S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 29, 2010

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

BG Medicine, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware   8071   04 3506204
(State or other jurisdiction of incorporation or organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

610 Lincoln Street North

Waltham, Massachusetts 02451

(781) 890-1199

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Pieter Muntendam, M.D.

President and Chief Executive Officer

BG Medicine, Inc.

610 Lincoln Street North

Waltham, Massachusetts 02451

(781) 890-1199

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

William T. Whelan, Esq.

Scott A. Samuels, Esq.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

One Financial Center

Boston, Massachusetts 02111

(617) 542-6000

  

Donald J. Murray, Esq.

Dewey & LeBoeuf LLP

1301 Avenue of the Americas

New York, New York 10019

(212) 259-8000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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

 

Large accelerated filer    ¨   Accelerated filer    ¨
Non-accelerated filer    x (Do not check if a smaller reporting company)   Smaller reporting company    ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)

 

Amount of

Registration

Fee(2)

Common Stock, $0.001 par value per share

  $86,250,000   $6,150
 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes the offering price of additional shares that the underwriters have the option to purchase.
(2) The registrant previously paid a registration fee of $2,542 with a registration statement on Form S-1, File No. 333-145124, initially filed with the Commission on August 3, 2007. Pursuant to Rule 457(p) of the Securities Act of 1933, $2,542 of the previously paid registration fee is offset against the registration fee otherwise due for this registration statement.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated January 29, 2010

Preliminary Prospectus

Shares

LOGO

Common Stock

This is the initial public offering of shares of our common stock. We are offering              shares of our common stock. Prior to this offering, there has been no public market for our common stock. We expect that the initial public offering price will be between $             and $             per share. We have applied for the listing of our common stock on The NASDAQ Global Market under the symbol “BGMD.”

 

 

Investing in shares of our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk Factors” beginning on page 8 of this prospectus.

 

     Per Share    Total

Public offering price

   $                 $             

Underwriting discounts and commissions

   $                 $             

Proceeds, before expenses, to us

   $                 $             

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters may also purchase up to an additional              shares from us at the initial public offering price, less the underwriting discount, to cover over-allotments, if any, within 30 days from the date of this prospectus.

The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares of our common stock will be made on or about                     , 2010.

Joint Bookrunning Managers

 

Jefferies & Company    UBS Investment Bank

Co-Managers

 

Cowen and Company   Thomas Weisel Partners LLC

The date of this prospectus is                     , 2010


Table of Contents

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

 

Table of Contents

 

     Page

Prospectus Summary

   1

Risk Factors

   8

Special Note Regarding Forward Looking Statements

   26

Use of Proceeds

   27

Dividend Policy

   28

Capitalization

   29

Dilution

   31

Selected Consolidated Financial Information

   33

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

   35

Business

   48

Management

   75

Compensation

   81

Principal Stockholders

   99

Certain Relationships and Related Person Transactions

   101

Description of Capital Stock

   104

Shares Eligible for Future Sale

   109

Underwriting

   112

Notice to Investors

   115

Where You Can Find More Information

   118

Legal Matters

   118

Experts

   118

Index to Consolidated Financial Statements

   F-1

 

 

This prospectus contains market data and industry forecasts that were obtained from industry publications, third party market research and publicly available information. These publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that the information from these publications is reliable, we have not independently verified, and make no representation as to the accuracy of, such information.

 

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Prospectus Summary

This summary provides an overview of selected information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our common stock. You should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, including the information discussed under “Risk Factors” and our consolidated financial statements and notes thereto that appear elsewhere in this prospectus. Unless otherwise indicated herein, the terms “we,” “our,” “us,” or “the Company” refer to BG Medicine, Inc. and its subsidiary.

BG Medicine

We are a life sciences company focused on the discovery, development and commercialization of novel diagnostic tests based on biomarkers for high-value market opportunities in healthcare that we identify. We believe that our tests will provide clinicians with improved information to better detect and characterize disease states. We believe that this information may enable physicians to achieve better patient outcomes and contain healthcare costs. We focus on blood-based tests that provide novel content for existing automated laboratory instruments.

