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. (Check one):
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant’s common stock on the last business day of its most recently completed second fiscal quarter, as reported on The NASDAQ Global Market, was approximately $347.3 million.$2.9 billion. Shares of common stock held by each executive officer and director and by each other person who may be deemed to be an affiliate of the Registrant, have been excluded from this computation. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes.
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 20182022 Annual Meeting of Stockholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K. Such proxy statement will be filed with the Securities and Exchange Commission not later than 120 days following the end of the registrant’s fiscal year ended December 31, 2017.
NANOSTRING TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20172021
TABLE OF CONTENTS
Risk Factor Summary
Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this report titled “Risk Factors.” The following is a summary of the principal risks we face:
•We face risks related to health epidemics and other outbreaks, such as COVID-19, which could significantly disrupt our operations and could have a material adverse impact on us.
•We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability.
•Our financial results may vary significantly from quarter to quarter which may adversely affect our stock price.
•If we do not achieve, sustain or successfully manage our anticipated growth, our business and growth prospects will be harmed.
•Our future success is dependent upon our ability to expand our customer base and introduce new applications and products.
•New market opportunities may not develop as quickly as we expect, limiting our ability to successfully market and sell our products.
•Our business depends on levels of research and development spending by academic and governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results.
•Our sales cycle is lengthy and variable, which makes it difficult for us to forecast revenue and other operating results.
•Our reliance on distributors for sales of our products outside of the United States could limit or prevent us from selling our products and impact our revenue.
•Our future capital needs are uncertain and we may need to raise additional funds in the future.
•We may not be able to develop new products, enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements or successfully manage the transition to new product offerings, any of which could have a material adverse effect on our business and operating results.
•We are dependent on single source suppliers for some of the components and materials used in our products, and the loss of any of these suppliers could harm our business.
•We may experience manufacturing problems or delays that could limit our growth or adversely affect our operating results.
•We expect to generate a substantial portion of our product and service revenue internationally and are subject to various risks relating to our international activities, which could adversely affect our operating results.
•Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims.
•If we experience a significant disruption in our information technology systems or breaches of data security, our business could be adversely affected.
•New product development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any of the products we develop individually or with our collaborators.
•The life sciences research market is highly competitive. If we fail to compete effectively, our business and operating results will suffer.
•We are subject to ongoing and extensive regulatory requirements, and our failure to comply with these requirements could substantially harm our business.
•Healthcare policy changes, including legislation reforming the United States healthcare system, may have a material adverse effect on our financial condition and results of operations.
•If we are unable to protect our intellectual property effectively, our business would be harmed.
•Involvement in lawsuits to protect or enforce our patents and proprietary rights, to determine the scope, coverage and validity of others’ proprietary rights, or to defend against third-party claims of intellectual property infringement, could be time-intensive and costly and may adversely impact our business or stock price.
•The price of our common stock may be volatile, and you could lose all or part of your investment.
•Complying with the laws and regulations affecting public companies increases our costs and the demands on management and could harm our operating results.
Special Note Regarding Forward-Looking Information
This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section in Item 7, and other materials accompanying this Annual Report on Form 10-K contain forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements can be identified by words such as “believe,” “anticipate,” “could,” “continue,” “depends,” “expect,” “expand,” “forecast,” “intend,” “predict,” “plan,” “rely,” “should,” “will,” “may,” “seek,” or the negative of these terms or and other similar expressions, although not all forward-looking statements contain these words. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:
•our expectations regarding our future operating results and capital needs, including our expectations regarding instrument, consumable and total revenue, operating expenses, sufficiency of cash on hand and operating and net loss;
•our expectations regarding the impact of the COVID-19 global pandemic as it relates to our ongoing operations, including our customer order activity levels and key supplier requirements;
•our ability to successfully commercialize our GeoMx DSP platform;
•our ability to successfully develop our CosMx Spatial Molecular Imager platform and pursue potential commercial applications and partnerships;
•the success, costs and timing of implementation of our business model, strategic plans for our business and future product development plans;
•the regulatory regime and our ability to secure and maintain regulatory clearance or approval or reimbursement for the clinical use of our products, domestically and internationally;
our ability to successfully commercialize Prosigna, our first in vitro diagnostic product;
our ability to realize the potential payments set forth in our collaboration agreements;
•our strategic relationships, including with patent holders of our technologies, manufacturers and distributors of our products, and collaboration partners and third parties who conduct our clinical studies;partners;
•our intellectual property position;position and the risk or results of litigation alleging that our products infringe upon the intellectual property rights of third parties;
•our ability to attract and retain key scientific or management personnel;
•our expectations that our existing cash, cash equivalents, and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months;
•our expectations regarding the competitive position, market size and growth potential for our business; and
•our ability to sustain and manage growth, including our ability to expand our customer base, develop new products, enter new markets and hire and retain key personnel.
All forward-looking statements are based on information available to us on the date of this Annual Report on Form 10-K and we will not update any of the forward-looking statements after the date of this Annual Report on Form 10-K, except as required by law. Our actual results could differ materially from those discussed in this Annual Report on Form 10-K. The forward-looking statements contained in this Annual Report on Form 10-K, and other written and oral forward-looking statements made by us from time to time, are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements, and you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Factors that might cause such a difference include, but are not limited to, those discussed in the following discussion and within Part I, Item 1A — “Risk Factors” of this Annual Report on Form 10-K. In this report, “we,” “our,” “us,” “NanoString,” and “the Company” refer to NanoString Technologies, Inc. and its subsidiaries.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
PART I
Item 1. Business
Overview
We develop, manufactureNanoString develops, manufactures and sell robust, intuitive productsmarkets technologies that unlock scientifically valuable and clinically actionable biologic information from minute amounts of tissue.biological material, primarily for life science researchers in the fields of genomics and proteomics. Our mission is to provide a portfolio of solutions that allow our customers to map the universe of biology, enabling scientific discoveries that can improve the human condition.
Our technologies include proprietary chemistries that enable the labeling and counting of single molecules. Our product platforms are used for scientific and clinical research applications, often in connection with pharmaceutical product development and human clinical trials of potential new therapies. Our customers include leading biopharmaceutical laboratories and academic and government research institutions. We currently offer two commercially available product platforms, our nCounter Analysis System, directly profiles hundreds of molecules simultaneously using a novel barcoding technology that is powerful enough for use in research, yet simple enough for use in clinical laboratories worldwide.or nCounter, and our GeoMx Digital Spatial Profiler, or GeoMx DSP, system. We markethave one additional product platform under development, our systems andCosMx Spatial Molecular Imager, or CosMx SMI, system. All NanoString product platforms include instruments, related consumables, software and services.
Every living organism has a genome that contains a full set of biological instructions required to researchersbuild and maintain life. A gene is a specific set of instructions embedded in academic, government,the deoxyribonucleic acid, or DNA, of a cell. For a gene to be “turned on,” or “expressed”, a cell must first transcribe a copy of a portion, or sequence, of its DNA code into molecules of messenger ribonucleic acid, or RNA. Then, the cell translates the expressed information contained in RNA into proteins that form the building blocks of organisms and biopharmaceutical laboratories for use in understanding fundamental biologybiological processes.
The decoding of the human and other genomes, and the molecular basisgeneration of disease andlarge amounts of genetic information, or gene sequence data, have led researchers to clinical laboratories and medical centers for diagnostic use. As of December 31, 2017, we had an installed base of approximately 605 nCounter systems,seek to understand which our customers have used to publish more than 1,800 peer-reviewed papers. As researchers using our systems discover new biologic insights to improve clinical decision-making, these discoveriesgenes among the decoded sequences may be translatedexpressed at any given time, and validated as diagnostic tests. For example, our first molecular diagnostic product is the Prosigna Breast Cancer Assay,how networks of genes may work together to produce a biological condition or function. Researchers determine which provides an assessmentgenes are expressed, and in what magnitude, by measuring levels of a patient’s risk of recurrence for breast cancer. In addition, we collaborate with biopharmaceutical companies to develop companion diagnostics,selected RNA or proteins that may be usedpresent in a biological sample. The desire to identify which patients are most likelymap and interpret gene expression patterns has led to respond to a particular therapeutic treatment.
Our nCounter Analysis System enables biologic analysis on a scale appropriatedemand for pathway-based biology,technologies that can precisely and efficiently measure the examinationexpression level of networks of tens or hundreds of genes simultaneously.
Demand for these new or improved technologies has been driven by researchers in areas such as cancer, immunology, neurology and proteins that actinfectious disease. Researchers in concertthese fields are increasingly attempting to produce biologic functions or trigger certain diseases, by digitally quantifying the activitydetermine which sequences of up to 800 genes or proteins simultaneouslymutations are important in disease-related biological pathways so new potential treatments might be developed. For example, in the field of cancer, researchers and clinicians have learned that cancer cell behavior is impacted by multiple genes and that analysis of these factors together may be important in determining whether or not a single minute tissue sample. Our technology platform is enabled bycancer might be responsive to a unique, proprietary optical barcoding chemistry only available to us. We offer a range of instruments to appeal to an array of potential customer types. Our nCounter SPRINT Profiler is designed to appeal to individual researchers running relatively smaller experiments. Our nCounter MAX is a higher throughput instrument with features appealing to larger core laboratories serving multiple researchers. Our nCounter Analysis System instrument has been FDA 510(k) cleared together with Prosigna and is targeted toward clinical laboratories. All three instruments are capable of running our research consumable products and provide comparable, high-quality data. Our revolutionary new 3D Biology products enable researchers to measure combinations of gene expression, protein expression and gene mutations simultaneously from a single minute tissue sample.
Our technology and products address a fundamental challenge in cancer research. Withcertain treatment. In addition, more cancers are being detected earlier and tumor samples are becoming smaller and smaller, while researchers and clinicians have a much greater appetite for information regarding the activity of genes and proteins. The sensitivity and precision of our novel barcoding chemistry allows the measurement of subtle changes in genomic and proteomic activity efficiently from minute samples of tissue. Furthermore, tumorsmaller. Tumor samples are often stored in a format known as formalin-fixed paraffin embedded, or FFPE, which complicates subsequent analysis of genetic material. Researchers and clinicians may face similar challenges with analysis of biological samples in other therapeutic areas of interest.
Our chemistrynCounter platform, which was commercially launched in 2008, is particularly compatible with FFPE, increasing its popularity among cancer researchers. Theused to conduct what is known as bulk gene expression analysis, whereby biological samples are first reduced, or broken down, and then gene expression, specifically quantities of selected RNA or proteins, are measured at their average levels throughout the totality of the sample. nCounter Analysis Systemcan be used to analyze the activity of up to 800 genes in a single experiment.
GeoMx DSP, which was commercially launched in 2019, is a pioneering product platform in the emerging field of spatial biology. While nCounter and other common gene expression analysis technologies use bulk analysis approaches, GeoMx DSP is used to analyze selected regions of an easy-to-use and flexible solution that allowsintact biological sample without the need to break down the sample, enabling researchers to efficiently test hypotheses insee how gene expression might vary across those regions. After a high throughput manner across thousandsresearcher selects regions of different samples. Asinterest, GeoMx DSP arranges the biological information extracted from these regions to be subsequently quantified and analyzed, or “read out,” by a result, the nCounter Analysis System is particularly useful for validating networks of genes and proteins that characterize and help predict disease states,platform such as cancer. UsingnCounter, whereby researchers can obtain information on up to 96 biological targets per selected region of interest, or by a next generation sequencer, or NGS, system, such as systems manufactured by Illumina, Inc., whereby researchers can obtain information on up to approximately 18,000 biological targets, or the FLEX configurationRNA from every gene in the genome, per selected region of our nCounter Dx Analysis System, researchers also have the potential to translate their discoveries to the clinic as diagnostics on a single instrument system after receiving any necessary regulatory authorizations.interest.
In addition to the nCounter Analysis System, we are currently developing two new systems enabled by our proprietary optical barcoding chemistry. Following completion of product development, each of these new systemsCosMx SMI, which is expected to be commercialized asbecome commercially available in the second half of 2022, is a new instrument along with associated consumables.
The first newproduct platform under development in development, Digital Spatial Profiling,the field of spatial biology. CosMx SMI is being developed to complement our GeoMx DSP. While GeoMx DSP offers researchers the ability to profile gene expression activity in a selected region of interest that may contain multiple cells or DSP,cell types, CosMx SMI is designed to enable multiplexed spatial profiling of RNA and protein targets at a single and sub-cellular resolution level. While GeoMx allows for more rapid, higher throughput analysis of gene expression activity in selected regions of interest, CosMx is designed to allow researchers to address important questions regarding how protein and gene expression vary spatially for regions“drill down” into a specific single cell or sub-
cellular area in a region of interest acrossto gather more information as desired or required. At the landscapetime of a heterogeneous tissue biopsy. Our DSP instruments are expected to image slide-mounted tissue biopsies, allow selection of regions of interest, and automate the preparation of samples from selected regions for molecular profiling using either an nCounter system or next generation sequencer. DSP technologycommercial launch, CosMx SMI is expected to offerenable the analysis of up to 1,000 RNA targets, or up to 100 protein targets, at a numbersingle or sub-cellular level of advantages comparedresolution within morphologically intact tissue samples.
All NanoString product platforms have the versatility to traditional technologies, including the abilitydetect both RNA and protein expression and are able to profile a larger number of different genes or proteinsgenerate reliable and reproduceable data in each region, more flexibility on the selection of regions, and processing of a larger number of samples per day. Early access sales of DSP instruments are expected to start in late 2018 and the commercial launch of DSP instruments is expected during the first half of 2019.
The second new platform in development, Hyb & Seq, is a next generation sequencing platform. Hyb & Seq is designed to have a workflow that is simpler and faster than current sequencing methods, due to the absence of library preparation, enzymes and amplification. Hyb & Seq's simple workflow and compatibility with a variety of biological sample types, offersincluding formalin fixed paraffin embedded, or FFPE, sample types.
the potentialWe market and sell our systems and related consumables to researchers in academic, government and biopharmaceutical laboratories for a sample-to-answer solution for clinical sequencing. The commercial launchresearch use, both through our direct sales force and through selected distributors in certain international markets. As of a research versionDecember 31, 2021, we had an installed base of Hyb & Seq is expected during 2020.
approximately 1,050 nCounter systems, which our customers have used to publish more than 5,200 peer-reviewed scientific papers. As of December 31, 2021, we had an installed base of approximately 255 GeoMx DSP systems, which our customers have used to publish approximately 90 peer-reviewed scientific papers. We generated revenue of $114.9$145.1 million, $86.5$117.3 million and $62.7$125.6 million in 2017, 20162021, 2020 and 2015,2019, respectively, while incurring net losses of $43.6$115.3 million, $47.1$110.1 million and $45.6$40.7 million in 2017, 20162021, 2020 and 2015,2019, respectively.
We were incorporated in Delaware in June 2003. Our principal executive offices are located at 530 Fairview Avenue, North, Seattle, Washington 98109 and our telephone number is (206) 378-6266. Our common stock trades on The NASDAQNasdaq Global Market under the symbol “NSTG.”
This Annual Report on Form 10-K includes our trademarks and registered trademarks, including “NanoString,”“NanoString”, “NanoString Technologies,”Technologies”, “nCounter”, “nCounter” “Prosigna,” “nCounter Elements,” “nCounter SPRINT SPRINT”,” “Vantage 3D,” “3D Biology,” “nSolver”, “GeoMx” and “Hyb & Seq.”“CosMx”. Each other trademark, trade name or service mark appearing in this Annual Report on Form 10-K belongs to its holder.
Industry
Background
Every living organism has a genome that contains thea full set of biological instructions required to build and maintain life. A gene is a specific set of instructions embedded in the DNA of a cell. For a gene to be “turned on,” or “expressed,” the cell must first transcribe a copy of its DNA code, or sequence, into molecules of messenger RNA. Then, the cell translates the expressed information contained in RNA into proteins that control most biological processes. In addition to the translated RNAs, there are many types of non-coding RNAs that are involved in many cellular processes and the control of gene expression, including microRNA, or miRNA.
By analyzing the variations in genomes, genes, gene activity or expression and proteins in and between organisms, researchers can determine their functions and roles in health and disease. An improved understanding of the genome and its functions allows researchers to drive advancements in scientific discovery. As they make scientific discoveries, researchers have been able to translate some of these findings into clinical applications that improve patient care.
A gene is a specific set of instructions embedded in the DNA of a cell. For a gene to be “turned on,” or “expressed,” the cell must first transcribe a copy of its DNA sequence into molecules of messenger RNA. Then, the cell translates the expressed information contained in the RNA into proteins that control most biological processes. In addition to the translated RNAs, there are many types of non-coding RNAs that are involved in many cellular processes and the control of gene expression, including microRNA, or miRNA.
Biological pathways are the networks of tens or hundreds of genes that work in concerttogether to produce a biological function. Understanding the activation state of pathways and disruptions in individual elements of these pathways provides significant insight into the fundamental basis of health and disease and facilitates data driven treatment decisions. Therapeutic interventions, such as drugs, can be used to treat disease by activating or inactivating biological pathways that are relevant to disease. As a result, pathway-based biology has become a widely adopted paradigm that researchers use to understand biological processes and has assisted them in the development of diagnosticsdiagnostic tests and drugs to treat disease. This is
Understanding biological pathways has become particularly important in cancer research and treatment.
Over the last decade, methods of measuring genomic information have advanced substantially. However, pathway-based research and the development of diagnostic tests require analysis of multiple genes and sensitivity to small changes in expression, which can be challenging for traditional genomic tools. In both life sciences research and clinical medicine, there is a growing need for improved technologies that can precisely and rapidly measure the activation state of hundreds of genes simultaneously across a large number of precious samples. Furthermore, there is an untapped opportunity for technologies capable of simultaneously profiling the activity of genes and related proteins, which ultimately dictate biological activity.
Life Sciences Research
Academic, government, and biopharmaceutical researchers engaged in gene expression or protein analysis typically focus on making biological discoveries that may lead to the development of relevant medical products and better informed treatment decisions for physicians and patients. They have traditionally performed gene expression experiments using microarrays or quantitative polymerase chain reaction, or PCR, and protein expression experiments using flow cytometry, mass spectrometry, immunohistochemistry or enzyme-linked immunosorbent assay, or ELISA, assays. More recently, RNA sequencing, or RNA-Seq, has dramatically enhanced researchers’ ability to discover patterns of gene expression that have biological meaning. However, related workflows and data analysis can be cumbersome and time consuming, and simultaneous analysis of proteins is not possible. Researchers are increasingly performing analyses on a larger number of genes and samples and are seeking new methods of interrogation that would allow them to:
increase the number of molecular targets that can be analyzed simultaneously in order to understand the complete biological pathway involving multiple genes;
improve the overall efficiency of their laboratories by simplifying workflow and accelerating the rate of successfully completing their research;
provide more reliable, precise and reproducible data about targeted genes and biological pathways;
maximize the amount of biologic information extracted from precious tissue samples;
minimize the computational intensity of complex genomic and proteomic analysis;
process difficult-to-work-with specimens, such as tumor biopsies stored in FFPE format; and
create more systematic and reliable ways to help transition their research discoveries into future clinical products.
We believe that the above items create an opportunity for technologies like ours that are optimized for pathway-based biology, providing the potential for seamless transition to clinical diagnostic testing laboratories on a distributed basis, with the capability to analyze both genomic and proteomic information.
Molecular Diagnostics
Growth in the molecular diagnostics market is being driven by technological innovations that have enabled unprecedented biological insights that may be used to inform treatment decisions. New and improved technologies have also led to increased test sensitivity, decreased turnaround times, simplified workflow, and lowered costs when compared to previous techniques. In addition, the medical community has seen a trend in favor of decentralized diagnostic testing as a result of the convenience of local testing, hospitals and medical centers increasingly viewing their laboratories as profit centers and a need to increase access to tests for patients outside of the United States. We believe that there is an opportunity to improve the quality of diagnosis and treatment of diseases by developing and commercializing comprehensive, simple and widely available diagnostic products based initially on gene expression analysis, and ultimately based on our 3D Biology capability.
Cancer is a disease generally caused by genetic mutations in cells. The behavior of cancer cells is extremely complex dependingand depends on the activity of many different genes and proteins. It is often impossible for researchers to identify a single gene or protein that adequately predicts a more aggressive or less aggressive type of cancer. In some cases, researchers have been able to identify more aggressive or less aggressive types of cancer through gene expression analysis of biological pathways, enabling oncologists to determine which specific treatments are most likely to be effective for an individual patient, monitor a patient’s response to those treatments and determine the likelihood of recurrence.
Recently cancer researchers, in the fieldpart based on their research of oncologybiological pathways and gene expression, have begun to demonstrate the potential of harnessing a patient’s immune system to fight cancer. A new class of therapeutics, referred to generally as immuno-oncology drugs, have begun to come to market with the promise of long-term remissions, or even cures, in certain types of cancer. Unlike cancer therapeutics
As interest in understanding biological pathways that may be relevant to medicine has increased, academic, government and biopharmaceutical company researchers have aspired to perform analyses of a larger number of genes and samples and are seeking new methods of interrogation that would allow them to:
•increase the number of molecular targets that can be analyzed simultaneously in order to understand the complete biological pathway involving multiple genes;
•analyze the activity of genes within the existing structural integrity, or spatial orientation, of a biological sample;
•provide more reliable, precise and reproducible data about targeted genes and biological pathways;
•maximize the amount of biologic information extracted from precious tissue or other biological samples;
•minimize the computational intensity of complex genomic and proteomic analysis;
•process difficult-to-work-with specimens, such as tumor biopsies stored in FFPE format;
•improve the overall efficiency of their laboratories by simplifying workflow and accelerating the rate of successfully completing their research; and
•create more systematic and reliable ways to help transition their research discoveries into future clinical products.
The interest in new methods of interrogation has led to the development of new research technologies. Certain technologies that have been rapidly adopted by researchers have focused primarily on determining the sequence of a person’s or organism’s DNA, in order to assess how differences among individuals might be predictive of health or disease. In particular, a technology known as next generation sequencing, or NGS, has become widely adopted. In recent years NGS use has accelerated, as the technology has improved and the cost to sequence DNA using NGS has declined. As of December 31, 2021, there were more than 20,000 Illumina NGS systems installed in laboratories globally.
While NGS has revolutionized researchers’ ability to generate gene sequence data rapidly and cost effectively on large numbers of biological samples, other aspects of examining biological pathways are often still done using legacy techniques or new technologies that have proved less capable of providing multiplexed experimentation, ease of use and low cost. Together with determining a gene sequence via NGS, pathway-based research requires further analysis of the past,activity of multiple genes and small changes in their expression, or of how gene expression may vary depending on where certain cells are situated within biological tissue, which can be challenging for traditional scientific tools.
Researchers interested in multiplex gene expression or biological pathway analysis have traditionally performed experiments using microarrays or quantitative polymerase chain reaction, or qPCR, and protein expression experiments using flow cytometry, mass spectrometry, immunohistochemistry or enzyme-linked immunosorbent assay, or ELISA, assays. Many of these therapeutics dotechniques have been available for decades, and while suitable for analyzing the expression of a smaller number of genes, may not target genetic abnormalities and therebe cost effective or scalable enough to study biological pathways. While these types of experiments could be repeated to analyze expression of multiple genes, they are typically no reliable genetic biomarkers for determining which patients are likely to respond to treatment. The developmentoften destructive of diagnostics to inform decisions regarding treatment with immuno-oncology drugs is likely to requirebiological samples, creating limitations given the amounts of biological sample that may be available. These methods also destroy the spatial integrity of the sample, eliminating any potential analysis of bothdifferences in how genes may be expressed based on where a cell or cells are situated in tissue, or how they may be interacting with other cells or biological functions. These types of experiments may also involve library preparation and amplification steps that can be cumbersome or time consuming or that may introduce the possibility of measurement errors.
More recently, RNA sequencing, or RNA-Seq, which is done using NGS technology, has enabled researchers to look at the entirety of the gene expression within a single sample. However, NGS systems have a more complex and proteins.time-consuming workflow than traditional methods of analyzing gene or protein expression, and RNA-Seq generates large amounts of data that may be expensive to store and may not have relevance to the scientific question being explored.
In addition,both life sciences research and clinical medicine, there is a growing need for improved technologies that can easily, precisely and rapidly measure the medical communityactivation state of hundreds to thousands of genes simultaneously across a large number of precious samples. Furthermore, there is an emerging desire for technologies that could enable researchers and clinicians to understand gene expression activity in tissue as it is naturally situated in the body, without the need to destroy the structure of the biological sample, in order to see if gene activity might vary depending on how, or where, cells are resident in the sample.
Our Strategy and Solutions
Our strategy is to offer a portfolio of technologies to genomics and proteomics researchers that are easy to use across multiple experimental scales or approaches, and that offer consistent, accurate and reproduceable scientific results in a variety of biological sample types, including those that may be more challenging to use or analyze with alternative technology platforms. Our proprietary chemistries and product platforms offer a number of specific advantages, including:
•Complementary solutions that enable gene expression analysis and spatial biology at multiple scales. Genomics and proteomics science has favoredevolved to where experiments can involve studying gene expression from just a trend toward decentralized diagnostic testing. Tests for HIV, Hepatitis C, Influenzahandful of data points from up to thousands of genes at a time, and MRSA, which were once centralized, are now often conductedmay involve different types of analysis, such as bulk or spatial analysis or quantifying RNA or proteins. nCounter, our bulk gene expression analysis solution, can profile the activity of up to 800 genes in hospital laboratoriesa single experiment on multiple biological samples per day, with fewer experimental steps as compared to other multiplex gene expression analysis technologies. Our GeoMx DSP spatial biology system enables multiplex profiling, in intact biological samples, of up to approximately 18,000 RNA targets and up to approximately 100 protein targets in selected regions of scientific interest, at multicellular resolution. Our CosMx SMI system is expected to offer the ability to analyze up to 1,000 RNA targets and up to 100 protein targets in specifically selected regions of a biological sample at single cell or at the point of care.sub-cellular resolution. We believe that this trendthe breadth of decentralized testing will continuegene expression
research applications offered by our product platforms may provide our customers with a complete solution for their laboratories, as well as consistency of platform features, usability and performance.
•Ease of use and automation. Gene expression research requires the extraction and analysis of large amounts of data, often from studies comprising hundreds of biological samples, which can make manual or non-automated experimental approaches cumbersome, labor intensive or expensive. Our product platforms are designed to offer minimal sample preparation and automated workflow, which enables the simultaneous analysis of up to thousands of genes and hundreds of proteins in approximately 24 hours between the time a resultsample is loaded and results are obtained. Our nCounter system can analyze from between 24 to 96 samples per day, depending upon the system choice and configuration. GeoMx DSP allows for throughput of many factors, including:
Convenience. We believe that physicians would prefer that molecular diagnostic tests be performed at a local level and10 or more biological samples per day, depending on the number of regions in the same laboratorysample selected for analysis. The ability to analyze several samples in a single day facilitates the more rapid completion of scientific studies for publication, or the use of our systems for analysis of pharmaceutical clinical trial results with large numbers of patients enrolled.
•Flexible and Efficient Biological Sample Requirements. Some biological samples, such as FFPE samples, can be challenging for scientists to work with, as the storage medium can make it difficult to extract gene expression information, or may partially degrade RNA or protein present in a sample. Biological samples may also be shared across multiple researchers, offering advantages to platforms that performs other testsare able to work with smaller sample amounts. Our systems are designed to unlock biologic information from minute amounts of a variety of challenging tissue samples, including FFPE samples, cell lysates and single cells, which may be important in settings where samples are used across multiple researchers and experiments, such as pharmaceutical product development.
•Robust and reproduceable scientific results. Some chemistries used in gene expression analysis have error rates that the physicians may order. Local molecular diagnostic testing could provide physicianslead to inconsistent data across the same rapid turnaround of test resultsor similar biological samples. Our chemistries hybridize directly to target molecules in a biological sample, which allows target molecules to be counted with high accuracy. Our approaches generate digital information (1 molecule = 1 count) which provides consistent and accurate data with excellent reproducibility, even in biological samples that they have learned to expect for other types of tests.
Economic Advantages. We believe that hospitals and medical centers desire to make their clinical laboratories profit centers by performing tests and billing third-party payors. As diagnostic technologies become less complicated to administer, hospitals and medical centers tend to favor in-sourcing tests.
International Availability. There is a critical need to increase access to molecular diagnostic tests for patients that live outside the United States. Currently, patients living outside the United States may be challenged to gain access to tests that are provided only by specialized laboratories located within the United States. We believe advanced molecular diagnostic testing will become more available to patients throughout the world when it can be provided by their localchallenging to work with, offering confidence for scientists preparing scientific studies for publication or utilizing results to understand the outcomes of pharmaceutical clinical laboratories.
trials.We believe that these factors create an opportunity for technologies like ours that can facilitateOur Products and Technology
Our products operate in the development and use of complex molecular diagnostics, potentially targeting gene mutations,bulk gene expression and proteinspatial biology markets, which exist within the larger life sciences technologies market. nCounter, our first commercially available product, was launched in 2008 and operates within the bulk gene expression market and primarily serves the clinical, or translational, research market, often in connection with a high levelpharmaceutical product development and human clinical trials of precision on a decentralized basis.potential new therapies. Our portfolio of spatial biology solutions, which include our commercially available GeoMx DSP platform and our CosMx SMI product platform under development, are uniquely suited to address researcher needs across both the discovery and translational research markets. Our nCounter systems including the nCounter FLEX system, which was cleared by the U.S Food and Drug Administration, FDA, as an in vitro diagnostic medical device and can be used for research or clinical diagnostic applications. GeoMx DSP and CosMx SMI are intended for research use only, but we may eventually develop these instruments for use in the clinical diagnostics market.
Our SolutionnCounter Analysis System
Our nCounter Analysis System is an automated, multi-application, digital detection and counting system which directly profiles hundreds of molecules simultaneously, using a novelour proprietary optical barcoding technologychemistry that is powerful enough for use in research, yet simple enough for use in clinical laboratories worldwide.laboratories. Our nCounter Analysis System is based on automated instruments that prepare and analyze tissuebiological samples using proprietary reagents which can only be obtained from us. Our research and clinical laboratory customers purchase instruments from us and then purchase our reagents and related consumables for the specific experiment or assay they wish to conduct. Our clinical laboratory customers either purchase or lease instruments from usconduct and also purchase our reagents and related consumables for tests that they intend to run.run, respectively.
Our nCounter Analysis System offers a number of compelling advantages, including:
Optimized for Pathway-Based Biology. The nCounter Analysis System can profile up to 800 molecules in a single test tube, which allows customers to analyze interactions among hundreds of genes or proteins that mediate biological pathways.
Digital Precision. Our molecular barcodes hybridize directly to the target molecules in a sample allowing them to be counted. This generates digital data (1 molecule = 1 count) of excellent quality over a wide dynamic range of measurements and provides excellent reproducibility.
Simple Workflow. The nCounter Analysis System’s minimal sample preparation and automated workflow enable the simultaneous analysis of hundreds of genes and proteins in approximately 24 hours between the time a sample is loaded into the system and results are obtained. Our nCounter Analysis System generates data that customers can evaluate without the use of complex bioinformatics.
Flexible Sample Requirements. The nCounter Analysis System is able to unlock biologic information from minute amounts of a variety of challenging tissue samples, including FFPE samples, cell lysates and single cells.
Versatility. The FLEX configuration of the nCounter Analysis System provides clinical laboratories a single platform with the flexibility to support both clinical testing, by running Prosigna or Laboratory Developed Tests using nCounter-based reagents, and research, by processing translational research experiments and multiplexed assays using our research reagents.
