HalioDx, an immuno-oncology diagnostics company that is based in Marseille, France, and operates globally. Doing business internationally involves a number of risks, including:
•multiple, conflicting and changing laws and regulations such as tax laws, privacy laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;
•difficulties in maintaining the manufacturing output we anticipate at the Marseille, France facility as a result of rolling blackouts due to energy shortages in Europe resulting from the Russian invasion of Ukraine;
•failure by us to obtain regulatory approvals or certifications where required for the use of our solutions in various countries;
•complexities associated with managing multiple payer reimbursement regimes, government payers or patient self-pay systems;systems, including payers mandating additional evidence requirements for reimbursement consideration;
•logistics and regulations associated with shipping tissue samples, including infrastructure conditions and transportation delays;
•challenges associated with establishing laboratory partners, including proper sample collection techniques, management of supplies, sample logistics, billing and promotional activities;
•limits on our ability to penetrate international markets if we are not able to process tests locally;
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•financial risks, such as longer payment cycles, difficulty in collecting from payers, the effect of local and regional financial crises, and exposure to foreign currency exchange rate fluctuations;
•natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, including COVID-19, boycotts, curtailment of trade and other business restrictions;restrictions (including as a direct or indirect result of the conflict in Ukraine); and
•regulatory and compliance risks that relate to maintaining accurate information and control over activities that may fall within the purview of the Foreign Corrupt Practices Act of 1977, including both its books and records provisions and its anti-bribery provisions.
Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.
Our operating results may be adversely affected by unfavorable macroeconomic and market conditions.
Our business or financial results may be adversely impacted by uncertain economic conditions, including: the impact of the COVID-19 pandemic, adverse changes in interest rates, foreign currency exchange rates, tax laws or tax rates; inflation; a recession; contraction in the availability of credit in the marketplace due to legislation or other economic conditions, which may potentially impair our ability to access the capital markets on terms acceptable to us or at all; and the effects of government initiatives to manage economic conditions. Many of the countries in which we operate, including the U.S. and those in Europe, have experienced and continue to experience uncertain economic conditions, including increased inflation rates, resulting from global as well as local factors. For example, in February 2022, Russia launched a significant military action against Ukraine, the short and long-term implications of which are difficult to predict at this time. The impact to Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by the U.S. and the European Union, and other countries and companies and organizations, could adversely affect the global economy and financial markets and thus could affect our business and results of operations, as well as the price of our common stock and our ability to raise additional capital when needed on acceptable terms.
Moreover, we cannot predict how future economic conditions will affect our customers, suppliers and distributors and any negative impact on our critical customers, suppliers or distributors may also have an adverse impact on our results of operations or financial condition. A severe or prolonged economic downturn, as result of a global pandemic such as the COVID-19 pandemic or otherwise, could result in a variety of risks to our business, including weakened demand for our products and services and our ability to raise additional capital when needed on favorable terms, if at all. A weak or declining economy could strain our collaborators, possibly resulting in supply disruption, or cause delays in their payments to us. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
Our reliance on distributors for sales of our products outside of the United States, and on clinical laboratories for delivery of Prosigna testing services, could limit or prevent us from selling our products and impact our revenue.
We have established distribution agreements for ourthe nCounter FLEX Analysis System for diagnostic use and related consumablediagnostic kit products in certain countries where we do not sell directly. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth.
Similarly, we or our distributors have entered into agreements with clinical laboratories globally to provide Prosigna testing services. We do not provide testing services directly and, thus, we are reliant on these clinical laboratories to actively promote and sell Prosigna testing services. These clinical laboratories may take longer than anticipated to begin offering Prosigna testing services and may not commit the necessary resources to market and sell Prosigna testing services to the level of our expectations. Furthermore, we intend to contract with additional clinical laboratories to offer Prosigna testing services, including physician-owned laboratories, and we may be unsuccessful in attracting and contracting with new clinical laboratory
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providers. If current or future Prosigna testing service providers do not perform adequately, or we are unable to enter into contracts with
additional clinical laboratories to provide Prosigna testing services, we may not be successful selling Prosigna and our future revenue prospects may be adversely affected.
Any of the foregoing defects or errors could harm our reputation, decrease market acceptance of our products or services or expose us to product liability claims. A product liability or errors and omissions liability claim could further result in substantial damages and be costly and time consuming for us to defend. Although we maintain product liability and errors and omissions insurance, we cannot assure you that our insurance would fully protect us from the financial impact of defending against these types of claims or any judgments, fines or settlement costs arising out of any such claims. Any product liability or errors and omissions liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our reputation, decrease market acceptance of our products or cause us to recall or suspend sales of our products and solutions. The occurrence of any of these events could have an adverse effect on our business and results of operations.
War, terrorism, geopolitical uncertainties, including any developments or if eitherconsequences of the conflict in Ukraine or related sanctions, trade restrictions, public health issues, natural disasters and other catastrophic events may cause damage or disruption to the economy and commerce on a global, regional or country-specific basis, and could disrupt supply or delivery of, or demand for, our laboratories becomes inoperable for anyproducts. For example, the COVID-19 outbreak has had, and may continue to have, a negative effect on consumer confidence and spending, and other reason,impacts, which could adversely affect our business.
In addition, we will be unable to perform our testing services and our business will be harmed.
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The laboratories and equipment we use to perform our tests would be costly to replace and could require substantial lead time to replace and qualify for use if they became inoperable. Either of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding and power outages, which may render it difficult or impossible for us to perform our testing services for some period of time or to receive and store samples. The inability to perform our tests for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we maintain insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.
Our inability to raise additional capital on acceptable terms in the future may limit our ability to develop and commercialize new solutions and technologies and expand our operations.
We expect continued capital expenditures and operating losses over the next few years as we expand our infrastructure, commercial operations and research and development activities. We may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. Additional funding may not be available to us on acceptable terms, or at all. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business. Our Loan and Security Agreement imposes restrictions on our operations, increases our fixed payment obligations, and has restrictive covenants. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third-party on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms. The trading prices for our common stock and other companies have been highly volatile as a result of the COVID-19 pandemic, which may reduce our ability to access capital on favorable terms or at all. In addition, a recession, depression or other sustained adverse market event resulting from the spread of COVID-19 could materially and adversely affect our business and the value of our common stock. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives. In addition, we may have to work with a partner on one or more of our products or development programs, which could lower the economic value of those programs to our company.
Security breaches, loss of data and other disruptions to usour or our third-party service providersproviders' data systems could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we and our third-party service providers collect and store sensitive data, including legally protected health information, other personally identifiable information, about our patients, credit card information, intellectual property, and our proprietary business and financial information. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems and cloud-based data center systems. We face a number of risks related to our protection of, and our service providers’ protection of, this critical information, including loss of access, inappropriate disclosure and inappropriate access, as well as risks associated with our ability to identify and audit such events. System failures or outages, including any potential disruptions due to significantly increased global demand on certain cloud-based systems during the COVID-19 pandemic, could compromise our ability to protect sensitive information and prevent business interference, which could harm our ability to conduct business and/or delay our financial reporting. Such failures could materially adversely affect our operating results and financial condition.
The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or otherwise breached due to employee error, malfeasance or other activities. While we are not currently aware of any such attack or breach having occurred, if such an event wouldwere to occur and cause interruptions in our operations, our networks would be compromised and the information we store on those networks could potentially be accessed
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by unauthorized parties, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability, and penalties under federal, state, and international laws and regulations that protect the privacy and security of personal information, such as the HIPAA regulations and regulatory penalties.the EU General Data Protection Regulation, or GDPR. Unauthorized access, loss or dissemination of such data also could also disrupt our operations, including our ability to process tests, provide test results, bill payers or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, collect, process, and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, and manage the administrative aspects of our business, and damage our reputation, any of which could adversely affect our business.business, including by materially damaging our reputation.
In addition, the interpretation and application of consumer, health-related and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory, and in flux. It is possible that these laws may be interpreted and appliedenforced in a manner that is inconsistent withwe have not anticipated in designing our practices.practices and compliance policies. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. Certain health-related and data protection requirements have been modified under section 319 of the Public Health Service Act during the Public Health Emergency, or PHE, first declared January 31, 2020, which was most recently extended effective January 11, 2023. The Biden Administration has announced that it intends to lift the PHE declaration on May 11, 2023. In addition, we are subject to various state laws, including the California Consumer Privacy Act, or CCPA, which, was enacted in California in 2018 and components of which went into effect on January 1, 2020. The CCPA, among other things, requires covered companies to provide disclosures to California consumers concerning the collection and sale of personal information, and gives such consumers the right to opt-outopt out of certain sales of personal information. Amendments to the CCPA have been made since its enactment in 2018, most significantly in the form of amendments and expansions pursuant to the California Privacy Rights Act adopted by ballot measure in November 2020, and it remains unclear what, if any, further amendments will be made to this legislation or how it will be interpreted. We cannot yet predict the impact of the CCPA or similar laws on our business or operations, but itthey may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply.
Risks associated with data privacy issues, including evolving laws, regulations and associated compliance efforts, may adversely impact our business and financial results.
Legislation in various countries around the world with regard to cybersecurity, privacy and data protection is rapidly expanding and creating a complex compliance environment. We are subject to many federal, state, and foreign laws and regulations, including those related to privacy, rights of publicity, data protection, content regulation, intellectual property, health and safety, competition, protection of minors, consumer protection, employment, and taxation.
Recent developments in Europe have created compliance uncertainty regarding the processing of personal data from Europe. For example, the General Data Protection Regulation, or GDPR, which became effective in the European UnionEU on May 25, 2018, applies to our activities conducted from an establishment in the EU or related to products and services that we offer to European UnionEU users. The GDPR createsimposed new compliance obligations applicable to our business, whichincluding accountability obligations requiring data controllers and processors to maintain a record of their data processing and implement policies as part of its mandated privacy governance framework. It also requires data controllers to be transparent and to disclose to data subjects how their personal data is to be used, protected, and shared; imposes limitations on retention of personal data; introduces mandatory data breach notification requirements; and sets higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. Continued compliance with these obligations could cause us to change our business practices, and increaseswe risk financial penalties for noncompliance (including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements). AsIn addition, the GDPR prohibits the transfer of personal data from the EEA to the United States and other jurisdictions that the European Commission does not recognize as having “adequate” data protection laws unless a result, wedata-protective transfer mechanism has been put in place. On July 16, 2020, the Court of Justice of the European Union, or CJEU, issued a decision undermining the validity of the data-protective transfer mechanisms previously relied on, creating widespread uncertainty about compliance with the GDPR rules on data transfers to non-“adequate” jurisdictions. The EU Commission announced in December 2022 that it had begun the process of adopting an adequacy decision that would apply to the United States based on an executive order issued by President Biden in October 2022; even if the EU Commission approves the adequacy decisions, however, it is widely expected that the new data transfer framework may be challenged before the CJEU.
While the CJEU generally confirmed the validity of the European Commission-approved “Standard Contractual Clauses”, or SCCs, as a personal data-protective transfer mechanism, it made clear that reliance on the SCCs alone may not necessarily be
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sufficient in all circumstances. Use of the SCCs must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to modifybe put in place, however, the waynature of these additional measures is currently uncertain. In response to the CJEU decision, the European Commission has published revised SCCs; existing SCC arrangements were required to be migrated to the revised SCCs by December 27, 2022. We were required to implement the revised SCCs, in relation to relevant existing contracts and certain additional contracts and arrangements, by that date. In addition, the revised SCCs are not to be relied on for data transfers to non-EEA entities subject to the GDPR, and we treatare waiting for further guidance on valid mechanisms for data transfers from the EEA to such information.entities.
Following the United Kingdom’s withdrawal from the EEA and the EU, and the expiry of the transition period, companies processing the information of EU data subjects have to comply with both the GDPR and the GDPR as incorporated into United Kingdom national law, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of global turnover. The European Commission has adopted an adequacy decision in favor of the United Kingdom, enabling data transfers from EU member states to the United Kingdom without additional safeguards. However, the UK adequacy decision will automatically expire in June 2025 unless the European Commission re-assesses and renews/ extends that decision, and remains under review by the Commission during this period. The relationship between the United Kingdom and the EU in relation to certain aspects of data protection law remains unclear, and it is unclear how UK data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. These developments may lead to additional costs and increase our overall risk exposure.
In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. In addition, we may obtain health information from third parties (including research institutions from which we obtain clinical trial data) that are subject to privacy and security requirements under HIPAA, as amended by HITECH. Depending on the facts and circumstances, we could be subject to civil and criminal penalties if we obtain, use, or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.
The CCPA established individual privacy rights for California consumers and places increased privacy and data security obligations on entities handling personal information of consumers or households. The CCPA was amended several times after its enactment, most recently by the California Privacy Rights Act, or the CPRA, which, as of its effective date of January 1, 2023, gives California residents expanded privacy rights, including the right to opt out of certain personal information sharing, the use of “sensitive personal information,” and the use of personal information for automated decision-making or targeted advertising. The CCPA and CPRA provide for civil penalties and a private right of action for data breaches that is expected to increase data breach litigation. The CCPA and CPRA may increase our compliance costs and potential liability. Following the lead of California, several other states, including Colorado, Utah, Virginia and Connecticut have each enacted laws similar to the CCPA/CPRA and other states are considering enacting privacy laws as well. The multiple layers of privacy law within the United States could increase our potential liability, increase our compliance costs, and adversely affect our business.
Other countries outside of the United States and Europe have enacted or are considering enacting similar cross-border data transfer restrictions and laws requiring local data residency and restricting cross-border data transfer, which could increase the cost and complexity of delivering our services and operating our business. For example, Brazil recently enacted the General Data Protection Law (Lei Geral de Proteção de Dados Pessoais or LGPD) (Law No. 13,709/2018), and effective November 1, 2021 was China’s Personal Information Protection Law (个人信息保护法, PIPL), both of which broadly regulate the processing of personal information and impose compliance obligations and penalties comparable to those of the GDPR.
These recent developments are likely to require us to review and amend the legal mechanisms by which we make and/ or receive personal data transfers to/in the United States and other countries outside of the EEA. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the SCCs cannot be used, and/or commence enforcement actions, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services and/or the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results.
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If we cannot license rights to use technologies on reasonable terms, we may not be able to commercialize new products in the future.
In the future, we may license third-party technology to develop or commercialize new products. In return for the use of a third-party’s technology, we may agree to pay the licensor royalties based on sales of our solutions. Royalties are a component of cost of revenue and affect the margins on our solutions. We may also need to negotiate licenses to patents and patent applications after introducing a commercial product. Our business may suffer if we are unable to enter into the necessary licenses on acceptable terms, or at all, if any necessary licenses are subsequently terminated, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties, or if the licensed patents or other rights are found to be invalid or unenforceable.
If we are unable to protect our intellectual property effectively, our business would be harmed.
We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property.
We apply for and in-license patents covering our products and technologies and uses thereof, as we deem appropriate, however we may fail to apply for patents on important products and technologies in a timely fashion or at all, or we may fail to apply for patents in potentially relevant jurisdictions. Our issued patents expire between 2029 and 2035 and are related to methods used in thyroid diagnostics, lung diagnostics, breast cancer diagnostics, and the nCounter FLEX analysis platform.
It is possible that none of our pending patent applications will result in issued patents in a timely fashion or at all, and even if patents are granted, they may not provide a basis for intellectual property protection of commercially viable products, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties. It is possible that others will design around our current or future patented technologies. We may not be successful in defending any challenges made against our patents or patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents and increased competition to our business. The outcome of patent litigation can be uncertain and any attempt by us to enforce our patent rights against others may not be successful, or, if successful, may take substantial time and result in substantial cost, and may divert our efforts and attention from other aspects of our business.
The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States or elsewhere. Courts frequently render opinions in the biotechnology field that may affect the patentability of certain inventions or discoveries, including opinions that may affect the patentability of methods for analyzing or comparing nucleic acids.
In particular, the patent positions of companies engaged in the development and commercialization of genomic diagnostic tests are particularly uncertain. Various courts, including the U.S. Supreme Court, have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to certain diagnostic tests and related methods. These decisions state, among other things, that patent claims that recite laws of nature (for example, the relationship between blood levels of certain metabolites and the likelihood that a dosage of a specific drug will be ineffective or cause harm) are not themselves patentable. What constitutes a law of nature is uncertain, and it is possible that certain aspects of genomic diagnostics tests would be considered natural laws. Accordingly, the evolving case law in the United States may adversely affect our ability to obtain patents and may facilitate third-party challenges to any owned and licensed patents.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States, and we may encounter difficulties protecting and defending such rights in foreign jurisdictions. The legal systems of many other countries do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents in such countries. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
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Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. We may not develop additional proprietary products, methods and technologies that are patentable.