Our lead product candidate, the BGM Galectin-3 test for heart failure, measures galectin-3 levels in blood plasma or serum. Galectin-3 is a protein that has been shown to play an important role in heart failure, which is a leading cause of death. Heart failure is a heterogenous condition that is characterized by the heart’s inability to pump blood efficiently to meet the requirements of organs in the body. According to the American Heart Association, heart failure affects an estimated 5.8 million Americans and we believe similar numbers in Europe. We have measured galectin-3 in more than five controlled studies involving over 2,000 patients with heart failure. In these studies, galectin-3 was found to be a strong independent predictor of mortality or hospitalization. We believe that the data from these studies indicate that heart failure patients with high levels of galectin-3 have a more progressive form of the disease, which we refer to as galectin-3-dependent heart failure. We believe that our galectin-3 test will provide physicians with meaningful information that may lead to more clinically- and cost-effective management of heart failure patients.

We obtained CE Mark in the European Union for a manual galectin-3 test in October 2009 and have begun limited sales and marketing activities in certain countries in Europe. In March 2009, we submitted a 510(k) premarket notification to the FDA in order to obtain the regulatory clearance to market this test in the United States. Upon review of our 510(k) application, the FDA indicated that additional clinical and other data was required in support of our filing and therefore denied clearance. We re-submitted a 510(k) application in December 2009 with additional data that we believe is responsive to the FDA’s comments. Subject to clearance from the FDA, we expect to begin marketing the test in the United States in the second half of 2010.

We have entered into a worldwide development and commercialization agreement with Abbott Laboratories for the inclusion of our galectin-3 test on Abbott’s automated Architect® instrument platform. Under our agreement with Abbott, we have the right to enter into four similar agreements with other diagnostic laboratory instrument manufacturers for use on their respective platforms.

We are also developing three other diagnostic product candidates for cardiovascular disease:

 

  §  

a second indication of our galectin-3 test as a predictor of heart failure development in patients following heart attack or a related condition called unstable angina, a serious form of cardiac chest pain;

 

  §  

AMIPredict to identify patients with a high risk of suffering a heart attack or stroke within the following two to four years, for which we plan to conduct validation studies in the second half of 2010; and

 

  §  

LipidDx, a novel protein biomarker, to aid in the management of common lipid disorders.

 

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We believe that the cardiovascular tests we are developing enable several promising new paradigms for the treatment of patients with cardiovascular disease.

As part of our strategy, we plan to continue to leverage our existing and any new collaborations and initiatives to successfully advance the development and commercialization of our products. For example, we initiated and are leading the HRP (“high-risk plaque”) Initiative, for atherothrombotic cardiovascular disease, such as heart attack and stroke. This initiative, which we began in 2006, is sponsored by Abbott, AstraZeneca, Merck, Philips and Takeda. In addition to the HRP Initiative, in 2009, we partnered with the National Heart, Lung, and Blood Institute, or NHLBI, and Boston University to access samples and data from the Framingham Heart Study to conduct biomarker discovery studies.

Our Solution

We believe that the current medical model has limitations in its ability to manage disease treatment, which often relies on a trial-and-error approach to medical management and characterization of disease based on signs and symptoms. We believe that our diagnostic tests can play a central role in the solution to this important medical challenge by better matching patients with appropriate treatments and enabling early detection and characterization of diseases, leading to more effective and often lower cost treatments. We believe that our solution offers several important benefits over existing approaches in diagnostics by:

 

  §  

Enabling us to structure a discovery process for high-value market opportunities. We believe that our proprietary technology platform offers us an opportunity to initiate a structured process for discovering biomarkers for high-value market opportunities that we identify.

 

  §  

Providing novel content for advanced diagnostic laboratory instruments. We are focused on discovering, developing and commercializing novel biomarker-based diagnostic content for use on the extensive installed base of advanced diagnostic laboratory instruments.

 

  §  

Improving characterization of disease process. We are developing diagnostic tests to identify disease during the subclinical stage, or before signs and symptoms are present. We believe that early detection and characterization of disease can help physicians better match patients with appropriate treatments, resulting in better clinical outcomes.