Life Sciences Research
Our nCounter Analysis System is capable of supporting a number of research applications based upon the measurement of the concentration or amount of a target molecule. Additionally, starting in September 2015, we have launched a series of 3D Biology applications, which enable the simultaneous analysis of DNA, RNAincluding gene expression, protein expression, gene mutation, miRNA expression, copy number variation, gene fusions and proteins in a single sample. Key applications currently supported include:
Gene Expression. Researchers can use themolecular diagnostics. We believe our nCounter Analysis System to measure the degree to which individual genes in pathways are turned “on” or “off” by simultaneously quantifying the amountoffers a number of messenger RNA, or mRNA, associatedadvantages, including providing a simpler and faster workflow with eachminimal hands-on time for multiplex analysis of up to 800 genes.RNA, or protein targets. Additionally, because nCounter is fully automated and easy-to-use, it is ideal for a range of applications requiring efficient, high-precision, simultaneous quantitation of hundreds of target molecules across a set of biological samples. Our nCounter assays generate high-quality results from challenging sample types, including FFPE and crude cell lysates.
nCounter Instrument Platforms
Protein Expression. Today, researchers can use
—————The left image is the nCounter Analysis System to measure simultaneously up to 30 proteins. Ultimately, we intend to expand this capability to an increased number of protein targets, limited only bySPRINT system, the 800 target capacity of an assaymiddle image is the nCounter MAX system and the number of antibodies that can be sourced and combined without cross-reaction.
Gene Mutations. In late 2016, we launched our first assay to detect a particular type of gene mutation, known as single nucleotide variations. Our initial panel, targeting solid tumors, gives researchers the power to measure 104 different gene mutations simultaneously, at the same time as measuring the expression of other genes and proteins.
miRNA Expression. Researchers can useright image is the nCounter Analysis System to measure the simultaneous expression levelsFLEX system.
We currently offer three versions of up to 800 different miRNAs. Theour nCounter Analysis System, is capable of highly multiplexed, direct digital detection and counting of miRNAs in a single reaction without amplification, thereby delivering high levels of sensitivity, specificity, precision, and linearity.
Copy Number Variation. Researchers can use the nCounter Analysis System to probe for structural variations that result in cells having an abnormal number of copies of one or more sections of the DNA. Researchers are able to conduct large-scale, statistically-powered studies of these copy number variations, or CNVs, by leveraging the nCounter Analysis System’s multiplexing capacity to assay up to 800 DNA regions in a single tube, with as little as 300 ng of DNA.
Gene Fusions. Researchers can use the nCounter Analysis System to detect gene fusion events that occur when one gene fuses to another gene. A number of design options are available for developing assays for
these complex structural variants which have been shown to be important in a number of cancers. In 2016, we launched two off-the-shelf panels for analysis of fusion genes relevant to lung cancer and leukemia.
Molecular Diagnostics
We believe that the attributes that make the nCounter Analysis System attractive to researchers also make the system attractive to hospitals and clinical laboratories that desire to conduct molecular diagnostic tests. The precision, ease of use and flexibility of the nCounter Analysis System will allow medical technicians in pathology labs to conduct complex molecular diagnostic tests with minimal training. We expect these tests to encompass both Laboratory Developed Tests based on our nCounter-based reagents and in vitro diagnostic kits.
Our Products and Technology
Instruments and Software
The nCounter Analysis System is an automated, multi-application, digital detection and counting system. In 2008, we began marketing a research use only version of the system, and since that time we have expanded our product line to include three instruments, each targeted at a distinct user segmentsegment. Our nCounter SPRINT is designed to appeal to individual researchers running relatively smaller experiments. Our nCounter MAX is a higher throughput instrument with features appealing to larger core laboratories serving multiple researchers. Our nCounter FLEX, which is targeted toward clinical laboratories, is a version of our target market.
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| | nCounter SPRINT | | nCounter MAX | | nCounter FLEX |
| Target customer | Individual researchers | | Core research labs | | Clinical labs |
| Throughput (samples per day) | 24 | | 48 | | 48 |
Expandable with additional prep station (1) | No | | Yes | | Yes |
| Diagnostic menu | No | | No | | Yes |
| U.S. list price | $149,000 | | $235,000 | | $265,000 |
(1)MAX system that has been 510(k) cleared by the FDA and CE marked by European regulatory authorities. The nCounter MAXFLEX system was designed and is manufactured under ISO 13485:2003, the current quality standard for in vitro diagnostic platforms and medical devices. nCounter FLEX throughputis enabled to run the Prosigna® breast cancer assay, as well as other proprietary or laboratory developed tests, or LDTs, that may be increaseddeveloped. Pursuant to upthe terms of our License and Asset Purchase Agreement, or LAPA, with Veracyte, Inc., or Veracyte, we granted to 96 samples per day by adding a second prep station.Veracyte an exclusive worldwide license to our nCounter FLEX system for in vitro diagnostic use and for the development and commercialization of in vitro diagnostic tests on the nCounter FLEX system and sold to Veracyte certain assets, including our rights with respect to the Prosigna breast cancer assay. For additional information regarding our agreement with Veracyte, see “ — License Agreements — Veracyte, Inc.” below.
The nCounter MAX and FLEX systems comprise a Prep Station and a Digital Analyzer. The Prep Station is the automated liquid handling component of the nCounter Analysis System that processes samples after they are hybridized and prepares the samples for data collection on the nCounter Digital Analyzer. The nCounter Digital Analyzer collects data from samples by taking images of the immobilized fluorescent reporters in the sample cartridge and processing the data into output files, which include the target identifier and related count numbers along with a broad set of internal controls that validate the precision of each assay. The nCounter SPRINT Profiler is a single instrument targeted to individual researchers that provides both the liquid handling steps and the digital analysis through use of a microfluidic cartridge. The nCounter FLEX system was designed and is manufactured under ISO 13485:2003, the current quality standard for in vitro diagnostic platforms and medical devices. We also provide our research customers with the nSolver Analysis Software, a data analysis program that offers researchers the ability to quickly and easily quality check, normalize, and analyze their data without having to use any additional software for data analysis. The diagnostic version of our instrument, the nCounter Analysis Dx FLEX System, was FDA 510(k) cleared and CE-marked together with Prosigna. The FLEX System can be enabled with the software that runs Prosigna to generate individualized patient reports, in addition to running any of our research applications.
The nCounter MAX and FLEX Systems employ a simple three-step workflow that takes approximately 24 hours and requires approximately 15 minutes of hands-on time bythroughput listed in the user. When run in research mode, a user can process up to 48 samples per day by installing one Prep Station with a single Digital Analyzer. One can increase the number of samples analyzed to 96 samples per day on a single Digital Analyzer if it is coupled with two Prep Stations. This throughputtable below can be quadrupled using sample multiplexing for experiments targeting 200 genes or fewer. For Prosigna,The nCounter SPRINT Profiler combines the liquid handling steps and the digital analysis through use of a clinical laboratory can processspecial microfluidic cartridge.
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| Target customer | Individual researchers | | Core research labs | | Clinical labs |
| Number of workflow steps | 3 | | 3 | | 3 |
Throughput (samples per day) (1) | 24 | | 48 - 96 | | 48 - 96 |
| Prep station and digital analyzer | No | | Yes | | Yes |
Expandable with additional prep station (1) | No | | Yes | | Yes |
| Diagnostic Menu | No | | No | | Yes |
| Hands-on time (minutes) | 10 | | 15 | | 15 |
| U.S. list price | $149,000 | | $235,000 | | $265,000 |
(1)nCounter MAX and FLEX throughput may be increased to up to 3096 samples per day on an nCounter Dx Analysis System. The nCounter SPRINT Profiler employs an even more streamlined two-step workflow that requires only 10 minutesby adding a second prep station.
Life Sciences ResearchnCounter Consumables
Following purchaseThe majority of anour nCounter Analysis System, research customers purchase consumables from us to enable their research experiments. These include custom CodeSets targetedsold are standardized off-the-shelf “panel” products that represent important gene signatures for certain disease areas. nCounter consumables can also be customized to a specific experiment,set of genes at a customer’s request.
Panels
We offer more than 50 gene expression panels for use with a broad range of sample types and nCounter-based reagents.species, including human, mouse, non-human primate- and other. These pre-manufactured panels contain highly-curated, thematic gene content built in collaboration with the scientific community. nCounter pre-built panels are also customizable to address specific research interests with the purchase of our custom Panel Plus product, allowing for up to 55 additional user defined genes to be added to any off-the-shelf-panel. Our panels can be used throughout the research, drug development, manufacturing and clinical biomarker discovery for oncology, immunology, infectious disease and neuroscience. Below are examples of our newer and most widely used nCounter panels.
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| Oncology Research Applications |
| Panel Name | Panel Description |
| PanCancer IO 360 770 gene expression panel | | Holistic view of tumor, microenvironment and immune response. Contains predefined IO signatures and automated data analysis report. | |
| PanCancer Breast Cancer 360 776 gene expression panel | | Contains 23 key breast cancer pathways and processes, 10 research focused signatures and 30 novel signatures measuring tumor and immune activities and automated data analysis report | |
| PanCancer Tumor Signaling 360 780 gene expression panel | | Holistic view of dysfunctional signaling pathways for tumor, microenvironment and immune response | |
| CAR-T Characterization 780 gene expression panel
| | Standardized panel for development collaborations and manufacturing optimization | |
| TCR Diversity | | Determine usage of TCR variable regions and shifts in TCR diversity in response to cancer, infectious disease, autoimmunity, or transplanted organ | |
| Immune Exhaustion 785 gene expression panel | |
Deep profiling of immune cell exhaustion resulting from cancer or chronic infection | |
| Metabolic Pathways 768 gene expression pane | | Addresses mechanisms behind metabolic adaptation, metabolic switching and metabolic alterations as a result of disease | |
| PanCancer Pathways 770 gene expression pane | | For measuring cancer treatment effects on pathways | |
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| PanCancer Immune Profiling 770 gene expression pane | | Focused panel measuring the many features of immune response | |
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| Immunology and Infectious Disease Research Applications |
| Panel Name | Panel Description |
| Host Response Panel 785 gene expression panel | | Study disease progression, severity, host immune response and convalescence | |
| Viral Panel Plus Spike-In to gene expression panels | | Pre-built Panel Plus spike-in with genes covering all coronavirus for viral detection and other probes for common pathogens | |
| Immunology Panel 594 general immunology genes | | All-purpose panel for broad immunology research studies | |
| Fibrosis Panel 770 gene expression panel | | In-depth profiling for diseases that lead to fibrotic tissue and organ damage | |
| Human Organ Transplant Panel 770 gene expression panel | | Focused content for studying organ transplant host response and organ rejection | |
| Stem Cell Characterization Panel 770 gene expression panel | | Deeply characterize and stem cell biology and optimize stem cell development | |
| miRNA Expression Panel | | Profile hundreds of miRNAs from human, mouse, and rat | |
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| Neuroscience Research Applications |
| Panel Name | Panel Description |
| Alzheimer’s Disease Panel 770 gene expression panel | |
Monitor progression of Alzheimer’s Disease and functional screening of potential therapeutics | |
| Glial Panel 770 gene expression panel | |
Comprehensive profiling for neuronal and peripheral immune cell types
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| Neuroinflammation Panel 770 gene expression panel | |
In-depth profiling of neuroimmune interactions
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| Neuropathology Panel 770 gene expression panel | | Comprehensive assessment of neurodegenerative pathways and processes | |
Custom CodeSets
We work with our customers to design and develop custom gene expression CodeSets to enable them to evaluate specific genes that are the subject of their study. Our customers provide us a list of targets for which we subsequently build a unique CodeSet to their specifications. Our design process leverages full length sequences for the DNA or RNA molecules that our customers are interested in detecting and prevents cross hybridization to non-target molecules in the sample. The custom CodeSet design process occurs in four distinct steps: (1) the customer selects the genes of interest, (2) we design probes and
provide a design report to the customer, (3) the customer reviews and approves the design report and (4) we manufacture, test and ship the CodeSet to the customer. The manufacturing process typically takes from three to five weeks, depending on the number of genes targeted and samples to be processed by the customer.
PanelsnCounter Software and Data Analysis
We offer more than 30 genenCounter instrument platforms also include our nSolver Analysis Software, a data analysis program that offers researchers the ability to quickly and easily quality check, normalize and analyze their data without having to use any additional software for data analysis. The FLEX system, in addition to running any of our research applications, can also be enabled with software that runs Prosigna to generate individualized patient reports.
In May 2020, we announced a collaboration with ROSALIND™ Bioinformatics, a provider of cloud-based genomic analysis tools, for the development of new analysis tools for data generated on our nCounter Analysis System. ROSALIND offers a cloud-based platform that connects researchers to differential expression and pathway exploration in a real-time collaborative environment.
Functionality has been built into ROSALIND’s cloud-based analysis panels for use with a broad range of sample typessuite that facilitates nCounter data visualization, exploration and species, including human, mouse, rat, non-human primate and other.collaboration. These pre-manufactured CodeSets include highly-curated content relevant to a particular research area. Our most significant current panel offering include:
Pan Cancer Gene Expression Panels. A portfolio of panels designed to comprehensively analyze genes driving the growth of cancer cells, the immune system’s response, and the progression of the cancer, including:
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◦ | Pathways. A novel set of 770 essential genes representing the signaling pathways implicated in cancer, including key driver genes, selected using a data-driven approach to identifying the genes most relevant to cancer biology.
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◦ | Immune Profiling. A novel set of 770 genes designed in collaboration with cancer immunologists around the globe, combining markers for 24 different immune cell types and populations, 30 common cancer antigens and genes that represent all known categories of immune response including key checkpoint blockade genes.
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◦ | Progression. A novel set of 770 genes addressing the key questions of what happens when cancer metastasizes, including genes for the study of angiogenesis, epithelial mesenchymal transition, extracellular matrix formation, and metastasis.
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PanCancer RNA: Protein Immune Profiling Panels. Two panels that combine gene expression analysis of the 770 genes contained in the PanCancer Immune Profiling Gene Expression Panel with the analysis of up to 30 proteins of interest in measuring the immune system’s response to cancer or intracellular signaling.
360 Gene Expression Panels. These panels include our IO 360 and Breast Cancer 360 and represent a series of next generation panels that combine clinically actionable content for evaluating the tumor microenvironment and immune response along with validated signatures such as the Company's Tumor Inflammation Signature (TIS) and PAM 50 (Breast cancer subtyping) along with up to 30 additional signatures encompassing all aspects of the cancer. These panels may be combined with our 360 Data Analysis Service to providenew capabilities were offered immediately through early access to propriety signature algorithms.
NeuropathologyCOVID-19 researchers performing critical host response studies on our nCounter platform. In 2021, ROSALIND created a unique data analysis solution specific to the nCounter TCR Diversity Panel, which is routinely utilized to profile T-cell receptor variable and Neuroinflammation Gene Expression Panels. Two new panels built in collaboration with leading drug developers, have been designed to address the growing biomarker needs in the field of neuroscience. These panels, which analyze approximately 770 genes profile mechanisms for neurodegenerative diseases as well as neuropsychiatric disorders.
Autoimmune Disease Gene Expression Panels. Two new panels created to address the specific challenges of autoimmune disease research,constant regions and assist with the understanding of the underlying mechanisms of autoimmune disease and for identification of potential responders and non-responders to drug treatments.
nCounter Vantage 3D Panels. A portfolio of panels that enable simultaneous analysis of DNA, RNA, and protein, eliminating the need to divide small samples among different experiments, including:
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◦ | RNA:Protein Solid Tumor Assay — Panels for lysates and FFPE that profile key cancer pathway targets at the RNA, total protein, and phospho-protein level, including targets associated with PI3K, MAPK, EGFR, and more.
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◦ | DNA SNV Solid Tumor Panel — A panel targeting 104 single nucleotide variants in 25 genes that are relevant to a variety of solid tumor types, currently available for MAX and FLEX systems.
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◦ | RNA Panels — A series of seven 192-gene expression panels each designed to interrogate a focused area of cancer biology: Adaptive Immunity, Cancer Metabolism, Intracellular Signaling, Cellular Profiling, Wnt Pathway, Innate Immunity, and DNA Damage & Repair.
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◦ | Lung Fusions — A panel targeting gene fusions that involve the following genes which are important in lung cancer: ALK, ROS, RET, and NTRK1.
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◦ | Leukemia Fusions — A panel targeting 27 gene fusions that are important in leukemia.
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Other Gene Expression Panels. A series of panels that allow researchers to conduct a wide variety of gene expression analysis, including analysis of both human and mouse immunology-related genes and inflammation-related genes.
miRNA Expression Panels. A family of panels that provide a cost-effective profiling solution capable of highly multiplexed, direct digital detection and counting of up to 800 miRNAsother T-cell markers, resulting in a single reaction without amplification. Separate panelsTCR Diversity Score. We are working with ROSALIND to make certain features of nSolver available within ROSALIND, and we are evaluating opportunities for use with samples from humans, mice, rats, and fruit flies.
Cancer Copy Number Variation Panel. Enables copy number quantification for 87 genes commonly amplified or deleted in cancer.
nCounter-Based Reagents
Our nCounter-based digital molecular barcoding reagents allow users to design their own customized assays using standard setsjoint development of barcodes provided by us with the laboratory's choice of oligonucleotide probes that can be purchased independently from an oligonucleotide manufacturer. The highly flexible architecture of these reagents enables a broad range of basic research studies where iterative design and refinement of assays are important.
Master Kits, Cartridges and Reagents
For our nCounter MAX or FLEX systems, the Master Kit includes all of the ancillary reagents and plasticware required for our customers to be able to setup and process samples in the nCounter Prep Station and nCounter Digital Analyzer. The components of the Master Kit include the sample cartridge, strip tubes, tips, buffers, and reagent plates. For our nCounter SPRINT Profiler, customers purchase microfluidic cartridges and separate bottles of reagents which together provide the ancillary components for processing samples with CodeSets, Panels or nCounter-based reagents.new analysis solutions.
Molecular Diagnostics
Our nCounter Dx Analysis System has the ability to simultaneously quantify gene expression on tens or hundreds of genes from minimal amounts of FFPE tissue, which makes it well suited for profiling pathway activation in tumor samples. In addition, it has the precision, reproducibility and simple workflow required of technologies used in clinical laboratories. Our clinicalWe believe the precision, ease of use and flexibility of the nCounter Analysis System may allow medical technicians to conduct complex molecular diagnostic tests with minimal training.
Clinical laboratory customers use the nCounter Dx Analysis System nCounter-based reagents and in vitro diagnostic kitsour Prosigna breast cancer assay to provide clinical diagnostic services. Currently, Prosigna is the only in vitro diagnostic kit available for use on our nCounter Dx Analysis System. Over time, we intend to develop, obtain regulatory authorization for, and sell additional in vitro diagnostic kits, each of which will enable a unique diagnostic test.
Laboratory Developed Tests
Clinical laboratories can use our custom manufacturing services to supply reagents to create Laboratory Developed Tests, or LDTs, which are diagnostic tests that are developed, validated and performed by a single laboratory. These reagents enable assays for gene expression, copy number variation and gene fusions. Clinical laboratories can use these reagents to develop assays to replace tests currently performed using fluorescence-based in situ hybridization, or FISH.
Prosigna
Prosigna, our first molecular diagnostic test, is based on a collection of 50 genes known as the PAM50 gene signature, which was discovered by several of our research customers. Prosigna can provide a breast cancer patient and her physician with a subtype classification based on the fundamental biology of the patient’s tumor, as well as a prognostic score that indicates the probability of cancer recurrence over 10 years. Physicians use Prosigna to help guide therapeutic decisions so that patients receive a therapeutic intervention, such as chemotherapy, only if clinically warranted. Prosigna is regulated as an in vitro diagnostic test and we distribute it as a kit for use on our nCounter Dx Analysis System in clinical laboratories.
Prosigna in the United States.In September 2013, we received 510(k) clearance from the FDA to market in the United States a version of Prosigna providing a prognostic indicator for distant recurrence-free survival at 10 years,years. In December 2019, we entered into an exclusive license of nCounter diagnostic assets and rights to Veracyte, Inc. (“Veracyte”). For additional information regarding our agreement with Veracyte, see “ — License Agreements — Veracyte, Inc.” below.
GeoMx DSP
Our GeoMx Digital Spatial Profiler, or GeoMx DSP, which was made commercially available in 2019, is a pioneering product platform in the emerging field of spatial biology. nCounter and many other existing gene expression analysis technologies typically assess the average gene expression throughout the totality of a biological sample using sample reduction, or “grind and bind” approaches. GeoMx DSP is designed to allow researchers to explore and quantify how the expression of large numbers of genes vary in different selected regions of interest across the landscape of a heterogeneous biological sample, retaining spatial information and providing assays that target different regions in the same sample.
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The left image is the GeoMx DSP instrument, the middle image is a sample of regions of interest, or ROIs, in a biological sample that have been selected by a researcher using GeoMx DSP for further analysis, and the right image is a “volcano plot” comparing the differential gene expression across regions within the biological sample.
The primary technologies historically used by researchers and clinicians to analyze gene activity in selected parts of a biological sample include immunohistochemistry, or IHC, which is indicated for postmenopausal women with Stage I/II lymph node-negativeused to estimate amounts of protein, and in-situ hybridization, or Stage II lymph node-positive (one to three positive nodes) hormone receptor-positive breast cancer who have undergone surgery in conjunction with locoregional treatment consistent with standard of care. For each patient, the Prosigna report includes the Prosigna Score,ISH, which is referredused to estimate amounts of RNA. Both IHC and ISH use fluorescent stains that provide the ability to identify typically four proteins or RNA at a time based on assigned colors. The colors aid researchers in identifying where certain proteins or RNA may reside in a sample and provide a visual approximation of amounts. These techniques are generally limited however in their ability to only look at four proteins or RNA at a time and offer no ability to precisely quantify the amounts present in any given region or cell type. These limitations may lead to incomplete scientific conclusions as to the ROR Scoremost relevant biological pathways in any given sample.
GeoMx DSP is designed to allow researchers to quantify a much larger number of RNA or proteins spatially within multiple regions of interest across the scientific literaturelandscape of a heterogeneous section of a biological sample. Our GeoMx DSP instrument images slide-mounted or freshly cut sample sections, allowing users to select regions of interest for subsequent quantification and outsideanalysis, or molecular profiling. The post-selection profiling or “read out,” can be performed using either our nCounter Analysis System, or an Illumina NGS system.
We believe GeoMx DSP offers a number of advantages as compared to traditional spatial technologies, including the United States,ability to profile both RNA and protein, the ability to multiplex large numbers of different RNA or proteins simultaneously in each selected region, flexibility on the selection of regions to analyze, and the ability to process 10 or more biological samples per day.
When GeoMx DSP was first made commercially available, researchers were only able to read out information on up to 96 biological targets from each of their GeoMx-selected regions of interest using nCounter. In August 2020, we added software capabilities and consumables which enabled GeoMx region of interest data to be read out using Illumina NGS systems, which significantly expanded the number of biological targets researchers can choose to analyze in selected regions. Linking GeoMx DSP with NGS also significantly expands our total potential market opportunity. As of December 31, 2021, there were approximately 20,000 Illumina NGS systems installed globally.
In the first half of 2021, our Whole Transcriptome Atlas, or WTA, became commercially available and further expanded the number of biological targets that may be read out on NGS systems to approximately 18,000 RNAs. WTA provides an unbiased, spatial view of all protein coding genes in a selected region of interest and is designed for use on GeoMx DSP using NGS readout.
GeoMx DSP Instrument and Software
Our GeoMx DSP instrument uses specialized optics to image slide-mounted biopsies that have been prepared using our GeoMx DSP consumable reagents, as well as with IHC or ISH technology typically available in research or commercial laboratories. GeoMx DSP then allows a researcher to select regions of interest for analysis on screen, and then prepares samples from the selected regions of interest for molecular profiling. Like nCounter, GeoMx DSP is capable of supporting applications including gene expression and protein expression. GeoMx DSP is fully automated and easy to use, requiring only 30 minutes of hands-on time per run and offering the ability to process up to 10 slides per day and is therefore ideal for a range of applications requiring efficient, high-precision, simultaneous quantitation of large numbers of target molecules across a set of biological samples.
The GeoMx DSP software enables the integration of the four color images acquired and the corresponding digital counts of the levels of RNA or protein as acquired using our nCounter Analysis System, or an Illumina NGS system. The GeoMx DSP data center uniquely combines system control to visualize whole sample images at single cell resolution with automated or manual region of interest selection. The fully integrated workflow provides tracking of image data and corresponding profiling data, allowing users to easily go from data collection to data analysis. In addition to our internally developed software, in 2020 we announced a collaboration with Illumina, whereby we are jointly developing a GeoMx DSP application powered by Illumina’s DRAGEN Bio-IT platform in order to facilitate the analysis of data generated by our customers using NGS read out on Illumina systems.
GeoMx DSP Consumables
Our current portfolio of GeoMx DSP consumables focuses on RNA and protein profiling for immunology, immuno-oncology and neurobiology applications, targeted either for nCounter read out where a set of genes and a risk category basedbiological pathway may be better understood for more targeted experiments, or for NGS read-out in basic discovery applications where significantly greater numbers of genes may be of interest. GeoMx DSP consumable products are currently designed as standardized panel products that represent important content for certain disease areas with an option for researchers to add customized content to that panel depending on the area of interest or desired number of targets for analysis. Our GeoMx DSP assays generate high-quality results from challenging sample types, including FFPE and crude cell lysates.
Our significant GeoMx DSP consumable products include:
Enabled for nCounter readout
•Immuno-Oncology Panels. An immuno-oncology-focused panel menu that comprises up to 96 protein and RNA targets for analyzing the tumor and tumor microenvironment compartments in human and mouse biological samples. The standard, or core, panel offering is comprised of 18 targets, and researchers have the option of adding over 30 additional targets for analysis focused on specific applications such as immuno-oncology drug target proteins, or human immune activation proteins, and 23 additional targets for analyzing mouse samples for pre-clinical applications. In addition, we offer RNA panel content to allow for the analysis of up to 84 targets for human immune pathways.
•Neurobiology Panels. A neurobiology-focused menu that comprises up to 40 protein targets to profile human neural cells. The standard, or core, panel offering comprises 20 targets, and researchers have the option of adding up to 20 additional targets for analysis focused on specific applications such as proteins implicated in Alzheimer’s disease or Parkinson’s disease.
Enabled for NGS readout
Targeted:
•Cancer Transcriptome Atlas (CTA). An oncology and immuno-oncology focused panel was the first commercial GeoMx DSP product to enable read out using NGS. The CTA allows for a nearly 20-fold increase in RNA targets that may be profiled as compared to GeoMx DSP RNA panels designed for nCounter read out, providing a high-resolution spatial view of cancer biology. The CTA includes more than 1,800 genes that cover over 100 pathways critical to understanding tumor biology, the immune response and the tumor microenvironment. Biological content can be further customized with the addition of up to 60 user defined targets. The CTA panel is compatible with both fresh frozen and FFPE-embedded biological samples, allowing scientists to work with a broad spectrum of samples in their research. As part of a full end-to-end solution, we are providing library preparation reagents and NGS readout, a bioinformatics pipeline that links high-resolution, full-slide images generated on GeoMx DSP with the massively parallel output of Illumina sequencers.
Universal:
•Protein Assays. A commercially available panel for NGS readout that includes greater than 140 protein targets. The currently available content covers applications in immuno-oncology and future content releases are planned to cover immunology and neuroscience. These assays will provide GeoMx CTA and WTA users complementary protein content designed for NGS read out. These new protein assays have been tested for performance on both fresh frozen and FFPE-embedded biological samples. Our GeoMx DSP Protein Assays for NGS readout expanded the Prosigna Score and nodal status. Node-negative patients are classified as low, intermediate or high risk, while node-positive patients are classified as low or high risk. Prosigna competesprotein capabilities of GeoMx DSP from tens to now hundreds of validated proteins to be analyzed from a single sample section with other testsspatial resolution.
•Whole Transcriptome Atlas (WTA). The WTA, a GeoMx DSP consumable product that are currentlybecame commercially available as services from specialized central laboratories.
We sell Prosigna kits to our lab customers on a fixed dollars-per-kit basis. These customers are responsible for providing the testing service and contracting and billing payors. Accordingly, we are not directly exposed to third-party payor reimbursement risk.
Prosigna in the European Union and Other Countries that Recognize the CE Mark. In September 2012, we obtained CE mark designation for Prosigna for use as a semi-quantitative in vitro diagnostic assay using the gene expression profile of cells found in FFPE breast tumor tissue to assess the 10-year risk of distant recurrence in postmenopausal women with HR+ early stage breast cancer treated with endocrine therapy alone. This CE-marked product is indicated for use in patientshuman and mouse biological samples during 2021, is a universal panel that provides an unbiased, spatial view of approximately 18,000 RNA targets and is designed to be read out using NGS. The WTA unlocks new pathways to be explored by researchers and is designed to broaden GeoMx RNA profiling from oncology and immunology to include neuroscience, developmental biology and other diverse fields. The WTA assay provides robust and sensitive performance both fresh frozen and FFPE-embedded biological samples, allowing scientists to work with a broad spectrum of samples in their research. WTA utilizes the same workflow and chemistry as our CTA.
GeoMx DSP Technology Access Program (TAP)
Selected customers can access our GeoMx DSP through our in-house TAP service and may select panels that read out on either node-negativenCounter or node-positive disease,NGS. Through GeoMx DSP TAP, customers submit biological samples to our Seattle facilities where they are imaged and provides physiciansprofiled using our instruments and their patientsonce completed, we provide a detailed report, which includes raw data and analyzed results back to the customer. We have successfully utilized GeoMx DSP TAP prior to and during our GeoMx DSP instrument and product commercial launches and believe it may be a leading indicator of potential future commercial demand for our products. To date, we have conducted over 770 TAP projects.
CosMx SMI
Our CosMx Spatial Molecular Imager, or CosMx SMI, is a new spatial biology product platform currently under development. CosMx SMI is designed to combine the spatial profiling of a large number of biological targets with high-resolution imaging, which will allow researchers to both analytically measure as well as visualize the activity of selected RNA or proteins at the single cell or sub-cellular level. CosMx SMI is expected to enable the analysis of up to 1,000 RNA targets or up to 100 protein targets directly from single cells within morphologically intact biological samples. CosMx SMI will offer researchers the opportunity to “drill down” further into regions of interest in biological samples, as a complement to our GeoMx DSP which typically offers gene expression profiling across regions containing multiple cells.
During 2021, we began offering a TAP service for our CosMx SMI product candidate, and we currently expect the instrument, consumables, and software associated with our CosMx SMI platform to be made commercially available in the second half of 2022.
CosMx SMI incorporates a proprietary version of our chemistry that was originally developed as part of our concluded collaboration with Lam Research, under which Lam provided us with $50.0 million in funding and we modified our core nCounter chemistry to be utilized in a NGS sequencing platform and related assays. Upon the conclusion of our Lam collaboration, in 2020 we began exploring applications for this newly developed chemistry in spatial biology, specifically whether we could conduct spatial analysis of increasingly smaller regions of interest, down to the individual cell and potentially sub-cellular level. Upon completing proof of principle research and development, we announced the expected development and commercialization timeline for CosMx SMI in December 2020.
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The left image is the CosMx SMI instrument, the middle image is a single-cell expression map of selected genes and the right image is a spatially-resolved cell type map in a biological sample.
Biology takes place on several spatial scales including multi-cellular, single cell and sub-cellular levels. Our GeoMx DSP enables multi-cellular analysis at the whole transcriptome level to elucidate the behavior of populations of cells, such as those within a tumor or the tumor microenvironment. We are developing CosMx SMI to address the unmet need for high-plex spatial analysis at single cell and sub-cellular resolution, which may be ideally suited for targeted applications such as creating cell atlases or studying cell-cell interactions. Our GeoMx DSP and CosMx SMI platforms are expected to be synergistic, creating a spatial biology portfolio that spans the continuum from targeted to whole transcriptome analysis, and from multicellular resolution down to single cell and sub cellular applications.