In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into agreements, including confidentiality agreements, non-disclosure agreements and intellectual property assignment agreements, with our employees, consultants, academic institutions, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. If we are required to assert our rights against such party, it could result in significant cost and distraction.
Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.
We may also be subject to claims that our employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights and face increased competition to our business. A loss of key research personnel work product could hamper or prevent our ability to commercialize potential products, which could harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
Further, competitors could attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. Others may independently develop similar or alternative products and technologies or replicate any of our products and technologies. If our intellectual property does not adequately protect us against competitors’ products and methods, our competitive position could be adversely affected, as could our business.
We have not registered certain of our trademarks in all of our potential geographic markets. If we apply to register these trademarks, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. If some other business in one of these markets already owns a trademark that is confusingly similar to one of our trademarks, we may be prohibited from entering that market under our trademark unless we re-brand our product in that location. Similarly, if we develop a new product line, there is no guarantee that one of our existing trademarks will be available as the brand for that new product line. Under those circumstances, we may incur the cost of developing a new trademark for this new product line.
To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage of our competitors’ products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.
We may be involved in litigation related to intellectual property, which could be time-intensive and costly and may adversely affect our business, operating results or financial condition.
We may receive notices of claims of direct or indirect infringement or misappropriation or misuse of other parties’ proprietary rights from time to time. Some of these claims may lead to litigation. We cannot assure you that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or other rights, or the validity of our patents, trademarks or other rights, will not be asserted or prosecuted against us.
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We might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings, or other post-grant proceedings declared by the U.S. Patent and Trademark Office that could result in substantial cost to us. No assurance can be given that other patent applications will not have priority over our patent applications. In addition, recent changes to the patent laws of the United States allow for various post-grant opposition proceedings, that have not been extensively tested, and their outcome is therefore uncertain.can be difficult to predict. Furthermore, if third parties bring these proceedings against our patents, we could experience significant costs and management distraction.
Litigation may be necessary for us to enforce our patent and proprietary rights or to determine the scope, coverage and validity of the proprietary rights of others. The outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us, and we might not be able to obtain licenses to technology that we require on acceptable terms or at all. Further, we could encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products. In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the validity, scope and coverage of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. Any litigation that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition.
As we move into new markets and applications for our products, incumbent participants in such markets may assert their patents and other proprietary rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success may depend in part on our non-infringement of the patents or proprietary rights of third parties. Numerous significant intellectual property issues have been litigated, and will likely continue to be litigated, between existing and new participants in our existing and targeted markets and competitors may assert that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets. Third parties may assert that we are employing their proprietary technology without authorization. In addition, our competitors and others may have patents or may in the future obtain patents and claim that making, having made, using, selling, offering to sell or importing our products infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, and obtain one or more licenses from third parties, or be prohibited from selling certain products. We may not be able to obtain these licenses on acceptable terms, if at all. We could incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our financial results. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products to avoid infringing third-party patents or proprietary rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our business and our ability to gain market acceptance for our products. With respect to trademarks, infringement litigation or threats of infringement litigation may require us to re-brand our product in order to enter into the new mark.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.
In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results, or financial condition.
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Our ability to use our net operating loss carryforwards may be limited and may result in increased future tax liability to us.
We have incurred net losses since our inception and may never achieve profitability. As of December 31, 2019,2022, we had net operating loss, or NOL, carryforwards of approximately $236.9$402.0 million, $58.3$78.8 million and $45.2$126.1 million available to reduce future taxable income, if any, for federal, California and other state income tax purposes, respectively. The U.S. federal NOL carryforwards will begin to expire in 20262031 while for state purposes, the NOL carryforwards begin to expire in 2028.2023. In addition, as of December 31, 2022, we had foreign net operating loss carryforwards of approximately $69.9 million and $44.2 million available to reduce future taxable income, if any, for Canadian and French income tax purposes, respectively. The Canada net operating loss carryforwards will begin to expire in 2034, while for French purposes, the net operating losses will carryforward indefinitely. These NOL carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the Tax Cuts and Jobs Acts, or Tax Act, which was enacted in December 2017, federal NOLs incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal NOLs is limited. It is uncertain if and to what extent various states will conform to the newly enacted federal tax law.
To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. We may be limited in the portion of NOL carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes, and federal tax credits to offset federal tax liabilities. Sections 382 and 383 of Internal Revenue Code limit the use of NOLs and tax credits after a cumulative change in corporate ownership of more than 50% occurs within a three-year period. The limitation could prevent a corporation from using some or all its NOL and tax credits before they expire within their normal 20-year lifespan, as it places a formula limit of how much NOL and tax credits a loss corporation can use in a tax year. In the event we have undergone an ownership change under Section 382 of the Internal Revenue Code, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us.
Changes to Internal Revenue Code Section 174 under the 2017 Tax Cuts and Jobs Act went into effect in 2022. The revised code no longer permits a deduction for research and development expenditures in the tax year that such costs are incurred. Instead, such costs must be capitalized and amortized over five or 15 years for U.S. and foreign costs, respectively. The new rules will change the utilization of our NOLs and it is uncertain whether the new rules will be repealed or modified in the future.
Impairment in the value of our goodwill or other intangible assets become impaired, we may be required to recordcould have a significant charge to earnings.material adverse effect on our operating results and financial condition.
We review ourrecord goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if conditions warrant, by comparing the carrying value of a reporting unit to its estimated fair value. Intangible assets with definite lives are reviewed for impairment when events or changes in circumstances indicate thethat their carrying value may not be recoverable, such asrecoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of our reporting unit could result in stock price, market capitalization, or cash flows and slower growth rates in our industry. Goodwill is required to be tested for impairment at least annually. If we are required to record a significant charge in our financial statements during the period in which anyan impairment of our goodwill or intangible assets and, in turn, a charge to net income. Any such charges could have a material adverse effect on our results of operations or financial condition.
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Our effective tax rate may fluctuate and we may incur obligations in tax jurisdictions in excess of amounts that have been accrued.
We are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rate may be lower or higher than experienced in the past due to numerous factors, including a change in the mix of our revenue from country to country, the establishment or release of valuation allowances against our deferred tax assets, and changes in tax laws. In addition, we have recorded gross unrecognized tax benefits in our consolidated financial statements that, if recognized, would impact our effective tax rate. We are subject to tax audits in various jurisdictions, including the United States, and tax authorities may disagree with certain positions we have taken and assess additional taxes. There can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes could have a material impact on our net income or financial condition. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could have an adverse effect on our business and results of operations. The recognition of deferred tax assets is determined,reduced by a valuation allowance if it is more likely than not that would negatively affectthe tax benefits will not be realized. We regularly review our operating results.deferred tax assets for recoverability and establish a valuation allowance based on historical income, projected future income, the expected timing of the reversals of existing temporary differences, and the implementation of tax-planning strategies.
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported operating results.
U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission, or the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
Our consolidated financial statements are subject to change and if our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Critical accounting policies and estimates used in preparing our consolidated financial statements include those related toto: revenue recognition, finite-livedrecognition; write-down of supplies; the useful lives of property and equipment; the recoverability of long-lived assets; the incremental borrowing rate for leases; the estimation of the fair value of intangible assets goodwill, and stock-based compensation expense.contingent consideration; variable interest entity assessment; impairment of equity investment, at cost; stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; reserve on accounts receivable and contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our common stock.
Risks Related to Being a Public Company
We will continue to incur increased costs and demands on management as a result of compliance with laws and regulations applicable to public companies, which could harm our operating results.
As a public company, we will continue to incur significant legal, accounting, consulting and other expenses that we did not incur as a private company, including costs associated with public company accounting and reporting requirements. In addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, as well as rules implemented by the SEC, and The Nasdaq Stock Market LLC, impose a number of requirements on public companies, including with respect to corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance and disclosure obligations. Moreover, these rules and regulations have and will continue to increase our legal, accounting and
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financial compliance costs and make some activities more complex, time-consuming and costly. We also expect that it will continue to be expensive for us to maintain director and officer liability insurance.
If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our reported financial information and the market price of our common stock may be negatively affected.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal controls on an annual basis. If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. We have only recently compiledwill need to maintain and enhance the systems, processes and documentation necessary to comply with Section 404 of the Sarbanes-Oxley Act. We will need to maintain and enhance these processes and controlsAct as we grow, and we will require additional management and staff resources to do so. Additionally, even if we conclude our internal controls are effective for a given period, we may in the future identify one or more material weaknesses in our internal
controls, in which case our management will be unable to conclude that our internal control over financial reporting is effective. We are nowalso required to include an attestation report from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting annually. Further, our recent acquisitions of Decipher Biosciences and HalioDx, both of which were previously private companies and were not subject to audits of internal controls, require or will require us to incorporate additional controls to such businesses, which may be difficult, costly and time-consuming. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.
If we are unable to conclude that our internal control over financial reporting is effective, or if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our common stock to decline. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our reported operating results and harm our reputation. Internal control deficiencies could also result in a restatement of our financial results.
Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.
There is an increasing focus from certain investors, employees, regulators and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance, or ESG, matters. Some investors may use these non-financial performance factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies and actions relating to corporate responsibility are inadequate. We may face reputational damage in the event that we do not meet the ESG standards set by various constituencies.
Furthermore, if our competitors’ corporate social responsibility performance is perceived to be better than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding environmental, social and governance matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors, employees and other stakeholders or our initiatives are not executed as planned, our reputation and business, results of operations, and financial condition could be adversely affected.
Risks Related to Our Common Stock
Our stock price may be volatile, and you may not be able to sell shares of our common stock at or above the price you paid.
The trading price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:
•actual or anticipated variations in our and our competitors’ results of operations;
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•announcements by us or our competitors of new products, commercial relationships or capital commitments;
•changes in reimbursement by current or potential payers, including governmental payers;
•issuance of new securities analysts’ reports or changed recommendations for our stock;
•fluctuations in our revenue, due in part to the way in which we recognize revenue;
•actual or anticipated changes in regulatory oversight of our products;
•developments or disputes concerning our intellectual property or other proprietary rights;
•commencement of, or our involvement in, litigation;
•announced or completed acquisitions of businesses or technologies by us or our competitors;competitors, including the effect of additional equity we or our competitors issue as consideration for such acquisitions;
•any major change in our management; and
•general economic conditions, including inflation and changes in interest rates, and slow or negative growth of our markets.
In addition, the stock market in general, and the market for stock of life sciences companies and other emerging growth companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced ifcause the trading volume of our stock remains low.to decrease. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay or prevent a change in control and may affect the trading price of our common stock.
Provisions in our restated certificate of incorporation and our amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:
•authorize our board of directors to issue, without further action by the stockholders, up to 5.0 million shares of undesignated preferred stock;
•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
•specify that special meetings of our stockholders can be called only by our board of directors, our chairman of the board, or our chief executive officer;
•establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;
•establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms;
•provide that our directors may be removed only for cause;
•provide that vacancies on our board of directors may, except as otherwise required by law, be filled only by a majority of directors then in office, even if less than a quorum;
•specify that no stockholder is permitted to cumulate votes at any election of directors; and
•require a super-majority of votes to amend certain of the above-mentioned provisions.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 generally prohibits us from engaging in a business combination with an interested stockholder subject to certain exceptions.
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We have never paid dividends on our capital stock, and we do not anticipate paying dividends in the foreseeable future.
We have never paid dividends on any of our capital stock and currently intend to retain any future earnings to fund the growth of our business. In addition, our Loan and Security Agreement restricts our ability to pay cash dividends on our common stock and weWe may also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings. We may from time to time become involved in legal proceedings arising in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the Nasdaq Global Market under the symbol "VCYT".
Holders of Record
As of February 24, 2023, there were 14 holders of record of our common stock. Because many of our shares of common stock are held in street name by brokers and other nominees on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our commons stock represented by these holders of record.
Dividend Policy
We have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Any future determination to declare dividends will be subject to the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects, and any other factors deemed relevant by our board of directors. In addition, the terms of our credit agreement restrict our ability to pay dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that will further restrict our ability to declare or pay dividends on our common stock.
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Recent Sale of Unregistered Securities and Use of Proceeds
Stock Performance Graph
The following information is not deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.
The graph below showscompares the cumulative total stockholder return (change in stock price plus reinvested dividends) assuming the investment of $100.00 on the date specified in each of our common stock to the Nasdaq Global Market Index and the Nasdaq Biotechnology Index forIndex. The graph and table below assume that $100 was invested on the period commencingstarting date and dividends, if any, were reinvested on October 30, 2013 (the first daythe date of tradingpayment without payment of our common stock) and ending on December 31, 2019.any commissions. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of future performance of our common stock.
| December 31, 2017 | December 31, 2018 | December 31, 2019 | December 31, 2020 | December 31, 2021 | December 31, 2022 | |||||||||||||||||||||||||||||||||
| Veracyte, Inc. | $ | 100.00 | $ | 193.00 | $ | 428.00 | $ | 749.00 | $ | 631.00 | $ | 363.00 | ||||||||||||||||||||||||||
| Nasdaq Global Market Index | $ | 100.00 | $ | 96.00 | $ | 130.00 | $ | 187.00 | $ | 227.00 | $ | 152.00 | ||||||||||||||||||||||||||
| Nasdaq Biotechnology Index | $ | 100.00 | $ | 94.00 | $ | 117.00 | $ | 148.00 | $ | 148.00 | $ | 133.00 | ||||||||||||||||||||||||||
| December 31, 2014 | December 31, 2015 | December 31, 2016 | December 31, 2017 | December 31, 2018 | December 31, 2019 | |||||||||||||||||||
| Veracyte, Inc. | $ | 73.00 | $ | 54.00 | $ | 58.00 | $ | 49.00 | $ | 95.00 | $ | 211.00 | ||||||||||||
| Nasdaq Global Market Index | $ | 121.00 | $ | 128.00 | $ | 137.00 | $ | 176.00 | $ | 169.00 | $ | 229.00 | ||||||||||||
| Nasdaq Biotechnology Index | $ | 148.00 | $ | 165.00 | $ | 129.00 | $ | 157.00 | $ | 147.00 | $ | 184.00 | ||||||||||||
ITEM 6. SELECTED FINANCIAL DATA
[RESERVED]
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||
| Revenue: | |||||||||||||||||||
| Testing revenue | $ | 107,355 | $ | 91,058 | $ | 71,953 | $ | 65,085 | $ | 49,503 | |||||||||
| Product revenue | 923 | — | — | — | — | ||||||||||||||
| Biopharmaceutical revenue | 8,090 | 950 | — | — | — | ||||||||||||||
| Collaboration revenue | 4,000 | — | — | — | — | ||||||||||||||
| Total revenue | $ | 120,368 | $ | 92,008 | $ | 71,953 | $ | 65,085 | $ | 49,503 | |||||||||
| Operating expenses: | |||||||||||||||||||
Cost of testing revenue(1) | 36,077 | 33,078 | 28,195 | 25,462 | 21,497 | ||||||||||||||
| Cost of product revenue | 446 | — | — | — | — | ||||||||||||||
Research and development(1) | 14,851 | 14,820 | 13,881 | 15,324 | 12,796 | ||||||||||||||
Selling and marketing(1) | 53,691 | 41,313 | 32,260 | 28,248 | 25,293 | ||||||||||||||
General and administrative(1) | 29,029 | 23,963 | 23,088 | 23,787 | 22,583 | ||||||||||||||
| Intangible asset amortization | 1,401 | 1,067 | 1,067 | 1,067 | 800 | ||||||||||||||
Total operating expenses(1) | 135,495 | 114,241 | 98,491 | 93,888 | 82,969 | ||||||||||||||
| Loss from operations | (15,127 | ) | (22,233 | ) | (26,538 | ) | (28,803 | ) | (33,466 | ) | |||||||||
| Interest expense | (677 | ) | (1,963 | ) | (4,941 | ) | (2,757 | ) | (378 | ) | |||||||||
| Other income, net | 3,205 | 1,197 | 476 | 202 | 140 | ||||||||||||||
| Net loss and comprehensive loss | $ | (12,599 | ) | $ | (22,999 | ) | $ | (31,003 | ) | $ | (31,358 | ) | $ | (33,704 | ) | ||||
| Net loss per common share, basic and diluted | $ | (0.27 | ) | $ | (0.62 | ) | $ | (0.91 | ) | $ | (1.09 | ) | $ | (1.30 | ) | ||||
| Shares used in computing net loss per common share, basic and diluted | 46,138,177 | 37,020,246 | 33,925,617 | 28,830,472 | 25,994,193 | ||||||||||||||
| Other Operating Data: | |||||||||||||||||||
| Reported genomic test volume | 39,612 | 31,710 | 26,026 | 23,237 | 19,421 | ||||||||||||||
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| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Cost of testing revenue | $ | 277 | $ | 130 | $ | 133 | $ | 126 | $ | 100 | |||||||||
| Research and development | 1,856 | 1,018 | 1,495 | 1,322 | 1,178 | ||||||||||||||
| Selling and marketing | 2,938 | 1,866 | 1,899 | 1,594 | 1,326 | ||||||||||||||
| General and administrative | 4,736 | 2,944 | 3,090 | 3,336 | 2,998 | ||||||||||||||
| Total stock-based compensation | $ | 9,807 | $ | 5,958 | $ | 6,617 | $ | 6,378 | $ | 5,602 | |||||||||
| As of December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Cash and cash equivalents | $ | 159,317 | $ | 77,995 | $ | 33,891 | $ | 59,219 | $ | 39,084 | |||||||||
| Working capital | 170,218 | 83,893 | 41,900 | 62,093 | 33,192 | ||||||||||||||
| Total assets | 275,212 | 120,638 | 78,669 | 101,034 | 75,247 | ||||||||||||||
| Accumulated deficit | (246,685 | ) | (234,086 | ) | (211,087 | ) | (180,084 | ) | (148,726 | ) | |||||||||
| Total stockholders' equity | 239,455 | 79,755 | 37,225 | 59,581 | 51,252 | ||||||||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read together with the consolidated financial statements and the related notes included in Item 8 of Part II of this Annual Report on Form 10-K. This discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section entitled "Risk Factors" in Item 1A, and other documents we file with the Securities and Exchange Commission. Historical results are not necessarily indicative of future results.