 

  §  

Reducing healthcare costs. We are developing novel diagnostic tests for costly disease states that place tremendous demands on healthcare systems. We believe that our tests can help improve medical management and care outcomes, while reducing healthcare costs in our target markets.

Our Strategy

Our objective is to become a leader in discovering, developing and commercializing diagnostic tests based on novel biomarkers that we discover or in-license. Key elements of our strategy are to:

 

  §  

Obtain regulatory clearance or approval for and launch our product candidates.

 

  §  

Leverage our proprietary technology platform and partnerships with third-party payors and government programs to discover clinically-relevant biomarkers for high-value market opportunities.

 

  §  

Partner with leading laboratory service providers to provide widespread access to our tests upon clearance or approval.

 

  §  

Partner with leading diagnostic laboratory instrument manufacturers for the development and commercialization of novel diagnostic content on their automated or point-of-care instrument platforms.

 

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  §  

Continue to leverage existing and new collaborations to successfully advance the development and commercialization of our products candidates.

 

  §  

Retain primary commercial responsibility for our biomarker tests to drive market penetration and clinical support for our products.

Risks Associated with Our Business

Our business is subject to numerous risks that could prevent us from successfully implementing our business strategy. These and other risks are discussed more fully in “Risk Factors” immediately following this prospectus summary and include the following:

 

  §  

We are an early stage company with a history of losses, and we expect to incur losses for at least the next several years and we may never achieve profitability.

 

  §  

We may not obtain regulatory clearance for our diagnostic product candidates when expected, if at all.

 

  §  

If the marketplace does not accept our galectin-3 test or any other diagnostic products we might develop, we may be unable to generate sufficient revenue to sustain and grow our business.

 

  §  

Our business is dependent on our ability to successfully develop and commercialize novel diagnostic products and services based on biomarkers. If we fail to develop and commercialize diagnostic products, we may be unable to execute our business plan.

 

  §  

If third parties assert that we have infringed their patents and proprietary rights or challenge the validity of our patents and proprietary rights, we may become involved in intellectual property disputes and litigation that would be costly, time consuming and delay or prevent the development or commercialization of our product candidates.

 

  §  

We expect to expand our development, clinical research and marketing capabilities, and as a result, we may encounter difficulties in managing our growth.

Company Information

We were incorporated in Delaware in February 2000 and later that year chose the name Beyond Genomics, Inc. In October 2004, we changed our name to BG Medicine, Inc. We maintain our operations at 610 Lincoln Street North, Waltham, Massachusetts 02451, and our phone number is (781) 890-1199. Our website address is www.bg-medicine.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

“BG Medicine,” the BG Medicine logo and BGM Galectin-3 are trademarks and service marks of BG Medicine, Inc. All other trademarks, service marks, trade names, logos and brand names identified in this prospectus are the property of their respective owners.

 

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The Offering

 

Common stock offered by us

                        shares

 

Common stock to be outstanding after this offering

                        shares

 

Over-allotment option

                        shares

 

Use of proceeds

We intend to use the net proceeds of this offering to fund the commercial launch of our lead product candidate, BGM Galectin-3, including establishing a commercial organization and infrastructure; the development, potential regulatory submission and potential commercial launch activities for our other diagnostic product candidates, including our galectin-3 test to identify patients at elevated risk for heart failure following a heart attack, AMIPredict and LipidDx; our biomarker discovery efforts and potential clinical development of additional novel diagnostic product candidates; possible acquisitions of technologies, products or businesses to complement our business; and other general corporate purposes. See “Use of Proceeds” for a more complete description of our intended use of the net proceeds from this offering.