To date, our prototype CosMx SMI systems have imaged RNA from up to 1,000 genes simultaneously across thousands of individual cells in FFPE-embedded biological samples. We believe in order to answer fundamental questions for the discovery, translational, clinical researchers in single cell biology, the ability to analyze the activity of at least 1,000 genes is the minimum panel requirement.
License Agreements
We have relied, and expect to continue to rely, on strategic collaborations and licensing agreements with third parties. For example, our molecular barcoding chemistry technology is in-licensed from the Institute for Systems Biology. In addition, we have licensed technology related to our diffuse large B-cell lymphoma, or DLBCL, assay from the National Institutes of Health, and we rely on other license and supply arrangements for proprietary components which require us to pay royalties on the sale of our products. Other research customers are using our nCounter Analysis System and GeoMx DSP to discover gene expression signatures that we believe could form the basis of future diagnostic products. In the future, we may consider these gene signatures for in-licensing.
Veracyte, Inc.
In December 2019, we entered into a LAPA and Service and Supply Agreements, or SSAs, with Veracyte. Pursuant to the LAPA, we completed a license of intellectual property and a sale of certain assets to Veracyte relating to our nCounter FLEX system for use in clinical diagnostic applications. Veracyte also acquired certain intellectual property rights and worldwide distribution rights relating to Prosigna and our LymphMark assay, and certain clinical diagnostic assay software modules that operate with the intrinsic subtypenCounter FLEX system. Pursuant to the LAPA, we provided Veracyte a worldwide exclusive license to market and sell clinical diagnostic tests developed for our nCounter FLEX platform for in vitro diagnostic use and for the development and commercialization of in vitro diagnostic tests, including in vitro diagnostic devices or laboratory developed tests, for use on the nCounter FLEX platform. In connection with the transaction, Veracyte agreed to assume certain liabilities associated with the assets purchased under the LAPA, including ongoing third-party royalty obligations relating to Prosigna and LymphMark. We also assigned to Veracyte our Amended and Restated Exclusive License Agreement with Bioclassifier, LLC, effective July 7, 2010, as amended, which granted rights to certain intellectual property related to Prosigna. We also entered into a sublicense agreement with Veracyte relating to the Bioclassifier Agreement wherein we obtained certain non-exclusive rights relating to our rights to provide Prosigna to Veracyte on an ongoing basis and for other research or investigational purposes.
Upon consummation of the LAPA, Veracyte paid us total consideration of $50.0 million, consisting of (i) $40.0 million in cash and (ii) 376,732 shares of Veracyte common stock valued at $10.0 million. Pursuant to the LAPA, we are eligible to receive potential milestone payments of up to $10.0 million in the aggregate, to be paid upon the launch of additional clinical diagnostic tests by Veracyte for our nCounter FLEX platform.
Pursuant to the SSAs, we agreed to supply to Veracyte nCounter FLEX systems, and to manufacture and supply Prosigna kits, LymphMark kits and any additional clinical diagnostic tests that Veracyte may develop in the future for nCounter, for a period of at least four years subsequent to the transaction date. Pursuant to the SSAs, Veracyte will pay the designated transfer prices for nCounter FLEX systems, Prosigna kits, LymphMark kits and any other nCounter-based diagnostic tests developed by Veracyte.
Institute for Systems Biology
In 2004, we entered into an agreement with the Institute for Systems Biology pursuant to which the Institute granted to us an exclusive, subject to certain government rights, worldwide license, including the right to sublicense, to the digital molecular barcoding technology on which our nCounter Analysis System is based, including 13 patents and patent applications. Pursuant to the terms of the amended license agreement, we are required to pay the Institute for Systems Biology royalties on net sales of products sold by us, or our sublicensees, at a low single digit percentage rate, which was reduced by 50% in the third quarter of 2016 for the remainder of the license term due to the achievement of a patient’s breast cancer tumor, ROR score, and risk category (high/intermediate/low). In early 2013,cumulative sales threshold. Through December 31, 2021, we began marketing this testhave paid aggregate royalties of $7.9 million under the license agreement. Unless terminated earlier in Europe and Israel.accordance with the terms of the amended license agreement, the agreement will terminate upon the expiration of the last to
expire patent licensed to us. The Institute for Systems Biology has the right to terminate the agreement under certain situations, including our failure to meet certain diligence requirements or our uncured material breach of the agreement.
Collaborations
Hyb & Seq Technology Development
Lam Research Corporation
In August 2017, we entered into a collaboration agreement with Lam Research Corporation, or Lam, to develop and commercialize our Hyb & Seqa NGS sequencing platform and related assays. Under the terms of the agreement, Lam will contribute up tocontributed an aggregate of $50.0 million towards the project. TheAs of December 31, 2019, all committed development funding is non-refundable, unlesshad been received from Lam, and as of December 31, 2020 all we received had been used in our continued development activities associated with our NGS sequencing platform and related assays.
In connection with the parties determine that completion of developmentexecution of the product will not occur and development activities are discontinued, in which case any funds advancedcollaboration agreement, we issued Lam a warrant to us by Lam that have not been committed or spent will be refunded to Lam. We will reimburse Lampurchase shares of our common stock at an exercise price for the costwarrant of up to 10 full-time Lam employees each year in accordance$16.75 per share, with the product development plan. Lam is eligiblenumber of underlying shares exercisable at any time proportionate to receive certain single-digit percentage royalty payments from us on net sales of certain products and technologies developed under the agreement. The maximum amount of royalties we may pay to Lam will be capped at an amount up to three times the amount of development funding actuallythe $50.0 million commitment that had been provided by Lam. We will retain exclusive rightsIn January 2020, we issued an aggregate of 407,247 shares of our common stock to obtain regulatory approval, manufactureLam upon the exercise of the warrant in full by Lam. In exchange for our waiver of certain lock-up restrictions, Lam agreed (i) to coordinate any sales of the shares with certain brokerage firms approved by us and commercialize(ii) not to sell more than 10% of the average daily trading volume of our common stock for the 30-day period immediately preceding any Hyb & Seq products.sale of the shares by Lam.
All intellectual property made or conceived solely by us pursuant to the collaboration will be owned by us and licensed to Lam solely for the purposes of the collaboration. All intellectual property made or conceived solely by Lam pursuant to the collaboration will be owned by Lam and, subject to certain restrictions on use with Lam competitors, licensed to us for the purposes of the collaboration and further development and commercialization of our Hyb & Seq platform, as well as certain other products and technologies resulting from the collaboration in the field of molecular profiling. Jointly created intellectual property will be jointly owned, provided that neither we nor Lam use such jointly owned intellectual property in the other party’s competitive field.
The collaboration agreement establishes a joint steering committee Lam is eligible to oversee, reviewreceive certain single-digit percentage royalty payments from us on net sales of certain products and coordinate our and Lam’s activities under the collaboration agreement and monitor progress and expenditures against the associated development plan. The joint steering committee is comprised of three employees from each of us and Lam, and will be chaired by one of our employees. We will have final decision-making authority on the joint steering committee, subject to certain exceptions for decisions regarding development failure, material changes to the development plan, budget, and the Hyb & Seq product beingtechnologies developed under the agreement, and intellectual property ownership, which require consensusif any such net sales are recorded. The maximum amount of the parties. The collaboration agreement also contains customary representations, warranties, covenants, indemnities and other obligations of the parties.
The term of the collaboration agreement is 15 years. Eitherroyalties we ormay pay to Lam may terminate the collaboration agreement in the case of a material breach by the other party after providing notice and an opportunity to cure or in the case of bankruptcy or insolvency of the other party. The joint steering committee may also terminate the collaboration agreement if development is discontinued in the case of a development failure. Lam may also terminate the collaboration agreement on or after the first anniversary in the event we undergo a change of control.
In connection with the execution of the collaboration agreement, we issued Lam a warrant to purchase up to 1.0will be capped at $150.0 million shares of our common stock with the number of underlying shares exercisable at any time proportionate to(three times the amount of the $50.0 million commitment that has beendevelopment funding actually provided by Lam. The exercise price of the warrant is $16.75 per share,Lam). We retain exclusive rights to obtain regulatory approval, manufacture and it will expire on the seventh anniversary of the issuance date. The warrant was determined to have a fair value of $6.7 million upon issuance, which will be recorded as additional paid in capital proportionately from the quarterly collaboration payments made by Lam.
In connection with the entry into the collaboration agreement and issuance of the warrant, we and Lam have agreed, subject to certain exceptions applicable to Lam, to be bound by certain “standstill” provisions. Pursuant to the “standstill” provisions, until the third anniversary of the entry into the collaboration agreement, we, Lam and our respective officers, directors, employees or contractors acting on their behalf will not (1) acquire, offer to acquire, agree to acquire or publicly propose or offer to acquire, securities, indebtedness, businesses, properties or assets of the other party orcommercialize any subsidiary or division thereof; (2) initiate, induce or attempt to induce any other person or group to initiate any transaction referred to in clause (1), any stockholder proposal regarding the other party or call hold or convene a stockholders’ meeting of the other party; (3) make or participate in any solicitation of proxies to vote or seek to advise or influence any person with respect to the voting of any voting securities of the other party; (4) make any public announcement with respect to, or submit a proposal or offer for any extraordinary transaction involving the other party or any of its securities or assets; (5) form, join or in any way participate in a group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, in connection with any of the foregoing prohibited activities; (6) act or seek to control or influence the management, board of directors or policies of the other party; (7) take any action that could reasonably be expected to require the other party to make a public announcement regarding the possibility of any of the prohibited activities described in clauses (1) through (6) or (8) advise, assist or encourage any other person in connection with any of the foregoing prohibited activities.
In addition, Lam has agreed, subject to certain exceptions, not to offer, sell or transfer any of our common stock or securities convertible into or exchangeable or exercisable for our common stock, for three years after the entry into the collaboration agreement without first obtaining our consent, which we may withhold in our sole discretion, unless the collaboration agreement has been terminated, in which case our consent may not be unreasonably withheld.
Companion Diagnostic Developmentproducts.
Celgene Corporation
In March 2014, we entered into a collaboration agreement with Celgene to develop, seek regulatory approval for, and commercialize a companion diagnostic assay using the nCounter Analysis System to identify a subset of patients with DLBCL, who are believed to be the most likely to benefit from treatment with Celgene’s drug REVLIMID. Under the terms of the collaboration agreement, we will develop, seek regulatory approval for, and commercialize the diagnostic test, and we retain the flexibility to independently develop and commercialize additional indications for the test. Pursuant to our agreement as amended inDLBCL. In February 2018, we are eligibleentered into an amendment with Celgene to receive payments from Celgene totaling up to $27.3 million, of which $5.8 million was received as an upfront payment and $21.5 million is for development funding and potential success-based developmental and regulatory milestones. There have been several amendments to theour collaboration agreement and in return we have received additional payments totaling $2.1 million. In the most recent amendment in February 2018,which Celgene agreed to provide us with additional funding for work intended to enable a subtype and prognostic indication for the test being developed under the agreement. In addition, the amendment provides an additional milestone payment to us payable upon achievement of certain regulatory activities and timelines.agreement for Celgene’s drug REVLIMID. In connection with this amendment, we agreed to remove the right to receive payments from Celgene in the event commercial sales of the companion diagnostic test do not exceed certain pre-specified minimum annual revenues during the first three years following regulatory approval. In addition, the amendment allows Celgene, at its election, to use trial samples with additional technologies for companion diagnostics.
DLBCL is a heterogeneous group of cancers that represents the most common form of Non-Hodgkin Lymphoma. AccordingPursuant to the National Cancer Institute, there were approximately 70,000 new cases of Non-Hodgkin Lymphoma in the United States in 2015. DLBCL is the most common type of Non-Hodgkin Lymphoma, representing approximately 1 out of every 3 cases. The subtypes of DLBCL have long been known to have varying prognoses. In January 2014, certain of our research customers published a paper in the journal Blood describing the development and validation of a biomarker assay based on a 20-gene expression DLBCL subtype classifier using our nCounter Analysis System. We have secured a license to the relevant intellectual property to enable the collaboration.
Under the collaboration agreement with Celgene, we have deliveredbeen developing an in vitro diagnostic test, LymphMark, as a potential companion diagnostic testto aid in identifying patients with DLBCL for treatment. In April 2019, Celgene announced that will be used to subtype and screen patients who are being enrolled in a pivotal study ofthe trial evaluating REVLIMID for the treatment of DLBCL. The upfront payment, a portion of the success-based milestone payments and the payments related to the subsequent amendments, totaling $13.9 million, have been received from Celgene to date, and we are using these funds in part to cover our costs for clinical development of the test.
Merck & Co., Inc.
DLBCL did not meet its primary endpoint. In May 2015, we entered into a clinical research2019, our collaboration agreement with Merck,Celgene was terminated effective July 2019, resulting in the recognition of substantially all of the remaining deferred revenue from the agreement. As a result, we do not intend to develop an assay intended to optimize immune-related gene expression signatures and evaluate the potential to predict benefit from Merck’s anti-PD-1 therapy, KEYTRUDA, in multiple tumor types. In February 2016, we expanded our collaboration with Merck by entering intofile a new development collaboration agreement to clinically develop, seek regulatorypre-market approval for and commercializeLymphMark as a companion diagnostic test to predict response to KEYTRUDA in multiple tumor types. In connection with the execution of the development collaboration agreement, we and Merck terminated our May 2015 clinical research collaboration and moved all remaining activities under such clinical research collaboration work plan to the new development collaboration agreement. Under the terms of the new development collaboration agreement, we have received to date $12.0 million as an upfront technology access payment, $8.5 million of preclinical milestone payments, and $19.4 million of development funding. In October 2017, we were notified by Merck of the decision not to pursue regulatory approval of the companion diagnostic test for KEYTRUDA. As a result, the scope of the collaboration was significantly reduced, and activities respecting this collaboration are expected to be materially concluded in 2018.
Medivation, Inc. and Astellas Pharma, Inc.
In January 2016, we entered into a collaboration with Medivation, Inc., or Medivation, and Astellas Pharma Inc., or Astellas, to pursue the translation of a novel gene expression signature algorithm discovered by Medivation into a companion diagnostic assay using the nCounter Analysis System. In September 2016, Medivation was acquired by Pfizer, Inc., or Pfizer, and became a wholly owned subsidiary of Pfizer. In May 2017, we received notification from Pfizer and Astellas terminating the collaboration agreement as a result of a decision to discontinue the related clinical trial. We received a $6.0 million upfront
payment for technology access, $6.0 million in preclinical milestone payments, $3.3 million in development funding payments, and a $1.0 million termination payment related to this collaboration agreement.REVLIMID.
Intellectual Property
We must develop and maintain protection on the proprietary aspects of our technologies in order to remain competitive. We rely on a combination of patents, copyrights, trademarks, trade secret and other intellectual property laws and confidentiality, material transfer agreements, licenses, invention assignment agreements and other contracts to protect our intellectual property rights.
As of December 31, 2017,2021, we owned or exclusively licensed 20approximately 35 issued U.S. patents and approximately 4024 pending U.S. patent applications, including provisional and non-provisional filings.filings and 5 pre-nationalization PCT applications. We also owned or licensed approximately 255303 pending and granted counterpart applications worldwide, including 111126 country-specific validations of 1218 European patents. The issued U.S. patents that we own or exclusively license are expected to expire between JulySeptember 3, 20212024 and February 6, 2033.November 21, 2037. We have either sole or joint ownership positions in all of our pending U.S. patent applications. Where we jointly own cases, we typically have negotiated license or assignment
provisions to obtain exclusive rights. For our material nCounter Analysis System and Prosigna product rights, we are the exclusive licensee. We also generally protect our newly developed intellectual property by entering into confidentiality agreements that include intellectual property assignment clauses with our employees, consultants and collaborators.
Our patent applications generally relate to the following main areas:
•our nCounter Analysis System or GeoMx DSP biology, chemistry, methods and hardware;
•specific applications for our nCounter Analysis System or GeoMx DSP technology;
•our gene expression markers, methods and gene signatures for recurrence and drug response in certain forms of cancer;
•methods and systems for the processing and analysis of spatial profiling and sequencing data;
•biological and chemical compositions, methods and hardware for enzyme and amplification free sequencing; and
•biological and chemical compositions, methods and hardware for multiplexed detection and quantification of protein and/or nucleic acid expression in a defined region of a tissue or cell.
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, and we cannot assure investors that any patents that have issued or might issue will protect our technology. We have received notices of claims of potential infringement from third parties and may receive additional notices in the future. When appropriate, we have taken a license to the intellectual property rights from such third parties. For additional information, see the section of this report captioned “Risk Factors — Risks Related to Intellectual Property.”
We own a number of trademarks and develop names for our new products and as appropriate secure trademark protection for them, including domain name registration, in relevant jurisdictions.
License Agreements
We have relied, and expect to continue to rely, on strategic collaborations and licensing agreements with third parties. For example, our base molecular barcoding technology is in-licensed from the Institute for Systems Biology and the intellectual property that forms the basis of Prosigna is in-licensed from Bioclassifier, LLC. In addition to the licenses with the Institute for Systems Biology and Bioclassifier, we have licensed technology related to the DLBCL assay from the National Institutes of Health, and we rely on other license and supply arrangements for proprietary components which require us to pay royalties on the sale of our products. Other research customers are using our nCounter Analysis System to discover gene expression signatures that we believe could form the basis of future diagnostic products. In the future, we may consider these gene signatures for in-licensing. Our licensing arrangements with the Institute for Systems Biology and Bioclassifier are discussed below in greater detail.
Institute for Systems Biology
In 2004, we entered into an agreement with the Institute for Systems Biology pursuant to which the Institute granted to us an exclusive, subject to certain government rights, worldwide license, including the right to sublicense, to the digital molecular barcoding technology on which our nCounter Analysis System is based, including 13 patents and patent applications. Pursuant to the terms of the amended license agreement, we are required to pay the Institute for Systems Biology royalties on net sales of products sold by us, or our sublicensees, at a low single digit percentage rate, which was reduced by 50% in the third quarter of 2016 for the remainder of the license term due to the achievement of a cumulative sales threshold. Through December 31, 2017, we have paid aggregate royalties of $4.9 million under the license agreement. Unless terminated earlier in
accordance with the terms of the amended license agreement, the agreement will terminate upon the expiration of the last to expire patent licensed to us. The Institute for Systems Biology has the right to terminate the agreement under certain situations, including our failure to meet certain diligence requirements or our uncured material breach of the agreement.
Bioclassifier, LLC
In July 2010, we entered into an exclusive license agreement with Bioclassifier, LLC, pursuant to which Bioclassifier granted to us an exclusive, subject to certain government rights, worldwide license, with the right to sublicense, to certain intellectual property rights and technology, including eight non-provisional patent applications, related to the PAM50 gene signature in the field of research products and prognostic and/or diagnostic tests for cancer, including Prosigna. Bioclassifier has licensed these rights from the academic institutions that employed the cancer researchers that discovered or were involved in the initial development of PAM50. Pursuant to the agreement, we are required to pay Bioclassifier the greater of certain minimum royalty amounts and mid-single digit to low double digit percentage royalties on net sales of products and/or methods sold by us that are covered by patent rights or include, use or are technology licensed to us. Our obligation to pay royalties to Bioclassifier expires on a country-by-country basis upon the expiration of the last patent licensed or, if a product or method includes, uses or is technology licensed to us but is not covered by a patent licensed to us, ten years after the first commercial sale of the product or method in such country. We are also required to pay Bioclassifier a low to mid double digit percentage of any income received by us from the grant of a sublicense to the patents or technology licensed to us under the agreement. The agreement specifies that we will control and be responsible for the costs of prosecuting and enforcing the intellectual property licensed in certain major market countries. The agreement also includes customary rights of termination for Bioclassifier, including for our uncured material breach or our bankruptcy. Through December 31, 2017, we have paid Bioclassifier $1.5 million.
Research and Development
We have committed, and expect to continue to commit, significant resources to developing new technologies and products, improving product performance and reliability and reducing costs. We are continuously seeking to improve our product platforms, including the technology, software, accessibility and overall capability. We also seek to develop additional research consumable content, new product platforms and new product capabilities. We have assembled experienced research and development teams at our greater Seattle, Washington locationarea facilities with the scientific, engineering, software and process talent that we believe is required to successfully grow our business. As of December 31, 2017, including clinical, medical and regulatory affairs,2021, we had 161210 employees in research and development, of which 64 hold a Ph.D. degree and one holds an M.D. degree. Our research and development expenses for the years ended December 31, 2017, 2016 and 2015 were $46.9 million, $34.7 million and $24.6 million, respectively.
Platform Technology
We are continuously seeking to improve the nCounter Analysis System, including improvements to the technology and accessibility, or to extend its capabilities. As we make improvements or add new capabilities, we anticipate that we will make available new and improved generations of the nCounter Analysis System. In addition to the nCounter Analysis System, we are currently developing two new systems enabled by our proprietary optical barcoding chemistry. Following completion of product development, each of these new systems is expected to be commercialized as a new instrument along with associated consumables.
The first new platform in development, DSP, will allow researchers to address important questions regarding how protein and gene expression vary spatially for regions of interest across the landscape of a heterogeneous tissue biopsy. Our DSP instruments are expected to image slide-mounted tissue biopsies, allow selection of regions of interest, and automate the preparation of samples from selected regions for molecular profiling using either an nCounter system or next generation sequencer. DSP technology is expected to offer a number of advantages compared to traditional technologies, including the ability to profile a larger number of different genes or proteins in each region, more flexibility on the selection of regions, and processing of a larger number of samples per day. Early access sales of DSP instruments are expected to start in late 2018 and the commercial launch of DSP instruments is expected during the first half of 2019.
The second new platform in development, Hyb & Seq, is a next generation sequencing platform. Hyb & Seq is designed to have a workflow that is simpler and faster than current sequencing methods, due to the absence of library preparation, enzymes and amplification. Hyb & Seq's simple workflow and compatibility with a variety of sample types offers the potential for a sample-to-answer solution for clinical sequencing. The commercial launch of a research version of Hyb & Seq is expected during 2020.
Prosigna Breast Cancer Assay
Our Prosigna clinical studies to date have employed a retrospective/prospective design, which means that we use samples that were previously collected from patients and for which the treatment regimen and ultimate outcome of each patient are known. Such studies are capital efficient as they do not require recruiting new patients and running prospective trials and
they can be completed much more quickly than typical prospective clinical trials. We intend to use a similar approach whenever possible for any additional clinical studies we may conduct for Prosigna.
In the future, we may participate in prospective clinical studies that require recruiting new patients. For example, we are participating in the OPTIMA trial, which is being organized and sponsored by a cooperative group in the United Kingdom. We are not financially responsible for conducting the trial; however, we are providing in-kind support through the sale of Prosigna in vitro diagnostic kits at a discounted price.
Future Molecular Diagnostics
We are continuously monitoring molecular signatures which have the potential to become additional diagnostic products or enable Laboratory Developed Tests based on nCounter-based reagents. We may in-license rights to molecular diagnostic intellectual property as part of our strategy to develop additional diagnostic products and enable Laboratory Developed Tests, with a particular focus on licensing rights from our research customers who are seeking to translate their research into clinical products or services after the necessary regulatory authorizations are secured.development.
Sales and Marketing
We began selling nCounter Analysis Systems to researchers in 2008 and began sales effortsGeoMx DSP in the clinical laboratory market in 2013.2019. We sell our instruments and related products primarily through our own sales force in North America and through a combination of direct and distributor channels in Europe, the Middle East, Asia Pacific and South America. We have agreements with 2638 distributors, each of which is exclusive withinspecific to a certain territory. In the event thea distributor does not meet minimum performance requirements, we may terminate the distribution agreement or convert from an exclusive to non-exclusive arrangement within the territory, allowing us to enter into arrangements with other distributors for the territory.
For additional information regarding geographic distribution of revenue, see Note 153 of the Notes to Consolidated Financial Statements under Item 8 of this report. For the year ended December 31, 2017, our collaborators, (1) Merck and (2) Medivation and Astellas, represented 25% and 10%, respectively, of our total revenue. For the year ended December 31, 2016, Merck represented 13% of our total revenue. No customers represented more than 10% of total revenue during the year ended December 31, 2015. Instrumentation and Research
Our sales and marketing efforts for instrumentation and in the life sciences research market are targeted at department heads, research or clinical laboratory directors, principal investigators, core facility directors and research scientists and pathologists at leading academic institutions, biopharmaceutical companies, publicly and privately-funded research institutions and contract research organizations. We seek to increase awareness of our products among our target customers through direct sales calls, trade shows, seminars, academic conferences, web presence and other forms of internet marketing.
Our instruments require a significant capital investment, or commitment to a lease or reagent rental agreement. Accordingly,and our sales process involves numerous interactions with multiple peopleindividuals within an organization, and often includes in-depth analysis by potential customers of our products, performance of proof-of-principle studies, preparation of extensive documentation and a lengthy review process. As a result of these factors, the largesignificant capital investment required in purchasing our instruments and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly and be up to 12 months or longer. Given the length and uncertainty of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales on a period-to-period basis.
We continuehave continued to invest in our commercial channel to increase our reach and productivity. During 2017,For example, in 2019, we added staff focusedcertain roles to focus specifically on sales of consumables tothe launch efforts associated with our existing instrument base.GeoMx DSP system. We believe these investments enabled our existing sales representativeshelp to focus on instrument sales and help drive the growth of our installed instrument base.
Molecular Diagnostics
The commercializationbase, and the continued utilization of Prosigna kits involves a three-pronged effort. First, we seek to establish third-party reimbursement and patient access for clinical testing services that our clinical laboratory customers will provide based upon our products by gaining inclusion in influential treatment guidelines and educating third-party payors regarding the clinical utility and health economic value of the clinical tests enabledconsumables by our technology. Second, we seek to establish an installed base of nCounter Analysis Systems by selling or leasing instruments to select clinical laboratories, with initial sales efforts directed at laboratories, hospitals, networks or practices that test or treat a high volume of breast cancer patients. As of December 31, 2017, there were approximately 78 laboratories worldwide that had purchased or rented nCounter Analysis Systems with the intent to market and sell Prosigna testing services. Third, we intend to drive physician demand for clinical testing services enabled by our diagnostic products, and direct test orders toward those laboratories which have adopted our technology. Where appropriate, we intend to coordinate commercial efforts with the sales and marketing personnel of the clinical laboratories offering clinical testing services based on our diagnostic products.
instrument users.
Manufacturing and Suppliers
We use third-party contract manufacturers to produce our instruments and certain raw materials for our consumables, and weconsumables. We build the CodeSets and reagent packagesour consumables at our facilities in the greater Seattle, Washington facility.area.
Instruments
We outsource manufacturing of our nCounter Analysis System instruments. Precision System Science, Co., Ltd. of Chiba, Japan, or PSS, is our sole source supplier for the nCounter Prep Station. Korvis Automation Inc., or Korvis, is our sole source supplier for our nCounter Digital Analyzers and our GeoMx DSP instrument at its facility in Corvallis, Oregon. Paramit Corporation, or Paramit, is our sole source supplier for our nCounter SPRINT Profiler at its facility in Morgan Hill, California. D&K Engineering, Inc. of San Diego, California is our sole source supplier of our CosMx SMI instrument.
The facilities at which our instruments are built have been certified to ISO 13485:2003 standards. Our contracts with these instrument suppliers do not commit them to carry inventory or make available any particular quantities. Under the terms of the threeour instrument supply agreements, we are required to place binding purchase orders for instruments that will be delivered to us by the supplier three to six months from the date of placement of the purchase order. Although qualifying alternative third-party manufacturers could be time consuming and expensive, our instruments’ design is similar to that of other instruments and we believe that alternatives would be available if necessary. However, if our instrument suppliers terminate our relationship with them or if they give other customers’ needs higher priority than ours, then we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms.
Consumables
We manufacture our consumables in our greater Seattle, Washington facilityarea facilities, certain of which hashave been certified to ISO 13485:2003 standards. WeIn the past several years, we have expanded our manufacturing capacity in 2015through additional leased space as well as by relocating certain research and development functions and converting the space to incremental manufacturing labs and offices. In the future, should additional space become necessary, we believe that there will be space available near our existing facility that we believe we can secure;facilities, however we cannot predict that this space will be available if and when it is needed.
We rely on a limited number of suppliers for certain components and materials used in the manufacture of our consumables. Some of these components are sourced from a single supplier. For example, Cidra Precision Services, LLC, of Wallingford, Connecticut, part of IDEX Health & Science, is the sole supplier of the microfluidic cartridge for our nCounter SPRINT Profiler. For some components, we have qualified second sources for several of our critical reagents, including oligonucleotides, adhesives and dyes. We believe that having dual sources for our components helps reduce the risk of a production delay caused by a disruption in the supply of a critical component. We continue to pursue qualifying additional suppliers, but cannot predict how expensive, time-consuming or successful these efforts will be. If we were to lose one or more of our suppliers, it may take significant time and effort to qualify alternative suppliers.
Competition
In the life sciences research market, we compete with companies such as Agilent Technologies, Becton-Dickinson, Bio-Rad, Bio-Techne, Fluidigm, HTG Molecular Diagnostics, Illumina, Luminex, Merck Millipore, O-Link, Perkin Elmer, Qiagen, Roche Applied Science, Thermo Fisher Scientific and WaferGen Biosystems, some of which also offer diagnostic applications of their technologies.10x Genomics. These competitors and others have products for gene and protein expression analysis and spatial biology that compete in certain segments of the market in which we sell our products. In addition, there are a number of new market entrants in the process of developing novel technologies for the life sciences market, such as next generation sequencing, including RNA-sequencing.
In the breast cancer diagnostics market, wethose that may compete with Genomic Health’s Oncotype Dx, a service for gene expression analysis performed in its central laboratory in Redwood City, California. We also face competition from companies such as Agendia and bioTheranostics, which also offer centralized laboratories that profile geneGeoMx DSP or protein expression in breast cancer. Outside the United States, we also face regional competition from Myriad Genetics, and its product EndoPredict, a distributed test for breast cancer recurrence.our CosMx SMI.
We believe that we have multiple competitive advantages, in the research market, including the automated nature of our nCounter Analysis Systemsystems with its simple, rapid and efficient workflow that requires very limited human intervention or labor; the multiplexing capability of our technology to analyze significantly more target molecules in a single tube without amplification, representing multiple biological pathways;experiment; the ability to analyze combinations of DNA, RNA and proteins simultaneously in a single experiment;proteins; compatibility with many sample types, including difficult samples such as FFPE; and the ability to analyze small sample inputs, in some cases down to a single cell, from a wide variety of sample types. In the diagnostics market, we believe our competitive advantages include the compelling evidence of Prosigna’s ability to inform major medical treatment decisions, including results from our studies; the quality of our nCounter Analysis System, which
enables consistent and reproducible results in decentralized laboratories; and the improved convenience for physicians and patients, including more rapid test result turnaround time.
While we believe that we compete favorably based on the factors described above, many of our competitors enjoy other competitive advantages over us, including:
•greater name and brand recognition, financial and human resources;
•broader product lines;
•larger sales forces and more established distributor networks;
•substantial intellectual property portfolios;
•larger and more established customer bases and relationships; and
•better established, larger scale and lower cost manufacturing capabilities.
For additional information, see the section of this report captioned “Risk Factors —- The life sciences research and diagnostics markets aremarket is highly competitive. If we fail to compete effectively, our business and operating results will suffer.”
Human Capital
Our employees are guided by our mission to map the universe of biology. Our core values of grit, authenticity, ambition, ingenuity and commitment to customers serve to guide us on our path toward achieving our mission. Our core values set the foundation for our attitudes and actions, how we conduct our business, interact with each other and our customers and evaluate employee performance.
Employees
As of December 31, 2021, we had 766 employees, of which 222 work in manufacturing, 252 in sales, marketing and business development, 210 in research and development and 82 in general and administrative. None of our U.S. employees are represented by a labor union or are the subject of a collective bargaining agreement. As of December 31, 2021, of our 766 employees, 675 were employed in the United States and 91 were employed outside the United States.