Overview
We are a leading genomicglobal diagnostics company that is creating value through innovation. We were foundedempowers clinicians with the high-value insights they need to guide and assure patients at pivotal moments in 2008 with a mission of improving diagnostic accuracy. Today, our growing menu ofthe race to diagnose and treat cancer. Our high-performing tests leverage advances in genomic science and technologyenable clinicians to improve care throughout the patient journey, enablingmake more confident diagnostic, prognostic and treatment decisions, helping patients avoid unnecessary procedures and interventions, and speed time to appropriate treatment, thereby improving outcomes for patients all over the world.
We currently offer tests in thyroid cancer (Afirma); prostate cancer (Decipher Prostate); breast cancer (Prosigna); interstitial lung diseases (Envisia); and bladder cancer (Decipher Bladder). Our Percepta Nasal Swab test is being run in our CLIA lab in support of clinical studies and our tests for kidney cancer and other challenging diseases. Welymphoma are creating new standards of care by enabling more patients to avoid risks of unnecessary invasive procedures and removing costs fromin development, the healthcare system, while speeding the time to diagnosis and treatment decisions.
We performserve global markets with two complementary models. In the United States, we offer LDTs through our genomic tests for thyroid cancer, lung cancer and idiopathic pulmonary fibrosis, or IPF, in our CLIA-certified laboratorycentralized CLIA certified laboratories in South San Francisco California. and San Diego, California, supported by our cytopathology expertise in Austin, Texas. Additionally, primarily outside of the United States, we provide tests to patients through distribution to laboratories and hospitals that can perform the tests locally. Today, this includes our Prosigna test, and in the future, we intend to offer the Envisia, Decipher Prostate and Percepta Nasal Swab tests as in IVD tests that run on the nCounter Analysis System. We believe our broad menu of advanced diagnostic tests, combined with our ability to deliver them globally, uniquely positions us in the diagnostics industry.
In December 2019,March 2021, we announcedacquired Decipher Biosciences, expanding our genomic testing menu into urologic cancers. The acquisition from NanoString Technologies,also provided us with Decipher GRID (Genomics Resource for Intelligent Discovery), a platform and database that helps drive biopharmaceutical partnerships, KOL engagement and pipeline development in urologic cancers.
In August 2021, we acquired HalioDx SAS and HalioDx Inc., or NanoString,historically a wholly owned subsidiary of HalioDx SAS, (collectively referred to as “HalioDx”), giving us the exclusive global diagnostics licensecapabilities and expertise to the nCounter FLEX Analysis System, as well as the Prosigna breast cancer prognostic gene signature assay, which is commercially available, and the LymphMark lymphoma subtyping assay, which is in development. Both tests are designedmanufacture our own IVD test kits for use on the nCounter system. Analysis System. The acquisition also deepened our scientific expertise and capabilities in the rapidly growing area of immuno-oncology further strengthening our offerings to biopharmaceutical and other partners.
COVID-19 and Macroeconomic Factors
We believe this strategic transaction positions usthe COVID-19 outbreak, including its numerous variants, impacted our total test volumes primarily during 2020 and 2021. Our customers, third-party contract manufacturers, carriers, suppliers and collaboration partners have been affected by the closure of hospitals, doctors' offices, manufacturing sites, or country borders, among other measures put in place around the world. Layoffs, furloughs and unplanned loss of staff in the medical industry and otherwise during the pandemic have had, and will continue to have, negative impacts on the demand for and supply of medical care and diagnostic tests, which affects the frequency with which tests are ordered, and the ability of doctors and hospitals to administer such tests. Further the inability to travel and conduct face-to-face meetings can also make it more difficult to expand utilization of our business globally withproducts into new geographies and to drive awareness of our products.
Our Decipher Prostate test has been least impacted by the pandemic because our customers are mostly community-based urology practices, which generally remained more accessible to patients and our sales reps. Our Afirma thyroid cancer test was impacted by COVID-19 in 2020 and portions of 2021 as a broad menumajority of advanced genomic tests that may be offered as distributed kitsour samples come from large institutions which are less accessible to patients and performed in local laboratories worldwide.our reps. We believe our current and pipeline products address a collective $40 billion global market.
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In addition, ongoing interest rate increases and inflation in the United States.
Factors Affecting Our Performance
Reported GenomicTotal Test Volume
Our performance depends on the number of genomic tests that we perform and report as completed in our CLIA laboratories.CLIA-certified laboratories and Prosigna tests processed on the nCounter Analysis System. Factors impacting the number of tests that we report as completed include, but are not limited to:
•the impact of COVID-19 on patients seeking to have tests performed;
•the availability of hospital staff to perform and support procedures needed to collect samples for our tests;
•the number of samples that we receive that meet the medical indication for each test performed;
•the quantity and quality of the sample received;
•receipt of the necessary documentation, such as physician order and patient consent, required to perform, bill and collect for our tests;
•the patient's ability to pay or provide necessary insurance coverage for the tests performed;
•the time it takes us to perform our tests and report the results;
•the seasonality inherent in our business, such as the impact of work days per period, timing of industry conferences and the timing of when patient deductibles are exceeded, which also impacts the reimbursement we receive from insurers; and
•our ability to obtain prior authorization or meet other requirements instituted by payers, benefit managers, or regulators necessary to be paid for our tests.
Continued Adoption of and Reimbursement for our Products
Revenue growth depends on our ability to secure coverage decisions, achieve broader reimbursement at increased levels from third-party payers, expand our base of prescribing physicians and increase our penetration in existing accounts. Because some payers consider our products experimental and investigational, we may not receive payment for tests and payments we receive may not be at acceptable levels. We expect our revenue growth to increase if more payers make a positive coverage decision and as payers enter into contracts with us, which should enhance our revenue and cash collections. To drive increased adoption of our products, we increased our sales force and marketing efforts over the last several years. Our sales team is structuredteams are aligned under our general manager-based structure to sell all of our products; we do not maintain a separate sales force for each product.focus on specific products and global markets. If we are unable to expand the base of prescribing physicians and penetration within these accounts at an acceptable rate, or if we are not able to execute our strategy for increasing reimbursement and associated collections, we may not be able to effectively increase our revenue. We expect to continue to see pressure from payers to limit the utilization of tests, generally, and we believe more payers are deploying cost containment tactics, such as pre-authorization, reduction of the payer portion of reimbursement and employing laboratory benefit managers to reduce utilization rates.
How We Recognize Revenue
We commenced recognizingrecognize revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers starting January 1, 2018. Prior, or ASC 606. This process involves identifying the contract with a customer, determining the performance obligations in the contract,
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determining the contract price, allocating the contract price to January 1, 2018, we recognizedthe distinct performance obligations in the contract, and recognizing revenue in accordance withwhen the provisionsperformance obligations have been satisfied.
Testing Revenue
We bill for testing services at the time of ASC 954-605, Health Care Entities - Revenue Recognition.
Generally, cash we receive is collected within 12 months of the date the test is billed. We cannot provide any assurance as to when, if ever, or to what extent any of these amounts will be collected. Notwithstanding our efforts to obtain payment for these tests, payers may deny our claims, in whole or in part, and we may never receive payment for these tests.
We bill list price regardless of contract rate, but only recognize revenue from amounts that we estimate are collectible and meet our revenue recognition criteria. Revenue may not be equal to the billed amount due to a number of factors that we consider when determining revenue accrual rates, including differences in reimbursement rates, the amounts of patient co-payments and co-insurance, the existence of secondary payers, claims denials and the amount we expect to ultimately collect. Finally, when we increase our list price, it will increase the cumulative amounts billed but may not positively impact accrued revenue. In addition, payer contracts generally include the right of offset and payers may offset payments prior to resolving disputes over tests performed.
Generally, we calculate thedetermine accrual rates by calculating an average of reimbursement from our products from all payers for tests thatperformed over a four-quarter period as it reduces the effects of temporary volatility and seasonality. The periods selected to determine accrual rates typically are on average a yearat least six months old sincebecause it can taketakes a significant period of time to collect from some payers. Except in situations where we believe the rate we reasonably expect to collect to vary due to aWe may also determine accrual rates based on other factors such as coverage decision, contract,decisions, contracts, or more recent reimbursement data or evidence to the contrary, we use an average of reimbursement for tests provided over four quarters as it reduces the effects of temporary volatility and seasonal effects. Thus, the average reimbursement per product represents the total cash collected to date against genomic classifier tests, including variants, performed during the relevant period divided by the number of these tests performed during that same period.appropriate.
The average genomic classifiertest reimbursement raterates will change over time due to a number of factors, including medical coverage decisions by payers, the effects of contracts signed with payers, changes in allowed amounts by payers, our ability to successfully win appeals for payment, and our ability to collect cash payments from third-party payers and individual patients. Historical average reimbursement is not necessarily indicative of future average reimbursement. For the year ended December 31, 2019, we accrued, on average, between $2,800 and $2,900 for the Afirma genomic classifier tests, including variants, that met our revenue recognition standard, which was between 90% - 95% of the reported Afirma classifier test volume.
We incur expense for tests in the period in which the test is conducted and recognize revenue for tests in the period in which our revenue recognition criteria are met.
Product Revenue
kits. We recognize product revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration expected to be received in exchange for those products and services.products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligations are considered satisfied once we have transferred control of a product or service to the customer, meaning the customer has the ability to use and obtain the benefit of the product or service.product. We recognize product revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control. Shipping and handling costs incurred for product shipments are charged to our customers and included in product revenue.
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Biopharmaceutical and Collaboration RevenuesOther Revenue
In arrangements involving more than one performance obligation,good or service delivered to a customer, each required performance obligationgood or service is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if the selling price on a stand-alone basis is not available.
The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related goods is transferred which may be at a point in time or services are performed.over time. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Should
there be royalties, we utilize the sales and usage-based royalty exception in arrangements that resulted from the license of intellectual property, recognizing revenuesrevenue generated from royalties or profit sharing as the underlying sales occur.
Timing of Our Research and Development Expenses
We deploy state-of-the-art and costly genomic technologies in our biomarker discovery experiments, and our spending on these technologies may vary substantially from quarter to quarter. We also spend a significant amount on activities to secure clinical samples that can be usedtrial results in discoverysupport of our testing and product development portfolio and on-market tests, as well as clinical validation and utilization studies. The timing of these research and development activities is difficult to predict, as is the timing of clinical trial enrollments and sample acquisitions. If a substantial number of clinical samples are acquired in a given quarter or if a high-cost experiment is conducted in one quarter versus the next, the timing of these expenses can affect our financial results. We conduct clinical studies to validate our new products, as well as on-going clinical studies to further the published evidence to support our commercialized tests. As these studies are initiated, start-up costs for each site can be significant and concentrated in a specific quarter. Spending on research and development, for both experiments and studies, may vary significantly by quarter depending on the timing of these various expenses.
Financial Overview
Through December 31, 2019,2022, we had derived a substantial majoritymost of our revenue from the sale of Decipher and Afirma tests, delivered primarily to physicians in the United States. We generally invoice third-party payers upon delivery of a patient report to the prescribing physician. As such, we take the assignment of benefits and the risk of cash collection from the third-party payer and
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individual patients. Third-party payers and other customers in excess of 10% of total revenue and their related revenue as a percentage of total revenue were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Medicare | 31 | % | 30 | % | 24 | % | |||||||||||
| UnitedHealthcare | 10 | % | 10 | % | 11 | % | |||||||||||
| 41 | % | 40 | % | 35 | % | ||||||||||||
| Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Medicare | 26 | % | 29 | % | 26 | % | ||
| UnitedHealthcare | 11 | % | 12 | % | 14 | % | ||
| 37 | % | 41 | % | 40 | % | |||
For tests performed, we recognize the related revenue upon delivery of a patient report to the prescribing physician based on the amount that we expect to ultimately receive. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of agreed upon reimbursement rate (if applicable), amount paid per test and any current development or changes that could impact reimbursement. Upon ultimate collection, the amount received is compared to previous estimates and the amount accrued is adjusted accordingly. Our ability to increase our revenue will depend on our ability to penetrate the market, obtain positive coverage policies from additional third-party payers, obtain reimbursement and/or enter into contracts with additional third-party payers for our current and new tests, and increase reimbursement rates for tests performed. Finally, should the judgments underlying our estimated reimbursement change, our accrued revenue and financial results could be negatively impacted in future periods.
Cost of Testing Revenue
The components of our cost of testing revenue are laboratory expenses, sample collection kit costs, sample collection expenses, compensation expense, license fees and royalties, depreciation, and amortization, other expenses such as equipment and laboratory supplies, and allocations of facility and information technology expenses. Costs associated with performing tests are recorded as the test is processed regardless of whether and when revenue is recognized with respect to that test. As a result, our cost of testing revenue as a percentage of testing revenue may vary significantly from period to period because we may not recognize all revenue in the period in which the associated costs are incurred. We expect cost of testing revenue in absolute dollars to increase as the number of tests we perform increases. However, we expect that the cost per test will decrease over time due to leveraging fixed costs, efficiencies we may gain as test volume increases and from automation, process efficiencies and other cost reductions. As we introduce new tests, initially our cost of testing revenue will be high as we expect to run suboptimal batch sizes, run quality control batches, test batches, registry samples, and generally incur costs that may suppress or reduce gross margins. This will disproportionately increase our aggregate cost of testing revenue until we achieve efficiencies in processing these new tests.
Cost of Product Revenue
Cost of product revenue for instrumentsBiopharmaceutical and consumables is recognized in the period the related revenue is recognized. Shipping and handling costs incurred for product shipments are included inOther Revenue
Our cost of product inbiopharmaceutical and other revenue are the consolidated statementscosts of operations.performing activities under arrangements that require us to perform research and development, commercialization, contract manufacturing and development, and contract testing services on behalf of a customer. This cost is mainly composed of compensation expense, laboratory supplies and pass-through costs.