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

 

NASDAQ Global Market symbol

BGMD

The number of shares of common stock to be outstanding after the offering is based on 20,816,515 shares of common stock outstanding as of December 31, 2009, which reflects the conversion of our outstanding preferred stock discussed below. Unless otherwise indicated, the information contained in this prospectus, including the information above, excludes:

 

  §  

4,757,831 shares of common stock issuable upon the exercise of outstanding options as of December 31, 2009, with a weighted-average exercise price of $2.67 per share;

 

  §  

259,961 shares of common stock reserved for future issuance under our 2001 Stock Option and Incentive Plan, or our 2001 Stock Plan, as of December 31, 2009; provided, however, that immediately upon completion of this offering, our 2001 Stock Plan will terminate so that no further awards may be granted under our 2001 Stock Plan;

 

  §  

an aggregate of up to            shares of common stock reserved for future issuance under our 2010 Employee, Director and Consultant Equity Incentive Plan, or our 2010 Stock Plan, which will become effective upon completion of the offering; plus shares of our common stock that are represented by awards granted under our 2001 Stock Plan that are forfeited, expire or are cancelled without delivery of shares or which result in the return of shares of our common stock to us, following the termination of the 2001 Stock Plan;

 

  §  

1,567,241 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2009, with a weighted-average exercise price of $0.42 per share; and

 

  §  

the shares of common stock that will be issued upon the automatic net exercise of a warrant to purchase 23,364 shares of our common stock upon the completion of this offering.

 

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In addition, except where we state otherwise, the information we present in this prospectus:

 

  §  

reflects the conversion of all of our outstanding preferred stock into 15,903,552 shares of our common stock immediately prior to completion of this offering;

 

  §  

assumes no exercise of the underwriters’ over-allotment option to purchase up to an additional            shares of our common stock; and

 

  §  

reflects the effectiveness of our restated certificate of incorporation and restated bylaws upon completion of this offering.

 

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Summary Consolidated Financial Data

The following tables present a summary of our consolidated financial data for the periods, and as of the dates, indicated. Our summary consolidated statements of operations data for each of the three years in the period ended December 31, 2009 and the summary consolidated balance sheet data as of December 31, 2009 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. Our summary consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The audit report on our 2009 consolidated financial statements expresses an unqualified opinion on the consolidated financial statements and includes an explanatory paragraph relating to substantial doubt about our ability to continue as a going concern.

 

     Years ended December 31,  
      2007     2008     2009  
    

(in thousands, except share and

per share amounts)

 

Consolidated Statements of Operations Data:

      

Revenue

   $ 8,982      $ 14,580      $ 8,490   

Operating expenses:

      

Cost of revenue

     7,301        13,822        8,431   

Research and development

     5,832        6,858        8,527   

Selling, general and administrative

     3,820        4,475        7,520   

Costs related to abandoned stock offering

     3,154                 

Gain on sale of property and equipment

     (118              
                        

Total operating expenses

     19,989        25,155        24,478   
                        

Loss from operations

     (11,007     (10,575     (15,988

Interest income

     302        422        121   

Interest expense(1)

     (689     (4,921     (244

Other expense

                   (26
                        

Net loss

     (11,394     (15,074     (16,137

Accretion of redeemable convertible preferred stock

     (368     (872     (977
                        

Net loss attributable to common stockholders

   $ (11,762   $ (15,946   $ (17,114
                        

Net loss attributable to common stockholders per share — basic and diluted

   $ (2.48   $ (3.31   $ (3.50
                        

Weighted-average common shares outstanding used in computing per share amounts — basic and diluted

     4,739,746        4,815,984        4,884,831   

Pro forma net loss attributable to common stockholders per share (unaudited) — basic and diluted(2)

       $ (0.78
            

Pro forma weighted-average common shares outstanding used in computing per share amounts (unaudited) — basic and diluted(2)

         20,788,383   

 

(1) Interest expense in 2008 includes non-cash charges of $3.0 million related to a beneficial conversion feature on convertible debt and $1.0 million related to the non-cash expense arising from the issuance of warrants issued in connection with that convertible debt that were accounted for as debt discount and immediately recognized as interest expense because the debt was due upon demand.
(2) Net loss used in computing pro forma basic and diluted net loss per share and the number of weighted-average common shares used in computing pro forma basic and diluted net loss per share give effect to the automatic conversion of all of our outstanding convertible preferred stock into 15,903,552 shares of common stock upon the completion of this offering as if such conversion had occurred at the beginning of the period.