Talent Acquisition and Development and Employee Engagement
Our employees play a key role in our ability to serve our customers and achieve our mission and we strive to attract, empower and retain high quality talent that is inspired, diverse and driven. To attract and retain top talent, we strive to create opportunities for our employees to grow and develop their careers and ensure they are supported by competitive salaries and a comprehensive benefits program.
We believe employee career development is an investment in our employees’ skills and our future. We offer career development opportunities such as educational reimbursement, onsite training to enhance job-related skills, management development programs and opportunities to attend job related conferences and seminars. Additionally, we have an annual formal employee review program which standardizes performance evaluation across all areas in the organization and aids in supporting our employees’ career and personal development, which ultimately contributes to achieving our mission.
We believe it is important to encourage open and direct communication at all levels in our organization and we regularly use employee experience and feedback surveys to understand whether our human capital policies are effective and where we can improve.
Compensation and Benefits
We believe we provide competitive and comprehensive financial compensation and benefits for our employees and our programs are designed to meet our employees’ needs. In addition to salaries, these programs (which may vary by country or region) include new employee equity grants, additional discretionary equity awards, including a discretionary annual equity grant, discretionary merit-based annual bonuses, a voluntary employee stock purchase program, a 401(k) plan which includes partial employer matching contributions, healthcare and insurance benefits, health savings and flexible spending accounts, flexible paid time off, family leave, employee assistance programs, an educational reimbursement program and health and wellness programs. In addition, we believe our employees can make a meaningful difference in their local communities and we offer all employees paid time off to volunteer in community involvement activities of their choice.
COVID-19 Pandemic Safety
In response to the COVID-19 pandemic, we implemented several changes that we determined were in the best interest of our employees, customers, the communities we operate in and which comply with government and health and safety regulations. We have created an internal committee of senior management leaders, including our director of employee health and safety, that meets a minimum of once a week and is focused on creating and maintaining a safe and healthy workplace for all employees, our customers and the communities in which we operate during the COVID-19 pandemic.
Diversity, Equity and Inclusion
We believe racism and discrimination are unacceptable. We are committed to building and maintaining a diverse and inclusive business and have diversity, equity and inclusion programs in place to help us achieve our commitment.
We seek diversity, equity and inclusion at every level in our organization. Our board of directors includes directors from various backgrounds, industries, skills and experience. We recently added two new members with diverse backgrounds to our board of directors in 2021. Our board of ten directors now includes three women and is racially diverse. Our senior leadership team includes leaders with diverse skills, experience, racial background and genders. Our employees come from numerous countries and various backgrounds and we strive to provide a diverse and inclusive environment.
We have active programs in place and continue to focus on extending our diversity, equity and inclusion initiatives across our entire workforce. As part of our program, we seek to make diversity, equity and inclusion a focus for our recruiting and hiring practices, including by ensuring we have diverse representations in our recruiting pool and interview panel. To further our commitment to create an inclusive and diverse culture, we engaged a third-party diversity, equity and inclusion consultant to assist us in our commitment.
We currently have three employee resource groups, or ERGs, that focus on communities including women, people of color and LGBTQ+. We believe these ERGs are guided by our priorities and values and provide a way for employees with common interests to connect, obtain professional development and participate in community outreach opportunities. We may expand our ERG offerings in the future.
In 2020, we joined Washington Employers for Racial Equity, or WERE, which is a new statewide coalition dedicated to racial equity and opportunity for all. As a coalition member, we have signed a Commitment to Progress, committing to own our part of the problem and setting specific improvement goals. As members of the coalition, we will listen, learn, partner, invest and work toward solutions in our own company and our communities.
Government Regulation
Medical Device Regulation
United States
In the United States, medical devices, including in vitro diagnostics, are subject to extensive regulation by the U.S. Food and Drug Administration, or FDA, under the Federal Food, Drug, and Cosmetic Act, or FDC Act, and its implementing regulations, and other federal and state statutes and regulations. The laws and regulations govern, among other things, medical device development, testing, labeling, storage, premarket clearance or approval, advertising and promotion and product sales and distribution.
A medical device is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component part or accessory, which is (1) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or (2) intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes. In vitro diagnostics are a type of medical device, and are tests that can be used in the screening or diagnosis and/or detection of diseases, conditions or infections, including, without limitation, the presence of certain chemicals, genetic or other biomarkers. Some tests are used in laboratories or other health professional settings and other tests are for consumers to use at home.
Medical devices to be commercially distributed in the United States must receive from the FDA either clearance of a premarket notification, or 510(k), or premarket approval of a premarket approval application, or PMA, pursuant to the FDC Act prior to marketing, unless subject to an exemption. Devices deemed to pose relatively low risk are placed in either Class I or II. Placement of a device into Class II generally requires the manufacturer to submit to the FDA a 510(k) seeking clearance for commercial distribution; this is known as the 510(k) clearance process. Preamendment Class III devices that were on the market before May 28, 1976 and for which FDA has not yet required submission of PMAs are also required to submit a 510(k) to FDA. Most Class I devices are exempted from this premarket submission requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices and some diagnostic tests, are placed into Class III requiring PMA approval. Devices deemed not substantially equivalent to a previously 510(k)-cleared device or novel devices for which no predicate device exists are placed into Class III, but may be reclassified by FDA into Class I or Class II upon the submission by the manufacturer of a de novo reclassification application. A clinical trial is almost always required to support a PMA application or de novo application, and in many cases is required for a 510(k) application. All clinical studies of investigational devices must be conducted in compliance with applicable FDA or Institutional Review Board, or IRB, regulations. Further, instrumentation intended for clinical multiplex test systems that meet the identification requirements under 21 CFR 862.2570 are considered Class II medical devices, subject to special controls, but are exempt from the 510(k) premarket notification procedures. Such special controls are described in FDA’s guidance document entitled “Class II Special Controls Guidance Document: Instrumentation for Clinical Multiplex Test Systems.”
510(k) Clearance Pathway. To obtain 510(k) clearance, a manufacturer must submit a premarket notification demonstrating to the FDA’s satisfaction that the proposed device is substantially equivalent in intended use and in technological
characteristics to a previously 510(k) cleared device or a device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for submission of PMA applications.applications, or to a device that has received de novo authorization. The previously cleared device is known as a predicate. The FDA’s 510(k) clearance pathway usually takes from foursix to 12 months, but it can lasttake significantly longer, particularly for a novel type of product. The FDA will also not begin a substantive review of the filing until it verifies the application contains all necessary information required to commence a substantive review. If the application does not contain all required information, the FDA will not file the application and return it to the submitter, highlighting the deficiencies in the application.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If
the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may require the manufacturer to seek 510(k) clearance or PMA approval. TheIf the modified device has been commercialized, the FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained.
PMA Approval Pathway. The PMA approval pathway requires a demonstration of reasonable assurance of safety and effectiveness of the device to the FDA’s satisfaction. The PMA approval pathway is costly, lengthy and uncertain.
A PMA application must provide extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for compliance with Quality System Regulation, or QSR, requirements, which impose elaboratestringent testing, control, documentation and other quality assurance procedures.
Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the application is accepted for filing. The FDA then commences an in-depth review of the PMA application. The PMA approval process typically takes one to three years, but may last longer. The review time is often significantly extended as a result of the FDA asking for more information or clarification of information already provided. The FDA also may respond with a “not approvable” determination based on deficiencies in the application and require additional clinical studies that are often expensive and time consuming and can delay approval for months or even years. During the review period for a new type of device, an FDA advisory committee, a panel of external experts, likely will be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel’s recommendation is important to the FDA’s overall decision making process.
If the FDA’s evaluation of the PMA application is favorable, the FDA typically issues an “approvable letter” requiring the applicant’s agreement to specific conditions, such as changes in labeling, or specific additional information such as submission of final labeling, in order to secure final approval of the PMA application. Once the approvable letter is satisfied, the FDA will issueapprove a PMA for the approved indications, which can be more limited than those originally sought by the manufacturer. The PMA can includewith post-approval conditions that the FDA believes are necessary to ensure the safety and effectiveness of the device including, among other things, post-approval studies and restrictions on labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval or placement of restrictions on the sale of the device until the conditions are satisfied.
Even after approval of a PMA, a new PMA or PMA supplement may be required in the event of a modification to the device, its labeling or its manufacturing process. Supplements to a PMA may require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.
De Novo Pathway. If no predicate can be identified, the product is automatically classified as Class III, requiring a PMA. However, the FDA can reclassify, or use “de novo classification” for, a device for which there was no predicate device if the device is low or moderate risk. A device company can ask the FDAalso submit a de novo application at the outset, if the de novo route is availablerather than submitting a 510(k) application for its particular product. When granting a de novo application the FDA will establish special controls that other applicants for the same device type must implement,satisfy, which often includes labeling restrictions and data requirements. Subsequent applicants can rely upon the de novo product as a predicate for a 510(k) clearance. The de novo route is less burdensome than the PMA process; it is similar in many respects to a 510(k), but generally takes much longer for clearance than the 510(k) process, and almost always requires clinical data. The de novo route has been used for many in vitro diagnostic products.
Postmarket. After a device is placed on the market, numerous regulatory requirements apply. These include: the quality manufacturing requirements set forth in the QSR, labeling regulations, the FDA’s general prohibition against promoting products for unapproved or “off label” uses, registration and listing, the Medical Device Reporting, or MDR, regulation (which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur), and the Reports of Corrections and Removals regulation (which requires manufacturers to report recalls and field actions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDC Act).
The FDA enforces these requirements by unannounced inspection, market surveillance and other means. If the FDA finds a violation, it can institute a wide variety of enforcement actions, ranging from an untitled regulatory letter or a public warning letter, to more severe sanctions such as fines, injunctions and civil penalties; recall or seizure of products; operating restrictions, partial suspension or total shutdown of production; refusing requests for 510(k) clearance or PMA approval of new products; withdrawing 510(k) clearance or PMA approvals already granted; and criminal prosecution. For additional information, see the section of this report captioned “Risk Factors — Risks Related to Government Regulation and Diagnostic Product Reimbursement.Regulation.”
Research Use Only.Products Labeled for Research Use Only or RUO, products belong to a separate regulatory classification under a long-standing FDA regulation. In essence,(RUO). RUO products are not regulated as medical devices and are therefore not subject to the
regulatory QSR requirements discussed above.enforced by the FDA. The FDA instead imposes labeling and distribution requirements with respect to RUO products. The products must bear the statement: “For Research Use Only. Not for Use in Diagnostic Procedures.” RUO products cannot make any claims related to safety, effectiveness or diagnostic utility, or clinical
applications, and they cannot be intended for human clinical diagnostic use. In November 2013, the FDA issued a final guidance on products labeled RUO, products, which, among other things, reaffirmed that a company may not make any clinical or diagnostic claims about an RUO product. The FDAproduct, stating that merely including an RUO labeling statement will also evaluatenot necessarily render the device exempt from the FDA’s clearance, approval, or other regulatory requirements if the totality of circumstances surrounding the evidence to determine ifdistribution of the product indicates that the manufacturer knows its product is intendedbeing used by customers for diagnostic purposes. uses or the manufacturer intends such as use.
If FDA were to determine, based on the totality of circumstances, that our RUO products marketed for RUO are intended for diagnostic purposes, they would be considered medical devices that will require clearance or approval.approval prior to commercialization. We continue to monitor the changing legal and regulatory landscape to ensure our compliance with any applicable rules, laws and regulations. Violation of any FDA regulatory requirements could result in regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, or fines, among other adverse actions.
Dual-Use Instruments. Dual-use instruments are subject to FDA regulation since they are intended, at least in part, for use by customers performing clinical diagnostic testing. In November 2014, FDA issued a guidance that described FDA’s approach to regulating molecular diagnostic instruments that combine in a single molecular instrument both approved/cleared device functions and device functions for which approval/clearance is not required.
Laboratory Developed Tests. Laboratory Developed Tests, or LDTs, are developed, validated and used within a single lab.laboratory. In the past, the FDA generally exercised its enforcement discretion for LDTs and did not require clearance or approval prior to marketing. On October 3, 2014, FDA issued two draft guidances that proposed to actively regulate LDTs using a risk-based approach, and would have required 510(k)s or PMAs for certain “moderate” or “high” risk devices. However, in late November 2016, FDA announced that it would not be finalizing the 2014 draft LDT Guidances. On January 13, 2017,More recently, the FDA has issued warning letters to genomics labs for illegally marketing genetic tests that claim to predict patients’ responses to specific medications, noting that the FDA has not created a legal “carve-out” for LDTs and retains discretion to take action when appropriate, such as when certain genomic tests raise significant public health concerns. As manufacturers develop more complex genetic tests and diagnostic software, the FDA may increase its regulation of LDTs. In August 2020, the Department of Health and Human Services (HHS) announced rescission of guidances and other informal issuances of the FDA regarding premarket review of LDTs absent notice-and-comment rulemaking, stating that, absent notice-and-comment rulemaking, those seeking approval or clearance of, or an emergency use authorization, or EUA, for an LDT may nonetheless voluntarily submit a premarket approval application, premarket notification or an EUA request, respectively, but are not required to do so. In November 2021, HHS under the Biden administration issued a discussion paper laying out key elements ofstatement that withdrew the August 2020 policy announcement, stating that HHS does not have a possible revised future LDT regulatory framework. We do not expect any guidance document regulatingpolicy on LDTs will go into effect in the near future.that is separate from FDA’s longstanding approach.
Companion Diagnostics.Diagnostics. In August 2014, FDA issued a companion diagnostics final guidance stating that if the device is essential to the safety or efficacy of the drug, FDA will generally require approval or clearance for the device at the time when FDA approves the drug. Most companion diagnostics will require PMA approval. FDA has also issued draft guidances on principles for co-development of an in vitro companion diagnostic device with a therapeutic product in July 2016 and on developing and labeling in vitro companion diagnostic devices for a specific group or class of oncology therapeutic products in December 2018.
Further, in June 2021, Congress introduced an updated legislation called the Verifying Accurate, Leading-edge IVCT Development Act (VALID Act), which, if enacted, will establish a new risk-based regulatory framework for in vitro clinical tests (IVCTs), which include IVDs, LDTs, collection devices, and instruments used with such tests, and a technology certification program, among other proposals. The adoption of new restrictions on IVDs, LDTs, or RUOs, whether by the FDA or Congress, could adversely affect our ability to commercialize our products and the demand for our specialized reagents and instruments. It is unclear whether the VALID Act or any other legislative proposals would be passed by Congress or signed into law by the President.
International
International salesTo the extent we decide to seek regulatory marketing authorization for certain of medical devices areour products in countries outside of the United States, we or our partners, or collaborators, will need to obtain regulatory marketing authorization for our products for the intended use in the jurisdiction where such products will be marketed. Regulatory clearance or approval in one jurisdiction does not mean that we will be successful in obtaining regulatory marketing authorization in other jurisdictions where we conduct business. Sales of such products outside the United States will likely be subject to foreign government regulations,regulatory requirements, which can vary substantiallygreatly from country to country.country, as well as FDA regulations on export of medical devices. The European Commission is the legislative body responsible for directives under which manufacturers selling medical products in the European Union, or EU, and the European Economic Area, or EEA, must comply. The EU includes most of the major countries in Europe, while other countries, such as Switzerland, are part of the EEA and have voluntarily adopted laws and regulations that mirror those of the EU with respect to medical devices. The EU has adopted numerous directives and standards that address regulation of the design, manufacture, labeling, clinical studies and post-market vigilance for medical devices. DevicesUnder the centralized authorization procedure, devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be marketed throughout the EUEuropean Union and EEA.European Economic Area member states. The European Medical Device Regulation (MDR), which will replace Europe’s Medical Device Directive (MDD), will be effective on May 26, 2021. Additionally, the In Vitro Diagnostic
Regulation (IVDR 2017/746), which addresses several weaknesses of the In Vitro Diagnostic Directive (IVDD 98/79/EC), will apply starting on May 26, 2022.
In September 2012, Prosigna was CE-marked for compliance with IVDD 98/79/EC for use in conjunction with a diagnostic version of our nCounter Analysis System in the EU to assess a breast cancer patient'spatient’s risk of distant recurrence.
Outside of the EU, regulatory approval needs to be sought on a country-by-country basis in order to market medical devices. Although there is a trend towards harmonization of quality system standards, regulations in each country may vary substantially, which can affect timelines of introduction.
Reimbursement
Our nCounter DxFLEX Analysis Systems are purchased or leased by clinical laboratories, which use our diagnostic products as the basis for testing patients’ samples. These customers can use our products to enable commercial testing services, and generate revenue for their laboratories for this service. In order to collect payment for testing services based upon our diagnostic products, our clinical laboratory customers may bill third parties, including public and private payors. The demand for our diagnostic products will depend indirectly upon the ability for our customers to successfully bill for and receive reimbursement from third-party payors for the clinical testing services based on our products. Therefore, we intend to work with third-party payors in markets where we intend to sell our diagnostic products to ensure that testing services based on our products are covered and paid.
The decision of payors to cover and pay for a specific testing service is driven by many factors, including:
strong clinical and analytical validation data;
acceptance into major clinical guidelines, including the National Comprehensive Cancer Network, or NCCN, the American Society of Clinical Oncologists, or ASCO, and the St. Gallen Consensus guidelines;
health economic studies that may indicate that the test improves quality-adjusted survival and leads to reduced costs; and
decision impact studies that show the test leads to better treatment decisions.
We have generated dossiers for submission to payors in support of reimbursement for testing services based upon our initial diagnostic product, Prosigna. The dossiers typically contain data from studies supporting the analytical and clinical validity of Prosigna, as well as health economic analyses that examine whether the clinical information supplied by Prosigna changes medical practice in a way that leads to benefit for both the patients and the payors. In some cases, these health economic analyses may be supported by the results of clinical studies of Prosigna’s impact on adjuvant treatment decisions in early stage breast cancer called decision impact studies. We developed a clinical protocol for Prosigna decision impact studies in collaboration with two European cooperative groups, and based on this protocol we have completed three studies to date.
United States
In the United States, clinical laboratory revenue is derived from various third-party payors, including insurance companies, health maintenance organizations, or HMOs, and government healthcare programs, such as Medicare and Medicaid. Clinical laboratory testing services are paid through various methodologies when covered by third-party payors, such as prospective payment systems and fee schedules. For any new clinical test, payment for the clinical laboratory service requires a decision by the third-party payor to cover the particular test, the establishment of a reimbursement rate for the test and the identification of one or more Current Procedural Terminology, or CPT, codes that accurately describe the test.
The American Medical Association, or AMA, has issued a set of CPT codes for billing and reimbursement of complex genomic tests that are based on information from multiple analytes or genes. These new MAAA, or Multianalyte Assays with Algorithmic Analyses, codes are intended to capture tests such as Prosigna and are divided into two categories of unique codes. Category 1 MAAA codes are intended for tests that AMA’s CPT Editorial Panel has vetted and found to meet a certain set of criteria, such as demonstrated clinical validity and utility, as well as current national utilization thresholds. MAAA codes issued to complex genomic tests that have not met all Category 1 coding criteria are referred to as administrative MAAA codes. Assignment of either unique reimbursement code to a particular test may facilitate claims processing by payors; however, assignment of a unique reimbursement code alone does not guarantee favorable reimbursement decisions by payors. A genomic test with an assigned MAAA code must still be vetted and approved by individual payors for coverage and payment before reimbursement is achieved. Given the more stringent requirements for receipt of a Category 1 MAAA, including demonstrated clinical validity and utility and satisfaction of national utilization thresholds, we believe that certain payors may more readily render favorable reimbursement decisions for genomic tests with a Category 1 MAAA rather than an administrative MAAA.
In April 2014, we received an administrative MAAA code (0008M) for use in reimbursement of testing services based on Prosigna. Given the recent commercial launch of Prosigna in the United States, and the lack of utilization data, we expected the issuance of an administrative MAAA initially. In October 2016, we applied for and received a Category 1 MAAA code for Prosigna. The code will be published in the CPT code book in late August 2017, with an effective date of January 1, 2018.
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. New diagnostic tests typically follow one of three routes to coverage via CMS: National Coverage Determinations, or NCDs, Local Coverage Determinations, or LCDs, or simply payment of claims by a MAC. The NCD applies to Medicare beneficiaries living throughout the United States. Due to cost and CMS bandwidth limitations there are generally few NCDs. The LCD process applies to only beneficiaries in the coverage area of a single MAC, requiring multiple LCDs to cover the testing throughout the United States. Due to the cost of developing an LCD, contractors tend to develop a relatively small number and prefer to tacitly cover services by paying claims. There is also a subset of NCDs known as Coverage with Evidence Development, or CED, that allow a technology (service or procedure) to be covered while evidence of clinical utility is collected through a registry or a study to answer outstanding questions on outcomes. Some MACs have developed Coverage with Data Development, or CDD, policies for the same purpose, which are administered at the local level.
Over the past three years, we have pursued Medicare coverage for Prosigna by working with MACs to obtain favorable LCDs. In 2016, Prosigna achieved Medicare coverage in all 50 states through this process.
For Medicare, the reimbursement rates for individual tests are established under the Clinical Laboratory Fee Schedule (local fee schedules for outpatient clinical laboratory services) or the Physician Fee Schedule, depending on the amount of physician work involved in the test. Molecular diagnostic tests such as Prosigna, are paid under the Clinical Laboratory Fee Schedule. For additional information, see the section of this report captioned “Risk Factors — Risks Related to Government Regulation and Diagnostic Product Reimbursement.Regulation.”
With respect to private insurance coverage, we have made significant progress in obtaining third-party reimbursement for the use of tests that incorporate new technology, such as Prosigna. Over the past three years, we have pursued coverage with all of the large private payers to facilitate reimbursement of Prosigna testing. In 2016, coverage policies were adopted by Cigna and Aetna and, in early 2017, Humana adopted a positive coverage policy. Additionally, the Blue Cross and Blue Shield, or
BCBS, Association Evidence Street recently published a positive assessment of Prosigna. Most individual BCBS entities have updated their coverage policies to include Prosigna based on this evaluation.
Outside the United States
In Europe, governments are primarily responsible for reimbursing diagnostic testing services. A relatively small portion of the market is made up of private payors and cash-pay patients. The primary barrier of adoption of a new in vitro diagnostic test is often reimbursement, and public reimbursement can take several years to achieve, depending on the country. Public reimbursement for genomic testing for breast cancer is available in Canada, Ireland, France, Greece, Switzerland, Denmark and the United Kingdom. Selected private coverage for testing is available in the United Kingdom, Germany, Spain, France, the UAE and Hungary. Reimbursement approval in some countries, such as Spain and Italy, is managed at the regional level. Israel is a market in which genomic testing for breast cancer is widely reimbursed by all four major Sick Funds, the third-party payors that cover a substantial majority of the population.
Our We will tailor our approaches to reimbursement and market access approach in Europe is similar to that inthroughout the United Statesrest of the world as appropriate as we evaluate new product and involves data driving clinical and economic publications to support guideline inclusion. Initially, we have targeted the private and cash pay market in Europe. In parallel, we are seeking to establish public reimbursementservice offerings.
Other Government Regulations
Our operations in the United States and abroad are subject to various fraud and abuse laws, including, without limitation, the federal anti-kickback statute and state and federal marketing compliance laws in the United States. These laws may impact our operations directly, or indirectly through our contractors, agents or customers, and may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patientvarious privacy regulation bylaws and regulations of both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include the following federal laws and their counterparts at the state level:
•the Federal Anti-kickback LawStatute and state anti-kickback prohibitions;
•the Federal physician self-referral prohibition, commonly known as the Stark Law, and state equivalents;
•the Federal Health Insurance Portability and Accountability Act of 1996, as amended;amended, commonly known as HIPAA;
•state privacy laws, such as the California Consumer Privacy Act and California Privacy Rights Act;
•the Medicare civil money penalty laws and exclusion requirements;
•the Federal False Claims Act, civil and criminal penalties and state equivalents;
•the Foreign Corrupt Practices Act, which applies to our international activities;
•the Physician PaymentPayments Sunshine Act; and
•the European Union'sUnion’s General Data Privacy Regulations,Regulation, or GDPR.
Employees
AsViolation of December 31, 2017, we had 467 employees, of which 119 work in manufacturing, 141 in sales, marketingany such requirements and business development, 144 in research and development, 17 in clinical, medical and regulatory affairs, and 46 in general and administrative. Noneother laws that apply to our operations, including activities of our U.S. employees are represented by a labor unioncontractors and partners, may result in significant penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, the curtailment or arerestructuring of its operations, loss of eligibility to obtain clearances or approvals from the subject of a collective bargaining agreement. As of December 31, 2017, of our 467 employees, 423 were employedFDA, exclusion from participation in the United Statesgovernment contracting, healthcare reimbursement or other federal or state government healthcare programs, including Medicare and 44 were employed outside the United States.Medicaid, integrity oversight and reporting obligations, imprisonment, and reputational harm.
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 the regulations under the current regulatory structure 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 development of new regulations will affect our business operations or the cost of compliance.
Where You Can Find Additional Information
We make available free of charge through our investor relations website, www.nanostring.com, our annual reports, quarterly reports, current reports, proxy statements and all amendments to those reports as soon as reasonably practicable after such material is electronically filed or furnished with the SEC. These reports may also be obtained without charge by contacting Investor Relations, NanoString Technologies, Inc., 530 Fairview Avenue North, Seattle, Washington 98109, e-mail: investorrelations@nanostring.com. Our Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K. In addition, the public may read and copy any materials we
file or furnish with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Moreover, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding reports that we file or furnish electronically with them at www.sec.gov.
Item 1A. Risk Factors
You should carefully consider the following risk factors, in addition to the other information contained in this report, including the sectionsections of this report captioned“Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. Our risk factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part. This report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
Risks Related to Our Business and Strategy
We face risks related to health epidemics and other outbreaks, such as COVID-19, which could significantly disrupt our operations and could have a material adverse impact on us.
Our business could be adversely impacted by the effects of health epidemics and other outbreaks. For example, in December 2019, a novel strain of coronavirus, SARS-CoV-2, the causative agent of coronavirus disease 2019, or COVID-19, was first reported. Since then, COVID-19 has spread across the globe and is affecting worldwide economic activity, including in the United States and European and Asia-Pacific countries. Quarantines, shelter-in-place and similar government orders have been imposed in many of the regions in which we have material operations or sales, including the greater Seattle, Washington area. As a result, our business activities originating from affected areas, including research and development, sales, manufacturing and supply chain related activities, have been, and could continue to be, adversely affected. Although restrictions related to the COVID-19 pandemic have been eased in many locations in which we do business, a resurgence in cases of COVID-19, such as with the Delta and Omicron variants, could occur at any time, resulting in new disruptions to our business. Disruptions have included:
•the temporary closure of our manufacturing facilities and/or those used in our supply chain processes;
•restrictions on the export or shipment of our products;
•unavailability of components and materials used in our products;
•significant cutback of ocean container delivery;
•business closures in impacted areas;
•reduced demand, research grants, and business activities of our customers due to the impact of COVID-19;
•limitations in employee resources, including because of stay-at-home orders, sickness of employees or their families or the desire of employees to avoid contact with large groups of people; and
•restrictions on our employees’ and other service providers’ ability to travel, to meet with customers and install and train customers on our systems.
The global spread of COVID-19 also has created significant macroeconomic uncertainty, volatility and disruption, which may adversely affect our and our customers’ and suppliers’ liquidity, cost of capital and ability to access the capital markets.
COVID-19 materially impacted our 2020 and 2021 results, and we anticipate that COVID-19 will continue to impact our business due to the factors discussed above. The extent to which COVID-19, including any variants that have emerged or may emerge in the future, impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and its variants and the actions to contain it or treat its impact, among others. We cannot at this time quantify or forecast the business impact of COVID-19, and there can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on our business, operating results and financial condition. In addition, the COVID-19 pandemic increases the likelihood and potential severity of other risks described in the “Risk Factors” section. Although national, state and local governments have introduced relief measures intended to alleviate the impact of COVID-19-related disruptions, we may not qualify for or benefit from such measures.
We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability.
We have incurred losses since we were formed and expect to incur losses in the future. We incurred net losses of $43.6$115.3 million, $47.1$110.1 million and $45.6$40.7 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively. As of December 31, 2017,2021, we had an accumulated deficit of $313.1$649.8 million. We expect that our losses will continue for at least the next several years as we will be required to invest significant additional funds toward ongoing development and commercialization of our technology. We also expect that our operating expenses will continue to increase as we grow our
business, butand there can be no assurance that our revenue and gross profit will increase sufficiently such that our net losses decline, or we attain profitability, in the future. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, future product development and our market penetration and margins. In addition, inflationary pressure could adversely impact our financial results. Our operating costs have increased, and may continue to increase, due to the recent growth in inflation. We may not fully offset these cost increases by raising prices for our products and services, which could result in downward pressure on our margins. Further, our customers may choose to reduce their business with us if we increase our pricing. We may never be able to generate sufficient revenue to achieve or sustain profitability.
Our financial results may vary significantly from quarter to quarter which may adversely affect our stock price.
Investors should consider our business and prospects in light of the risks and difficulties we expect to encounter in the new, uncertain and rapidly evolving markets in which we compete. Because these markets are new and evolving, predicting their future growth and size is difficult. We expect that our visibility into future sales of our products, including volumes, prices and product mix between instruments and consumables and the amount and timing of payments pursuant to collaboration agreements will continue to be limited and could result in unexpected fluctuations in our quarterly and annual operating results.
Numerous other factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results, including the ongoing impact of the COVID-19 pandemic on our business operations and financial results. These fluctuations may make financial planning and forecasting difficult. For example, in the third quarter of 2017, product and service revenue did not meet expectations which adversely affected our stock price. In addition, these fluctuations may result in unanticipated changes in our available cash, which could negatively affect our business and prospects. Factors that may contribute to fluctuations in our operating results include many of the risks described in this section. Also, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. For example, in May 2017, our collaboration with Medivation, Inc. and Astellas Pharma Inc., or Astellas Pharma, was terminated, resulting in the recognition of $11.3 million of collaboration revenue for the three months ended June 30, 2017, including the impact of a $1.0 million termination penalty. Also, in October 2017, Merck & Co. Inc., or Merck, notified us of the decision to not continue to pursue regulatory approval of the companion diagnostic for their product, KEYTRUDA, under our collaboration, resulting in the recognition of $11.6 million of collaboration revenue during the fourth quarter of 2017. Furthermore, our instruments involve a significant capital commitment by our customers and accordingly involve a lengthy sales cycle. We may expend significant effort in attempting to make a particular sale, which may be deferred by the customer or never occur. Accordingly, comparing our operating results on a period-to-period basis may not be meaningful, and investors should not rely on our past results as an indication of our future performance. If such fluctuations occur or if our operating results deviate from our expectations or the expectations of securities analysts, our stock price may be adversely affected.
If we do not achieve, sustain or successfully manage our anticipated growth, our business and growth prospects will be harmed.
We have experienced significant revenue growth in recent periods and we may not achieve similar growth rates in the
future. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline. Furthermore, growth will place significant strains on our management and our operational and financial systems and processes. For example, development and commercializationthe recent commercial launch of the Prosigna Breast Cancer Assay, or Prosigna, and other future diagnostic products worldwide areour GeoMx DSP system currently for research use only is a key elementselement of our growth strategy and have requiredwill require us to hire and retain additional sales and marketing medical, regulatory, manufacturingpersonnel and quality assurance personnel.resources. If we do not successfully generate demand for GeoMx DSP or other new product offerings, or manage our anticipated expenses accordingly, our operating results will be harmed. Additionally, the expected commercial launch of our CosMx Spatial Molecular Imager, or CosMx SMI, platform for research use only in the second half of 2022, is also a key element of our growth strategy and may also require us to hire and retain additional sales and marketing personnel and resources. If we do not successfully generate demand for our productsnew CosMx SMI platform or other new product offerings, or manage our anticipated expenses accordingly, our operating results will be harmed.