Research and Development
Research and development expenses include expenses incurred to develop our technology, collect clinical samples and conduct clinical studies to develop and support our products and pipeline. These expenses consist of compensation expenses, direct research and development expenses such as prototype materials, laboratory supplies and costs associated with setting up and conducting
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Selling and Marketing
Selling and marketing expenses consist of compensation expenses, direct marketing expenses, professional fees, other expenses such as travel and communications costs, andas well as allocation of facility and information technology expenses. WeOur sales team of approximately 120 representatives is organized by business unit, with separate teams calling on thyroid cancer, urologic cancers, and pulmonology physicians. The business units have expanded our internal sales forcededicated marketing support, as we invest in our multi-product sales strategy to assign a single point of contact to successfully develop and implement relationships with our customers and increased our marketing spending. We have also incurred increased selling and marketing expensewell as a resultmarketing operations team that serves the commercial organization broadly. Prosigna sales outside of investments in our lung product portfoliothe U.S. are led by country managers that call on laboratories and believe total sellingbreast cancer oncologists and have dedicated marketing expenses will continue to increase as we launch and promote our new tests.support.
General and Administrative
General and administrative expenses include compensation expenses for executive officers and administrative, billing and client service personnel, professional fees for legal and audit services, occupancy costs, depreciation and amortization, and other expenses such as information technology and miscellaneous expenses offset by allocation of facility and information technology expenses to other functions. ForGeneral and administrative expenses include costs related to the year ended December 31, 2019, approximately 67%acquisitions of the average headcount classified asDecipher Biosciences and HalioDx, which were included in general and administrative encompass our billingcompensation expense and customer care teams.professional fees. We expect general and administrative expenses to continue to increase as we build our general and administration infrastructure to scale revenue growth, and to stabilize thereafter.
Intangible Asset Amortization
Our finite-lived intangible assets, acquired in business combinations, are being amortized over 5 to154 to 15 years, using the straight-line method. Amortization expense is expected to be approximately $5.1$21.3 million per year through 2024 and decrease thereafter.
Interest Expense
Interest expense is attributable to our borrowings under debt agreements and capital leases as well as costs associated with the pre-paymentprepayment of debt.
Other Income, Net
Other income, net consists primarily of sublease rental incomerealized and unrealized gains and losses on foreign currency transactions, French research tax credits, interest expense on our debt and interest income from our cash held in interest bearing accounts. The French research tax credits (crédit d’impôt recherche or CIR) are generated by our wholly owned subsidiary, Veracyte SAS, in connection with its research efforts performed in Marseille, France.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to
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understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
Testing Revenue
We bill for testing services at the time of test completion as defined by the delivery of test results. We recognize revenue related to billings on an accrual basis based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of the agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management.
Generally, we determine accrual rates based on theby calculating an average of reimbursement from all payers for tests that are on averageperformed over a yearfour-quarter period as it reduces the effects of temporary volatility and seasonality. The periods selected to determine accrual rates tend to be at least six months old sincebecause it can taketakes a significant period of time to collect from some payers. Except in situations where we believe the rate we reasonably expect to collect to vary due to aWe may also determine accrual rates based on other factors such as coverage decision, contract,decisions, contracts, or more recent reimbursement data or evidence to the contrary, we use an average of reimbursement for tests provided over four quarters as it reduces the effects of temporary volatility and seasonal effects.appropriate.
We use judgment in determining accrual rates and our judgments will continue to evolve in the future as we continue to gain reimbursement experience.
Product Revenue
Our products consist of the Prosigna breast cancer assay, the nCounter Analysis System and related diagnostic kits. We recognize product revenue when control of the promised goods is transferred to our customers, in an amount that reflects the consideration expected to be received in exchange for those products. Shipping and handling costs incurred for product shipments are charged to our customers and included in product revenue. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities.
Biopharmaceutical and Collaboration RevenueOther Revenues
At the inception of each arrangement that includes milestone payments (variable consideration), we evaluate whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. Milestone payments that are readily availablenot within either party’s control, such as non-operational developmental and (ii)regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the good or service is separately identifiable from other promisesend of each reporting period, we re-evaluate the probability of achievement of milestones that are within either party’s control, such as operational developmental milestones and any related constraint, and if necessary, adjusts our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the contract. The consideration under the arrangement is then allocatedperiod of adjustment. Revisions to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the sellingtransaction price would be ifmay also result in negative revenues and earnings in the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available.
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Other Significant Accounting Policies
Acquisitions
We first determine whether a set of assets acquired and liabilities assumed constitute a business and should be accounted for as a business combination. If the assets acquired are not a business, we account for the transaction as an asset acquisition. Business combinations are accounted for by using the acquisition method of accounting. Under the acquisition method, assets acquired, and liabilities assumed are recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill.
Contingent consideration obligations incurred in connection with a business combination are recorded at fair value on the acquisition date and remeasured at each subsequent reporting period until the related contingencies are resolved, with the resulting changes in fair value recorded in earnings. The estimation of the fair value of the contingent consideration is based on the present value of the expected payments calculated by assessing the likelihood of when the related milestones would be achieved, discounted using our estimated borrowing rate.
Goodwill
Goodwill is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate that it may be impaired. Our goodwill evaluation is based on both qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying value. We have determined that we operate in a single segment and have a single reporting unit associated with the development and commercialization of diagnostic products. In the event we determine that it is more likely than not the carrying value of the reporting unit is higher than its fair value, quantitative testing is performed comparing recorded values to estimated fair values. If impairment is present, the impairment loss is measured as the excess of the recorded goodwill over its implied fair value. We perform our annual evaluation of goodwill during the fourth quarter of each fiscal year. There was no impairment recognized during the years ended December 31, 2019, 2018,2022, 2021, or 2017.2020.
Stock-based Compensation
We recognize stock-based compensation expense for only those shares underlying stock options and restricted stock units that we expect to vest on a straight-line basis over the requisite service period of the award. We estimate the fair value of stock options using a Black-Scholes option-pricing model, which requires the input of highly subjective assumptions, including the option's expected term and stock price volatility. In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Performance-based stock units, which vest upon the achievement of certain performance conditions, are subject to the employees’ continued service with us. The probability of vesting is assessed at each reporting period and compensation cost is adjusted based on this probability assessment. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
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Supplies and Inventory
Supplies consists of materials and reagents consumed in the performance of testing services. Inventory consists of raw materials consumed in the contract manufacturing process as well as finished and semi-finished components used in the assembly of diagnostic kits related to product sales. Inventory is stated at the lower of cost or net realizable value on a weighted average basis. We periodically analyze supply and inventory levels and expiration dates, and write down supply or inventory that has become obsolete, that has a cost basis in excess of its net realizable value, or in excess of expected sales requirements as cost of revenue. We record an allowance for excess or obsolete supplies and inventory using an estimate based on historical trends and evaluation of near-term expirations.
Leases
We determine if an arrangement is, or contains, a lease at inception. Operating leases are included in right-of-use assets - operating leases and operating lease liabilities in our consolidated balance sheets, representing our right to use an underlying asset for the lease term and the obligation to make lease payments arising from the lease. Right-of-use, or ROU, assets and lease liabilities are recognized at commencement based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments. The ROU assets also includes any lease payments made and is adjusted for lease incentives. Lease terms may include options to extend or terminate the lease which are recognized when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease terms. Lease and non-lease components are accounted for as a single lease component. Financing leases are immaterial and are included in property and equipment, net and other liabilities in the consolidated balance sheets. Leases with terms of 12 months or less are not recorded on our balance sheet.
Foreign Currency Translation
The functional currency of our foreign subsidiary, Veracyte SAS, is the Euro. Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using the exchange rates at the balance sheet date. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Revenue and expenses from our foreign subsidiaries are translated using the monthly average exchange rates in effect during the period in which the transactions occur. Foreign currency transaction gains and losses are recorded in other income, net, on the consolidated statements of operations.
Comprehensive Loss
Comprehensive loss is the change in stockholders’ equity from transactions and other events and circumstances other than those resulting from investments by stockholders and distributions to stockholders. Our comprehensive loss includes our net loss and gains and losses from the foreign currency translation of the assets and liabilities of our foreign subsidiaries.
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Results of Operations
Comparison of the Years Ended December 31, 20192022 and 20182021 (in thousands of dollars, except percentages)percentages and test volume)
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | Change | % | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Testing revenue | $ | 250,544 | $ | 62,362 | 33 | % | $ | 188,182 | |||||||||||||||
| Product revenue | 12,632 | 1,168 | 10 | % | 11,464 | ||||||||||||||||||
| Biopharmaceutical and other revenue | 33,360 | 13,492 | 68 | % | 19,868 | ||||||||||||||||||
| Total revenue | 296,536 | 77,022 | 35 | % | 219,514 | ||||||||||||||||||
| Operating expense: | |||||||||||||||||||||||
| Cost of testing revenue | 75,317 | 16,457 | 28 | % | 58,860 | ||||||||||||||||||
| Cost of product revenue | 7,820 | 1,933 | 33 | % | 5,887 | ||||||||||||||||||
| Cost of biopharmaceutical and other revenue | 18,445 | 8,792 | 91 | % | 9,653 | ||||||||||||||||||
| Research and development | 40,603 | 10,760 | 36 | % | 29,843 | ||||||||||||||||||
| Selling and marketing | 97,560 | 17,720 | 22 | % | 79,840 | ||||||||||||||||||
| General and administrative | 76,518 | (24,835) | (25) | % | 101,353 | ||||||||||||||||||
| Intangible asset amortization | 21,354 | 5,373 | 34 | % | 15,981 | ||||||||||||||||||
| Total operating expenses | 337,617 | 36,200 | 12 | % | 301,417 | ||||||||||||||||||
| Loss from operations | (41,081) | 40,822 | 50 | % | (81,903) | ||||||||||||||||||
| Other income, net | 4,654 | 4,400 | 1,732 | % | 254 | ||||||||||||||||||
| Loss before income tax benefit | (36,427) | 45,222 | (55) | % | (81,649) | ||||||||||||||||||
| Income tax provision (benefit) | 133 | 6,219 | (102) | % | (6,086) | ||||||||||||||||||
| Net loss | $ | (36,560) | $ | 39,003 | 52 | % | $ | (75,563) | |||||||||||||||
| Other Operating Data: | |||||||||||||||||||||||
| Diagnostic tests reported | 93,340 | 22,891 | 32 | % | 70,449 | ||||||||||||||||||
| Product tests sold | 9,184 | 1,068 | 13 | % | 8,116 | ||||||||||||||||||
| Total test volume | 102,524 | 23,959 | 30 | % | 78,565 | ||||||||||||||||||
| Depreciation and amortization expense | $ | 25,928 | $ | 6,335 | 32 | % | $ | 19,593 | |||||||||||||||
| Stock-based compensation expense | $ | 27,456 | $ | 4,937 | 22 | % | $ | 22,519 | |||||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2019 | Change | % | 2018 | |||||||||||
| Revenue: | ||||||||||||||
| Testing revenue | $ | 107,355 | 16,297 | 18 | % | $ | 91,058 | |||||||
| Product revenue | 923 | 923 | — | % | — | |||||||||
| Biopharmaceutical revenue | 8,090 | 7,140 | 752 | % | 950 | |||||||||
| Collaboration revenue | 4,000 | 4,000 | — | % | — | |||||||||
| Total revenue | 120,368 | $ | 28,360 | 31 | % | $ | 92,008 | |||||||
| Operating expense: | ||||||||||||||
| Cost of testing revenue | 36,077 | 2,999 | 9 | % | 33,078 | |||||||||
| Cost of product revenue | 446 | 446 | — | % | — | |||||||||
| Research and development | 14,851 | 31 | — | % | 14,820 | |||||||||
| Selling and marketing | 53,691 | 12,378 | 30 | % | 41,313 | |||||||||
| General and administrative | 29,029 | 5,066 | 21 | % | 23,963 | |||||||||
| Intangible asset amortization | 1,401 | 334 | 31 | % | 1,067 | |||||||||
| Total operating expenses | 135,495 | 21,254 | 19 | % | 114,241 | |||||||||
| Loss from operations | (15,127 | ) | 7,106 | 32 | % | (22,233 | ) | |||||||
| Interest expense | (677 | ) | 1,286 | (66 | )% | (1,963 | ) | |||||||
| Other income, net | 3,205 | 2,008 | 168 | % | 1,197 | |||||||||
| Net loss and comprehensive loss | $ | (12,599 | ) | $ | 10,400 | 45 | % | $ | (22,999 | ) | ||||
| Other Operating Data: | ||||||||||||||
| Genomic classifiers reported | 39,612 | 7,902 | 25 | % | 31,710 | |||||||||
Revenue
Revenue increased $28.4$77.0 million, or 31%35%, for the year ended December 31, 20192022 compared to 2018,2021. This was primarily due to an increase in testing revenue from a 25% increase in genomic classifiers reported. We had a $15.8$62.4 million increase in testing revenue fordriven by a 32% volume increase, as well as a $13.5 million increase in our Afirma, Percepta,Biopharmaceutical and Envisia classifiers inother revenue. Testing revenue and volume reported for the year ended December 31, 2019 compared2022 increased primarily due to 2018. We also make adjustments, as necessary, for testingDecipher Prostate tests, which contributed $56.6 million of the increase and was partially impacted by the closing of the Decipher Bioscience acquisition on March 12, 2021. The remaining increase was driven by growth in our Afirma test volume. Product revenue accrued in prior periods as collections are made if the amount we expect to collect changes. The adjustment for testing revenue accrued in prior periods was $1.0 million and $2.0increased $1.2 million for the yearsyear ended December 31, 2019 and 2018, respectively, a net decrease of $1.0 million between the years. We also recognized $0.9 million from2022 compared to 2021, driven primarily by product tests kits as well as sales of Prosigna,the nCounter Analysis System. This growth was partially offset by a decline in currency exchange rates, which negatively impacted product revenue by $1.1 million. Biopharmaceutical and other revenue increased by $13.5 million for the year ended December 31, 2022 driven primarily by the contribution of the HalioDx acquisition and partially offset by a $4.0 million milestone payment received in the prior year period that we acquired from NanoString in December 2019. We recognized $8.1did not repeat. Currency exchange rates negatively impacted our total revenue by $4.7 million of biopharmaceutical revenuewhen compared to $1.0 million in 2018prior year rates, primarily duerelated to the performanceour Biopharmaceutical and other revenue.
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Comparison of revenue for the years endingended December 31, 20182021 and 20172020 is included in Item 8 of Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 28, 2022.
Cost of revenue
Comparison of the years ended December 31, 2022 and 2021 was as follows (in thousands of dollars, except percentages):
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | Change | % | 2021 | ||||||||||||||||||||
| Cost of testing revenue: | |||||||||||||||||||||||
| Laboratory expense | $ | 37,502 | $ | 5,312 | 17 | % | $ | 32,190 | |||||||||||||||
| Sample collection expense | 9,633 | 4,210 | 78 | % | 5,423 | ||||||||||||||||||
| Compensation expense | 17,018 | 5,243 | 45 | % | 11,775 | ||||||||||||||||||
| License fees and royalties | 75 | (856) | (92) | % | 931 | ||||||||||||||||||
| Depreciation and amortization | 1,247 | 106 | 9 | % | 1,141 | ||||||||||||||||||
| Other expenses | 4,080 | 1,170 | 40 | % | 2,910 | ||||||||||||||||||
| Allocations | 5,762 | 1,272 | 28 | % | 4,490 | ||||||||||||||||||
| Total | $ | 75,317 | $ | 16,457 | 28 | % | $ | 58,860 | |||||||||||||||
| Cost of product revenue: | |||||||||||||||||||||||
| Product costs | $ | 5,879 | $ | 1,128 | 24 | % | $ | 4,751 | |||||||||||||||
| License fees and royalties | 1,089 | 28 | 3 | % | 1,061 | ||||||||||||||||||
| Depreciation and amortization | 151 | 76 | 101 | % | 75 | ||||||||||||||||||
| Other expenses | 620 | 620 | NM | — | |||||||||||||||||||
| Allocations | 81 | 81 | NM | — | |||||||||||||||||||
| Total | $ | 7,820 | $ | 1,933 | 33 | % | $ | 5,887 | |||||||||||||||
| Cost of biopharmaceutical and other revenue: | |||||||||||||||||||||||
| Compensation expense | $ | 8,935 | $ | 4,678 | 110 | % | $ | 4,257 | |||||||||||||||
| License fees and royalties | 170 | 69 | 68 | % | 101 | ||||||||||||||||||
| Depreciation and amortization | 400 | 166 | 71 | % | 234 | ||||||||||||||||||
| Other expenses | 8,732 | 3,638 | 71 | % | 5,094 | ||||||||||||||||||
| Allocations | 208 | 241 | (730) | % | (33) | ||||||||||||||||||
| Total | $ | 18,445 | $ | 8,792 | 91 | % | $ | 9,653 | |||||||||||||||
Cost of testing revenue increased $16.5 million, or 28.0%, for the year ended December 31, 2022 compared to 2021. The increase in cost of testing revenue is due to increased volume in testing, primarily related to Afirma and Decipher Prostate as well as approximately $1.3 million of costs related to sample collection kits that were classified as marketing expense in the prior year.