 

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The following table sets forth consolidated balance sheet data as of December 31, 2009:

 

  §  

on an actual basis;

 

  §  

on an unaudited pro forma basis to give effect upon the completion of this offering to (i) the automatic conversion of all shares of our convertible preferred stock outstanding at December 31, 2009 into an aggregate of 15,903,552 shares of our common stock effective; and (ii) the conversion of warrants to purchase 92,305 shares of our convertible preferred stock into warrants to purchase 92,305 shares of our common stock;

 

  §  

on an unaudited pro forma as adjusted basis to give effect to the pro forma adjustments described above and the sale of shares of our common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

The unaudited pro forma and pro forma as adjusted consolidated financial data is presented for informational purposes only and does not purport to represent what our consolidated results of operations or financial position actually would have been had the transactions reflected occurred on the dates indicated or to project our financial condition as of any future date or results of operations for any future period.

 

     As of December 31, 2009
      Actual     Pro forma     Pro forma
as adjusted(1)
    

(in thousands)

Consolidated Balance Sheet Data:

  

Cash, cash equivalents and marketable securities

   $ 10,393      $ 10,393      $     —

Total assets

     12,625        12,625       

Long-term debt including current portion

     1,252        1,252       

Total liabilities

     5,467        4,996       

Redeemable convertible preferred stock

     71,059              

Convertible preferred stock

     1,708              

Accumulated deficit

     (78,576     (78,576    

Total stockholders’ (deficit) equity

     (63,901     7,629       

 

(1) Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the price range on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted cash, cash equivalents and marketable securities, total assets and total stockholders’ (deficit) equity by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information set forth in this prospectus, including our consolidated financial statements and the related notes, before deciding to invest in our common stock. If any of the events or developments described below occurs, our business, financial condition or results of operations could be negatively affected. In that case, the market price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business and Strategy

We are an early stage company with a history of losses, we expect to incur losses for at least the next several years, and we may never achieve profitability.

We have incurred substantial net losses since our inception in February 2000. For the years ended December 31, 2007, 2008 and 2009, we incurred net losses of $11.4 million, $15.1 million and $16.1 million, respectively. Our accumulated deficit was approximately $78.6 million at December 31, 2009. We expect to continue to incur substantial net losses for at least the next several years, and these losses are likely to increase in the near-term.

Historically, we have generated limited revenue from our biomarker discovery and analysis services agreements and we have only recently begun limited marketing and sales activities in Europe relating to our first diagnostic test for galectin-3. As we continue the discovery and development of our diagnostic product candidates, our expenses are expected to increase significantly. Accordingly, we will need to generate significant revenue to achieve profitability. Subject to clearance from the U.S. Food and Drug Administration, or FDA, we expect to introduce our galectin-3 test in the United States in the second half of 2010. Even if we begin selling our products, we expect our losses to continue as a result of ongoing research and development expenses, as well as increased manufacturing, sales and marketing expenses. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders’ equity. Because of the numerous risks and uncertainties associated with our product development and commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve and then maintain profitability, our business, financial condition and results of operations will be negatively affected and the market value of our common stock will decline.

We may not have sufficient resources to continue as a going concern without the proceeds from this offering.

We have received an audit report from our independent registered public accounting firm containing an explanatory paragraph stating that our stockholders’ deficit, recurring net losses and history of negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. We anticipate that our current cash, cash equivalents and marketable securities without additional funding will not be sufficient to fund our current operations beyond the second quarter of 2010. We believe that the successful completion of this offering will allow us to meet our anticipated cash requirements at least through 2012. If we are unable to successfully complete this offering, we will need to obtain alternative financing and modify our operational plans in order to continue as a going concern.

Our business is dependent on our ability to successfully develop and commercialize novel diagnostic products and services based on biomarkers. If we fail to develop and commercialize diagnostic products, we may be unable to execute our business plan.