Our future success is dependent upon our ability to expand our customer base and introduce new applications and products.
Our current customer base is primarily composed of academic and government research laboratories, biopharmaceutical companies and clinical laboratories (including physician-owned laboratories) that perform analyses using our nCounter Analysis Systems. Our success will depend, in part, upon our ability to increase our market penetration among all of these customers and to expand our market by developing and marketing new research applications new instruments, and new diagnostic products. During 2017, in an effort to enhance future results, we have added sales staff focused on consumable sales to existing customers, thus enabling existing sales representatives to increase focus on instrument sales.instruments. We expect that increasing the installed base of our nCounter Analysis Systems and GeoMx DSP systems will drive demand for our relatively high margin consumable products. If we are not able to successfully increase our installed base of nCounter Analysis Systems or GeoMx DSP systems, sales of our consumable products and our margins may not meet expectations. Moreover, we must convince physicians and third-party payors that our diagnostic products, such as Prosigna, are cost effective in obtaining information that can help inform treatment decisions and that our nCounter Analysis Systems could enable an equivalent or superior approach that lessens reliance on centralized laboratories. Palmetto GBA, a Medicare Administrative Contractor, or MAC, that assesses molecular diagnostic technologies through its Molecular Diagnostics Services Program, or MolDx, issued a positive coverage determination for Prosigna in 2015. Several other Medicare jurisdictions that participate in the MolDx program have adopted the same coverage policy. In the fall of 2017, Palmetto declined to process Medicare claims for Prosigna tests performed at physician-owned laboratories. However, after receiving additional information demonstrating that such labs have the same qualifications required to perform Prosigna as independent labs, Palmetto has agreed to process such claims.
We also plan to develop and introduce new products, which would be sold primarily to new customer types, such as our Digital Spatial Profiling, orGeoMx DSP instrument for usesystem, which was commercially launched in pathology labs2019, and a sequencer based onthe expected commercial launch of our Hyb & Seq chemistry targeted for use by hospitalsCosMx SMI platform in the second half of 2022. We anticipate that scaling and oncology clinics. Attractingtraining our sales force to attract new customers and introducing new applications and products requireswill require substantial time and expense. Any failure to expand our existing customer base through the launch of our GeoMx DSP system and the expected launch of our CosMx SMI platform or launchother new applications and products would adversely affect our ability to improve our operating results.
The life sciences research market is highly competitive. If we fail to compete effectively, our business and operating results will suffer.
We face significant competition in the life sciences research market. We currently compete with both established and early stage life sciences research companies that design, manufacture and market instruments and consumables for gene expression analysis, single-cell analysis, polymerase chain reaction, or PCR, digital PCR, other nucleic acid detection and additional applications. These companies use well-established laboratory techniques such as microarrays or quantitative PCR as well as newer technologies such as next generation sequencing, including RNA-sequencing. We believe our principal competitors in the life sciences research and diagnostic markets are Agilent Technologies, Bio-Rad, Bio-Techne, Fluidigm, Illumina, Qiagen, Thermo Fisher Scientific and 10x Genomics. In addition, there are a number of new market entrants in the process of developing novel technologies for the life sciences market, including those that may compete with GeoMx DSP.
Many of our current competitors are large publicly-traded companies, or are divisions of large publicly-traded companies, and may enjoy a number of competitive advantages over us, including:
•greater name and brand recognition, financial and human resources;
•broader product lines;
•larger sales forces and more established distributor networks;
•substantial intellectual property portfolios;
•larger and more established customer bases and relationships; and
•better established, larger scale, and lower cost manufacturing capabilities.
We believe that the principal competitive factors in all of our target markets include:
•cost of capital equipment;
•cost of consumables and supplies;
•reputation among customers;
•innovation in product offerings;
•flexibility and ease-of-use;
•accuracy and reproducibility of results; and
•compatibility with existing laboratory processes, tools and methods.
We cannot assure investors that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot assure investors that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results.
New product development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any of the products we develop.
Few research and development projects result in successful commercial products. At any point, we may abandon development of a product candidate, which would adversely impact potential revenue and our expenses. In addition, any delay in product development would provide others with additional time to commercialize competing products before we do, which in turn may adversely affect our growth prospects and operating results. For example, our inability to successfully develop the CosMx SMI platform would negatively impact our prospects for future revenue growth.
New market opportunities may not develop as quickly as we expect, limiting our ability to successfully market and sell our products.
The markets for our products are new and evolving. Accordingly, we expect the application of our technologies to emerging opportunities will take several years to develop and mature and we cannot be certain that these market opportunities will develop as we expect. For example, in 2019 we commercially launched our GeoMx DSP system, in 2021 we launched new assays to analyze GeoMx DSP data on next generation sequencing systems, and in late 2022 we expect to make our newest product platform, CosMx SMI, available to customers.
In 2019 we also launched our GeoMx DSP system and related consumables. GeoMx DSP targets spatial genomics, a novel market opportunity and research application for which existing research experience and applications are limited. Prior to the launch of GeoMx DSP, we had not previously targeted this market and, as a result, we have limited marketing and selling experience. Even if we successfully develop these products, our limited marketing and selling experience targeting these new markets and customers may hinder the successful commercialization of these products.
In addition, we expect to commercially launch our new CosMx SMI platform in the second half of 2022. The CosMx SMI is designed to combine the spatial profiling of a large number of biological targets with high-resolution imaging. The CosMx SMI is expected to enable the analysis of up to 1,000 biological targets directly from single cells within morphologically intact tissue samples, as compared to GeoMx DSP, which typically offers such profiling across regions containing multiple cells. Even if we successfully develop and launch our CosMx SMI platform, we cannot be certain that the market opportunity for the instrument and any related consumables will develop as we expect.
The future growth of the market for these new products depends on many factors beyond our control, including recognition and acceptance of our applications by the scientific community and the growth, prevalence and costs of competing methods. In addition, the COVID-19 pandemic has disrupted our operations and the operations of the customers we seek to service in our targeted markets, which has impacted, and we expect will continue to impact, our growth and our ability to serve these markets. If the markets for our new products do not develop as we expect, our business may be adversely affected. If we are not able to successfully market and sell our products or to achieve the revenue or margins we expect, our operating results may be harmed.
Our research business depends on levels of research and development spending by academic and governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results.
In the near term, we expect that a large portion of our revenue will be derived from sales of our nCounter Analysis Systems and GeoMx DSP systems, as well as related consumables, to academic and government research laboratories and biopharmaceutical companies worldwide for research and development applications. The demand for our products will depend in part upon the research and development budgets of these customers, which are impacted by factors beyond our control, such as:
•changes in government programs (such as the National Institutes of Health) that provide funding to research institutions and companies;
•macroeconomic conditions, the political climate and the political climate;ongoing impact of the COVID-19 pandemic;
•changes in the regulatory environment;
•differences in budgetary cycles;
•competitor product offerings or pricing;
•inflationary pressures;
•market-driven pressures to consolidate operations and reduce costs; and
•market acceptance of relatively new technologies, such as ours.our GeoMx DSP instrument.
In addition, academic, governmental and other research institutions that fund research and development activities may be subject to stringent budgetary constraints that could result in spending reductions, reduced allocations or budget cutbacks, which could jeopardize the ability of these customers to purchase our products. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers.customers, including delays caused by these customers’ reducing activities in response to the COVID-19 pandemic. Any decrease in our customers’ budgets or expenditures, or in the size, scope or frequency of capital or operating expenditures, could materially and adversely affect our business, operating results and financial condition.
Our sales cycle is lengthy and variable, which makes it difficult for us to forecast revenue and other operating results.
Our instruments require a significant investment and, accordingly, our sales process involves numerous interactions with multiple individuals within an organization, and often includes in-depth analysis by potential customers of our products, performance of proof-of-principle studies, preparation of extensive documentation and a lengthy review process. As a result of these factors, the largesignificant capital investment required in purchasing our instruments and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly, and may be up to 12 months or longer. With the introduction of our nCounter SPRINT system in July 2015, which is targeted at individual researchers that often have less certain funding than other potential customers, our visibility regarding timing of sales has decreased. Given the length and uncertainty of our sales cycle we have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales will occur on a period-to-period basis. These factors also make it difficult to forecast revenue on a quarterly basis. For example, in the third quarter of 2017, our actual revenues were lower than our forecasts for many reasons that we did not predict, including extended timelines for finalizing purchase decisions by potential customers. Furthermore, from time-to-time, we may lease instruments or place instruments under reagent rental agreements, wherein a customer does not purchase an instrument upfront but instead pays a rental fee associated with each purchase of reagents. An increase in instruments placed under these lease or reagent rental agreements may reduce the number of instruments we would otherwise sell in any period. In addition, any failure to meet customer expectations could result in customers choosing to continue to use their existing systems or to purchase systems other than ours.
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 exclusive distribution agreements for our nCounter Analysis Systemsinstruments and related consumable products in many 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 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.
Our strategy to seek to enter into strategic collaborations and licensing arrangements with third parties to develop diagnostic tests and other products may not be successful.
We have relied, and expect to continue to rely, on strategic collaborations and licensing agreements with third parties for discoveries based on which we develop diagnostic tests. For example, we licensed the rights to intellectual property that forms the basis of Prosigna from Bioclassifier, LLC, which was founded by several of our research customers engaged in translational research. Similarly, in connection with our collaboration with Celgene Corporation, we licensed the rights to intellectual property relating to a gene signature for lymphoma subtyping, which was discovered by a consortium of researchers including several of our research customers, from the National Institutes of Health. In connection with our collaboration with Merck to develop a companion diagnostic test, our partner has licensed the technology for such test to us. We intend to enter into more such arrangements with our research customers and other researchers, including biopharmaceutical companies, for development of future diagnostic products. However, there is no assurance that we will be successful in doing so. Establishing collaborations and licensing arrangements is difficult and time-consuming. Discussions may not lead to collaborations or licenses on favorable terms, if at all. To the extent we agree to work exclusively with a party in a given area, our opportunities to collaborate with others could be limited. Certain parties may seek to partner with companies in addition to us in connection with a project. This, in turn, may limit the commercial potential of any products that are the subject of such collaborations. Potential collaborators or licensors may elect not to work with us based upon their assessment of our financial, regulatory, commercial or intellectual property position. In particular, our customers are not obligated to collaborate with us or license technology to us, and they may choose to develop diagnostic products themselves or collaborate with our competitors.
In August 2017, we entered into a collaboration agreement with Lam Research Corporation, or Lam, with respect to the development and commercialization of our Hyb & Seq sequencing platform and related assays. Pursuant to the terms of the collaboration agreement, Lam will contribute up to $50.0 million, payable quarterly, for allowable development costs. In exchange, Lam is eligible to receive certain single-digit percentage royalty payments on net sales by us of certain products and technologies developed under the collaboration agreement. In addition, we issued Lam a warrant to purchase up to 1.0 million shares of our common stock. The outcome of this collaboration is uncertain and development costs may exceed $50.0 million, in which case we would need to obtain additional funding to complete development of our Hyb & Seq sequencing platform and related assays. Ultimately the development may not be successful, which would negatively impact our prospects for future revenue growth.
New diagnostic product development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any of the tests or products we develop individually or with our collaborators.
Few research and development projects result in successful 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 impact potential revenue and our expenses. In addition, any delay in product development would provide others with additional time to commercialize competing products before we do, which in turn may adversely affect our growth prospects and operating results.
In addition, the success of the development programs for any product candidates or assays developed in collaboration with others will be dependent on the continued pursuit and success of the related drug trials by our collaborators. For example, in October 2017, Merck notified us of their decision not to continue to pursue regulatory approval of the companion diagnostic we were developing for their product, KEYTRUDA. There is no guarantee that our collaborators will continue to pursue clinical trials for product candidates or assays that are the subject of our collaborations or that such clinical trials will be successful and, as a result, we may expend considerable time and resources developing in vitro diagnostic assays that will not gain regulatory approval. Furthermore, significant consolidation in the life sciences industry has occurred during the last several years and in connection with such consolidation, the combined company often reassesses its development priorities which may impact our existing collaborations or future opportunities. For example, in May 2017, Astellas Pharma announced a joint decision with Pfizer Inc., or Pfizer, to discontinue the planned ENDEAR trial which was the subject of our collaboration. We were informed that the decision resulted from an oncology portfolio review by Astellas Pharma and Pfizer.Even if we establish new relationships, we or our collaborators may terminate those relationships or they may never result in the successful development or commercialization of future tests or other products. From time to time we have agreed to modify the terms of our agreements with collaborators, including financial terms, and in the future it is possible that we will agree to modify the terms of existing and future agreements with collaborators.
Although we expect such collaborations to provide funding to cover our costs of development, the failure, discontinuation or modification of these clinical trials could negatively impact our ability to attract new collaboration partners, and would reduce our prospects for introducing new diagnostic products, revenue growth, and future operating results.
Our future capital needs are uncertain and we may need to raise additional funds in the future.
We believe that our existing cash and cash equivalents together with funds available under our term loan agreement and revolving credit facility,short-term investments will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, we may need or choose to raise substantial additional capital to:
•expand the commercialization of our products;
•fund our operations; and
•further our research and development.
Our future funding requirements will depend on many factors, including:
•market acceptance of our products;
•the cost and timing of establishing additional sales, marketing and distribution capabilities;
revenue and cash flow derived from existing or future collaborations;
•the cost of our research and development activities;
•the cost and timing of regulatory clearances or approvals;
•the effect of competing technological and market developments; and
•the extent to which we acquireengage in strategic transactions, such as the acquisition of, investment in or invest indisposal of businesses, assets, products and technologies, including newinbound or outbound licensing arrangements for new products.arrangements.
We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, or convertible debt, our stockholders may experience dilution. For example, in
January 2018, March 2020, we entered intosold $230.0 million aggregate principal amount of our 2.625% Convertible Senior Notes due 2025, or the notes, in a sales agreement with Cowenprivate placement to qualified institutional buyers for net proceeds of $222.6 million and Company, LLC, or Cowen, to sell up to $40.0 million worthin October 2020, we sold an aggregate of 5,750,000 shares of our common stock from time to time, throughin an “at the market” equityunderwritten public offering program under which Cowen will act as sales agent. Additionalfor net proceeds of $215.8 million. Future debt financing, if available, may involve additional covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaborationstrategic transactions with third parties, such as collaborations, asset sales and licensing arrangements, with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. We have in the past pursued these types of transactions, such as the License and Asset Purchase Agreement, or LAPA, with Veracyte, Inc., or Veracyte, which we completed in December 2019, and may in the future pursue similar transactions or other strategic transactions, on our own or with other advisors, that may impact our business and prospects and the value of our common stock. If we do not have, or are not able to obtain sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.
Our research and development efforts will be hindered if we are not able to contract with third parties for access to archival tissue samples.
Under standard clinical practice, tumor biopsies removed from patients are preserved and stored in formalin-fixed paraffin embedded, or FFPE, format. We rely on our ability to secure access to these archived FFPE tumor biopsy samples, as well as information pertaining to the clinical outcomes of the patients from which they were derived for our clinical development activities. Others compete with us for access to these samples. Additionally, the process of negotiating access to archived samples is lengthy because it typically involves numerous parties and approval levels to resolve complex issues such as usage rights, institutional review board approval, privacy rights, publication rights, intellectual property ownership and research parameters. In January 2017, the Department of Health and Human Services finalized new rules, which became effective as of January 19, 2018, expanding the language to be included in informed consent forms related to the collection of identifiable private information or identifiable biospecimens. If this new requirement, or other factors arising in the future, impact our ability to negotiate access to archived tumor tissue samples with hospitals, clinical partners, pharmaceutical companies, or companies developing therapeutics on a timely basis or on commercially reasonable terms, or at all, or if other laboratories or our competitors secure access to these samples before us, our ability to research, develop and commercialize future products will be limited or delayed.
The life sciences research and diagnostic markets are highly competitive. If we fail to compete effectively, our business and operating results will suffer.
We face significant competition in the life sciences research and diagnostic markets. We currently compete with both established and early stage life sciences research companies that design, manufacture and market instruments and consumables for gene expression analysis, single-cell analysis, polymerase chain reaction, or PCR, digital PCR, other nucleic acid detection and additional applications. These companies use well-established laboratory techniques such as microarrays or quantitative PCR as well as newer technologies such as next generation sequencing such as RNA-sequencing. We believe our principal competitors in the life sciences research and diagnostic markets are Agilent Technologies, Becton-Dickinson, Bio-Rad, Bio-Techne, Fluidigm, HTG Molecular Diagnostics, Illumina, Luminex, Merck Millipore, O-Link, Perkin Elmer, Qiagen, Roche Applied Science, Thermo Fisher Scientific, and WaferGen Biosystems. In addition, there are a number of new market entrants in the process of developing novel technologies for the life sciences market.
We also compete with commercial diagnostic laboratory companies. We believe our principal competitor in the breast cancer diagnostics market is Genomic Health, which provides gene expression analysis at its central laboratory in Redwood City, California and currently commands a substantial majority of the market. We also face competition from companies such as Agendia, bioTheranostics, and Myriad Genetics.
Many of our current competitors are large publicly-traded companies, or are divisions of large publicly-traded companies, and may enjoy a number of competitive advantages over us, including:
greater name and brand recognition, financial and human resources;
broader product lines;
larger sales forces and more established distributor networks;
substantial intellectual property portfolios;
larger and more established customer bases and relationships; and
better established, larger scale, and lower cost manufacturing capabilities.
We believe that the principal competitive factors in all of our target markets include:
cost of capital equipment;
cost of consumables and supplies;
reputation among customers;
innovation in product offerings;
flexibility and ease-of-use;
accuracy and reproducibility of results; and
compatibility with existing laboratory processes, tools and methods.
We believe that additional competitive factors specific to the diagnostics market include:
availability of reimbursement for testing services;
breadth of clinical decisions that can be influenced by information generated by tests;
volume, quality, and strength of clinical and analytical validation data;
inclusion in treatment guidelines; and
economic benefit accrued to customers based on testing services enabled by products.
We cannot assure investors that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot assure investors that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. For example, we recently concluded that certain of our customers have shifted certain types of experiments that previously had been performed on our nCounter system to RNA-sequencing technology. Although we are pursuing several strategies to mitigate this trend, there can be no assurance we will be successful in doing so. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results.
If Prosigna fails to achieve and sustain sufficient market acceptance, we will not generate expected revenue, and our prospects may be harmed.
Commercialization of Prosigna in Europe, the United States and the other jurisdictions in which we intend to pursue regulatory approval or clearance is a key element of our strategy. Currently, most oncologists seeking sophisticated gene expression analysis for diagnosing and profiling breast cancer in their patients ship tissue samples to a limited number of centralized laboratories typically located in the United States. We may experience reluctance, or refusal, on the part of physicians to order, and third-party payors to pay for, Prosigna if the results of our research and clinical studies, and our sales and marketing activities relating to communication of these results, do not convey to physicians and patients that Prosigna provides equivalent or better prognostic information than those centralized laboratories. In addition, our diagnostic tests are performed by pathologists in local laboratories, rather than by a vendor in a remote centralized laboratory, which requires us to educate pathologists regarding the benefits of this business model and oncologists regarding the reliability and consistency of results generated locally. Also, we offer Prosigna in other countries outside of the United States, where genomic testing for breast cancer is not widely available and the market for such tests is new. The future growth of the market for genomic breast cancer testing will depend on physicians’ acceptance of such testing and the availability of reimbursement for such tests.
These hurdles may make it difficult to convince healthcare providers that tests using our technologies are appropriate options for cancer diagnostics, may be equivalent or superior to available tests, and may be at least as cost effective as alternative technologies. If we fail to successfully commercialize Prosigna, we may never receive a return on the significant investments in sales and marketing, medical, regulatory, manufacturing and quality assurance personnel we have made, and further investments we intend to make, which would adversely affect our growth prospects, operating results and financial condition.
We may not be able to develop new products, enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements or successfully manage the transition to new product offerings, any of which could have a material adverse effect on our business and operating results.
Our success depends on our ability to develop new products and applications for our technology in existing and new markets, while improving the performance and cost-effectiveness of our systems. New technologies, techniques or products could emerge that might offer better combinations of price and performance than our current or future products and systems. Existing markets for our products, including gene expression analysis, gene fusions and copy number variation, as well as new markets, such as protein expression and gene mutations, and potential markets for our research and diagnostic product candidates, are characterized by rapid technological change and innovation. Competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. We anticipate that we will face increased competition in the future as existing companies and competitors develop new or improved products and as new
companies enter the market with new technologies. It is critical to our success that we anticipate changes in
technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. For example, we recently announced that we intend to make DSP, which enables the precise quantification of protein and gene expression spatially for regions of interest in a tissue sample, available on an early access basis in late 2018. In addition, we have been developing a unique amplification-free Hyb & Seq chemistry that provides both short and long read capability simultaneously, as well as the ability to sequence both DNA and RNA in parallel. If we do not successfully innovate and introduce new technology into our product lines, our business and operating results will be adversely impacted.
The development and manufacture of new products typically requires new scientific discoveries or advancements and complex technology and engineering.engineering, including the design of sophisticated software. Such developments may involve external suppliers and service providers, making the management of development projects complex and subject to risks and uncertainties regarding timing, timely delivery of required components, software or services and satisfactory technical performance of such components, software or assembled products. For example, in 2017, we continued to work with our supplier of cartridges used in our nCounter SPRINT systems to improve the design which resolved the previous leakage issues in the microfluidic device produced for us. If we do not achieve the required technical specifications or successfully manage new product development processes, or if development work and manufacturing is not performed according to schedule, then such new technologies or products may be adversely impacted and our business and operating results may be harmed. Any delays in bringing new products to market may lead our customers to purchase our competitors’ products or cancel outstanding purchase orders.
Additionally, we must carefully manage the introduction of new products. If customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. In July 2015, we commercially launched a new version of our nCounter Analysis System, the nCounter SPRINT Profiler, that is smaller and less expensive than the previous version. If customers conclude that such new products offer better value as compared to our existing products, we may suffer from reduced sales of our existing products and our overall revenue may decline. We may also have excess or obsolete inventory of older products as we transition to new products and our experience in managing product transitions is limited. If we do not effectively manage the transitions to new product offerings, our revenue, results of operations and business will be adversely affected.
New market opportunities may not develop as quickly as we expect, limiting our ability to successfully market and sell our products.
The market for our products is new and evolving. Accordingly, we expect the application of our technologies to emerging opportunities will take several years to develop and mature and we cannot be certain that these market opportunities will develop as we expect. For example, in September 2015, we launched our first 3D Biology application, a new product that allows users to simultaneously measure gene and protein expression from a single sample. In 2016 and 2017, we launched additional 3D Biology panels, including our first for the measurement of DNA mutations and in 2017 we launched our 360 panels for use in breast cancer, immuno-oncology and hematology. This year, we intend to expand beyond oncology and launch panels in neuroscience and immune-related diseases. At the end of 2018, we intend to launch our DSP product on an early access basis. This product will target the pathology market, which we have not previously targeted.
The future growth of the market for these new products depends on many factors beyond our control, including recognition and acceptance of our applications by the scientific community and the growth, prevalence and costs of competing methods of genomic analysis. If the markets for our new products do not develop as we expect, our business may be adversely affected. If we are not able to successfully market and sell our products or to achieve the revenue or margins we expect, our operating results may be harmed.
We are dependent on single source suppliers for some of the components and materials used in our products, and the loss of any of these suppliers could harm our business.
We rely on single source suppliers for some of the components and materials used in our instruments, such as Precision System Science, Co., Ltd of Chiba, Japan, to build our nCounter Prep Station,Station; and Korvis LLC of Corvallis, Oregon, to build our nCounter Digital Analyzer Paramit Corporation of Morgan Hill, California, to build our new nCounter SPRINT Profiler and IDEX Corporation of Lake Forest, Illinois to build the fluidics cartridge, a key component of our nCounter SPRINT Profiler. Each of these contract manufacturers are sole suppliers.GeoMx DSP. Since our contracts with these instrument suppliers do not commit them to carry inventory or make available any particular quantities, they may give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. We also rely on sole suppliers for various components we use to manufacture our consumable products. We periodically forecast our needs for such components and enter into standard purchase orders with them. If we were to lose such suppliers, or if the products provided by such suppliers are unable to meet our performance specifications, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. In addition, if as a result of global economic or political instability or disease outbreaks such as the COVID-19 pandemic, our suppliers experience shortages or delays for materials sourced or manufactured in the affected countries, their ability to supply us with instruments or product components may be affected. From time to time, certain components of our systems and reagents reach the end of their life cycles or are obsoleted by our suppliers, and we have to procure alternative sources for these end-of-life products. If we should encounter delays or difficulties in securing the quality and quantity of materials we require for our products, our supply chain would be interrupted which would adversely affect sales. If any of these events occur, our business and operating results could be harmed.
We may experience manufacturing problems or delays that could limit our growth or adversely affect our operating results.
Our consumable products are manufactured at our facilities located in the greater Seattle, Washington facilityarea using complex processes, sophisticated equipment and strict adherence to specifications and quality systems procedures. Any unforeseen manufacturing problems, such as contamination of our facility,facilities, equipment malfunction, quality issues with components and materials sourced from third-party suppliers, or failure to strictly follow procedures or meet specifications, or reduced or blocked access to our facilities as a result of the ongoing COVID-19 pandemic, could result in delays or shortfalls in production or require us to voluntarily recall our consumable products. Identifying and resolving the cause of any such manufacturing or supplier issues could require substantial time and resources. If we are unable to keep up with demand for our products by successfully manufacturing and shipping our products in a timely manner, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products.products or cancel outstanding purchase orders.
In addition, the introduction of new products may require the development of new manufacturing processes and procedures.procedures as well as new suppliers. For example, our 3D Biology applications for the simultaneous measurement of gene and protein expression and DNA mutations involve new processes for manufacturing our molecular barcodes.GeoMx DSP systems require that we establish supply relationships with antibody providers. While all of our CodeSets are produced using the same basic processes, significant variations may be required to meet new product specifications. Developing new processes and negotiating supply agreements can be very time consuming, and any unexpected difficulty in doing so could delay the introduction of a product.
If our greater Seattle area facilities become unavailable or inoperable, we will be unable to continue our research and development, manufacturing our consumables or processing sales orders, and our business will be harmed.
We manufacture our consumable products in our headquarters facilities located in the greater Seattle, Washington. In addition, Seattle isWashington area, which are the center for research and development, order processing, receipt of our instruments manufactured by third-party contract manufacturers and shipping products to customers. Our facilities and the equipment we use to manufacture our consumable products would be costly, and would require substantial lead time, to repair or replace. The Seattle area is situated near active earthquake fault lines. These facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes and power outages, which may render it difficult or impossible for us to produce our products for some period of time. The inability to manufacture consumables or to ship products to customers for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we possess insurance for damage to our property and the disruption of our business, this insurance, and in particular earthquake insurance, which is limited, 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.
We expect to generate a substantial portion of our product and service revenue internationally and are subject to various risks relating to our international activities, which could adversely affect our operating results.
For 2017, 2016 and 2015 approximately 40%, 38% and 39% respectively, of ourOur product and service revenue was generated from sales to customers located outside of North America.America was approximately 35%, 34% and 38% for the years ended December 31, 2021, 2020 and 2019, respectively. We believe that a significant percentage of our future revenue will come from international sources as we expand our overseas operations and develop opportunities in additional areas. Engaging in international business involves a number of difficulties and risks, including:
•required compliance with existing and changing foreign regulatory requirements and laws;
•required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act and U.K. Bribery Act, privacy and data privacyprotection requirements, labor laws and anti-competition regulations;
•export or import restrictions;
•various reimbursement and insurance regimes;
•laws and business practices favoring local companies;
•longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
•political and economic instability, such as the anticipated exit of Great Britainthe United Kingdom from the European Economic Community;Union;
•global health pandemics, such as the ongoing COVID-19 pandemic;
•potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers;
•difficulties and costs of staffing and managing foreign operations; and
•difficulties protecting or procuring intellectual property rights.
As we expand internationally, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Historically, most of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local currency outside of the United States, principally the Euro. Our expenses are generally denominated in the currencies of the countries in which our operations are located, which is primarily in the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows will
increasingly be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, our product and service revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. Similarly, a strong U.S. dollar relative to the local currencies of our international customers can potentially reduce demand for our products, which may compound the adverse effect of foreign exchange translation on our revenue. If we dedicate significant resources to our international operations and are unable to manage these risks effectively, our business, operating results and prospects will suffer.
Significant U.K. or European developments stemming from the U.K.’s referendum on membershipWe could be subject to additional income tax liabilities.
We are subject to income taxes in the European UnionUnited States and numerous foreign jurisdictions. Significant judgment is required in evaluating our worldwide provision for income taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in the relevant tax, accounting and other laws, regulations, principles and
interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable and we have established any required reserves in respect of such estimates in accordance with Generally Accepted Accounting Principles, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on us.
In June 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, and in March 2017, the government of the United Kingdom formally initiated the withdrawal process. This has created political and economic uncertainty, particularly in the United Kingdom and the European Union, and this uncertainty may last for years. Our business in the United Kingdom, the European Union, and worldwide could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. There are many ways in which our business could be affected, only some of which we can identify as of the date of this report.
The decision of the United Kingdom to withdraw from the European Union has caused and, along with events that could occur in the future as a consequence of the United Kingdom’s withdrawal, including the possible breakup of the United Kingdom, may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements or data transfer agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory and immigration barrierscash flows in the United Kingdom. In addition, the Europe-wide market authorization frameworkperiod or periods for our products (and for the drugs sold by our collaboration partners in the pharmaceutical industry) may also change. Furthermore, we currently operate in Europe through a subsidiary based in the United Kingdom, which provides us with certain operational, tax and other benefits, as well as through other subsidiaries in Europe. The United Kingdom’s withdrawal from the European Union could adversely affect our ability to realize those benefits and we may incur costs and suffer disruptions in our European operations as a result. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the European Union, may adversely affect our operating results and growth prospects.that determination is made.
Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, President Trump recently signed taxthe legislation into law,commonly known as the Tax Cuts and& Jobs Act, thator the TCJA, which was signed into law on December 22, 2017, as modified by the Coronavirus Aid, Relief, and Economic Security Act of 2020, or CARES Act, significantly revised the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, contains many significant changes to corporate taxation, including a reduction of the federal statutory rates from a top marginal rate of 35% to a flat rate of 21%, the transition of U.S. international taxation from a worldwide tax system to a territorial system, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, and modifying or repealing many business deductions and credits. We have accounted for such changes in accordance with our understanding of the TCJA, as modified by the CARES Act, and guidance available as of the date of this filing as described in more detail in our financial statements. We will continue to monitor and assess the impact of the federal legislation on our business and the extent to which various states conform to the federal tax law. Any further changes in tax laws the consequencesor regulations that are applied adversely to us of which have not yet been determined. Changes in corporate tax rates, the availability of the net deferred tax assets relating toor our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Cuts and Jobs Act or other tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense. Furthermore, changes to the taxation of undistributed foreign earnings could change our future intentions regarding reinvestment of such earnings. The foregoing itemscustomers could have a material adverse effect on our business, cash flow, financial condition or results of operations.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
As of December 31, 2017,2021, we had federal net operating loss carryforwards, or NOLs, to offset future taxable income of approximately $232.8$554.0 million. The federal NOLs generated during and after fiscal 2018 totaling $320.1 million whichare carried forward indefinitely, while all others, if not utilized, will expire in various years beginning in 2025, if not utilized.2025. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We may have already experienced one or more ownership changes. Depending on the timing of any future utilization of our carryforwards, we may be limited as to the amount that can be utilized each year as a result of such previous ownership changes. However, we do not believe such limitations will cause our NOLNOLs and tax credit carryforwards to expire unutilized. In addition, future changes in our stock ownership as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Internal Revenue Code. Our NOLs may also be impaired under similar provisions of state law.law or limited pursuant to provisions of the TCJA amendments to the Code, as modified by the CARES Act. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.