Cost of product revenue is related to sales of Prosigna and nCounter Analysis Systems. Cost of product revenue increased $1.9 million, or 33%, for the year ended December 31, 2022 compared to the same period in 2021, driven by increased test volume, system sales and transitional costs related to in-sourcing the manufacturing of the product line to our facilities in Marseille, France. This was partially offset by a $0.3 million currency exchange impact.
Cost of biopharmaceutical and other revenue includes labor costs incurred by our employees working on customer projects and laboratory supplies and pass-through expenses incurred on these projects. Cost of biopharmaceutical and other
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revenue increased by $8.8 million driven by the operations of HalioDx following its acquisition on August 2, 2021, including a $1.9 million favorable currency exchange impact when compared to prior year rates.
Comparison of cost of revenue for the years ended December 31, 2021 and 2020 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019. There was no product revenue, biopharmaceutical revenue or collaboration revenue in 2017.28, 2022.
Comparison of the years ended December 31, 20192022 and 20182021 was as follows (in thousands of dollars, except percentages):
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | Change | % | 2021 | ||||||||||||||||||||
| Research and development expense | |||||||||||||||||||||||
| Compensation expense | $ | 27,383 | $ | 6,276 | 30 | % | $ | 21,107 | |||||||||||||||
| Direct research and development expense | 5,675 | 1,171 | 26 | % | 4,504 | ||||||||||||||||||
| Depreciation and amortization | 524 | 212 | 68 | % | 312 | ||||||||||||||||||
| Other expenses | 4,146 | 2,389 | 136 | % | 1,757 | ||||||||||||||||||
| Allocations | 2,875 | 712 | 33 | % | 2,163 | ||||||||||||||||||
| Total | $ | 40,603 | $ | 10,760 | 36 | % | $ | 29,843 | |||||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2019 | Change | % | 2018 | |||||||||||
| Cost of testing revenue: | ||||||||||||||
| Laboratory expense | $ | 20,166 | $ | 1,108 | 6 | % | $ | 19,058 | ||||||
| Sample collection expense | 4,801 | 635 | 15 | % | 4,166 | |||||||||
| Compensation expense | 6,013 | 1,492 | 33 | % | 4,521 | |||||||||
| License fees and royalties | 10 | (795 | ) | (99 | )% | 805 | ||||||||
| Depreciation and amortization | 1,020 | 220 | 28 | % | 800 | |||||||||
| Other expenses | 1,749 | 18 | 1 | % | 1,731 | |||||||||
| Allocations | 2,318 | 321 | 16 | % | 1,997 | |||||||||
| Total | $ | 36,077 | $ | 2,999 | 9 | % | $ | 33,078 | ||||||
| Cost of product revenue | $ | 446 | $ | 446 | — | % | $ | — | ||||||
Comparison of cost of testing revenueresearch and development expense for the years endingended December 31, 20182021 and 20172020 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019. There was no cost of product revenue in 2017.28, 2022.
Comparison of the years ended December 31, 20192022 and 20182021 was as follows (in thousands of dollars, except percentages):
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | Change | % | 2021 | ||||||||||||||||||||
| Selling and marketing expense: | |||||||||||||||||||||||
| Compensation expense | $ | 72,258 | $ | 14,847 | 26 | % | $ | 57,411 | |||||||||||||||
| Direct marketing expense | 6,138 | (1,073) | (15) | % | 7,211 | ||||||||||||||||||
| Other expenses | 13,485 | 3,045 | 29 | % | 10,440 | ||||||||||||||||||
| Allocations | 5,679 | 901 | 19 | % | 4,778 | ||||||||||||||||||
| Total | $ | 97,560 | $ | 17,720 | 22 | % | $ | 79,840 | |||||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2019 | Change | % | 2018 | |||||||||||
| Research and development expense | ||||||||||||||
| Compensation expense | $ | 9,444 | $ | 1,209 | 15 | % | $ | 8,235 | ||||||
| Direct research and development expense | 2,924 | (792 | ) | (21 | )% | 3,716 | ||||||||
| Professional fees | 548 | (242 | ) | (31 | )% | 790 | ||||||||
| Depreciation and amortization | 287 | (113 | ) | (28 | )% | 400 | ||||||||
| Other expenses | 443 | 38 | 9 | % | 405 | |||||||||
| Allocations | 1,205 | (69 | ) | (5 | )% | 1,274 | ||||||||
| Total | $ | 14,851 | $ | 31 | — | % | $ | 14,820 | ||||||
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the Decipher test volume. The decreasereduction in direct research and developmentmarketing expense was dueis related to one-time sequencing costs and materials and supplies purchasedthe reclassification of sample collection kit expense to cost of revenue for research and development projects in 2018. The decrease in professional fees was due to lower consulting costs.the year ended December 31, 2022.
Comparison of researchselling and developmentmarketing expense for the years endingended December 31, 20182021 and 20172020 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019.28, 2022.
Comparison of the years ended December 31, 20192022 and 20182021 was as follows (in thousands of dollars, except percentages):
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | Change | % | 2021 | ||||||||||||||||||||
| General and administrative expense: | |||||||||||||||||||||||
| Compensation expense | $ | 51,357 | $ | (13,585) | (21) | % | $ | 64,942 | |||||||||||||||
| Occupancy costs | 5,816 | 761 | 15 | % | 5,055 | ||||||||||||||||||
| Depreciation and amortization | 2,245 | 398 | 22 | % | 1,847 | ||||||||||||||||||
| Other expenses | 31,705 | (9,202) | (22) | % | 40,907 | ||||||||||||||||||
| Allocations | (14,605) | (3,207) | 28 | % | (11,398) | ||||||||||||||||||
| Total | $ | 76,518 | $ | (24,835) | (25) | % | $ | 101,353 | |||||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2019 | Change | % | 2018 | |||||||||||
| Selling and marketing expense: | ||||||||||||||
| Compensation expense | $ | 33,239 | $ | 7,346 | 28 | % | $ | 25,893 | ||||||
| Direct marketing expense | 6,015 | 1,148 | 24 | % | 4,867 | |||||||||
| Professional fees | 2,234 | 727 | 48 | % | 1,507 | |||||||||
| Other expenses | 9,008 | 2,459 | 38 | % | 6,549 | |||||||||
| Allocations | 3,195 | 698 | 28 | % | 2,497 | |||||||||
| Total | $ | 53,691 | $ | 12,378 | 30 | % | $ | 41,313 | ||||||
Comparison of general and administrative expense for the years endingended December 31, 20182021 and 20172020 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019.28, 2022.
| Year Ended December 31, | ||||||||||||||
| 2019 | Change | % | 2018 | |||||||||||
| General and administrative expense: | ||||||||||||||
| Compensation expense | $ | 18,537 | $ | 2,479 | 15 | % | $ | 16,058 | ||||||
| Professional fees | 8,854 | 2,652 | 43 | % | 6,202 | |||||||||
| Occupancy costs | 2,518 | 143 | 6 | % | 2,375 | |||||||||
| Depreciation and amortization | 1,408 | (245 | ) | (15 | )% | 1,653 | ||||||||
| Other expenses | 4,430 | 987 | 29 | % | 3,443 | |||||||||
| Allocations | (6,718 | ) | (950 | ) | 16 | % | (5,768 | ) | ||||||
| Total | $ | 29,029 | $ | 5,066 | 21 | % | $ | 23,963 | ||||||
Comparison of general and administrative expenseOther income, net, for the years endingended December 31, 20182021 and 20172020 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019.28, 2022.
Liquidity and Capital Resources
From inception through December 31, 2019,2022, we have been financed primarily through net proceeds from the sale of our equity securities and borrowings under our credit facilities.securities. We have incurred net losses since our inception. For the years ended December 31, 2019, 20182022, 2021 and 2017,2020, we had net losses of $12.6$36.6 million, $23.0$75.6 million and $31.0$34.9 million, respectively, and we expect to incur additional losses in 20202023 and potentially in future years. As of December 31, 2019,2022, we had an accumulated deficit of $246.7$393.7 million.
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We believe our existing cash and cash equivalents and short-term investments of $159.3$178.9 million as of December 31, 2019, our available revolving line of credit,2022, and cash flows generated by our revenue during the next 12 months will be sufficient to meet our anticipated cash requirements for at least the next 12 months. We expect that our near- and longer-term liquidity requirements will continue to consist of costs to run our laboratories, research and development expenses, selling and marketing expenses, general and administrative expenses, working capital, costs to service our Loan and Security Agreement (See Note 8 to our audited consolidated financial statements included in this Annual Report on Form 10-K for more information about our Loan and Security Agreement), capital expenditures, lease obligations and general corporate expenses associated with the growth of our business. However, we may also use cash to acquire or invest in complementary businesses, technologies, services or products that would change our cash requirements. If we are not able to generate cash flows from our revenue to finance our cash requirements, we will need to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations or licensing arrangements. If we raise funds by issuing equity securities, dilution to stockholders could result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. The incurrence of indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, restrictions on our cash and other operating restrictions that could adversely affect our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third-party on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives, or forgo potential acquisitions or investments. In addition, we may have to work with a partner on one or more of our products or development programs, which could lower the economic value of those programs to us.
Public Offering of Common Stock
In July 30, 2018,August 2020, we issued and sold 5,750,0006,900,000 shares of common stock in a registered public offering, including 750,000900,000 shares issued and sold upon the underwriters’underwriters' exercise in full of their option to purchase additional shares, at a price to the public of $10.25$30 per share. Our net proceeds from the offering were approximately $55.0$193.8 million, after deducting underwriting discounts and commissions and estimated offering expenses of $3.9$13.2 million.
Operating Leases
We lease office and laboratory facilities in South San Francisco and San Diego, California; Austin, Texas; Marseille, France; and Richmond, Virginia, and lease certain equipment under various non-cancelable lease agreements. The lease terms extend to October 2030 and contain extension of lease term and expansion options. As of December 31, 2022, the leases have a weighted average remaining lease term of 3.9 years and total future minimum lease payments of $16.6 million.
As of December 31, 2022, Veracyte SAS has signed a lease agreement for facilities which will be constructed in Marseille, France. The lease will commence upon completion of the construction of the office building which we currently expect to occur in the fourth quarter of 2023 at which time we will record a lease liability and a corresponding right-of-use asset. The initial term of the lease will be twelve years with annual rent of approximately $1.4 million, which is subject to change based on final construction.
Supplies Purchase Commitments
We had non-cancelable purchase commitments with suppliers to purchase a minimum quantity of supplies for approximately $10.1 million at December 31, 2022.
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Acquisition-Related Contingent Consideration
In December 2019, we acquired from NanoString the exclusive global diagnostics license to the nCounter Analysis System, the Prosigna breast cancer prognostic gene signature assay, and the LymphMark lymphoma subtyping assay. Pursuant to the terms of the agreement, we paid NanoString $40.0 million in cash and $10.0 million in Veracyte common stock, and may pay up to an additional $10.0 million in cash, contingent upon first achievement or occurrence, by or on behalf of Veracyte, of the commercial launch of the first, second and third diagnostic tests for use on the nCounter multiplex analysis system. As of December 31, 2022, the achievement of two of the milestones is forecasted to occur within the next 12 months, requiring payments totaling $7.0 million.
HalioDx Acquisition-Related Payments
In connection with the HalioDx Acquisition, 11,031 unvested HalioDx free ordinary share awards, or free shares, were modified to provide us the right to purchase the vested free shares (call option) from the holders and the holders the right to sell the vested free shares to us (put option) from time to time through late 2023. As a result of the call and put options, the free shares are liability classified. Additionally, in connection with the HalioDx Acquisition, all of HalioDx's equity-classified options that were outstanding prior to the HalioDx Acquisition were terminated and cancelled at the acquisition date. We committed to pay cash consideration of $1.5 million to holders of unvested options on the date the employee satisfies the original service requirement.
As part of the agreement, we held back $16.8 million of the cash consideration, or the holdback, which will be payable to the founders of HalioDx based on their continuous employment with us. Fifty percent of the holdback was placed in escrow on the founders' behalf on the first anniversary of the closing date and the remainder will be paid directly to the founders on the second anniversary.
As of December 31, 2022, the remaining amount to be paid for all HalioDx related items was $9.6 million subject to holders continued service, excluding any potential associated social charges.
Loan and Security Agreement
On November 3, 2017, we entered into the Loan and Security Agreement with Silicon Valley Bank. The Loan and Security Agreement allowsallowed us to borrow up to $35.0 million, with a $25.0 million term loan, or Term Loan, and a revolving line of credit of up to $10.0 million, or the Revolving Line of Credit, subject to, with respect to the Revolving Line of Credit, a borrowing base of 85% of eligible accounts receivable. The Term Loan was advanced upon the closing of the Loan and Security Agreement. Borrowings underIn October 2022, the Loan and Security Agreement mature in October 2022. The Term Loan bears interest at a variable rate equal to (i) the thirty-day U.S. London Interbank Offer Rate, or LIBOR, plus (ii) 4.20%, with a minimum rate of 5.43% per annum. Principal amounts outstanding under the Revolving Line of Credit bear interest at a variable rate equal to (i) LIBOR plus (ii) 3.50%, with a minimum rate of 4.70% per annum. We are also required to pay an annual facility fee on the Revolving Line of Credit of $25,000. The average Term Loan Advance interest rate for the year ended December 31, 2019 was 6.70%.
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2019, 20182022, 2021 and 20172020 (in thousands of dollars):
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net cash provided by (used in) operating activities | $ | 7,535 | $ | (31,621) | $ | (9,711) | |||||||||||
| Net cash used in investing activities | (29,387) | (739,206) | (3,837) | ||||||||||||||
| Net cash provided by financing activities | 3,494 | 596,320 | 203,595 | ||||||||||||||
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cash used in operating activities | $ | (3,232 | ) | $ | (13,521 | ) | $ | (23,915 | ) | ||
| Cash used in investing activities | (42,733 | ) | (1,874 | ) | (1,315 | ) | |||||
| Cash provided by (used in) financing activities | 127,287 | 59,499 | (218 | ) | |||||||
Cash Flows from Operating Activities
Cash used inprovided by operating activities for the year ended December 31, 20192022 was $3.2$7.5 million. The net loss of $12.6$36.6 million includes non-cash charges of $9.8$26.7 million of stock-based compensation expense, and $4.1$25.9 million of depreciation and amortization, which includes $1.4including $21.4 million of intangible asset amortization, and $0.2$3.3 million of end-of-term debt obligation accruals.impairment of intangible asset, noncash lease expense of $3.3 million, and $0.5 million of foreign currency loss. Cash used as a result of changes in operating assets and liabilities was $4.8$16.4 million, primarily comprised ofcomprising an increase in accounts receivable of $6.2$4.5 million, a decrease in accrued liabilities of $3.9 million, a decrease in operating lease liability of $3.4 million, an increase in supplies and inventory of
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$3.0 million, and an increase in other assets of $0.4$3.0 million, partially offset by an increasea decrease in accrued liabilitiesprepaid expense and deferred rentother current assets of $5.2$1.4 million.
Cash used in operating activities for the year ended December 31, 20182021 was $13.5$31.6 million. The net loss of $23.0$75.6 million includes non-cash charges of $6.0$22.5 million of stock-based compensation expense, and $3.9$19.6 million of depreciation and amortization, which includes $1.1including $16.0 million of intangible asset amortization. It also includes $0.3amortization, $6.3 million of end-of-term debt obligation accruals.deferred income taxes, noncash lease expense of $1.6 million, $1.2 million of foreign currency loss, and a $0.8 million expense for the revaluation of the contingent consideration related to the NanoString transaction. Cash provided by changes in operating assets and liabilities was $4.2 million, primarily comprised of an increase in accrued liabilities of $14.4 million and an increase in accounts payable of $5.2 million, partially offset by an increase in accounts receivable of $8.6 million, an increase in prepaid expense and other current assets of $3.3 million, an increase in supplies of $1.5 million and a decrease in operating lease liability of $1.8 million.