Historically, we have generated revenue from initiatives, collaborations and biomarker discovery and analysis services agreements with pharmaceutical companies and healthcare organizations. Our current business strategy, however, focuses on discovering, developing and commercializing diagnostic products and services based on biomarkers, and we do not expect to continue to receive significant revenue from performing biomarker

 

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discovery and analysis services for third parties. The success of our business will depend on our ability to develop and commercialize diagnostic products based on the candidates that we currently have in our product pipeline, as well as others that we might develop internally or in-license in the future.

Prior to commercializing our diagnostic products, we are required to undertake time-consuming and costly development activities, sometimes including clinical studies, and to obtain regulatory clearance or approval, for which the outcome is uncertain. We have limited experience in taking biomarker discovery projects through the development and commercialization stages. There are considerable risks involved in these activities. The science and methods that we are employing are innovative and complex, and it is possible that our product development programs will ultimately not yield diagnostic tests for commercialization. Products that appear promising in early development may fail to be validated in subsequent studies, and even if we achieve positive results, we may still fail to obtain the necessary regulatory clearances or approvals. Few research and development projects result in commercial products, and perceived viability 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 obtaining additional clinical and nonclinical data, which would adversely impact the timing for generating potential revenue from those product candidates. Further, our ability to develop and launch diagnostic tests is dependent on our receipt of substantial additional funding either through this offering or other financing transactions. If our discovery and development programs yield fewer commercial products than we expect, we may be unable to execute our business plan, and our business, financial condition and results of operations may be adversely affected.

Our galectin-3 test has not been cleared by the FDA for sale in the United States.

We do not currently receive significant revenue from sales of our diagnostic tests. We anticipate that a substantial portion of any future product revenue will come from sales of our galectin-3 test. Our galectin-3 test for heart failure has obtained CE Mark in the European Union, but we have commenced only limited sales and marketing activities in the region and to date have generated negligible revenue from this product. In addition, we have not obtained FDA clearance for our galectin-3 test for marketing in the United States. In March 2009, we submitted a 510(k) premarket notification to the FDA in order to obtain regulatory clearance to market this test in the United States. Upon review of our 510(k) application, the FDA determined that our device was not substantially equivalent to the legally marketed device to which we claimed substantial equivalence and therefore denied clearance. The FDA indicated that additional clinical and other data was required in support of our filing, and we re-submitted a 510(k) application in December 2009 with additional data that we believe is responsive to the FDA’s comments. The re-submitted 510(k) application is currently under review by the FDA. The FDA may require that we conduct yet additional studies and submit additional data prior to clearing our 510(k) application. The FDA may again determine that our device is not substantially equivalent to the legally marketed device, in which case we would not be able to sell our galectin-3 test in the United States. If the FDA denies our request for 510(k) clearance, we may be required to seek and obtain premarket approval, or PMA. The PMA process is more complex, costly and time-consuming than the 510(k) process. In addition, the FDA may clear our galectin-3 test for a narrower indication than we are seeking, in which case the market for our product candidate could be significantly reduced. The occurrence of any of these events would adversely affect our commercial opportunity and our business, financial condition and results of operations.

Furthermore, we have additional product candidates in various stages of development. If we are successful in developing these product candidates, we intend to submit these product candidates for regulatory clearance through the FDA’s 510(k) process before marketing in the United States. Conducting studies and collecting, analyzing and submitting necessary data can be time-consuming and expensive. We cannot be certain that any of our product candidates will complete the development process, be validated as clinically useful and accurate diagnostic tests, be eligible for the 510(k) process, or be cleared by the FDA. In addition, new government regulations or policies could prevent or delay FDA clearance of our product candidates.

We may not be able to achieve milestones described in this prospectus in the timeframes we expect.

This prospectus includes several estimated timeframes for achieving specific objectives and milestones, such as our commercialization of our galectin-3 test and completion of AMIPredict studies. There are a variety of risks

 

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and uncertainties that may cause delays in, or prevent us from, achieving these milestones. Delays may result from unanticipated problems in product development, an inability to obtain regulatory clearance or approval on a timely basis, and an inability to successfully enter into partnerships with diagnostic laboratory instrument companies and other risks described elsewhere in this prospectus.