Provisions of our debt instruments we may enter into may restrict our ability to pursue our business strategies.
Our term loan agreement and revolving credit facility require us, and anyFrom time to time, we have used debt financing to provide capital for our business. Debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to, among other things:
•dispose of assets;
•complete mergers or acquisitions;
•incur indebtedness;
•encumber assets;
•pay dividends or make other distributions to holders of our capital stock;
•make specified investments;
•engage in any new line of business; and
•engage in certain transactions with our affiliates.
These restrictions could inhibit our ability to pursue our business strategies. In addition, we are subject tostrategies and may also impose certain financial covenants based on totalthat require us to achieve certain revenue andtargets and/or maintain certain minimum cash balances. If we default under our term loan agreement or revolving credit facility, andany such event of default is not cured or waived,debt instruments, the lenders could terminate commitments to lend and cause all amounts outstanding with respect to thesuch debt to be due and payable immediately, which in turn could result in cross defaults under other debt instruments. Our
assets and cash flow may not be sufficient to fully repay borrowings under all of our then outstanding debt instruments if some or all of these instruments are accelerated upon a default. We may incur additional indebtedness in the future. The debt instruments governing such indebtedness could contain provisions that are as, or more, restrictive than our existing debt instruments. If we are unable to repay, refinance or restructure our indebtedness when payment is due, the lenders could also proceed against theany collateral granted to them to secure such indebtedness or force us into bankruptcy or liquidation.
Acquisitions or joint ventures could disrupt our business, cause dilution to our stockholders and otherwise harm our business.
We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses. We have not made any acquisitions to date, and our ability to do so successfully is unproven. Any of these transactions could be material to our financial condition and operating results and expose us to many risks, including:
•disruption in our relationships with customers, distributors or suppliers as a result of such a transaction;
•unanticipated liabilities related to acquired companies;
•difficulties integrating acquired personnel, technologies and operations into our existing business;
•diversion of management time and focus from operating our business;
•increases in our expenses and reductions in our cash available for operations and other uses; and
•possible write-offs or impairment charges relating to acquired businesses.
Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Also, the anticipated benefit of any strategic transaction may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results.
If we are unable to recruit, train and retain key personnel, we may not achieve our goals.
Our future success depends on our ability to recruit, train, retain and motivate key personnel, including our senior management, research and development, manufacturing and sales and marketing personnel. Competition for qualified personnel is intense, particularly in the Seattle, Washington area. Our growth depends, in particular, on attracting, retaining and motivating highly-trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. We do not maintain fixed term employment contracts or key man life insurance with any of our employees. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, train, retain and motivate qualified personnel could materially harm our operating results and growth prospects.
Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims.
Our products have in the past and may in the future contain undetected errors or defects when first introduced or as new versions are released. Disruptions or other performance problems with our products may damage our customers’ businesses, harm our reputation and result in reduced revenues. If that occurs, we may also incur significant costs, the attention of our key personnel could be diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors or defects in our products. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our products could adversely impact our business and operating results.
The sale and use of products or services based on our technologies, or activities related to our research, and clinical studies, could lead to the filing of product liability claims if someone were to allege that one of our products contained a design or manufacturing defect which resulted in the failure to adequately perform the analysis for which it was designed. A product liability claim could result in substantial damages and be costly and time consuming to defend, either of which could materially harm our business or financial condition. We cannot assure investors that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future.
We face risks related to handling of hazardous materials and other regulations governing environmental safety.
Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials in manufacturing and in our products, and the generation, transportation and storage of waste. We could discover that we, or an acquired business or our suppliers are not in material compliance with these regulations. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.
If we experience a significant disruption in our information technology systems or breaches of data security, our business could be adversely affected.
We rely on information technology systems to keep financial records, manage our manufacturing operations, fulfill customer orders, capture laboratory data, maintain corporate records, communicate with staff and external parties and operate other critical functions. Our information technology systems, and those of our vendors, are potentially vulnerable to disruption due to breakdown, malicious intrusion and computer viruses, ransomware or other malicious code, or other disruptive events including but not limited to natural disaster. We are increasingly dependent upon our and our vendors’ technology systems to operate our business and our ability to effectively manage our business depends on the security, reliability and adequacy of our technology systems and data, which includes use of cloud technologies, including Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). If we were to experience a prolonged system disruption in our information technology systems or those of certain of our vendors, it could negatively impact our ability to serve our customers, which could adversely impact our business. Although we maintain offsite back-ups of our data, if operations at our facilities were disrupted, it may cause a material disruption in our business if we are not capable of restoring function on an acceptable timeframe. In addition, our information technology systems, and those of our vendors, are potentially vulnerable to data security breaches –and other security incidents — whether by employees or others –— which may expose sensitive data to unauthorized persons. Such data security breaches and incidents, whether resulting from hacking, social engineering, phishing, or other causes could lead to the loss of confidential information, financial assets, trade secrets or other intellectual property, or could lead to unauthorized access to or use, modification, unavailability, disclosure, loss or acquisition of, or the public exposure of, personal information (including sensitive personal information) of our employees, customers and others, or confidential information of ourselves or of third parties that we maintain, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations. If we are unable to preventIn addition, any such security breachesaccess, disclosure or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, and we may sufferother loss of information could result in legal claims, investigations or proceedings by governmental entities or private parties, adverse publicity and harm to our reputation, financial loss of business, and liability under laws or regulations, including privacy and data protection laws and regulations and the EU General Data Protection Regulation, or GDPR, and other negative consequences becauselaws and regulations, the breach of lost or misappropriated information.which could result in significant penalties and other liabilities. In addition, these breaches and incidents and other inappropriate access can be difficult to detect, and any delay in identifying them and responding to or otherwise remediating them may lead to increased harm of the type described above. We expect to continue to expend significant resources to protect against security breaches and incidents, and could be required to expend significant amounts to remediate and otherwise respond to security breaches and incidents, including in connection with making notifications to customers or other persons or implementing additional security measures. With the increase in personnel working remotely during the COVID-19 pandemic, we and our vendors are at increased risk for security breaches and incidents. We are taking steps in an effort to monitor and enhance the security of our technology systems and data; however, the unprecedented scale of remote work may require additional personnel and resources, which nevertheless cannot be guaranteed to fully safeguard our technology systems or data or other data or information that we maintain or that otherwise is processed in our business.
Although we maintain insurance that may cover certain liabilities in connection with a security breach or other security incident, we cannot be certain our insurance coverage will be adequate for liabilities actually incurred, that insurance will continue to be available to us on commercially reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, results of operations and reputation.
Significant United Kingdom or European developments stemming from the United Kingdom’s withdrawal from the European Union could have a material adverse effect on us.
In June 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, and in March 2017, the government of the United Kingdom formally initiated the withdrawal process. After several delays the United Kingdom exited from the European Union, on January 31, 2020, subject to a transition period that ended December 31, 2020. The United Kingdom’s exit from the EU, or Brexit, has created political and economic uncertainty, particularly in the United Kingdom and the European Union, and this uncertainty may last for several more years. Our business in the United Kingdom, the European Union, and worldwide could be affected during this period of uncertainty, and perhaps longer. Complying with changes in regulations in the United Kingdom in addition to European Union regulations will increase our costs of compliance and result in greater legal risks. There are many ways in which our business could be affected, only some of which we can identify as of the date of this report.
The decision of the United Kingdom to withdraw from the European Union has caused and, along with events that could occur in the future as a consequence of the United Kingdom’s withdrawal may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new or modified trade agreements or data transfer agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory and immigration barriers in the United Kingdom. In addition, the Europe-wide market authorization framework for our products and access to European Union research funding by research scientists based in the United Kingdom may also change and may also result in a slowdown in spending on research tools like our systems. Furthermore, we currently operate in Europe through a subsidiary based in the United Kingdom, which provides us with certain operational, tax and other benefits, as well as through other subsidiaries in Europe. The United Kingdom’s withdrawal from the European Union could adversely affect our ability to realize those benefits and we may incur costs and suffer disruptions in our European operations as a result. These possible negative impacts, and others resulting from the United Kingdom’s withdrawal from the European Union, may adversely affect our operating results and growth prospects.
We intend to seek strategic collaborations and partnerships and other transactions, which may result in the use of a significant amount of our management resources or significant costs, and we may not be able to fully realize the potential benefit of such transactions.
We intend to seek strategic collaborations, partnerships and partnershipsother transactions to support the continued growth of theour company. However, there is no assurance that we will be successful in doing so. Accordingly, we may be engaged in evaluating potential transactions including, without limitation, strategic partnerships, divestitures of existing businesses or assets, a merger or consolidation with a third party that results in a change in control, a sale or transfer of all or a significant portion of our assets or a purchase by a third party of our securities that may result in a minority or control investment by such third party. From time to time, we may engage in discussions that may result in one or more transactions. Although there would be uncertainty that any of these discussions would result in definitive agreements or the completion of any transaction, we may devote a significant amount of our management resources to such a transaction,
which could negatively impact our operations. In addition, we may incur significant costs in connection with seeking strategic transactions regardless of whether the transaction is completed. In the event that we consummate a strategic collaboration, or partnership or other transaction in the future, we cannot assure you that we would fully realize the potential benefit of such a transaction whichor that the market would not have an adverse reaction to any such transaction. The failure to fully realize the potential benefit of such a transaction, adverse market reaction to any such transaction and any other issues we may encounter in connection with the consummation of any such transaction could adversely affect our future financial results or that such transaction would positivelynegatively impact the value of stockholders'stockholders’ investment in us.
For example, in December 2019, we entered into a LAPA, with Veracyte, pursuant to which we granted to Veracyte an exclusive worldwide license to our nCounter FLEX Analysis System, or the FLEX System, for in vitro diagnostic use and for the development and commercialization of in vitro diagnostic tests, including in vitro diagnostic devices, or IVDs, or laboratory developed tests, or LDTs, for use on the FLEX System and sold to Veracyte certain assets, including our rights with respect to the Prosigna Breast Cancer Prognostic Gene Signature Assay, the LymphMark Lymphoma Subtyping Test and the assay software modules that operate together with the FLEX System. For additional information regarding our transaction with Veracyte please see Part I, Item 1. “Business — License Agreement — Veracyte, Inc.” of this report. We cannot be certain that we will realize all of the anticipated benefits from our transaction with Veracyte and the disposition of certain of our assets pursuant to the LAPA may yet have an unforeseen detrimental impact on our business. Furthermore, transactions such as our agreement with Veracyte can be disruptive to our retained operations, divert management’s attention from day-to-day operations and potentially increase employee attrition.
Risks Related to Government Regulation and Diagnostic Product Reimbursement
Our “research use only”“Research Use Only” products for the research life sciences market could become subject to regulationmore stringent regulatory requirements as medical devices by the FDA or other regulatory agencies in the future which could increase our costs and delay our commercialization efforts, thereby materially and adversely affecting our business and results of operations.
In the United States, most of our products are currently labeled and sold for research use only,Research Use Only, or RUO, and not for the diagnosis or treatment of disease, and are sold to pharmaceutical and biotechnology companies, academic and government institutions and research laboratories. Because such RUO products are not intended for diagnostic or clinical use, and the products do not include clinical or diagnostic claims or provide directions tofor use as diagnostic products, they are not subject to regulation by the Food and Drug Administration, or FDA, as medical devices. In particular, while the FDA regulations require that RUO products be appropriately labeled, “For Research Use Only. Not for useUse in diagnostic procedures,Diagnostic Procedures,” the regulations do not subject such products to the FDA’s pre- and post-market controls for medical devices. Pursuant to the FDA guidance on RUO products, a company may not make clinical or diagnostic claims about an RUO product or provide clinical directions or clinical support services to customers for RUO products.products, or engage in distribution or sales practices that are not consistent with the RUO labeling. If the FDA were to modify its approach to regulating RUO products, labeled for research use only, itcompliance with additional or changes in regulations could reduce our revenue or increase our costs and adversely affect our business, prospects, results of operations or financial condition.
Even where our products are labeled, promoted, and intended as RUO, the FDA or comparable agencies of other countries, depending on the totality of circumstances, could disagree with our conclusion that our products are intended for research use only or deem our sales, marketing and promotional efforts as being inconsistent with research use only products. For example, our customers may independently elect to use our RUO products for clinical or diagnostic purposes, which could subject our products to government regulation, and the regulatory clearance or approval and maintenance process for such products may be uncertain, expensive, and time-consuming. This uncertainty exists even if such use by our customers occurs without our consent. If the FDA determines that our sales or distribution practices are not consistent with the RUO labeling, the FDA could consider our products to be misbranded and/or adulterated under the Federal Food, Drug, and Cosmetic Act and take adverse administrative or enforcement actions against us, such as recall and warning letter, among others, any of which could materially harm our business. In the event that the FDA requires marketing authorization of our RUO products in the future, there can be no assurance that the FDA will ultimately grant any clearance or approval requested by us in a timely manner, or at all.
In addition, we sell dual-use instruments with software that has both FDA-cleared functions, and research functions for which the FDA approval or clearance is not required. Dual-use instruments are subject to FDA regulation since they are intended, at least in part, for use by customers performing clinical diagnostic testing. In November 2014, the FDA issued a guidance document that described the FDA’s approach to regulating molecular diagnostic instruments that combine both approved/cleared device functions and deviceresearch functions for which approval/clearance is not required. There is a risk that the FDA could take enforcement action against a manufacturerrequirements for distributing dual-use instruments if the company does not follow the restrictions discussed in the guidance document.could change causing additional costs and delays for development of these products. For example, there could be enforcement action if the FDA determines that approval or clearance was required for those functions for which the FDA approval or clearance has not been obtained, or the instruments are being promoted off-label.for off-label use. There is also a risk that the FDA could broaden its current regulatory enforcement of dual-use instruments through additional FDA oversight of such products or impose additional requirements upon such products. Earlier this past year,In July 2017, FDA proposed that the clinical diagnostic portions ofadopted a new regulation exempting certain clinical multiplex test systems, like the ones used with ourthe Prosigna assay be exempt from the requirement for FDA clearance. FDA adopted the proposal on July 11, 2017 and issued new regulations exempting certain clinical multiplex test systemsthat we supply to Veracyte, from premarket notification requirements.requirements, although such instruments are still required to comply with the special controls applicable to Class II medical devices. However, these new regulations will not impact the FDA clearance requirements for our nCounter Dx Analysis System which will still require 510(k) clearanceintended for use with specific assays like Prosigna.
If Medicare and other third-party payors in the United States and foreign countries do not approve reimbursementor panels for clinical or diagnostic tests enabled by our technology, the commercial success of our diagnostic products would be compromised.
Successful commercialization of our diagnostic products depends, in large part, on the availability of adequate reimbursement for testing services that our diagnostic products enable from government insurance plans, managed care organizations and private insurance plans. There is significant uncertainty surrounding third-party reimbursement for the use of tests that incorporate new technology. For example, after the FDA clearance of Prosigna in September 2013, it took over two years to achieve broad Medicare reimbursement of Prosigna testing.
If we are unable to obtain positive policy decisions from third-party payors approving reimbursement for our tests at adequate levels, the commercial success of our diagnostic products would be compromised and our revenue would be significantly limited. Even if we do obtain reimbursement for our tests, Medicare, Medicaid and private and other payors may withdraw their coverage policies, cancel their contracts at any time, review and adjust the rate of reimbursement, require co-payments from patients or stop paying for our tests, which would reduce revenue for testing services based on our technology, and indirectly, demand for diagnostic products. In addition, insurers, including managed care organizations as well as government payors such as Medicare and Medicaid, have increased their efforts to control the cost, utilization and delivery of healthcare services, which may include decreased coverage or reduced reimbursement. From time to time, Congress has considered and implemented changes to the Medicare fee schedules in conjunction with budgetary legislation, and pricing and payment terms, including the possible requirement of a patient co-payment for Medicare beneficiaries for tests covered by
Medicare, and are subject to change at any time. Most recently the Protecting Access to Medicare Act, or PAMA, of 2014 revises the Medicare Clinical Laboratory Fee Schedule, or CLFS, to base prices on commercial payer rates that are reported to the Centers for Medicare and Medicaid Services, or CMS. In June 2016, CMS released the final Clinical Diagnostic Tests Laboratory Payment System regulations, in response to PAMA. The statute applies different reporting and payment requirements to Advanced Diagnostic Laboratory Tests and to Clinical Diagnostic Laboratory Tests, or CDLTs. Under the definitions in the rules, Prosigna is defined as a CDLT and therefore will be repriced every three years based on a weighted median of commercial payments submitted by labs. As a result, if commercial payment amounts decline, there is a risk that Medicare prices will fall as well, though PAMA limits these reductions to no more than 10% less than the prior year during calendar years 2018-2020 and no more than 15% less during years 2021-2023.
Reductions in the reimbursement rate of third-party payors have also occurred and may occur in the future. For example, in September 2017, CMS published its preliminary determinations of pricing for CDLTs to take effect on January 1, 2018. CMS issued a proposed payment determination that would reduce Medicare reimbursement of Prosigna to our customers from the current rate of $3,443 per test to $508 per test. CMS used a pricing methodology called "crosswalking" pursuant to which a new testpurposes, such as Prosigna, is determined to be similar to an existing test and is assigned the same fee schedule amount as the existing test. CMS recommended crosswalking Prosigna to a colorectal screening test,each of which has the lowest priced code for advanced diagnostic tests on the fee schedule, despite a recommendation from an advisory panel that it be crosswalked to a different code (0008M). We successfully advocated to CMS to crosswalk Prosigna to the 0008M code category and restore its current reimbursement level. However, as part of its market-based pricing determinations for 2018 required by PAMA, CMS calculated the weighted median of commercial payments for laboratory tests. For Prosigna, only one commercial payment rate from a single commercial laboratory was reported which was lower than the current reimbursement price. CMS used that single payment amount as the weighted median which triggered an automatic reduction in Prosigna's Medicare reimbursement rate of $3,443 to $3,419, effective January 1, 2018. Reductions in the prices at which testing services based on our technology are reimbursed could have a negative impact on our revenue.will require separate premarket notification or premarket approval.
In many countries outside of the United States, various coverage, pricing and reimbursement approvals are required. Positive reimbursement decisions for Prosigna have occurred in France, certain regions of Spain, Canada, Israel, Switzerland and Denmark but despite these positive developments, we continue to expect that it will take several years to establish broad coverage and reimbursement for testing services based on our products with most payors in countries outside of the United States, and our efforts may not be successful.
We continue to pursue positive reimbursement and coverage decisions from government insurance plans, managed care organizations and private insurance plans. From time to time, if positive coverage decisions are obtained, we may publicly announce such decisions. In most cases where coverage is denied by a third-party payor, there will be subsequent opportunities to submit additional information or clinical evidence and have such decision reconsidered. We intend to evaluate the benefit of continued pursuit of a positive reimbursement determination on a case by case basis and in most cases expect to continue to pursue a positive coverage decision with those payors based on additional information or subsequent clinical developments; as a result, we do not intend to publicly announce any denials of coverage or the absence of a coverage determination on a regular basis.
Our nCounter-basednCounter reagents may be used by clinical laboratories to create Laboratory-Developed Tests (LDTs), which could, in the future, be the subject of additional FDA regulation as medical devices, which could materially and adversely affect our business and results of operations.
In February 2014, we launchedOur nCounter Elements reagents a digital molecular barcoding chemistry that allowsallow users to design and validate their own customized assays using standard sets of barcodes provided by us with the laboratories’ choice of oligonucleotide probes. These reagents which will now be offered to customers in the United States through a custom manufacturing service, may be used by laboratories in conjunction with appropriate analyte-specific reagents and general purpose reagents to create diagnostic tests or test systems.systems validated within the accredited testing laboratory.
A clinical laboratory can use our custom-manufactured reagents to create what is called a Laboratory Developed Test, or LDT. LDTs, according to the FDA, are in vitro diagnostic tests that are developed, validated and performed by a single laboratory and include genetic tests. Historically, the FDA has generally exercised “enforcement discretion” for most LDTs, generally havemeaning that the FDA has not been subjectrequired LDTs to comply with medical device requirements. However, the FDA regulations.has sought to
regulate certain types of LDTs, such as pharmacogenetic tests and cancer screening tests, and had taken enforcement action against companies marketing such tests without premarket authorization. In October 2014, the FDA issued two draft guidance documents proposing a comprehensive risk-based regulatory framework for all LDTs. Although the FDA announced in 2016 these draft guidance documents would not be finalized, the FDA could in the future seek to regulate LDTs more broadly and could take enforcement action against new LDTs, the FDA could alter its position or question a particular LDT that a laboratory is providing.
In August 2020, the Department of Health and Human Services, or HHS, announced rescission of guidances and other informal issuances of FDA regarding premarket review of LDT absent notice-and-comment rulemaking, stating that, absent notice-and-comment rulemaking, those seeking approval or clearance of, or an emergency use authorization, for an LDT may nonetheless voluntarily submit a premarket approval application, premarket notification or an EUA request, respectively, but are not required to do so. In November 2021, HHS under the Biden administration issued a statement that withdrew the August 2020 policy announcement stating that HHS does not have a policy on LDTs that is separate from FDA’s longstanding approach.
Legislative and administrative proposals to amend the FDA's oversight of a risk-based approach to regulating LDTs.LDTs have been introduced in recent years, including the Verifying Accurate Leading-edge IVCT Development Act of 2021 (VALID Act). It is unclear how such action as well as future legislation by federal and state governments and FDA regulation will impact the industry, including our business and that of our customers. Any restrictions on LDTs, IVDs, or RUO products by the FDA, HHS, Congress, or state regulatory authorities could decrease the demand for our reagents.products. Additionally, compliance with additional regulatory burdens could be time consuming and costly for us and our partners and customers. While FDA announced in November 2016 that it did not intend to seek finalizationThe adoption of the draft LDT guidance innew restrictions on RUOs, whether by the near term, FDA could alter its position or Congress, could enact legislation that could result in FDA regulation of some LDTs. If FDA changed its policy or legislation were enacted, it could adversely affect demand for theseour specialized reagents.
Ifreagents and instruments. Further, we are unable to obtain additional regulatory clearances or approvals to market Prosigna in additional countries or if regulatory limitations are placed on our diagnostic products, our business and growth will be harmed. In addition, if we do not obtain additional regulatory clearances or approvals necessary to market products other than Prosigna for diagnostic purposes, we will be limited to marketing such products for research use only.
We have received regulatory clearance in the United States under a 510(k) for a version of our first diagnostic product, Prosigna, providing an assessment of a patient’s risk of recurrence for breast cancer, and we have obtained a CE mark for Prosigna which permits us to market that assay for diagnostic purposes in the European Union. We do not have regulatory clearance or approval to market in any additional markets, other than Switzerland, Israel, Canada, Turkey, New Zealand, Hong Kong, Australia, Thailand, Argentina and Singapore, or to promote Prosigna in the United States for additional indications. Other than with respect to Prosigna in such jurisdictions, we are limited to marketing our products for research use only, which means that we cannot make diagnostic or clinical claims. We intend to seek regulatory authorizations to market 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 any regulatory authorizations needed to use the companion diagnostic tests in clinical trials as well as the regulatory approvals to sell the companion diagnostic tests following completion of such trials. Some of the compensation we expect to receive pursuant to these collaborations is based on the receipt of such approvals.
We cannot assure investors that we will be successful in obtaining these regulatory clearances or approvals. If we do not obtain additional regulatory clearances or approvals to market future products or expand future indications for diagnostic purposes, if additional regulatory limitations are placed on our products or if we fail to successfully commercialize such products, the market potential for our diagnostic products would be constrained, and our business and growth prospects would be adversely affected.
Approval and/or clearance by the FDA and foreign regulatory authorities 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 our products for use as clinical diagnostics in the United States, thereby subjecting them to FDA regulation as medical devices, unless an exemption applies we are required to obtain prior 510(k) clearance, de novo authorization or pre-market application approval, or PMA approval, from the FDA. In September 2013, we received FDA 510(k) clearance for Prosigna as a prognostic indicator for distant recurrence-free survival at 10 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 who have undergone surgery in conjunction with locoregional treatment and consistent with the standard of care. We may pursue additional intended uses for Prosigna that require a PMA approval, which is a more burdensome regulatory process than the 510(k) clearance process. In addition, we are currently collaborating with Celgene on a companion diagnostic test for their drug REVLIMID. In August 2014, the FDA issued a companion diagnostics final guidance stating that if the device is essential to the safety or efficacy of the drug, the FDA generally will require approval or clearance for the device at the time when the FDA approves the drug. The FDA stated in the companion diagnostics final guidance that while in some instances a companion diagnostic could come to market through a 510(k), FDA expects that companion diagnostics usually will require a PMA. In July 2016, the FDA issued a draft co-development companion diagnostic and therapeutic guidance document which similarly reflected this information. The draft guidance appears to also relate, at least in part, to what may be considered complementary diagnostics, i.e., diagnostics that are beneficial for therapeutic product development or clinical decision making but that do not meet the definition of an IVD companion diagnostic. If we developed a diagnostic device to be used in conjunction with a pharmaceutical product that was then cleared or approved but not as a companion diagnostic for the therapeutic product, this may result in potentially reduced revenue for the test as the labeling of the drug would not reference the need for the diagnostic test.
Any 510(k) clearance, de novo authorization or PMA approval we obtain for any future product would place substantial restrictions on how our device is marketed or sold. The FDA will continue to place considerable restrictions on our products, including, but not limited to, the obligation to comply with the Quality System Regulation, or QSR, registering manufacturing facilities, listing the products with the FDA, and complying 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, and generally takes from several months to several years from submission, and generally requires detailed and comprehensive scientific and clinical data, as well as compliance with FDA regulations. In addition, we have limited experience in obtaining PMA approval from the FDA and are therefore supplementing our operational capabilities to manage the more complex processes needed to obtain and maintain PMAs. Notwithstanding the expense, these efforts may never result in FDA approval or clearance. Even if we were to obtain regulatory approval, authorization or clearance, 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 products 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 outside the United States may differ from that required to obtain FDA approval or clearance, and we may not be able to obtain foreign regulatory approvals on a timely basis or at all. Approval or clearance by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval or clearance by regulatory authorities in other countries or by the FDA, and foreign regulatory authorities could require additional testing beyond what the FDA requires. In addition, FDA regulates exports of medical devices. Failure to comply with these regulatory requirements or to obtain required approvals or clearances could impair our ability to commercialize our diagnostic products outside of the United States.
We expect to rely on third parties in conducting any future studies of our diagnostic products that may be required by the FDA or other regulatory authorities, and to fulfill product registration requirements in foreign countries, and those third parties may not perform satisfactorily.
We do not have the ability to independently conduct the clinical studies or other studies that may be required to obtain FDA and other regulatorypremarket clearance or approval forbefore we can continue to sell our diagnostic products including additional indications for Prosigna. Accordingly, we expect to rely on third parties, such ascertain customers.
For medical institutions, clinical investigators, consultants, and our pharmaceutical collaborators to conduct such studies. For example, we contract with clinical laboratories to perform the companion diagnostic tests we are developing that are used in the clinical trials run by pharmaceutical companies pursuant to our companion diagnostic collaborations. Our reliance on these third parties for clinical development activities will reduce our control over these activities. These third-party contractors may not complete activities on schedule or conduct studies in accordance with regulatory requirements or the study design. Our reliance on third partiesdevices that we do not control will not relieve us of any applicable requirement to ensure compliance with various procedures required under good clinical practicesdevelop and regulatory requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, the studies may be extended, delayed, suspended or terminated, andcommercialize, we may not be able to obtain regulatory approval for our diagnostic products. In addition, under our contracts with our pharmaceutical collaborators, we potentially could be held liable for the failure of our third party subcontractors to perform their contractual obligations.
In many countries, we are not permitted to directly apply for product registrations, and therefore must rely on third-party contractors or product distributors resident in those countries to fulfill the product registration requirements. Our reliance on these third parties reduces our control over the registration activities, and those parties may not appropriately register the products. Our reliance on third parties does not relieve us of the obligation to comply with applicable requirements, and therefore any failure on the part of the third parties could subject us to enforcement action in the country in which the registration was not properly fulfilled.
We are subject to ongoing and extensive regulatory requirements, 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, including Prosigna and the nCounter DxFLEX Analysis System. Accordingly, we and certain of our contract manufacturers are subject to ongoing International Organization for Standardization, or ISO, obligations as well as regulation by the FDA, state regulatory authorities, and FDA obligationsother comparable national and continued regulatory oversight and review.local health authorities. These may include routine inspections by European Union, or EU, Notified Bodies and by the FDA of our manufacturing facilities and our records forby Notified Bodies, the FDA, and other health authorities, to assess compliance with requirements such as ISO 13485 and the FDA’s Quality System Regulations, or QSR, 21 C.F.R. Part 820 which establishinclude extensive requirements for quality assurance and control as well as manufacturing and change control procedures.procedures, among other things. We are also subject to other regulatory obligations,FDA regulations, such as requirements pertaining to the registration of our manufacturing facilities and the listing of our devices with the FDA; continued medical device reporting, for example, reporting of adverse eventevents and malfunction reporting;malfunctions; reporting certain corrections and removals reporting;removals; and labeling and promotional requirements. Other agencies may also issue guidelines and regulations that could impact the development, labeling, marketing, and distribution of our products, including companion diagnostic tests. For example,among other activities. The final form of the European Medicines Agency, a European Union agencyMedical Device Regulation (MDR), which is responsible for the scientific evaluation of medicines used in the EU, recently launched an initiative to determine guidelines for the use of genomic biomarkers in the development and life-cycle of drugs.will replace Europe’s Medical Device Directive (MDD), became effective on May 26, 2021. On May 25, 2017 the European Union adopted the IVD Directive Regulation, which increases the regulatory requirements applicable to some in vitrodiagnostics in the EU and wouldmay require that we re-classifythe re-classification and obtain pre-approval for our existingapproval, registration, or clearance of CE-marked IVD products, including our nCounter FLEX system, within a five-year grace period (by May 25,26, 2022).
We may also be subject to additional FDA or global regulatory authority post-marketing obligations or requirements by the FDA or globalother regulatory authorityauthorities to change our current product classifications which would impose additional regulatory obligations on us. For example, following discussions with the FDA regarding the appropriate classification forus and our nCounter Elements TagSets as General Purpose Reagents,contractors. If we submitted a de novo application to the FDA. The FDA requested additional information in support ofor our application. We subsequently withdrew the application, and plan to offer a custom code
set manufacturing service to customers developing assays. The promotional claims we can make for Prosigna are limited to the cleared (or equivalent) indication. If wecontractors or suppliers 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 by EU Competent Authorities and the FDA and other global regulatory authorityauthorities such as through 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 other foreign jurisdictions as we continue to commercialize our products in new markets outside of the U.S.United States and Europe. AdverseAny adverse action by Notified Body, EU Competent Authority, orthe FDA or other global regulatory authority action in any of these areas could significantly increase our expenses, andexpose us to greater liability, limit our revenue and profitability.profitability, and cause reputational harm.
We are also required to comply with an increasing number of environmental compliance regulations, including those focused upon the restriction of certain hazardous substances in our products. We have compliance programs designed to meet the requirements of environmental compliance regulations, but our failure to comply with such current or future regulations could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations that could have a material adverse effect on our business, results of operations and financial condition.
We may be subject, directly or indirectly, to healthcare fraud and abuse laws and other laws applicable to our marketing and promotional practices. If we or our agents and contractors are unable to comply, or have not complied, with such laws, we could face substantial penalties.