Cash used in operating activities for the year ended December 31, 2020 was $9.7 million. The net loss of $34.9 million includes non-cash charges of $13.0 million of stock-based compensation expense, $7.9 million of depreciation and amortization, including $5.1 million of intangible asset amortization, a $1.1 million write-down of supplies, noncash lease expense of $1.0 million, an impairment loss of $1.0 million and a $1.5 million expense for the revaluation of the contingent consideration related to the NanoString transaction. Cash used as a result of changes in operating assets and liabilities of $0.7was $0.5 million, was primarily due tocomprised of a decrease in accounts payableaccrued liabilities of $1.6$0.9 million, a decrease in operating lease liability of $1.4 million, and an increase in other assets of $0.8 million and increases in prepaid expensesexpense and other current assets and accounts receivable of $0.9$1.0 million, partially offset by a decrease in supplies of $1.9 million and an increase in accrued liabilities and deferred rent of $0.7 million.
Cash Flows from Investing Activities
Cash used in investing activities for the year ended December 31, 20192022 was $42.7 million, consisting of $40.0$29.4 million for the acquisitionpurchase and maturity of NanoString Technologies, Inc.'s diagnostics business,short-term investments and $2.7 million for the acquisition of property and equipment, net of proceeds from the disposal of property and equipment.
Cash used in investing activities for the year ended December 31, 20182021 was $1.9$739.2 million consisting of $574.4 million for the acquisition of Decipher Biosciences, $162.4 million for the acquisition of HalioDx and $5.4 million for the acquisition of property and equipment.equipment partially offset by $3.0 million of proceeds from the sale of an equity investment.
Cash used in investing activities for the year ended December 31, 20172020 was $1.2 million, mainly comprising $1.8$2.8 million for the acquisition of property and equipment partially offset by $0.4and $1.0 million for the purchase of proceeds from the saleequity securities of property and equipment.MAVIDx, Inc.
Cash Flows from Financing Activities
Cash provided by financing activities for the year ended December 31, 20192022 was $127.3$3.5 million, consisting of $137.8 million in net proceeds from the issuance of common stock in a public offering in May 2019 and $14.6$7.9 million in proceeds from the exercise of options to purchase our common stock and purchase of stock under our Employee Stock Purchase Plan, or ESPP, during the year, partially offset by $24.9$3.2 million in tax payments during the period related to the vesting of loan principal repaymentsrestricted stock units granted to employees and finance lease payments$1.3 million in payment of $0.3 million.long-term debt.
Cash provided by financing activities for the year ended December 31, 20182021 was $59.5$596.3 million, consisting of $55.0$593.8 million in net proceeds from the issuance of common stock in a public offering in the second quarter of 2018, $4.4February 2021, $11.5 million in proceeds from the exercise of options to purchase our common stock and purchasespurchase of stock under our ESPP and $0.4 million in proceeds from a legal settlement, partially offset by capital lease$9.0 million in tax payments of $0.3 million during the period.period related to the vesting of restricted stock units granted to employees.
Cash used inprovided by financing activities for the year ended December 31, 20172020 was $0.2$203.6 million, consisting of a $25.4$193.8 million payment of the principal on prior credit agreement, $1.5 million payment for the prepayment premium for terminating the prior credit agreement and $0.3 million of capital lease payments, partially offset by $24.9 million ofin net proceeds from our new loan and security agreement, $1.9the issuance of common stock in a public offering in August 2020, $13.7 million in proceeds from the purchase of stock under our ESPP and exercise of options to purchase our common stock.stock and purchase of stock under our ESPP partially offset by $3.8 million in tax payments during the period related to the vesting of restricted stock units granted to employees.
| Payments Due by Period | |||||||||||||||||||
| Fiscal Year 2020 | Fiscal Year 2021 to 2022 | Fiscal Year 2023 to 2024 | Fiscal Year 2025 and Beyond | Total | |||||||||||||||
| Operating lease obligations (1) | $ | 2,332 | $ | 4,873 | $ | 5,157 | $ | 4,161 | $ | 16,523 | |||||||||
| Long-term debt obligations (2) | — | 1,288 | — | — | 1,288 | ||||||||||||||
| Supplies purchase commitments | 5,693 | 1,913 | — | — | 7,606 | ||||||||||||||
| Capital lease obligation | — | — | — | — | — | ||||||||||||||
| Total | $ | 8,025 | $ | 8,074 | $ | 5,157 | $ | 4,161 | $ | 25,417 | |||||||||
(1) Represents minimum operating lease payments under operating leases for facilities. (2) Debt obligations include principal, estimate of variable rate interest and end-of-term debt obligation. In January 2019 and May 2019, we paid off $12.5 million and $12.4 million of principal from our Loan and Security Agreement, respectively. | |||||||||||||||||||
Recent Accounting Pronouncements
In February 2016,October 2021, the FASB issued ASU No. 2016-2,2021-08, LeasesBusiness Combinations (Topic 842)805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). This ASUThe update will generally result in an entity recognizing contract assets and contract liabilities at
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amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The new standard is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lesseeseffective on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accountedprospective basis for as operating leases. The ASU was effective for interim and annual periodsfiscal years beginning after December 15, 2018. Additionally, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which offers an additional transition method whereby entities may apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings rather than application of the new leases standard at the beginning of the earliest period presented in the financial statements. We elected this transition method and adopted ASC 842 on January 1, 2019 and as a result, recorded operating lease right-of-use ("ROU") assets of $9.8 million, including offsetting deferred rent of $4.3 million, along with the associated operating lease liabilities of $14.1 million. On January 1, 2019, we had finance lease ROU assets of $0.8 million and associated finance lease liabilities of $0.3 million for leases classified as finance leases prior to the adoption of ASC 842. The adoption of ASC 842 had an immaterial impact on the our consolidated statement of operations and comprehensive loss, consolidated statement of stockholders' equity and consolidated statement of cash flows for the year ended December 31, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed it to carry forward the historical lease
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. We had cash and cash equivalents and short-term investments of $159.3$178.9 million as of December 31, 20192022 which consisted of bank deposits, money market funds and overnight reverse repurchase agreements.U.S. treasury securities. Such interest-bearing instruments carry a degree of risk; however, As of December 31, 2022, a hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
Foreign Currency Risk
As of December 31, 2022, we held $3.6 million of bank deposits denominated in Euros. Such Euro denominated deposits carry a degree of risk from changes in currency exchange rates as the gains or losses from changes in exchange rates are included in our net loss and comprehensive loss. As of December 31, 2022 a hypothetical 10% appreciation or depreciation of the U.S. dollar relative to the Euro would not have had a material impact on our consolidated financial statements.
Inflation Risk
We are facing inflation headwinds in compensation, travel, supply and inventory costs, however we do not believe that inflation has had a material effect on our business, financial condition, or operating results to date.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Veracyte, Inc.
Index to Consolidated Financial Statements
| Page No. | |||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 42) | |||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Veracyte, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Veracyte, Inc. (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated February 25, 202028, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
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| Revenue from diagnostic services | |||||
| Description of the Matter | During the year ended December 31, Auditing the measurement of the Company’s diagnostic services revenue was complex due to the judgments used in estimating the amount to be realized per test. In determining the amount to recognize for a delivered test the Company considers factors such as payment history, amount collected per test, payer coverage, and whether there is a reimbursement contract between the payer and the Company. The Company also considers whether historical collections per test are indicative of future collections or if there are any current or expected developments or changes that could affect reimbursement rates, which is an estimate that requires significant judgment by the Company. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls used by management in making this estimate. For example, we tested controls over management’s review of changes in collection trends, payer rates, contract terms, and payer behavior and expectations of how those changes are expected to impact future collections and the amount of revenue to be recognized per test. To test management’s estimate of the amount of revenue to be recognized per test delivered our audit procedures included, among others, evaluating the methodology used, understanding and testing the significant assumptions discussed above, and testing the underlying data used by the Company (including the completeness and accuracy of historical data). We tested payment history and amount collected per test on a sample basis, including agreeing selections to supporting documentation such as physician requisition, cash collected, write-offs of receivables, and proof of delivery, as applicable. We evaluated and tested management’s assessment of changes in payer trends, behaviors, and contract terms and how those changes will impact future cash collections as well as management’s consideration of any contrary factors. We also assessed and tested management’s review of differences between prior period accrual rates and actual cash collections and how those differences were factored into management’s estimate of current period accrual rates. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2014.
San Diego, California
February 25, 202028, 2023
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VERACYTE, INC.
Consolidated Balance Sheets
(in thousands, except share and per sharepar value amounts)
| As of December 31, | As of December 31, | |||||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||||
| Assets | Assets | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 159,317 | $ | 77,995 | Cash and cash equivalents | $ | 154,247 | $ | 173,197 | |||||||||
| Short-term investments | Short-term investments | 24,605 | 3,964 | |||||||||||||||
| Accounts receivable | 19,329 | 13,168 | Accounts receivable | 44,021 | 41,461 | |||||||||||||
| Supplies | 6,806 | 3,402 | ||||||||||||||||
| Supplies and inventory | Supplies and inventory | 14,294 | 11,225 | |||||||||||||||
| Prepaid expenses and other current assets | 2,235 | 2,387 | Prepaid expenses and other current assets | 11,469 | 13,255 | |||||||||||||
| Total current assets | 187,687 | 96,952 | Total current assets | 248,636 | 243,102 | |||||||||||||
| Property and equipment, net | 8,933 | 8,940 | Property and equipment, net | 17,702 | 15,098 | |||||||||||||
| Right-of-use assets - operating lease | 8,808 | — | ||||||||||||||||
| Finite-lived intangible assets, net | 65,019 | 12,000 | ||||||||||||||||
| Right-of-use assets - operating leases | Right-of-use assets - operating leases | 13,160 | 16,043 | |||||||||||||||
| Intangible assets, net | Intangible assets, net | 174,866 | 202,731 | |||||||||||||||
| Goodwill | 2,725 | 1,057 | Goodwill | 695,891 | 707,904 | |||||||||||||
| Restricted cash | 603 | 603 | Restricted cash | 749 | 749 | |||||||||||||
| Other assets | 1,437 | 1,086 | Other assets | 5,418 | 2,198 | |||||||||||||
| Total assets | $ | 275,212 | $ | 120,638 | Total assets | $ | 1,156,422 | $ | 1,187,825 | |||||||||
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 2,328 | $ | 2,516 | Accounts payable | $ | 11,911 | $ | 12,360 | |||||||||
| Accrued liabilities | 13,734 | 9,186 | Accrued liabilities | 37,774 | 39,475 | |||||||||||||
| Current portion of long-term debt | — | 1,357 | Current portion of long-term debt | — | 1,127 | |||||||||||||
| Current portion of operating lease liability | 1,407 | — | ||||||||||||||||
| Current portion of deferred revenue | Current portion of deferred revenue | 2,613 | 4,646 | |||||||||||||||
| Current portion of acquisition-related contingent consideration | Current portion of acquisition-related contingent consideration | 6,060 | 2,682 | |||||||||||||||
| Current portion of operating lease liabilities | Current portion of operating lease liabilities | 4,070 | 3,630 | |||||||||||||||
| Current portion of other liabilities | Current portion of other liabilities | 186 | 231 | |||||||||||||||
| Total current liabilities | 17,469 | 13,059 | Total current liabilities | 62,614 | 64,151 | |||||||||||||
| Long-term debt | 694 | 23,925 | ||||||||||||||||
| Deferred rent, net of current portion | — | 3,899 | ||||||||||||||||
| Acquisition related contingent consideration | 6,088 | — | ||||||||||||||||
| Operating lease liability, net of current portion | 11,506 | — | ||||||||||||||||
| Deferred revenue, net of current portion | Deferred revenue, net of current portion | — | 343 | |||||||||||||||
| Deferred tax liability | Deferred tax liability | 4,531 | 5,592 | |||||||||||||||
| Acquisition-related contingent consideration, net of current portion | Acquisition-related contingent consideration, net of current portion | 2,498 | 5,722 | |||||||||||||||
| Operating lease liabilities, net of current portion | Operating lease liabilities, net of current portion | 10,648 | 14,096 | |||||||||||||||
| Other liabilities | Other liabilities | 931 | 1,407 | |||||||||||||||
| Total liabilities | 35,757 | 40,883 | Total liabilities | 81,222 | 91,311 | |||||||||||||
| Commitments and contingencies | Commitments and contingencies | |||||||||||||||||
| Stockholders' equity: | Stockholders' equity: | |||||||||||||||||
| Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of December 31, 2019 and 2018 | — | — | ||||||||||||||||
| Common stock, $0.001 par value; 125,000,000 shares authorized, 49,625,341 and 40,863,202 shares issued and outstanding as of December 31, 2019 and 2018, respectively | 50 | 41 | ||||||||||||||||
| Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of December 31, 2022 and 2021 | Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of December 31, 2022 and 2021 | — | — | |||||||||||||||
| Common stock, $0.001 par value; 125,000,000 shares authorized, 71,959,454 and 71,123,108 shares issued and outstanding as of December 31, 2022 and 2021, respectively | Common stock, $0.001 par value; 125,000,000 shares authorized, 71,959,454 and 71,123,108 shares issued and outstanding as of December 31, 2022 and 2021, respectively | 72 | 71 | |||||||||||||||
| Additional paid-in capital | 486,090 | 313,800 | Additional paid-in capital | 1,500,191 | 1,468,683 | |||||||||||||
| Accumulated deficit | (246,685 | ) | (234,086 | ) | Accumulated deficit | (393,717) | (357,157) | |||||||||||
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (31,346) | (15,083) | |||||||||||||||
| Total stockholders' equity | 239,455 | 79,755 | Total stockholders' equity | 1,075,200 | 1,096,514 | |||||||||||||
| Total liabilities and stockholders' equity | $ | 275,212 | $ | 120,638 | Total liabilities and stockholders' equity | $ | 1,156,422 | $ | 1,187,825 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VERACYTE, INC.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Revenue: | Revenue: | |||||||||||||||||||||||||||
| Testing revenue | $ | 107,355 | $ | 91,058 | $ | 71,953 | Testing revenue | $ | 250,544 | $ | 188,182 | $ | 101,970 | |||||||||||||||
| Product revenue | 923 | — | — | Product revenue | 12,632 | 11,464 | 9,845 | |||||||||||||||||||||
| Biopharmaceutical revenue | 8,090 | 950 | — | |||||||||||||||||||||||||
| Collaboration revenue | 4,000 | — | — | |||||||||||||||||||||||||
| Biopharmaceutical and other revenue | Biopharmaceutical and other revenue | 33,360 | 19,868 | 5,668 | ||||||||||||||||||||||||
| Total revenue | 120,368 | 92,008 | 71,953 | Total revenue | 296,536 | 219,514 | 117,483 | |||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||
| Operating expenses: | Operating expenses: | |||||||||||||||||||||||||||
| Cost of testing revenue | 36,077 | 33,078 | 28,195 | Cost of testing revenue | 75,317 | 58,860 | 35,913 | |||||||||||||||||||||
| Cost of product revenue | 446 | — | — | Cost of product revenue | 7,820 | 5,887 | 4,921 | |||||||||||||||||||||
| Cost of biopharmaceutical and other revenue | Cost of biopharmaceutical and other revenue | 18,445 | 9,653 | 621 | ||||||||||||||||||||||||
| Research and development | 14,851 | 14,820 | 13,881 | Research and development | 40,603 | 29,843 | 17,204 | |||||||||||||||||||||
| Selling and marketing | 53,691 | 41,313 | 32,260 | Selling and marketing | 97,560 | 79,840 | 52,389 | |||||||||||||||||||||
| General and administrative | 29,029 | 23,963 | 23,088 | General and administrative | 76,518 | 101,353 | 36,729 | |||||||||||||||||||||
| Intangible asset amortization | 1,401 | 1,067 | 1,067 | Intangible asset amortization | 21,354 | 15,981 | 5,095 | |||||||||||||||||||||
| Total operating expenses | 135,495 | 114,241 | 98,491 | Total operating expenses | 337,617 | 301,417 | 152,872 | |||||||||||||||||||||
| Loss from operations | (15,127 | ) | (22,233 | ) | (26,538 | ) | Loss from operations | (41,081) | (81,903) | (35,389) | ||||||||||||||||||
| Interest expense | (677 | ) | (1,963 | ) | (4,941 | ) | ||||||||||||||||||||||
| Other income, net | 3,205 | 1,197 | 476 | Other income, net | 4,654 | 254 | 480 | |||||||||||||||||||||
| Net loss and comprehensive loss | $ | (12,599 | ) | $ | (22,999 | ) | $ | (31,003 | ) | |||||||||||||||||||
| Loss before income tax benefit | Loss before income tax benefit | (36,427) | (81,649) | (34,909) | ||||||||||||||||||||||||
| Income tax provision (benefit) | Income tax provision (benefit) | 133 | (6,086) | — | ||||||||||||||||||||||||
| Net loss | Net loss | $ | (36,560) | $ | (75,563) | $ | (34,909) | |||||||||||||||||||||
| Net loss per common share, basic and diluted | $ | (0.27 | ) | $ | (0.62 | ) | $ | (0.91 | ) | Net loss per common share, basic and diluted | $ | (0.51) | $ | (1.11) | $ | (0.66) | ||||||||||||
| Shares used to compute net loss per common share, basic and diluted | 46,138,177 | 37,020,246 | 33,925,617 | Shares used to compute net loss per common share, basic and diluted | 71,549,204 | 67,890,328 | 53,239,231 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VERACYTE, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net loss | $ | (36,560) | $ | (75,563) | $ | (34,909) | |||||||||||
| Other comprehensive loss: | |||||||||||||||||
| Change in currency translation adjustments | (16,263) | (15,083) | — | ||||||||||||||
| Net comprehensive loss | $ | (52,823) | $ | (90,646) | $ | (34,909) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VERACYTE, INC.