Various laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Our operations are directly, or indirectly through our agents, contractors, or customers, subject to various fraud and abuse laws, including, without limitation, the federal and state anti-kickback statutes and state, federal and foreign marketing compliance laws. Any misconduct could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by our employees, agents, representatives, or independent contractors that we may work with, and the precautions we take to detect and prevent misconduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other adverse actions or lawsuits stemming from a failure to comply with applicable laws and gift bans.regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions, exclusion from participation in government healthcare programs, or the curtailment or restructuring of our operations. These laws may impact, among other things, our proposed sales and marketing and education programs and require us to implement additional internal systems for tracking certain marketing expenditures and reporting them to government authorities. In addition, we may be subject to laws and regulations relating to privacy regulationsand data protection by both the federal government and the states in which we conduct our business as well as by foreign governments and entities. The laws that may affect our ability to operate include:include, but are not limited to:
•the federal Anti-kickback LawStatute and state anti-kickback prohibitions;equivalents;
•the federal physician self-referral prohibition, commonly known as the Stark Law, and the state equivalents;
•the federal Health Insurance Portability and Accountability Act of 1996, as amended;amended, commonly known as HIPAA;
•the Medicare civil money penalty laws and exclusion requirements;
•the federal False Claims Act civil and criminal penalties and state equivalents;
state physician gift bans and •the Physician Payments Sunshine Act;
•state, federal and foreign marketing expenditure disclosure laws;
•state privacy laws, such as the California Consumer Privacy Act and California Privacy Rights Act;
•the Foreign Corrupt Practices Act, which applies to our international activities; and
•the European Union'sUnion’s General Data Protection Regulation.
Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the U.S. We have undertaken certain efforts to conform transfers of personal data from the European Economic Area, or EEA, to the U.S. and other jurisdictions based on our understanding of current regulatory obligations and the guidance of data protection authorities, including standard contractual clauses approved by the European Commission, or the SCCs, and the EU-U.S. and Swiss-U.S. Privacy Shield programs administered by the U.S. Department of Commerce. Despite this, we may be unsuccessful in maintaining conforming means of transferring personal data from the EEA, Switzerland, and United Kingdom, in particular as a result of continued legal and legislative activity within those regions. The EU-U.S.-and Swiss-U.S. Privacy Shield frameworks and the SCCs have been subject to legal challenge and on July 16, 2020, the Court of Justice of the European Union, or CJEU, issued a decision invalidating the EU-U.S. Privacy Shield and imposing additional requirements in connection with the use of the SCCs. The Swiss-U.S. Privacy Shield also has been declared invalid. The European Commission issued new SCCs in June 2021 that account for the CJEU’s decision and other developments, which need to be put in place for new contracts involving the transfer of personal data from the EEA to a third country as of September 27, 2021, and by December 27, 2022, replace previous SCCs included in existing contracts concluded before September 27, 2021. Additionally, the United Kingdom’s Information Commissioner’s Office issued new standard contractual clauses to support personal data transfers out of the United Kingdom on February 2, 2022. If approved by the United Kingdom Parliament, these standard contractual clauses will become effective March 21, 2022. We are assessing these developments and their impact on our data transfer mechanisms. We may, in addition to other impacts, experience additional costs associated with increased compliance burdens, and we and our customers face the potential for regulators in the EEA, Switzerland, and United Kingdom to apply different standards to the transfer of personal data from those regions to the U.S., and to block, or require ad hoc verification of measures taken with respect to, certain data flows from those regions to the U.S. We also may be required to engage in new contract negotiations with third parties that aid in processing data on our behalf. We may find it necessary or desirable to make further changes to our handling of personal data of residents of those regions. The regulatory environment applicable to the handling of the personal data of EEA, Switzerland, and United Kingdom residents, and our actions taken in response, may cause us to assume additional liabilities or incur additional costs and could result in our business, operating results and financial condition being harmed. Additionally, we and
our customers may face a risk of enforcement actions by data protection authorities in those regions relating to personal data transfers. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel and negatively affect our business, operating results and financial condition.
The exit of the United Kingdom from the EU, also known as Brexit, has created uncertainty with regard to data protection in the United Kingdom. The United Kingdom maintains the Data Protection Act of 2018 and the UK GDPR, which collectively implement and complement the GDPR and provide for penalties for noncompliance of up to the greater of £17.5 million, or four percent, of worldwide revenues. On June 28, 2021, the European Commission announced a decision of “adequacy” concluding that the United Kingdom ensures an equivalent level of data protection to the GDPR, which provides some relief regarding the legality of continued personal data flows from the EEA to the United Kingdom. Such adequacy decision must, however, be renewed after four years and may be modified or revoked in the interim. We cannot fully predict how the Data Protection Act, the UK GDPR and other United Kingdom data protection laws or regulations may develop in the medium to longer term, nor the effects of divergent laws and guidance regarding how data transfers to and from the United Kingdom will be regulated.
More generally, the laws, rules and regulations relating to privacy or data protection to which we may be subject, or that otherwise apply to our business, are constantly evolving, and we expect that there will continue to be new proposed laws, regulations and industry standards concerning these matters in the United States, the EU and other jurisdictions. If our operations are found to be in violation of any of the laws or regulations described above or any other governmental regulationsothers that apply to us, or to which we become subject in the future, we may be subject to claims, complaints, investigations, enforcement actions, and penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Healthcare policy changes, including legislation reforming the United States healthcare system, may have a material adverse effect on our financial condition and results of operations.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the ACA, enacted in March 2010, made changes that significantly impact the pharmaceutical and medical device industries and clinical laboratories. For example, beginning in 2013, each medical device manufacturer must pay a sales tax in an amount equal to 2.3% of the price for which such manufacturer sells its medical devices. In December 2015, Congress passed a two-year suspension of the medical device tax from January 1, 2016 to December 31, 2017. In January 2018, Congress suspended the tax again for a two-year period. The tax applies to our listed medical device products, which include the nCounter Dx Analysis System and Prosigna. The Budget Control Act of 2011 contained automatic spending cuts to the federal budget known as sequestration. As a result of sequestration, Medicare payments are reduced by 2% per year. For Prosigna, pricing changes can occuryear through 2031, with the biannual adjustment toexception of a temporary suspension implemented under various COVID 19 relief legislation from May 1, 2020 through March 31, 2022 unless additional congressional action is taken. Under current legislation, the CLFS; this resulted in a 10%actual reduction in Medicare payments will vary from 1% in 2022 to up to 4% in the Medicare reimbursement price for Prosigna starting on January 1, 2018.final fiscal year of this sequester. These or any future proposed or mandated reductions in payments may apply to some or all of the clinical laboratory tests that our customers use our technology to deliver to Medicare beneficiaries, and may indirectly reduce demand for our products.
Other significant measures contained in the ACA include 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 includesincluded significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasingincreased potential penalties for such violations. In addition,
Since its enactment, certain provisions of the ACA establishes an Independent Payment Advisory Board, or IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce healthcare expenditures, which may have a negative impact on payment rates for services, including our tests. Although created in 2010, to date no members have been appointedsubject to IPAB,judicial and it remains non-operational.
Congressional challenges. In addition to the ACA, the effect of which cannot presently be quantified, various healthcare reform proposals have
also emerged from federal and state governments. Changes in healthcare policy, such as the creation of broad test utilization limits for diagnostic products in general or requirements that Medicare patients pay for portions of clinical laboratory tests or services received, could substantially impact the sales of our tests, increase costs and divert management’s attention from our business. In addition, sales of our tests outside ofJune 2021, the United States will subject usSupreme Court held that Texas and other challengers had no legal standing to foreign regulatory requirements,challenge the ACA, dismissing the case without specifically ruling on the constitutionality of the ACA, which may also change over time.
remains in effect in its current form. We cannot predict whetherthe impact of these decisions, future litigation, as well as future healthcare initiatives, including potential repeal of the ACA in whole or in part by Congress following the election of President Trump, will belegislation, regulation, and other efforts implemented at the federal or state level or in countries outside of the United States in which we may do business or the effect any future legislation or regulation will have on us.us, our partners or customers, or our industry in general. Changes in the United States healthcare industry may increase our compliance burden, expose us to greater liability, result in decreased profits to us, lower reimbursements by payors for our products or reduced medical procedure volumes, all of which mayand adversely affect our business, financial condition and results of operations.
Risks Related to Intellectual Property
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. As of December 31, 2017,2021, we owned or licensed 20approximately 35 issued U.S. patents and approximately 4024 pending U.S. patent applications, including provisional and non-provisional filings.filings and 5 pre-nationalization PCT applications. We also owned or licensed approximately 255303 pending and granted counterpart applications worldwide, including 111126 country-specific validations of 1218 European patents. We continue to file new patent applications to protect the full range of our technologies. 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.
Our success depends in part on obtaining patent protection for our products and processes, preserving trade secrets, patents, copyrights and trademarks, operating without infringing the proprietary rights of third parties, and acquiring licenses for technology or products. We cannot assure investors that any of our currently pending or future patent applications will result in issued patents, and we cannot predict how long it will take for such patents to be issued. As the patent and prior art landscape for translational research and molecular diagnostic life science products grows more crowded and becomes more complex we may find it more difficult to obtain patent protection for our products including those related to digital spatial profiling, spatial molecular imaging and sequencing, for example.sequencing. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and may therefore fail to provide us with any competitive advantage. Additionally, we cannot assure investors that our currently pending or future patent applications have or will be filed in all of our potential markets. Further, we cannot assure investors that other parties will not challenge any patents issued to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the third party or the unenforceability or invalidity of such patents and could deprive us of the ability to prevent others from using the technologies claimed in such issued patents.
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 ininside or outside the United States. Furthermore, in the biotechnology field, courts frequently render opinions that may affect the patentability of certain inventions or discoveries, including opinions that may affect the patentability of methods for analyzing or comparing DNA.biological macromolecules including nucleic acids, such as DNA and RNA, and proteins.
In particular, the patent positions of companies engaged in development and commercialization of genomic diagnostic tests, like Prosigna, are particularly uncertain. Various United States courts, including the U.S. Supreme Court, have rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to genomic diagnostics. Specifically, these decisions stand for the proposition that patent claims that recite laws of nature (for example, the relationships between gene expression levels and the likelihood of risk of recurrence of cancer) are not themselves patentable unless those patent claims have sufficient“sufficient” additional features thatwhich provide practical assurance that the processes are genuinegenuinely inventive applications of those laws, rather than patent drafting efforts designed to monopolize the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. Furthermore, in view of these decisions, in December 2014 the U.S. Patent and Trademark Office, or USPTO, published revised guidelines for patent examiners to apply when examining process claims for patent eligibility. This guidance was updated by the USPTO in July 2015 and additional illustrative examples provided in May 2016. The USPTO provided additional guidance on examination procedures pertaining to subject matter eligibility in April 2018, June 2018, January 2019 and October 2019. The guidance indicates that claims directed to a law of nature, a natural phenomenon, or an abstract idea that do not meet the eligibility requirements should be rejected as non‑statutory, patent ineligible subject matter.matter; however, method of treatment claims that practically apply natural relationships should be considered patent eligible. We cannot assure youinvestors that our patent portfolio will not be negatively impacted by the current uncertain state of the law, new court rulings or changes in
guidance or procedures issued by the USPTO. From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and validity of patents within the genomic diagnostic space, and any such changes could have a negative impact on our business.
The laws of some non-U.S. countries do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing 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. 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.business; the foreign court may find that our enforced patent is invalid or unenforceable.
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. For example:
•We might not have been the first to make the inventions covered by each of our pending patent applications.
•We might not have been the first to file patent applications for these inventions.
•Others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies.
•It is possible that our pending patent applications will not result in issued patents, and even if they issue as patents, they may not provide a basis for commercially viable products, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties.
•We may not develop additional proprietary products and technologies that are patentable.
•The patents of others may have an adverse effect on our business.
•We apply for 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.
In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Similarly, where permitted by applicable law, we enter into non-compete agreements with certain of our employees. 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. 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 beis unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.
In addition, competitors could purchase our products and 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. In addition, competitors may develop their own versions of our teststechnology in countries where we did not apply for patents, where our patents have not issued or where our intellectual property rights are not recognized and compete with us in those countries and markets. If our intellectual property is not adequately protected so as to protect our market against competitors’ products and methods, our competitive position could be adversely affected, as could our business.
We have not yet registered certain of our trademarks in all of our potential markets. If we apply to register these trademarks, our applications may not be allowed for registration, 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.
To the extent our intellectual property, including licensed 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 protection against 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 depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our products.
We rely on licenses in order to be able to use various proprietary technologies, that are material to our business, including our core digital molecular barcoding technology licensed from the Institute for Systems Biology and technology relating to Prosigna licensed from Bioclassifier, LLC, intellectual property relating to a gene signature of tumor inflammation from Merck and the intellectual property relating to a gene signature for lymphoma subtyping from the National Institutes of Health for use in our collaboration with Celgene Corporation.Veracyte. We do not own the patents that underlie these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of those licenses.
We may need to license other technologies to commercialize future products. We may also need to negotiate licenses to patents and patent applications after launching any of our commercial products. Our business may suffer if the patents or patent applications are unavailable for license or if we are unable to enter into necessary licenses on acceptable terms.
In some cases, we do not control the prosecution, maintenance, or filing of the patents to which we hold licenses, or the enforcement of these patents against third parties. Some of our patents and patent applications were either acquired from another company who acquired those patents and patent applications from yet another company, or are licensed from a third party. Thus, these patents and patent applications arewere not written by us or our attorneys, and we did not have control over the drafting and prosecution. The former patent owners and our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting and prosecution. We cannot be certain that drafting or prosecution of the licensed patents and patent applications by the licensors havehas been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.
Enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. Certain of our licenses contain provisions that allow the licensor to terminate the license upon specific conditions. Therefore, our business may suffer if these licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties or if the licensed patents or other rights are found to be invalid. Our rights under the licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligation can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license or termination of the license. If a licensor believedbelieves that we wereare not paying the royalties due under the license or wereare otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.
In addition, certain of the patents we have licensed relate to technology that was developed with U.S. government grants. Federal regulations impose certain domestic manufacturing requirements with respect to some of our products embodying these patents. Additionally, under the Bayh-Dole Act, the U.S. government has certain rights to inventions developed with such grants.
We may be involvedInvolvement in lawsuits to protect or enforce our patents and proprietary rights, to determine the scope, coverage and validity of others’ proprietary rights, or to defend against third-party claims of intellectual property infringement, any of which could be time-intensive and costly and may adversely impact our business or stock price.
We have received notices of claims of infringement and misappropriation or misuse of other parties’ proprietary rights in the past and may from time to time receive additional notices. Some of these claims have led and may lead to litigation. We cannot assure investors 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.
For example, on May 6, 2021, 10x Genomics, Inc. and Prognosys Biosciences, Inc. filed a complaint, and on May 19, 2021, they filed an amended complaint, against us in the U.S. District Court for the District of Delaware. Further, on February 28, 2022, 10x Genomics, Inc. and President and Fellows of Harvard College filed a complaint against us in the U.S. District Court for the District of Delaware. The complaints allege infringement of certain patents described in the complaints, and seek, among other relief, injunctive relief and unspecified damages (including attorneys’ fees). We have evaluated the plaintiffs’ claims and do not believe that our activities infringe any patent rights held by the plaintiffs, and we intend to vigorously defend ourselves. If the plaintiffs prevail in these pending litigations, we may be prohibited from selling the alleged infringing products and services in the United States and potentially elsewhere or be ordered to pay significant damages or both, either of which would have a material and adverse impact on our business. Even if we ultimately prevail in these litigations, litigation is costly, time-consuming and will divert our management’s attention, which could also have a material and adverse impact on our business. For additional information regarding these pending litigations, please refer to the section of this report titled “Legal Proceedings.”
Litigation may also be necessary for us to protect or enforce our patent and proprietary rights, to defend against third-party claims or to determine the scope, coverage and validity of the proprietary rights of others. Litigation could result in substantial legal fees and could adversely affect the scope of our patent protection and reduce our ability to compete in the marketplace. The outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us. 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.
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. Our success depends in part on our non-infringement of the patents or proprietary rights of third parties. We develop complex products that integrate a wide range of technologies which
may impact our ability to do so clear of third partythird-party rights and therefore may need to license other technologies or challenge the scope, coverage and validity of the proprietary rights of others to commercialize future products. As we develop new technologies such as those related to genomic diagnostic tests, digital spatial profiling, spatial molecular imaging and sequencing, for example, and move into new markets and applications for our products, we expect incumbent participants in such markets may assert their patents and other proprietary rights against us as part of a business strategy to slow our entry into such markets, impede our successful competition and/or extract substantial license and royalty payments from us. In addition, we may be unaware of pending third-party patent applications that relate to our technology and our competitors and others may have patents or may in the future obtain patents and may claim that use of our products infringes these patents. 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.
We are aware of a third party, Genomic Health, Inc., that has issued patents and pending patent applications in the United States, Europe and other jurisdictions that claim methods of using certain genes that are included in Prosigna, which we manufacture for Veracyte. We believe that our manufacture of Prosigna does not infringe any valid issued claim. We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have an adverse impact on our stock price, which may be disproportionate to the actual impact of the ruling itself. 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 obtain one or more licenses from third parties, or be prohibited from selling certain products. We may not be able to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. 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 on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and gain market acceptance for our products.
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 suppliers, distributors, customers, collaborators and other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims against us, including the 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 any of these 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.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our employees’ former employers.
Many of our employees were previously employed at universities or other life sciences companies, including our competitors or potential competitors. Although no claims against us are currently pending, we or our employees may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. 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. A loss of key research personnel work product could hamper or prevent our ability to commercialize certain potential products, which could severely 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.
Our products contain third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.
Our products contain software tools licensed by third-party authors under “open source” licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product sales.
Although we monitor our use of open source software to avoid subjecting our products to conditions, we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure investors that our processes for controlling our use of open source software in our products will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses
from third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition.
We use third-party software that may be difficult to replace or cause errors or failures of our products that could lead to lost customers or harm to our reputation.
We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software, or other third-party software failures, could result in errors, defects or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.
We will need to maintain our relationships with third-party software providers and to obtain software from such providers that does not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver reliable products to our customers and could harm our results of operations.
Risks Related to Ownership of Our Common Stock
The price of our common stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock has fluctuated and may continue to fluctuate substantially. The trading price of our common stock depends on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause stockholders to lose all or part of their investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
•actual or anticipated quarterly variation in our results of operations or the results of our competitors;
•announcements by us or our competitors of new products, significant contracts or commercial relationships or capital commitments;relationships;
failure to obtain or delays•developments in obtaining product approvals or clearances from the FDA or foreign regulators;our pending litigations with 10x Genomics, Inc. and its co-plaintiffs;
•adverse regulatory or reimbursement announcements;
•issuance of new or changed securities analysts’ reports or recommendations for our stock;
•developments or disputes concerning our intellectual property or other proprietary rights;
•commencement of, or our involvement in, litigation;
•volatility and uncertainty in U.S. and international markets resulting from the spread of COVID-19 and its variants and related containment and mitigation measures;
•market conditions in the research and diagnostics markets;market;
•manufacturing disruptions;
•any future sales of our common stock or other securities;
•any change to the composition of the board of directors or key personnel;
•announcements by us or our competitors of significant acquisitions or divestitures, strategic partnerships, joint ventures or capital commitments;
•general economic conditions and slow or negative growth of our markets; and
•the other factors described in this “Risk Factors” section.
The stock market in general, and market prices for the securities of life sciences and diagnostic companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. In several recent situations where the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our
stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.
An active trading market for our common stock may not be sustained.
Although our common stock is listed on The NASDAQ Global Market, the market for our shares has demonstrated varying levels of trading activityresults and the current level of trading may not be sustained in the future. Purchases or sales of large blocks of our shares relative tonegatively impact the trading volume on a given day can have a disproportionate effect on the price of our common stock. The lack
If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Future sales of our common stock in the public market could cause our stock price to fall.
Our stock price could decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur.occur, including by our officers, directors and their respective affiliates. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
Holders of approximately 3.4 million shares (including shares underlying outstanding warrants), or approximately 13%, of our outstanding shares as of December 31, 2017, have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also register the offer and sale of all shares of common stock that we may issue under our equity compensation plans.
In addition, in the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. For example, in March 2020, we sold $230 million aggregate principal amount of 2.625% Convertible Senior Notes due 2025 in a private placement to qualified institutional buyers for net proceeds of $222.6 million and in October 2020, we sold an aggregate of 5,750,000 shares of common stock in an underwritten public offering for net proceeds of $215.8 million. Any such future issuance including any issuances pursuant to our “at the market” equity offering program under our sales agreement with Cowen, could result in substantial dilution to our existing stockholders and could cause our stock price to decline.
We will have broad discretion over the use of the proceeds to us from our “at the market” equityMarch 2020 convertible notes offering programand October 2020 underwritten public offering and may apply the proceeds to uses that do not improve our operating results or the value of your securities.
We will have broad discretion toover the use the netof proceeds to us from our “at the market” equityMarch 2020 convertible notes offering program put into place in January 2018,and October 2020 underwritten public offering and investors will be relying solely on the judgment of our board of directors and management regarding the application of these proceeds. Although we expect to use the net proceeds from our “at the market” equity offering program for general corporate purposes, we have not allocated these net proceeds for specific purposes. Investors will not have the opportunity, as part of their investment decision, to assess whether the proceeds are being used appropriately. Our use of the proceeds may not improve our operating results or increase the value of the securities offered pursuant to the “atforegoing fundraising transactions.
Servicing our convertible notes may require a significant amount of cash, and we may not have sufficient cash flow or the market” equity offering program.ability to raise the funds necessary to satisfy our obligations under the notes, and our current and future indebtedness may limit our operating flexibility or otherwise affect our business.
Our officersability to make scheduled payments of the principal of, to pay interest on or to refinance any current or future indebtedness, including the notes, or to make cash payments in connection with any conversion of notes or upon any fundamental change if note holders require us to repurchase their notes for cash, depends on our future performance, which is subject to economic, financial, competitive and directors,other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our indebtedness and their respective affiliates, own a significant percentage ofmake necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our stockindebtedness will depend on the capital markets and willour financial condition at such time. We may not be able to exercise significant influence over matters subject to stockholder approval.
Our executive officersengage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, our existing and directors together with their respective affiliates, own approximately 17% of our outstanding common stock as of December 31, 2017. Accordingly, our executive officers and directors together with their respective affiliates, will be able to exert significant influence over matters submittedfuture indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
•make it more difficult for approval, as well asus to satisfy our managementdebt obligations, including the notes;
•increase our vulnerability to general adverse economic and affairs. This concentrationindustry conditions;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•restrict us from exploiting business opportunities;
•place us at a competitive disadvantage compared to our competitors that have less indebtedness; or
•limit our availability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general purposes.
Transactions relating to our notes may dilute the ownership couldinterest of existing stockholders, or may otherwise depress the price of our common stock.
If the notes are converted by holders, we have the effectability under the indenture for the notes to deliver cash, common stock, or any combination of delayingcash or preventing a changecommon stock, at our election upon conversion of the notes. If we elect to deliver common stock upon conversion of the notes, it would dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our control or otherwise discouraging a potential acquirer from attemptingcommon stock. In addition, certain holders of the notes may engage in short selling to obtain controlhedge their position in the notes. Anticipated future conversions of us, which in turnsuch notes into shares of our common stock could have a material adverse effect ondepress the price of our stock price and may prevent attempts by our stockholders to replace or remove the board of directors or management.
common stock.
Anti-takeover provisions in our charter documents and under Delaware or Washington law could make an acquisition of us difficult, limit attempts by our stockholders to replace or remove our current management and limit our stock price.
Provisions of our certificate of incorporation and bylaws may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our stock. Among other things, the certificate of incorporation and bylaws:
•permit the board of directors to issue up to 15,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;
•provide that the authorized number of directors may be changed only by resolution of the board of directors;
•provide that all vacancies, including newly-created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
•divide the board of directors into three classes;
•provide that a director may only be removed from the board of directors by the stockholders for cause;
•require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be taken by written consent;
•provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and meet specific requirements as to the form and content of a stockholder’s notice;
•prevent cumulative voting rights (therefore allowing the holders of a plurality of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);
•provide that special meetings of our stockholders may be called only by the chairman of the board, our chief executive officer or by the board of directors; and
•provide that stockholders are permitted to amend the bylaws only upon receiving at least two-thirds of the total votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances now or in the future. These provisions prohibit a “target corporation” from engaging in any of a broad range of business combinations with any stockholder constituting an “acquiring person” for a period of five years following the date on which the stockholder became an “acquiring person.”
We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012. We will cease to be an “emerging growth company” on December 31, 2018. As an “emerging growth company,” we have chosen to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. If some investors find our common stock less attractive as a result of these exemptions, there may be a less active trading market for our common stock and our stock price may be lower and be more volatile. As an “emerging growth company” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.
Complying with the laws and regulations affecting public companies increases our costs and the demands on management and could harm our operating results.
As a public company, and particularly after we cease to be an “emerging growth company,” we incur and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and The NASDAQNasdaq Global Market impose numerous requirements on public companies, including requiring changes in corporate governance practices. Also, the Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. Our management and other personnel must devote a substantial amount of time to compliance with these laws and regulations. These burdens may increase as new legislation is passed and implemented, including any new requirements that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may impose on
public companies. These requirements have increased and will likely continue to increase our legal, accounting, and financial compliance costs and have made and will continue to make some activities more time consuming and costly. For example, as a public company it is more difficult and more expensive for us to obtain director and officer liability insurance, and in the future we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.
TheRules implemented by the SEC pursuant to the Sarbanes-Oxley Act requires,require, among other things, that we assess the effectiveness of our internal control over financial reporting annually and assess the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404 of the Sarbanes-Oxley Act, or Section 404, requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting. As an “emerging growth company,” we avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an “emerging growth company” on December 31, 2018. When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will requirerequires that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, ifFor example, management concluded that our internal controls over financial reporting were not effective as of December 31, 2019 and 2018, resulting in extensive remediation efforts during 2019 and 2020, including increased staffing and investments in additional technology and other expenses. While we are not able to comply withhave since remediated the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in ourmaterial weakness, maintaining adequate internal control over financial reporting that are deemedwill continue to be material weaknesses,require significant management attention and the market priceincurrence of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.expense.
Furthermore, investor perceptions of our company may suffer if deficiencies are found,as a result of material weakness findings in our internal controls, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harmavoid future material weaknesses, our operations, financial reporting, or financial results could be harmed, and any such material weakness findings could result in an adverse opinion on our internal control over financial reporting from our independent registered public accounting firm.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently have threeOur leased properties include four long-term operating lease agreements for 104,538approximately 134,000 square feet of space used for general office, laboratory, manufacturing, operations, and research and development purposes in the greater Seattle, Washington.Washington area. The long-term operating leases in the greater Seattle, Washington area expire beginning in 2026 through 2030 and include options to renew at the then fair market rental for each of the facilities. The lease agreements contain rent abatement periods, scheduled rent increases and provide for tenant improvement allowances. In addition, we have two office leases outside of Seattle, Washington, totaling 2,202 square footage, with terms of two years or less.
Our landlords hold security deposits of approximately $317,000.$2.0 million. We believe that our existing facilities are adequate to meet our business requirements for the near-term and that additional space will be available on commercially reasonable terms, if required.
Item 3. Legal Proceedings
On May 6, 2021, 10x Genomics, Inc. and Prognosys Biosciences, Inc. (“Prognosys”) filed a complaint, and on May 19, 2021, an amended complaint, against us in the U.S. District Court for the District of Delaware. The amended complaint alleges that certain of our products, services and components, including those sold by us for use in connection with our GeoMx DSP system (the “Identified GeoMx Products”), infringe seven patents owned by Prognosys: (a) U.S. Patent No. 10,472,669, “Spatially encoded biological assays”, (b) U.S. Patent No. 10,662,467, “Spatially encoded biological assays,” (c) U.S. Patent No. 10,961,566, “Spatially encoded biological assays,”(d) U.S. Patent No. 10,983,133,“Spatially encoded biological assays,” (e) U.S. Patent No. 10,966,219, “Spatially encoded biological assays,” (f) U.S. Patent No. 11,001,878, “Spatially encoded biological assays,” and (g) U.S. Patent No. 11,008,607, “Spatially encoded biological assays” (the “Asserted Prognosys Patents”). The amended complaint seeks, among other relief, injunctive relief and unspecified damages (including treble damages and attorneys’ fees) in relation to our making, using, selling, offering to sell, exporting and/or importing in the United States the Identified GeoMx Products, as well as the alleged infringement by others of the Asserted Prognosys Patents through their use of the Identified GeoMx Products. We have evaluated the plaintiffs’ claims and do not believe that our activities infringe any patent rights held by the plaintiffs. On November 17, 2021, the Court granted our motion to dismiss the plaintiffs’ claims of pre-suit indirect infringement and willful infringement with leave to amend the complaint. Discovery is in progress. A trial is scheduled for June 2023. We intend to continue to vigorously defend ourselves in this ongoing litigation.
On February 28, 2022, 10x Genomics, Inc. and President and Fellows of Harvard College (“Harvard”) filed a complaint against us in the U.S. District Court for the District of Delaware. The complaint alleges that certain of our products, services and components, including those sold by us for use in connection with our CosMx SMI system (the “Identified CosMx Products”), infringe two patents owned by Harvard: (a) U.S. Patent No. 10,227,639, “Compositions and Methods for Analyte Detection”, and (b) U.S. Patent No. 11,021,737, “Compositions and Methods for Analyte Detection,” (the “Asserted Harvard Patents”). The complaint seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to our making, using, selling, offering to sell, exporting and/or importing in the United States the Identified CosMx Products. We have evaluated the plaintiffs’ claims and do not believe that our activities infringe any patent rights held by the plaintiffs. We intend to vigorously defend ourselves and are preparing our answer to the complaint.
Other than the pending litigations with 10x Genomics and its co-plaintiffs, we are not engaged in any material legal proceedings. From time to time, we may become involved in litigation relating to claims arising from the ordinary course of business. WeOther than the pending litigations with 10x Genomics and its co-plaintiffs, we believe that there are no claims or actions pending against us currently, the ultimate disposition of which would have a material adverse effect on our consolidated results of operation,operations, financial condition or cash flows.
Item 4. Mine Safety Disclosures
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 NASDAQNasdaq Global Market under the symbol “NSTG.” Trading of our common stock commenced on June 26, 2013 in connection with our initial public offering. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on The NASDAQ Global Market.
|
| | | | | | | |
| Year ended December 31, 2017 | High | | Low |
| First quarter | $ | 23.25 |
| | $ | 16.50 |
|
| Second quarter | $ | 20.70 |
| | $ | 14.72 |
|
| Third quarter | $ | 16.78 |
| | $ | 13.17 |
|
| Fourth quarter | $ | 16.60 |
| | $ | 7.03 |
|
| Year ended December 31, 2016 | | | |
| First quarter | $ | 17.66 |
| | $ | 11.30 |
|
| Second quarter | $ | 16.50 |
| | $ | 11.89 |
|
| Third quarter | $ | 20.28 |
| | $ | 12.50 |
|
| Fourth quarter | $ | 23.45 |
| | $ | 18.19 |
|
Holders
As of February 28, 2018,22, 2022, there were approximately 2519 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Dividends
We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, our term loan agreement materially restricts, and future debt instruments we issue may materially restrict, our ability to pay dividends on our common stock. Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.
Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of NanoString Technologies, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph compares the performance of our common stock for the periods indicated with the performance of the NASDAQNasdaq Composite Index, the Nasdaq Medical Equipment Index and the NASDAQ Medical EquipmentNasdaq Biotechnology TR Index. This graph assumes an investment of $100 on June 26, 2013December 31, 2016 in each of our common stock, the NASDAQNasdaq Composite Index, the Nasdaq Medical Equipment Index and the NASDAQ Medical EquipmentNasdaq Biotechnology TR Index, and assumes reinvestment of dividends, if any. We have decided to change from the Nasdaq Medical Equipment Index to the Nasdaq Biotechnology TR Index as management believes the Nasdaq Biotechnology TR Index represents a broader universe of companies of different sizes and stages of development than the Nasdaq Medical Equipment Index. Beginning with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, we will only present the cumulative total return of the Nasdaq Composite Index and the Nasdaq Biotechnology TR Index. The stock price performance shown on the graph below is not necessarily indicative of future stock price performance.