Consolidated Statements of Stockholders' Equity
(in thousands, except shares)thousands)
| Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 33,762,278 | $ | 34 | $ | 239,631 | $ | (180,084 | ) | $ | 59,581 | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | Balance at December 31, 2019 | 49,625 | $ | 50 | $ | 486,090 | $ | (246,685) | $ | — | $ | 239,455 | |||||||||||||||||||||||||||||||||||||||||
| Sale of common stock in a public offering, net of offering costs of $13,169 | Sale of common stock in a public offering, net of offering costs of $13,169 | 6,900 | 7 | 193,824 | — | — | 193,831 | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock on exercise of stock options and vesting of restricted stock units | 295,059 | — | 1,374 | — | 1,374 | Issuance of common stock on exercise of stock options and vesting of restricted stock units | 1,573 | 1 | 11,667 | — | — | 11,668 | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan (ESPP) | 153,051 | — | 656 | — | 656 | Issuance of common stock under employee stock purchase plan (ESPP) | 103 | — | 2,037 | — | — | 2,037 | |||||||||||||||||||||||||||||||||||||||||
| Tax portion of vested restricted stock units | Tax portion of vested restricted stock units | — | — | (3,845) | — | — | (3,845) | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (employee) | — | — | 6,352 | — | 6,352 | Stock-based compensation expense (employee) | — | — | 12,017 | — | — | 12,017 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (non-employee) | — | — | 19 | — | 19 | Stock-based compensation expense (non-employee) | — | — | 51 | — | — | 51 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (ESPP) | — | — | 246 | — | 246 | Stock-based compensation expense (ESPP) | — | — | 927 | — | — | 927 | |||||||||||||||||||||||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | (31,003 | ) | (31,003 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 34,210,388 | 34 | 248,278 | (211,087 | ) | 37,225 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | Net loss | — | — | — | (34,909) | — | (34,909) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | Balance at December 31, 2020 | 58,201 | 58 | 702,768 | (281,594) | — | 421,232 | ||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock in a public offering, net of offering costs of $38,677 | Sale of common stock in a public offering, net of offering costs of $38,677 | 8,547 | 9 | 593,812 | — | — | 593,821 | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisition | Issuance of common stock for acquisition | 3,347 | 3 | 147,086 | — | — | 147,089 | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock on exercise of stock options and vesting of restricted stock units | 756,231 | 1 | 3,432 | — | 3,433 | Issuance of common stock on exercise of stock options and vesting of restricted stock units | 947 | 1 | 9,174 | — | — | 9,175 | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan (ESPP) | 146,583 | — | 790 | — | 790 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock in a public offering, net of issuance costs of $3,890 | 5,750,000 | 6 | 55,032 | — | 55,038 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under ESPP | Issuance of common stock under ESPP | 81 | — | 2,353 | — | — | 2,353 | ||||||||||||||||||||||||||||||||||||||||||||||
| Tax portion of vested restricted stock units | Tax portion of vested restricted stock units | — | — | (9,029) | — | — | (9,029) | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (employee) | — | — | 5,602 | — | 5,602 | Stock-based compensation expense (employee) | — | — | 20,795 | — | — | 20,795 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (non-employee) | — | — | 24 | — | 24 | Stock-based compensation expense (non-employee) | — | — | 61 | — | — | 61 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (ESPP) | — | — | 332 | — | 332 | Stock-based compensation expense (ESPP) | — | — | 1,663 | — | — | 1,663 | |||||||||||||||||||||||||||||||||||||||||
| Legal settlement from short-swing profits, net of tax | — | — | 310 | — | 310 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | (22,999 | ) | (22,999 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 40,863,202 | 41 | 313,800 | (234,086 | ) | 79,755 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | Net loss | — | — | — | (75,563) | — | (75,563) | ||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | Comprehensive loss | — | — | — | — | (15,083) | (15,083) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | Balance at December 31, 2021 | 71,123 | 71 | 1,468,683 | (357,157) | (15,083) | 1,096,514 | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock on exercise of stock options and vesting of restricted stock units | 1,924,156 | 2 | 13,376 | — | 13,378 | Issuance of common stock on exercise of stock options and vesting of restricted stock units | 681 | 1 | 4,193 | — | — | 4,194 | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan (ESPP) | 136,251 | — | 1,266 | — | 1,266 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock in a public offering, net of issuance costs of $9,208 | 6,325,000 | 6 | 137,842 | — | 137,848 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisition | 376,732 | 1 | 9,999 | — | 10,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under ESPP | Issuance of common stock under ESPP | 155 | — | 3,748 | — | — | 3,748 | ||||||||||||||||||||||||||||||||||||||||||||||
| Tax portion of vested restricted stock units | Tax portion of vested restricted stock units | — | — | (3,167) | — | — | (3,167) | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (employee) | — | — | 8,883 | — | 8,883 | Stock-based compensation expense (employee) | — | — | 24,781 | — | — | 24,781 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (non-employee) | — | — | 181 | — | 181 | Stock-based compensation expense (non-employee) | — | — | 11 | — | — | 11 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense (ESPP) | — | — | 743 | — | 743 | Stock-based compensation expense (ESPP) | — | — | 1,942 | — | — | 1,942 | |||||||||||||||||||||||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | (12,599 | ) | (12,599 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 49,625,341 | $ | 50 | $ | 486,090 | $ | (246,685 | ) | $ | 239,455 | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | Net loss | — | — | — | (36,560) | — | (36,560) | ||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | Comprehensive loss | — | — | — | — | (16,263) | (16,263) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | Balance at December 31, 2022 | 71,959 | $ | 72 | $ | 1,500,191 | $ | (393,717) | $ | (31,346) | $ | 1,075,200 | |||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VERACYTE, INC.
Consolidated Statements of Cash Flows
(in thousands of dollars)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Operating activities | |||||||||||||||||
| Net loss | $ | (36,560) | $ | (75,563) | $ | (34,909) | |||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||||||
| Depreciation and amortization | 25,928 | 19,593 | 7,944 | ||||||||||||||
| Loss on disposal of property and equipment | 206 | — | — | ||||||||||||||
| Stock-based compensation | 26,734 | 22,519 | 12,995 | ||||||||||||||
| Provision for (benefit from) income taxes | 133 | (6,258) | — | ||||||||||||||
| Interest on end-of-term debt obligation | 161 | 216 | 216 | ||||||||||||||
| Write-down of excess supplies | — | — | 1,088 | ||||||||||||||
| Noncash lease expense | 3,320 | 1,632 | 964 | ||||||||||||||
| Revaluation of acquisition-related contingent consideration | 154 | 810 | 1,506 | ||||||||||||||
| Impairment loss | 3,318 | — | 1,000 | ||||||||||||||
| Effect of foreign currency on operations | 522 | 1,211 | (34) | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable | (4,495) | (8,571) | 955 | ||||||||||||||
| Supplies and inventory | (3,011) | (1,464) | 1,061 | ||||||||||||||
| Prepaid expenses and other current assets | 1,390 | (3,316) | (970) | ||||||||||||||
| Other assets | (3,049) | (216) | 37 | ||||||||||||||
| Operating lease liability | (3,448) | (1,794) | (1,407) | ||||||||||||||
| Accounts payable | 152 | 5,155 | 711 | ||||||||||||||
| Accrued liabilities and deferred revenue | (3,920) | 14,425 | (868) | ||||||||||||||
| Net cash provided by (used in) operating activities | 7,535 | (31,621) | (9,711) | ||||||||||||||
| Investing activities | |||||||||||||||||
| Purchase of short-term investments | (33,519) | — | — | ||||||||||||||
| Proceeds from maturity of short-term investments | 12,681 | — | — | ||||||||||||||
| Acquisition of Decipher Biosciences, net of cash acquired | — | (574,411) | — | ||||||||||||||
| Acquisition of HalioDx, net of cash acquired | — | (162,419) | — | ||||||||||||||
| Proceeds from sale of equity securities | — | 3,000 | — | ||||||||||||||
| Purchase of equity securities | — | — | (1,000) | ||||||||||||||
| Purchases of property and equipment | (8,549) | (5,376) | (2,837) | ||||||||||||||
| Net cash used in investing activities | (29,387) | (739,206) | (3,837) | ||||||||||||||
| Financing activities | |||||||||||||||||
| Proceeds from issuance of common stock in a public offering, net of issuance costs | — | 593,821 | 193,831 | ||||||||||||||
| Payment of long-term debt | (1,281) | — | (100) | ||||||||||||||
| Payment of taxes on vested restricted stock units | (3,167) | (9,029) | (3,845) | ||||||||||||||
| Proceeds from the exercise of common stock options and employee stock purchases | 7,942 | 11,528 | 13,709 | ||||||||||||||
| Net cash provided by financing activities | 3,494 | 596,320 | 203,595 | ||||||||||||||
| (Decrease) increase in cash, cash equivalents and restricted cash | (18,358) | (174,507) | 190,047 | ||||||||||||||
| Effect of foreign currency on cash, cash equivalents and restricted cash | (592) | (1,514) | — | ||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (18,950) | (176,021) | 190,047 | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 173,946 | 349,967 | 159,920 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 154,996 | $ | 173,946 | $ | 349,967 | |||||||||||
| Supplementary cash flow information of non-cash investing and financing activities: | |||||||||||||||||
| Shares issued for purchase consideration for a business combination | $ | — | $ | 147,089 | $ | — | |||||||||||
| Purchases of property and equipment included in accounts payable and accrued liabilities | — | 392 | 294 | ||||||||||||||
| Supplementary cash flow information: | |||||||||||||||||
| Cash paid for interest on debt | 9 | 9 | 13 | ||||||||||||||
| Cash paid for tax | 570 | 112 | 112 | ||||||||||||||
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| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Operating activities | |||||||||||
| Net loss | $ | (12,599 | ) | $ | (22,999 | ) | $ | (31,003 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 4,117 | 3,920 | 3,841 | ||||||||
| (Gain) loss on disposal of property and equipment | (23 | ) | — | 12 | |||||||
| Stock-based compensation | 9,807 | 5,958 | 6,617 | ||||||||
| Other income | — | (93 | ) | — | |||||||
| Amortization and write-off of debt discount and issuance costs | 83 | 32 | 472 | ||||||||
| Interest on end-of-term debt obligation and prepayment penalty | 229 | 312 | 1,589 | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (6,161 | ) | (452 | ) | (3,960 | ) | |||||
| Supplies | (3,404 | ) | 1,922 | (1,849 | ) | ||||||
| Prepaid expenses and other current assets | 154 | (517 | ) | (7 | ) | ||||||
| Right-of-use assets - operating lease and operating lease liability | (171 | ) | — | — | |||||||
| Other assets | (351 | ) | (760 | ) | (192 | ) | |||||
| Accounts payable | (141 | ) | (1,568 | ) | 1,728 | ||||||
| Accrued liabilities and deferred rent | 5,228 | 724 | (1,163 | ) | |||||||
| Net cash used in operating activities | (3,232 | ) | (13,521 | ) | (23,915 | ) | |||||
| Investing activities | |||||||||||
| Cash paid for acquisition | (40,000 | ) | — | — | |||||||
| Purchases of property and equipment | (2,756 | ) | (1,874 | ) | (1,755 | ) | |||||
| Proceeds from the sale of property and equipment | 23 | — | 440 | ||||||||
| Net cash used in investing activities | (42,733 | ) | (1,874 | ) | (1,315 | ) | |||||
| Financing activities | |||||||||||
| Proceeds from the issuance of long-term debt, net of debt issuance costs | — | — | 24,880 | ||||||||
| Proceeds from issuance of common stock in a public offering, net of issuance costs | 137,848 | 55,038 | 200 | ||||||||
| Payment of long-term debt | (24,900 | ) | — | (25,385 | ) | ||||||
| Payment of end-of-term debt obligation and prepayment penalty | — | — | (1,536 | ) | |||||||
| Proceeds from legal settlement regarding short-swing profits | — | 403 | — | ||||||||
| Payment of financial lease liability | (308 | ) | (292 | ) | (274 | ) | |||||
| Proceeds from the exercise of common stock options and employee stock purchases | 14,647 | 4,350 | 1,897 | ||||||||
| Net cash provided by (used in) financing activities | 127,287 | 59,499 | (218 | ) | |||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 81,322 | 44,104 | (25,448 | ) | |||||||
| Cash, cash equivalents and restricted cash at beginning of year | 78,598 | 34,494 | 59,942 | ||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 159,920 | $ | 78,598 | $ | 34,494 | |||||
| Supplementary cash flow information of non-cash investing and financing activities: | |||||||||||
| Operating lease liability arising from obtaining right-of-use assets - operating lease at beginning of period | $ | 14,118 | $ | — | $ | — | |||||
| Shares issued for purchase consideration for a business combination | 10,000 | — | — | ||||||||
| Deferred purchase consideration for a business combination | 6,088 | — | — | ||||||||
| Purchases of property and equipment included in accounts payable and accrued liabilities | 226 | 273 | 42 | ||||||||
| Supplementary cash flow information: | |||||||||||
| Cash paid for interest on debt | 332 | 1,547 | 2,718 | ||||||||
| Cash paid for tax | 35 | 79 | 21 | ||||||||
Cash, Cash Equivalents and Restricted Cash:
| December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash and cash equivalents | $ | 154,247 | $ | 173,197 | $ | 349,364 | |||||||||||
| Restricted cash | 749 | 749 | 603 | ||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 154,996 | $ | 173,946 | $ | 349,967 | |||||||||||
| December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cash and cash equivalents | $ | 159,317 | $ | 77,995 | $ | 33,891 | |||||
| Restricted cash | 603 | 603 | 603 | ||||||||
| Total cash, cash equivalents and restricted cash | $ | 159,920 | $ | 78,598 | $ | 34,494 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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1. Organization and Description of Business
Veracyte, Inc. (“Veracyte”, or Veracyte, or the “Company”)Company, is a leading genomicglobal diagnostics company that is creating value through innovation. The Company was foundedempowers clinicians with the high-value insights they need to guide and assure patients at pivotal moments in 2008 with a missionthe race to improve diagnostic accuracy. Today, the Company's growing menu ofdiagnose and treat cancer. Veracyte's high-performing tests leverage advances in genomic science and technologyenable clinicians to improve care throughout the patient journey, enablingmake more confident diagnostic, prognostic and treatment decisions, in cancer and other challenging diseases. The Company is creating new standards of care by enabling morehelping patients to avoid risks of unnecessary invasive procedures and removing costs from the healthcare system, while speeding theinterventions, and speed time to diagnosis andappropriate treatment, decisions.thereby improving outcomes for patients all over the world.
Veracyte was incorporated in the state of Delaware on August 15, 2006, as Calderome, Inc. Calderome operated as an incubator until early 2008. On March 4, 2008, the Company changed its name to Veracyte, Inc. The Company’s operationsheadquarters are based in South San Francisco, California, and it also has operations in San Diego, California; Austin, Texas,Texas; Richmond, Virginia; and it operates in 1 segment.Marseille, France.
The Company performscurrently offers tests in thyroid cancer (Afirma); prostate cancer (Decipher Prostate); breast cancer (Prosigna); interstitial lung diseases (Envisia); and bladder cancer (Decipher Bladder). The Company’s Percepta Nasal Swab test is being run in its genomicCLIA lab in support of clinical studies and its tests for thyroid cancer, lungkidney cancer and idiopathic pulmonary fibrosis,lymphoma are in development, the latter as a companion diagnostic.
The Company serves global markets with two complementary models. In the United States, it offers laboratory developed tests, or IPF, in our CLIA-certified laboratoryLDTs, through its centralized, Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified laboratories in South San Francisco California. In December 2019, we announced our acquisitionand San Diego, California, supported by its cytopathology expertise in Austin, Texas. Additionally, primarily outside of the exclusive global diagnostics licenseUnited States, the Company provides its Prosigna test to patients through distribution to laboratories and hospitals that can perform the NanoStringtests locally as an in vitro diagnostic, or IVD, test that runs on the nCounter FLEX Analysis System,System.
In March 2021, the Company acquired Decipher Biosciences, expanding the Company's genomic testing menu into urologic cancers. The acquisition also provided it with Decipher GRID (Genomics Resource for Intelligent Discovery), a platform and database that helps drive biopharmaceutical partnerships, key opinion leaders engagement and pipeline development in urologic cancers.
In August 2021, the Company acquired HalioDx SAS and HalioDx Inc., historically a wholly owned subsidiary of HalioDx SAS, collectively referred to as well asHalioDx, giving it the Prosigna breast cancer prognostic gene signature assay, which is commercially available,capabilities and expertise to manufacture the LymphMark lymphoma subtyping assay, which is in development. Both tests are designedCompany's own IVD test kits for use on the nCounter system.
Analysis System. The Company offers genomic testsacquisition also deepened its scientific expertise and capabilities in thyroid cancer; lung cancer; IPFthe rapidly growing area of immuno-oncology further strengthening its offerings to biopharmaceutical and breast cancer:
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, ("or U.S. GAAP").GAAP. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, which was created in 2019 to process certain administrative functions associated with the business combination in Note 4, Business Combination.subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amountsprior period balances have been reclassified to conform to current period presentation of the Company’s consolidated financial statements and accompanying notes. Such reclassifications have no effect on previously reported results of operations, accumulated deficit, subtotals of operating, investing or financing cash flows or consolidated balance sheet totals; however, for the period December 31, 2021, the Company reclassified $4.0 million of short-term investments from the prepaid expenses and other current assets caption in the consolidated statementsbalance sheets.
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VERACYTE, INC.
Notes to Consolidated Financial Statements (Continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include: revenue recognition; thewrite-down of supplies; useful lives of property and equipment; the recoverability of long-lived assets; the incremental borrowing rates for leases; accounting for acquisitions; the estimation of the fair value of intangible assets;assets and contingent consideration; stock options;based compensation; income tax uncertainties, including a valuation allowance for deferred tax assets; credit related losses on investments; and allowance for credit losses and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recognizedrecorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.
Liquidity
The Company has incurred net losses since its inception and as of December 31, 2019,2022, the Company had an accumulated deficit of $246.7$393.7 million. The Company believes its cash and cash equivalents and short-term investments of $159.3$178.9 million as of December 31, 20192022, and its revenue from sales in 20202023 will be sufficient to meet its anticipated cash requirements through at least February 2021.2024.
In November 2017,August 2020, the Company entered intoissued and sold 6,900,000 shares of common stock in a Loanregistered public offering, including 900,000 shares issued and Security Agreementsold upon the underwriters' exercise in full of their option to purchase additional shares, at a price to the public of $30 per share. The Company's net proceeds from the offering were approximately $193.8 million, after deducting underwriting commissions and drew down a term loan advanceoffering expenses of $25.0 million of which the entire amount was used to pay the outstanding balance of the Company's previous long-term debt as discussed in Note 8 - Debt.$13.2 million.
If the Company is not able to generate cash proceeds from revenue sufficient to satisfy its cash obligations, the Company will need to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations or licensing arrangements. If the Company is not able to secure additional funding when needed, on acceptable terms, it may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives which may have a material adverse effect on the Company's business, results of operations, financial condition and/or its ability to fund its scheduled obligations on a timely basis or at all.
Concentrations of Credit Risk and Other Risks and Uncertainties
The worldwide spread of coronavirus, or COVID-19, has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have. As a result, the ultimate impact of COVID-19 and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. If the financial markets or the overall economy are impacted for an extended period, the Company’s liquidity, revenue, supplies, goodwill and intangibles may be adversely affected. The Company considers the effects, to the extent knowable, of the COVID-19 pandemic in developing its estimates.
The majority of the Company'sCompany’s cash and cash equivalents are deposited with 1one major financial institution in the United States. Deposits in this institution may exceed the amount of insurance provided on such deposits. The Company has not experiencedrealized any losses on its deposits of cash and cash equivalents.equivalents other than exchange rate losses related to foreign currency denominated accounts.
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Several of the components of the Company's sample collection kitkits and test reagents, and itsthe nCounter FLEX DX systemsAnalysis system and related testdiagnostic kits, are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company's requirements on a timely basis, itthe Company could suffer delays in being able to deliver its diagnostic solutions, suffer a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.
Through December 31, 2022, the Company has derived most of its revenue from the sale of Decipher and Afirma testing. To date, Decipher and Afirma testing have been delivered primarily to physicians in the United States.
The Company is also subject to credit risk from its accounts receivable related to its sales. Credit risk for accounts receivable from testing revenue is incorporated in testing revenue accrual rates as the Company assesses historical collection rates and current developments to determine accrual rates and amounts the Company will ultimately collect. The Company generally does not perform evaluations of customers'customers’ financial condition for testing revenue and generally does not require collateral.
The Company's revenue have been derived from the sale of Afirma. To date, Afirma has been delivered primarily to physicians in the United States. The Company'stotal third-party payers and other customers in excess of 10% of total revenue and their related revenue as a percentage of total revenue were as follows:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Medicare | 26 | % | 29 | % | 26 | % | ||
| UnitedHealthcare | 11 | % | 12 | % | 14 | % | ||
| 37 | % | 41 | % | 40 | % | |||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Medicare | 31 | % | 30 | % | 24 | % | |||||||||||
| UnitedHealthcare | 10 | % | 10 | % | 11 | % | |||||||||||
| 41 | % | 40 | % | 35 | % | ||||||||||||
The Company's significant third-party payers and other customers in excess of 10% of total accounts receivable and their related accounts receivable balance as a percentage of total accounts receivable were as follows:
| As of December 31, | |||||
| 2019 | 2018 | ||||
| Medicare | 15 | % | 20 | % | |
| Johnson and Johnson Services, Inc. | 10 | % | — | % | |
| UnitedHealthcare | 9 | % | 11 | % | |
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Medicare | 14 | % | 12 | % | |||||||
| UnitedHealthcare | 10 | % | 9 | % | |||||||
Cash Equivalents
Short-Term Investments
The Company's short-term investments consist of U.S. treasury securities and time deposits with a bank with maturities at the time of purchase that were between 90 days and one year. The Company classifies these investments as held-to-maturity debt securities, which are reported at amortized cost. Discounts or premiums from the datepurchase of purchase. Cash equivalents consistthe securities are recognized as a component of amounts investedinterest income in a money market account primarily consistingother income (loss), net in the consolidated statements of U.S. Treasury reserves, and overnight reverse repurchase agreementsoperations. Investments are initially recorded net of an allowance for expected credit losses, if any, which are tri-party repurchase agreementsremeasured each period and any impairments are collateralized by U.S. Treasury and agency securities of at least 102% of the principal amount. In a tri-party repurchase agreement, a third-party custodian bank functionsrecognized as an independent intermediary to facilitate transferexpense. Unrealized gains and losses are not recognized in income. As of cashboth December 31, 2022 and holdingDecember 31, 2021, no allowances for expected credit losses had been recorded and there have been no impairment or credit losses on the collateral on behalfCompany's short term investments.
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VERACYTE, INC.
Notes to Consolidated Financial Statements (Continued)
The Company had deposits of $603,000$0.7 million included in long-term assets as of both December 31, 20192022 and December 31, 2018,2021, restricted from withdrawal and held by a bankbanks in the form of collateral for an irrevocable standby letterletters of credit held as security for the lease of the Company's South San Francisco facility.leases.
Acquisitions
The Company first determines whether a set of assets acquired and liabilities assumed constitute a business and should be accounted for as a business combination. If the assets acquired are not a business, the Company accounts for the transaction as an asset acquisition. Business combinations are accounted for by using the acquisition method of accounting. Under the acquisition method, assets acquired, and liabilities assumed are recorded at their respective fair values as of the acquisition date in ourthe Company's consolidated financial statements. The estimated fair value of intangible assets acquired are based on discounted cash flows utilizing certain assumptions including revenues (such as projected testing volumes, growth rates), discount rates and expected economic life/obsolescence factors of the respective assets. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Contingent consideration obligations incurred in connection with a business combination are recorded at fair value on the acquisition date and remeasured at each subsequent reporting period until the related contingencies are resolved, with the resulting changes in fair value recorded in earnings.general and administrative expense in the consolidated statements of operations.
In July 2020, the Company invested $1.0 million in the preferred stock of MAVIDx, Inc., or MAVIDx, a company developing a diagnostic platform for infectious diseases testing. MAVIDx is a variable interest entity, or VIE, and Allowancethe Company's investment is a variable interest. The Company has determined that it is not the primary beneficiary of the VIE due to the fact that the Company does not have the power to direct the activities that impact the economic performance of MAVIDx or the obligation to fund its operations with ongoing financial support or contributions. MAVIDx is a private company and its equity securities are not traded or quoted in any securities exchange or in the over-the-counter market, and therefore does not have a readily determinable fair value. As such, the Company has elected to measure its investment in the preferred stock at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for Doubtful Accounts for Product Salesan identical or similar equity financings of MAVIDx, in accordance with Accounting Standards Codification, or ASC 321, Investments—Equity Securities. Based on the fourth quarter of 2020 operating performance of MAVIDx and the volatile nature of the market in which it operates, the Company determined that the investment in MAVIDx was fully impaired as of December 31, 2020. As a result, an impairment loss of $1.0 million was recorded in the fourth quarter of 2020 and is included in general and administrative expense in the consolidated statements of operations.
Supplies consists of materials and reagents consumed in the performance of testing services. Inventory consists of raw materials consumed in the contract manufacturing process as well as finished and semi-finished components used in the assembly of diagnostic kits related to product sales. Inventory is stated at the amount management expects to collect from customers based on their outstanding invoices. Management reviews accounts receivable regularly to determine if any receivable will potentially be uncollectible and to estimate the amountlower of allowance for doubtful accounts necessary to reduce accounts receivable to its estimatedcost or net realizable value by analyzing the statuson a weighted average basis. The Company periodically analyzes supply and inventory levels and expiration dates, and writes down supply or inventory that has become obsolete, that has a cost basis in excess of significant past due receivables. Productits net realizable value, or in excess of expected sales commenced in December 2019 and there was norequirements as cost of revenue. The Company records an allowance for doubtful accounts at either December 31, 2019excess or 2018.obsolete supplies and inventory using an estimate based on historical trends and evaluation of near-term expirations.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations and comprehensive loss in the period realized.
93
Leases
The Company determines if an arrangement is, or contains, a lease at inception. Operating leases are included in right-of-use assets - operating leases and operating lease liabilities in the consolidated balance sheets, representing the right to use an underlying asset for the lease term and the obligation to make lease payments arising from the lease. Right-of-use, or ROU, assets and lease liabilities are recognized at commencement based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments. The ROU assets also includes any lease payments made and is adjusted for lease incentives. Lease terms may include options to extend or terminate the lease which are recognized when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease terms. Lease and non-lease components are accounted for as a single lease component. Financing leases are immaterial and are included in property and equipment, net and other liabilities in the consolidated balance sheets. Leases with terms of 12 months or less are not recorded on our balance sheet.
Finite-lived Intangible Assets
Finite-lived intangible assets consist of intangible assets acquired as part of business combinations. The Company amortizes finite-lived intangible assets using the straight-line method over their estimated useful lives of 54 to 15 years, based on management's estimate of the period over which their economic benefits will be realized, product life and patent life. The Company tests these finite-lived intangible assets for impairment when events or circumstances indicate a reduction in the fair value below their carrying amounts. There was 0The Company recorded a $3.3 million impairment charge for the year ended December 31, 2022 and no impairment charge for the years ended December 31, 2019, 20182021 or 2017.2020. See Note 5 Balance Sheet Components for more information on the 2022 impairment testing.
Indefinite-lived Intangible Assets
Indefinite-lived intangible assets consist of in-process research and development, or IPR&D, acquired as part of business combinations. The IPR&D is not amortized until it becomes commercially viable and placed in service. At the time when the intangible assets are placed in service the Company will determine a useful life. The Company also tests these indefinite-lived intangible assets for impairment when events or circumstances indicate a reduction in the fair value below their carrying amounts. There was no impairment of indefinite-lived intangible assets for the years ended December 31, 2022, 2021 or 2020.
Goodwill
Goodwill, derived from the Company's acquisition of Allegro Diagnostics Corp. in September 2014 and the exclusive global diagnostics license to the NanoString nCounter FLEX Analysis System and Prosigna and LymphMark assays in December 2019, is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate that it may be impaired. The Company's goodwill evaluation is done annually on October 31 and is based on both qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying value. The Company has determined that it operates in a single segment and has a single reporting unit associated with the development and commercialization of diagnostic products. In the event the Company determines that it is more likely than not the carrying value of the reporting unit is higher than its fair value, quantitative testing is performed comparing recorded values to estimated fair values. If impairment is present, the impairment loss is measured as the excess of the recorded goodwill over its implied fair value. There was 0no impairment of goodwill for the years ended December 31, 2019, 20182022, 2021 or 2017.2020.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities.
See Note 6, "Fair6. Fair Value Measurements"Measurements for further information on the fair value of the Company’s financial instruments.
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Revenue Recognition
The Company commenced recognizing testingrecognizes revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606, starting January 1, 2018. Prior to January 1, 2018, the Company recognized testing revenue in accordance with the provisions of ASC 954-605, Health Care Entities - Revenue Recognition, or ASC 954.
| Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||
| Testing revenue recognized on the accrual basis | $ | 107,355 | 100 | % | $ | 91,058 | 100 | % | $ | 69,274 | 96 | % | ||||||||
| Testing revenue recognized on the cash basis | — | — | % | — | — | % | 2,679 | 4 | % | |||||||||||
| Total | $ | 107,355 | 100 | % | $ | 91,058 | 100 | % | $ | 71,953 | 100 | % | ||||||||
In arrangements involving more than one performance obligation,service or good, each required performance obligationservice or good is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the goodservice or servicegood either on its own or together with other resources that are readily available and (ii) the goodservice or servicegood is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects the Company's best estimate of what the selling price would be if the deliverable was regularly sold by the Company on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available.
The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred which may be at a point in time or over time.
Testing Revenue
The Company bills for testing services at the time of test completion as defined by the delivery of test results. The Company recognizes revenue based on estimates of the related goodsamount that will ultimately be realized. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is transferreda reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or services are performed. Consideration associated with at-risk substantive performance milestones ischanges that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions.
The Company has changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior years and recognized asimmaterial changes in revenue, when it is probable that a significant reversalloss from operations and basic and diluted net loss per share for the years ended December 31, 2022, 2021 and 2020.
Product Revenue
The Company's products consist of the cumulativeProsigna breast cancer assay, the nCounter Analysis System and related diagnostic kits. Product revenue from diagnostic kits is generally recognized will not occur. Should there be royalties,upon shipment. Product revenue from instruments is generally recognized when the Company utilizesinstrument is ready for use by the salesend customer. Shipping and usage-based royalty exceptionhandling costs incurred for product shipments are included in arrangementsproduct revenue. Revenue is presented net of the taxes that resultedare collected from the license of intellectual property, recognizing revenues generated from royalties or profit sharing as the underlying sales occur.
Biopharmaceutical and Other Revenue
The Company enters into collaborative arrangements with partners that fall under the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”). While these arrangements are in the scope of ASC 808, the Company may analogize to ASC 606 for some aspects of these arrangements. The Company analogizes to ASC 606 for certain activities within the collaborative arrangement for the delivery of a good or service (i.e., a unit of account) that is part of its ongoing major or central operations.