Recent Sales of Unregistered Securities
On July 21, 2017, we issued an aggregate of 28,534 shares of our common stock to a warrant holder upon the exercise of outstanding warrants to purchase an aggregate of 77,677 shares of our common stock pursuant to a net exercise mechanism under the warrants. Each warrant had an exercise price of either $8.448 or $14.397 per share. These issuances were exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) thereof as an exchange with an existing security holder where no commission or other remuneration is paid or given for soliciting such exchange.
On August 4, 2017, we issued Lam a warrant to purchase up to 1.0 million shares of our common stock, with the exact number of issuable shares equal to (1) 1.0 million shares multiplied by (2)(a) the amount of funding provided by Lam divided by (b) $50.0 million. The exercise price of the warrant is $16.75 per share. The issuance of the warrant was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving a public offering. During 2017, Lam did not exercise any warrants.
None.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information about our equity compensation plans as of December 31, 2017.2021. All outstanding awards relate to our common stock.
| | | | | | | | | | | | | | | | | |
| Plan Category | (a) Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights | | (b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (1) | | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (2) |
| Equity compensation plans approved by security holders: | | | | | |
| 2004 Stock Option Plan | 39,310 | | | $ | 2.34 | | | — | |
| 2013 Equity Incentive Plan | 3,281,695 | | | $ | 17.19 | | | 2,713,058 | |
| 2013 Employee Stock Purchase Plan | — | | | N.A. | | 752,884 | |
Equity compensation plans not approved by security holders(3): | 30,001 | | | $ | 18.88 | | | 70,000 | |
| Total | 3,351,006 | | | N.A. | | 3,535,942 | |
|
| | | | | | | | | |
| Plan Category | (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | (b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (1) |
| Equity compensation plans approved by security holders: | | | | | |
| 2004 Stock Option Plan | 932,175 |
| | $ | 3.34 |
| | — |
|
| 2013 Equity Incentive Plan | 4,925,785 |
| | 13.42 |
| | 180,497 |
|
| 2013 Employee Stock Purchase Plan | — |
| | N.A. |
| | 269,811 |
|
Equity compensation plans not approved by security holders(2): | — |
| | N.A. |
| | — |
|
| Total | 5,857,960 |
| | N.A. |
| | 450,308 |
|
(1) (2) Our 2013 Equity Incentive Plan includes provisions providing for an annual increase in the number of securities available for future issuance on the first day of each fiscal year, equal to the least of: (a) 1,406,250 shares; (b) 5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; and (c) such other amount as the board of directors may determine. Our 2013 Employee Stock Purchase Plan includes provisions providing for an annual increase in the number of securities available for future issuance on the first day of each fiscal year, equal to the least of: (a) 1% of the outstanding shares of common stock on the first day of such fiscal year; (b) 281,250 shares; and (c) such other amount as the board of directors, or a committee appointed by the board of directors, may determine.
(2) (3) On January 15, 2018, our board of directors adopted the NanoString Technologies, Inc. 2018 Inducement Equity Incentive Plan, or the Inducement Plan, and, subject to the adjustment provisions of the Inducement Plan, reserved 250,000 shares of our common stock for issuance pursuant to equity awards granted under the Inducement Plan. The Inducement Plan was adopted without stockholder approval pursuant to Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules. The Inducement Plan provides for the grant of equity-based awards, including nonstatutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance units, and its terms are substantially similar to our 2013 Equity Incentive Plan, including with respect to treatment of equity awards in the event of a “merger” or “change in control” as defined under the Inducement Plan, but with such other terms and conditions intended to comply with the NASDAQNasdaq inducement award exception or to comply with the NASDAQNasdaq acquisition and merger exception. However, our 2013 Equity Incentive Plan permits certain exchange programs (including repricings) without stockholder approval, while the Inducement Plan requires stockholder approval for such exchange programs.
Item 6. Selected Financial DataReserved
The following selected financial data is derived from our audited financial statements and should be read in conjunction with, and is qualified in its entirety by, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K. The selected Consolidated Statements of Operations data for the years ended December 31, 2017, 2016 and 2015 and Consolidated Balance Sheet data as of December 31, 2017 and 2016 have been derived from our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The selected Consolidated Statements of Operations data for the years ended December 31, 2014 and 2013 and Consolidated Balance Sheet data as of December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of future results.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (In thousands, except per share amounts) |
| Consolidated Statements of Operations: | | | | | | | | | |
| Revenue | $ | 114,905 |
| | $ | 86,489 |
| | $ | 62,667 |
| | $ | 47,593 |
| | $ | 31,403 |
|
| Costs and expenses: | | | | | | | | | |
| Cost of product and service revenue | 31,880 |
| | 30,245 |
| | 26,126 |
| | 21,149 |
| | 15,009 |
|
| Research and development | 46,888 |
| | 34,720 |
| | 24,597 |
| | 21,404 |
| | 14,979 |
|
| Selling, general and administrative | 74,334 |
| | 62,700 |
| | 53,186 |
| | 51,063 |
| | 29,912 |
|
| Total costs and expenses | 153,102 |
| | 127,665 |
| | 103,909 |
| | 93,616 |
| | 59,900 |
|
| Loss from operations | (38,197 | ) | | (41,176 | ) | | (41,242 | ) | | (46,023 | ) | | (28,497 | ) |
| Other income (expense): | | | | | | | | | |
| Interest income | 809 |
| | 390 |
| | 233 |
| | 272 |
| | 68 |
|
| Interest expense | (6,153 | ) | | (5,672 | ) | | (4,017 | ) | | (4,140 | ) | | (1,942 | ) |
| Other income (expense) | 183 |
| | (515 | ) | | (389 | ) | | (147 | ) | | (66 | ) |
| Revaluation of preferred stock warrant liability | — |
| | — |
| | — |
| | — |
| | 1,156 |
|
| Total other income (expense) | (5,161 | ) | | (5,797 | ) | | (4,173 | ) | | (4,015 | ) | | (784 | ) |
| Net loss before provision for income taxes | (43,358 | ) | | (46,973 | ) | | (45,415 | ) | | (50,038 | ) | | (29,281 | ) |
| Provision for income taxes | (204 | ) | | (116 | ) | | (166 | ) | | — |
| | — |
|
| Net loss | $ | (43,562 | ) | | $ | (47,089 | ) | | $ | (45,581 | ) | | $ | (50,038 | ) | | $ | (29,281 | ) |
| Accretion of mandatorily redeemable convertible preferred stock | — |
| | — |
| | — |
| | — |
| | (4,653 | ) |
| Net loss attributable to common stockholders | $ | (43,562 | ) | | $ | (47,089 | ) | | $ | (45,581 | ) | | $ | (50,038 | ) | | $ | (33,934 | ) |
| Net loss per share—basic and diluted | $ | (1.84 | ) | | $ | (2.34 | ) | | $ | (2.40 | ) | | $ | (2.80 | ) | | $ | (4.44 | ) |
| Weighted-average shares used in computing basic and diluted net loss per share | 23,731 |
| | 20,116 |
| | 19,027 |
| | 17,839 |
| | 7,643 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash, cash equivalents and short-term investments | $ | 77,555 |
| | $ | 74,036 |
| | $ | 49,044 |
| | $ | 72,225 |
| | $ | 42,656 |
|
| Working capital | 86,002 |
| | 77,402 |
| | 61,882 |
| | 76,411 |
| | 42,106(1) |
|
| Total assets | 136,762 |
| | 126,373 |
| | 92,869 |
| | 102,068 |
| | 64,372(1) |
|
| Total long-term debt and lease financing obligations, net of unamortized debt issue costs (includes current portion) | 48,931 |
| | 47,424 |
| | 41,226 |
| | 30,246 |
| | 18,293(1) |
|
| Total stockholders’ equity | $ | 40,109 |
| | $ | 12,305 |
| | $ | 20,215 |
| | $ | 44,813 |
| | $ | 31,469 |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis together with the financial statements and the related notes to those statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in the section of this report captioned “Risk Factors” and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. Throughout this discussion, unless the context specifies or implies otherwise, the terms “NanoString”, “we”, “us” and “our���“our” refer to NanoString Technologies, Inc. and its subsidiaries.
The discussion regarding our financial condition and results of operations for the year ended December 31, 2019 and the comparison of the year ended December 31, 2020 to the year ended December 31, 2019 have been omitted from this Annual Report on Form 10-K and is incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021, under the section titled “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Overview
We develop, manufacture and sell robust, intuitive productsmarket technologies that unlock scientifically valuable and clinically actionable biologic information from minute amounts of tissue.biological material, primarily for life science researchers in the fields of genomics and proteomics. Our mission is to provide a portfolio of solutions that allow our customers to map the universe of biology, enabling scientific exploration that may lead to new therapies that can improve the human condition.
Our technologies include proprietary chemistries that enable the labeling and counting of single molecules. Our product platforms are used for scientific discovery and clinical research applications, often in connection with pharmaceutical product development and human clinical trials of potential new therapies. Our proprietary chemistries may reduce the number of steps required to conduct certain types of scientific experiments and allow for multiple experiments to be conducted at once. Our product platforms are also able to extract information from multiple types of biological samples, including those that are often challenging to work with using other scientific methods or platforms. As a result, we are able to develop tools that are easier for researchers to use and that may generate faster and more consistent scientific results.
We currently offer two commercially available product platforms, our nCounter Analysis System, directly profiles hundredsor nCounter, and our GeoMx Digital Spatial Profiler, or GeoMx DSP, system. We have one additional product platform under development, our CosMx Spatial Molecular Imager, or CosMx SMI, system. All NanoString product platforms include instruments, related consumables, software and services, and all NanoString product platforms have the versatility to detect both RNA and protein expression and are able to generate reliable and reproduceable data in a variety of molecules simultaneously using a novel barcoding technology that is powerful enough for usebiological sample types, including FFPE. Our product platforms allow our customers to progress their research in research, yet simple enough for use in clinical laboratories worldwide.
areas such as oncology, immunology and neurology. We market and sell our systemsinstruments and related consumables to researchers in academic, government and biopharmaceutical laboratories for research use, both through our direct sales force and through selected distributors in understanding fundamental biologycertain markets.
Our nCounter platform, which was commercially launched in 2008, is used to conduct what is known as bulk gene expression analysis, whereby biological samples are first reduced, and then gene expression, specifically quantities of selected RNA or proteins, are measured at their average levels throughout the molecular basistotality of disease andthe sample. nCounter can be used to clinical laboratories and medical centers for diagnostic use.analyze the activity of up to 800 genes in a single experiment. As of December 31, 2017,2021, we had an installed base of approximately 6051,050 nCounter systems, which our customers have used to publish more than 1,8005,200 peer-reviewed papers.
GeoMx DSP, which was commercially launched in 2019, is a pioneering product platform in the emerging field of spatial biology. While nCounter and other common gene expression analysis technologies use bulk analysis approaches, GeoMx DSP is used to analyze selected regions of an intact biological sample without the need to reduce or destroy the sample, enabling researchers to see how gene expression might vary across those regions. After a researcher selects regions of interest, GeoMx DSP arranges the biological information extracted from these regions to be subsequently quantified and analyzed, or “read out,” by a platform such as nCounter, whereby researchers can obtain information on up to 96 biological targets per selected region of interest, or by a next generation sequencer, or NGS, system, such as systems manufactured by Illumina, Inc., whereby researchers can obtain information on up to 18,000 biological targets, or the whole possible universe of potential RNA targets, per selected region of interest. As of December 31, 2021, we had an installed approximately 255 GeoMx DSP systems, which customers have used to publish approximately 90 peer-reviewed scientific papers.
We have discovered other novel applications that utilize our core technologies. CosMx SMI, which is expected to become commercially available in the second half of 2022, is a new product platform under development in the field of spatial biology. CosMx SMI is being developed to compliment GeoMx DSP. While GeoMx DSP offers researchers the ability to profile gene expression activity in a selected region of interest that may contain multiple cells or cell types, CosMx SMI is designed to enable multiplexed spatial profiling of RNA and protein targets at a single and sub-cellular resolution level. While GeoMx allows for more rapid, higher throughput analysis of gene expression activity in selected regions of interest, CosMx is designed to allow researchers to “drill down” into a specific single cell or sub-cellular area in a region of interest to gather more
information as desired or required. At the time of commercial launch, CosMx SMI is expected to enable the analysis of up to 1,000 RNA targets, or up to 100 protein targets, at a single or sub-cellular level of resolution within morphologically intact tissue samples.
In advance of and subsequent to our commercial launch of GeoMx DSP and in advance of our commercial launch of CosMx SMI, we have provided selected customers in-house sample testing services whereby customers send biological samples to our Seattle facilities to be analyzed using our systems discover new biologic insightsproduct platforms and selected consumables under our technology access program, or TAP. Upon completion of each project, the raw data and analysis report is provided to improve clinical decision-making, these discoveries may be translated and validated as diagnostic tests. For example, our first molecular diagnostic product is the Prosigna Breast Cancer Assay, which provides an assessmentcustomer. As of a patient’s risk of recurrenceDecember 31, 2021, we have conducted over 770 TAP projects for breast cancer. In addition, we collaborate with biopharmaceutical companies to develop companion diagnostics, that may be used to identify which patients are most likely to respond to a particular drug therapy.approximately 340 customers.
We derive a substantial majority of our revenue from the sale of our products, to life science researchers, which consist of our nCounter and GeoMx DSP instruments and related proprietary consumables, which we call CodeSets, nCounter-based reagents and Master Kits. After buying an nCounter Analysis System, research customers purchase consumables from us for use in their experiments.consumables. Our instruments are designed to work only with our consumable products. Accordingly, as the installed base of our instruments grows, we expect recurring revenue from consumable sales to bebecome an increasingly important driver of our operating results. Our consumables include our standardized nCounter and GeoMx DSP panel products, nCounter custom codeset products that contain a specific set of targets for scientific analysis as requested by a customer, and the Prosigna breast cancer assay which is manufactured for our partner Veracyte Inc, or Veracyte. We also derive revenue from processing fees related to proof-of-principle studies, including from our GeoMx DSP TAP and in future periods, for our CosMx TAP, which we conduct for potential customerscustomers. For nCounter, GeoMx DSP, and in future periods, for our CosMx SMI, we offer extended service contracts for our nCounter Analysis Systems.
In 2013, we began offering instruments and consumables for use in diagnostic testing. In September 2013, we received 510(k) clearance from the FDA to market in the United States a version of Prosigna providing an assessment of a patient’s risk of recurrence for breast cancer. In November 2013, we began offering a version of the nCounter Analysis System to high-complexity, CLIA-certified laboratories for research and diagnostics purposes. This configuration of the nCounter Analysis System provides clinical laboratories a single platform with the flexibility to support both clinical testing, by running Prosigna, and research, by processing translational research experiments using our research consumables. The nCounter-based reagents provide further flexibility by allowing laboratories to develop their own Laboratory Developed Tests for gene expression, copy number variation and gene fusion signatures, which can be performed by a laboratory and may include genetic tests and other tests for rare conditions.generate service revenue.
We use third-party contract manufacturers to produce theour instruments comprising the nCounter Analysis System.and certain raw materials for our consumables. We manufacturebuild our consumables, including our panels, custom code sets and reagent packages, at our greater Seattle, Washington facility. This operating model is designed to be capital efficient and to scale efficiently as our product volumes grow. area facilities.
We focus a substantial portion of our resources on developing new technologies, products and solutions. We invested $46.9Research and development expense totaled $69.5 million, $34.7$62.9 million and $24.6$68.0 million in 2017, 20162021, 2020 and 2015, respectively, in research and development and2019, respectively. We intend to continue to make significant investments in research and development.development to support our existing instrument platforms and related consumable offerings, as well as research and development of new technologies.
In March 2014,December 2019, we entered into a collaboration agreementLicense and Asset Purchase Agreement, or LAPA, and service and supply agreements, or SSAs, with Celgene Corporation,Veracyte, Inc, or Celgene, pursuantVeracyte. Pursuant to whichthe LAPA, we are working collaboratively with Celgenecompleted a license of intellectual property and a sale of certain assets to develop, seek regulatory approval for, and commercialize a companion diagnostic assayVeracyte relating to our nCounter FLEX system for use in screening patientsclinical diagnostic applications. Veracyte also acquired certain intellectual property rights and worldwide distribution rights relating to our Prosigna Breast Cancer Assay and our LymphMark assay and certain clinical diagnostic assay software modules that operate with Diffuse Large B-Cell Lymphoma. Underthe nCounter FLEX system. Pursuant to the terms of the collaboration agreement,LAPA, Veracyte paid us $50.0 million, consisting of $40.0 million in cash, paid in connection with the entry into the LAPA, and 376,732 shares of Veracyte common stock valued at $10.0 million, which shares were issued in connection with the entry into the LAPA. Additionally, we will develop, seek regulatory approval for, and commercialize the diagnostic test, and we retain the flexibility to independently develop and commercialize additional indications for the test. We are eligible tomay receive future potential milestone payments from Celgene totalingof up to $27.3$10.0 million in the aggregate, to be paid upon the launch of which $5.8 million was received as an upfront payment upon delivery of certain information to Celgene and $21.5 million isadditional clinical diagnostic tests by Veracyte for development funding and potential success-based development and regulatory milestones. In February 2018, we entered into an amendmentour nCounter FLEX platform. Pursuant to the collaboration agreement in which Celgene agreed to provide us with additional funding for work intended to enable a subtype and prognostic indication for the test being developed under the agreement for Celgene’s drug REVLIMID. In addition, the amendment provides an additional milestone payment to us payable upon achievement of certain regulatory activities and timelines. In connection with this amendment,SSAs, we agreed to remove the rightsupply to receive payments from CelgeneVeracyte nCounter FLEX systems, and to manufacture and supply Prosigna kits, LymphMark kits and any additional clinical diagnostic tests that Veracyte may develop in the event commercial salesfuture for nCounter, for a period of at least four years subsequent to the companiontransaction date. Pursuant to the SSAs, Veracyte will pay the designated transfer prices for nCounter FLEX systems, Prosigna kits, LymphMark kits and any other nCounter-based diagnostic test do not exceed certain pre-specified minimum annual revenues during the first three years following regulatory approval. In addition, the amendment
allows Celgene, at its election, to use trial samples with additional technologies for companion diagnostics. For additional information regarding the development collaboration agreement, see the section of this report captioned “Business—Collaborations—Celgene Corporation” and Note 17 - Subsequent Events of the consolidated financial statements included in this report.
In May 2015, we entered into a clinical research collaboration agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., or Merck, to develop an assay intended to optimize immune-related gene expression signatures and evaluate the potential to predict benefit from Merck’s anti-PD-1 therapy, KEYTRUDA, in multiple tumor types. In February 2016, we expanded our collaboration with Mercktests developed by entering into a new development collaboration agreement to clinically develop and commercialize a novel diagnostic test, based on an optimized gene expression signature, to predict response to KEYTRUDA in multiple tumor types. In October 2017, we were notified by Merck of the decision not to pursue regulatory approval of the companion diagnostic test for KEYTRUDA. As a result, the scope of the collaboration was significantly reduced. For additional information regarding the development collaboration agreement, see the section of this report captioned “Business—Collaborations—Merck & Co., Inc.”.
In January 2016, we entered into a collaboration with Medivation, Inc. and Astellas Pharma Inc. to pursue the translation of a novel gene expression signature algorithm discovered by Medivation into a companion diagnostic assay using the nCounter Analysis System. In September 2016, Medivation was acquired by Pfizer, Inc., or Pfizer, and became a wholly owned subsidiary of Pfizer. In May 2017, we received notification from Pfizer and Astellas terminating the collaboration agreement as a result of a decision to discontinue the related clinical trial. For additional information regarding the development collaboration agreement, see the section of this report captioned “Business—Collaborations—Medivation, Inc. and Astellas Pharma, Inc.”.
In August 2017, we entered into a collaboration agreement with Lam Research Corporation, or Lam, to support the development of our Hyb & Seq product candidate and related assays. For additional information regarding the development collaboration agreement, see the section of this report captioned “Business—Collaborations—Lam Research Corporation”.Veracyte.
Our totalproduct and service revenue increased 29% to $114.9$144.0 million in 2017 from $86.52021, compared to $111.4 million in 2016 and $62.7 million in 2015.2020. The increase was driven primarily by increased revenue of $25.5 million recordedrevenues from our various collaborations which are discussedsales of GeoMx DSP systems and related consumables as well as increases in more detailnCounter consumables resulting from increased lab activity by our customers, as the impact from the COVID-19 pandemic was less severe in the above referenced section of this report. Absent the increase in collaboration revenue, our core2021 as compared to 2020. Our product and service revenue increased 7% to $111.4 million in 2020, compared to $103.7 million in 2019. The increase was driven primarily by increased revenues increased moderately drivenfrom our sales of GeoMx DSP systems and related consumables. The increases were offset by declines in part by growthsales of nCounter consumables primarily as a result the COVID-19 pandemic and its impact on lab activity with our customers during 2020. In addition, while greater unit sales of Prosigna kits were recorded in 2020 as compared to 2019, our revenues recorded from the sale of Prosigna kits were lower, as our Prosigna supply agreement entered into as part of the transaction with Veracyte completed in December 2019 reduced our average selling price received on Prosigna kits, which in prior periods had been sold directly to end user customers or distributors.
Our total revenue in 2021 was $145.1 million, compared to $117.3 million in 2020 and $125.6 million in 2019. During 2021, our total revenue was not materially different than our product and service revenue, due primarily to reduced activity associated with certain collaboration agreements in 2021 as compared to previous periods. However, historically our total revenue has varied more significantly as compared to our product and service revenue, as well as increaseda result of the timing of revenue from consumables and service contractsrecognition associated with our growing install basecollaboration agreements. Revenue recognition relating to these agreements, which is recorded as collaboration revenue, consists primarily of nCounter Analysis Systems. Historically, we have generatedrecognizing deferred revenue relating to cash payments received previously from
our collaborators. Collaboration revenue recognized may vary significantly depending on the timing and cost of certain research and development activities relating to a substantial majoritycollaboration, the expected time frame for completing certain collaboration activities, the outcome of our revenue from salesresearch and development activities being conducted pursuant to customers in North America; however, as we have expanded our European direct sales forcea collaboration, the contractual terms of a particular collaboration agreement and entered into agreements with distributors of our products in Europe, the Middle East, Asia Pacific and South America, the amount of revenue generated outside of North America has generally increased, although there have been significant quarter-to-quarter fluctuations. other factors.
We have never been profitable and had net losses of $43.6$115.3 million, $47.1$110.1 million and $45.6$40.7 million in 2017, 20162021, 2020 and 2015,2019, respectively. As of December 31, 2017,2021, our accumulated deficit was $313.1$649.8 million.
Key Financial Metrics
We are organized as, and operate in, one reportable segment, which issegment: the development, manufacture and commercialization of instruments, consumables and services for efficiently profiling the activity of hundreds of genes and proteins simultaneously from a single tissue sample. Our chief operating decision maker is the chief executive officer, who manages our operations and evaluates our financial performance on a total company basis. Our principal operations and decision-making functions are located at our corporate headquarters in the United States.
Revenue
We generate revenue from the sale of our products and related services.services and collaborations. For a description of our revenue recognition policies, see the section of this report captioned “—Critical Accounting Policies and Significant Estimates—Revenue Recognition.”
Product Revenue
Our products consistproduct revenue consists of sales of our nCounter Analysis SystemSystems and related consumables including Prosigna in vitro diagnostic kits.and our GeoMx DSP systems and related consumables. Our nCounter MAX Analysis System typically consists of one nCounter Digital Analyzer and one nCounter Prep Station, having a U.S. list price of $235,000. The U.S. list price of the similarly configured nCounter DxFLEX Analysis System is $265,000, or $285,000 if fully enabled to run Prosigna.$265,000. Our newly developed nCounter SPRINT Profiler has a reduced footprint and combines the function of the prep station with the digital analyzer in a single instrument. It has a U.S. list price of $149,000. Our GeoMx DSP system has a U.S. list price of $295,000.
Outside the United States, depending on the country, list prices are generally higher. In certain cases, customers may pay less than the list price for our various nCounter instruments. For example, some of our systems are sold to customers through
independent distributors, and these distributors may purchase systems from us at a discount to list price. In certain regions outside of the US, we sell through distribution partners who typically receive discounted prices. In addition, in some cases we may sell an nCounter system and a GeoMx DSP system together as a bundle, or we may sell a system together with an initial order of consumables for a single price, in which cases we may offer discounted prices for instruments as compared to list prices.
Our customer base is primarily composed of academic institutions, government laboratories, biopharmaceutical companies and clinical laboratories that perform analyses or testing using our nCounter Analysis Systemand GeoMx DSP systems and purchase related consumables, potentially including Prosigna kits.consumables.
For our research customers, related consumables include (1) gene and protein expression analysis panels, which are standardized and pre-manufactured (2)kits, or panels, that are designed to measure the expression of a pre-selected set of genes. For nCounter, we also offer custom CodeSets, which we manufacture to the specific requirements of an individual researcher, and (3) Master Kits, cartridges and reagents, which are ancillary reagents, cartridges, tips and reagent plates required to setup and process samples in our instruments.
For our clinical laboratory customers, related consumables include Prosigna Pursuant to the LAPA with Veracyte entered into in vitro diagnostic kits and selected nCounter reagents. We2019, we now sell our nCounter Dx Analysis SystemsProsigna in vitro diagnostic kits to clinical laboratoryVeracyte, who then sells Prosigna to end user customers or offer to lease them under “reagent rental” arrangements where an instrument is placed at a customer location at minimal direct cost and the customer commits to purchase a minimum volume of consumable products over a period of time. To date, the majority of our clinical laboratory customers have elected to purchase instruments. distributors.
Our average annualized consumables revenue per installed systemnCounter Analysis System was approximately $90,000$55,000 for the year ended December 31, 2017.
The list price2021, which includes our nCounter consumable sales and sales of aour Prosigna test inkits. Our average annualized consumables revenue per installed GeoMx DSP was approximately $97,000 for the United States and Europe is $2,080 and €1,550 per patient, respectively. Although the price of Prosigna and our additional future diagnostic products will depend on many factors, including whether and how much third-party payors will reimburse laboratories for conducting such tests, we expect that the gross margin for our diagnostic kits may be higher than for our research consumables. We sell Prosigna kits to our lab customers, who will be responsible for providing the testing service and contracting and billing payors. Prosigna kits are sold to clinical laboratories on a fixed dollars-per-kit basis, which does not expose us to direct third-party payor reimbursement risk. However, we provide customary volume discounts, and in some cases, introductory pricing during the period in which third-party payor reimbursement is being established. As a result, the average selling price per Prosigna test is lower than list price.year ended December 31, 2021.
Service Revenue
Service revenue consists of fees associated with service contracts and fees for conducting proof-of-principle studies.various forms of data analysis studies, including providing services under our Technology Access Programs, or TAP. We include a one-year warranty with the sale of our instruments and offer service contracts, which are purchased by a majority of our customers. We selectively provide proof-of-principleTAP services and other data analysis studies to prospective customers in order to help them better understand the benefits primarily of the nCounter Analysis System, and in some cases allowing customers early access toour GeoMx DSP system or other technologies under development, for which we generate data and perform analysis services on their behalf.
Collaboration Revenue
Collaboration revenue has been derived primarily from our historical collaborations with Lam and our terminated collaborations with Celgene Merck, Lam and historically, our terminatedMerck. We recorded collaboration with Medivationrevenue of $1.1 million, $5.9 million and Astellas.$21.9 million in 2021, 2020 and 2019, respectively. As of December 31, 2017,2021, we have received a total of $83.4do not expect to receive further development funding from Lam in future periods, and the original commitment from Lam to provide up to $50.0 million from these collaboration agreements, of which $42.3 million, $16.7 million, and $5.9 million has been recorded as collaboration revenue in 2017, 2016, and 2015, respectively, with the remainder recorded as deferred revenue and customer deposits, which will be recognized as collaboration revenue over our remaining development performance period for each of the agreements.funding was fully satisfied in 2019. Collaboration revenue also includes revenue recognized under several smaller collaborations.
Revenue by Geography
We sell our products through our own sales forces in the United States, Canada, Singapore, Israel and certain European countries.countries and also various countries within the Asia Pacific region, including China, India, Japan and Singapore, among others. We also sell through distributors in other parts of the world. As we have expanded our European direct sales force and entered into agreements with distributors of our products in Europe, the Middle East, Asia Pacific and South America, the amount of revenue generated outside of North America has generally increased, although there have been significant quarter-to-quarter fluctuations. In the future, we intend to continue to expand our sales force and establish additional distributor relationships outside the United States to better access international markets.
The following table reflects total revenue by geography based on the geographic location of our customers, distributors and collaborators. For sales to distributors, their geographic location may be different from the geographic locations of the ultimate end customer. Americas consists of the United States, Canada, Mexico and South America; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia, Vietnam, Thailand, India and Australia.
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands) | | (Dollars in thousands) |
| Americas | $ | 86,099 |
| | 75 | % | | $ | 60,330 |
| | 70 | % | | $ | 41,265 |
| | 66 | % | Americas | $ | 94,360 | | | 65 | % | | $ | 79,787 | | | 68 | % | | $ | 86,139 | | | 69 | % |
| Europe & Middle East | 21,791 |
| | 19 | % | | 18,497 |
| | 21 | % | | 14,807 |
| | 24 | % | Europe & Middle East | 35,170 | | | 24 | % | | 26,897 | | | 23 | % | | 30,289 | | | 24 | % |
| Asia Pacific | 7,015 |
| | 6 | % | | 7,662 |
| | 9 | % | | 6,595 |
| | 10 | % | Asia Pacific | 15,555 | | | 11 | % | | 10,632 | | | 9 | % | | 9,140 | | | 7 | % |
| Total revenue | $ | 114,905 |
| | 100 | % | | $ | 86,489 |
| | 100 | % | | $ | 62,667 |
| | 100 | % | Total revenue | $ | 145,085 | | | 100 | % | | $ | 117,316 | | | 100 | % | | $ | 125,568 | | | 100 | % |
Most of our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. Changes in foreign currency exchange rates have not materially affected us to date; however, they may become material to us in the future asif our operations outside of the United States expand.
Cost of product and service revenue consists primarily of costs incurred in the production process, including costs of purchasing instruments from third-party contract manufacturers, consumable component materials and assembly labor and overhead, installation, warranty, service and packaging and delivery, installation, warranty and any follow-on servicing related costs. In addition, cost of product and service revenue includes royalty costs for licensed technologies included in our products, provisions for slow-moving and obsolete inventory and non-cash expenses including depreciation and amortization associated with various assets used in the production of our products and stock-based compensation expense. We provide a one-year warranty on each nCounter Analysis System sold and GeoMx DSP system and we establish a reserve for warranty repairs based on historical warranty repair costs incurred.
Research and development expenses consist primarily of salaries and benefits, occupancy costs, laboratory supplies, engineering services, consulting fees, costs associated with licensing molecular diagnostics rights expenses and clinical studynon-cash expenses to supportincluding depreciation and amortization associated with various assets used in the regulatory approval or clearanceresearch and development of diagnostic products. our products and stock-based compensation expense.
We have made substantial investments in research and development since our inception. Our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products and applications. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increasecontinue to make investments in future periods. In particular, following the entry into the Lam collaboration in August 2017, which provides up to $50 million of funding for our Hyb & Seq program, we expect to experience a substantial increase in related research and development expenses.activities, with an expected focus on spatial genomics.
customers of our products, performance of proof-of-principle studies, preparation of extensive documentation and a lengthy review process. As a result of these factors, the largesignificant capital investment required in purchasing our instruments and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly, and may be up to 12 months or longer. Given the length and uncertainty of our sales cycle, we have in the past experienced, and likely will likelyin the future experience, fluctuations in our future instrument sales on a period-to-period basis.