We may never successfully commercialize our diagnostic tests. If we are unable to execute our commercialization strategy, we may be unable to generate sufficient revenue to sustain our business.

We are an early stage company and have engaged in only limited sales and marketing activities for our first product, the BGM Galectin-3 test for heart failure. We are in the process of transitioning into a commercial organization, and we have only very limited experience to date in conducting commercial activities.

Our success in commercializing any product candidates that we are able to develop will require that we expand or develop a wide variety of operational functions with which to date we have had little or no experience. We intend to retain worldwide marketing rights to our products, and we will be primarily responsible for generating demand, increasing market adoption, working with payors to make reimbursement and coverage determinations and ensuring that our biomarker-based tests realize their market potential. To accomplish this, we will need to create a commercial infrastructure that we do not currently have. We have hired a senior sales executive, but to execute our strategy we also plan to hire a limited number of professionals to form our specialty sales force. Sales professionals with the necessary technical and business qualifications we plan to hire are in high demand, and we may have difficulty hiring or retaining them. We plan to distribute and market our products initially through U.S. national and regional laboratory service providers and through large diagnostic laboratory instrument manufacturers, such as Abbott Diagnostics. Other than our agreement with Abbott, we have not entered into agreements with any of these organizations and cannot be sure that we will be able to do so. Moreover, even if we are able to implement this strategy, we will be largely dependent on these third parties for the commercial success of our products. They may not deploy the resources we would like them to, and our revenue would then suffer. In addition, we could become embroiled in disputes with these parties regarding the terms of any agreements, their performance or intellectual property rights. Any dispute could disrupt the sales of our products and adversely affect our reputation and revenue. Our strategy to leverage the expertise, marketing resources and installed base of these potential partners may ultimately fail.

If the marketplace does not accept our galectin-3 test or any other diagnostic products we might develop, we may be unable to generate sufficient revenue to sustain and grow our business.

Even if we succeed in developing and obtaining regulatory clearance or approval for our galectin-3 test or other diagnostic product candidates that we believe will be promising commercial products, our products may never gain significant acceptance in the marketplace and therefore never generate substantial revenue or profits for us. As is the case with all novel biomarkers, we must establish a market for our galectin-3 test and build that market through physician education and awareness programs. We have built and launched an educational website for Europe supporting the clinical utility of our galectin-3 test for use in heart failure. Publication in peer review journals of results from studies using our products will be an important consideration in the adoption by physicians of our products. The process of publication in leading medical journals is subject to a peer review process. Peer reviewers may not consider the results of our galectin-3 studies sufficiently novel or worthy of publication. Failure to have our studies published in peer review journals may adversely affect adoption of our products.

Under our collaboration agreement with Abbott for the commercialization of our galectin-3 test, we bear primary responsibility for validating the clinical utility of our galectin-3 test. We are also responsible for promoting the utility of the galectin-3 biomarker, including developing and executing plans to raise awareness of, and create demand for, our galectin-3 test among clinicians and payors, as well as developing and implementing a reimbursement strategy for our galectin-3 test. We have little experience in these types of activities. We may be unable to demonstrate that our galectin-3 test provides incremental benefits over currently available heart failure

 

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diagnostic tests sufficient to ensure adoption of our test. Our ability to successfully commercialize the diagnostic products that we may develop will depend on numerous factors, including:

 

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whether healthcare providers believe our galectin-3 test and any other diagnostic tests that we successfully develop provide sufficient incremental clinical utility;

 

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whether the medical community accepts that our diagnostic products have sufficient sensitivity and specificity to be meaningful in patient care and treatment decisions; and

 

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whether health insurers, government health programs and other third-party payors will cover and pay for our diagnostic tests and the amount they will reimburse.

These factors may present obstacles to commercial acceptance of our diagnostic product candidates. If these obstacles arise, we may need to devote substantial time and money to surmount these obstacles, and we might not be successful. Failure to achieve widespread market acceptance of our diagnostic products would materially harm our business, financial condition and results of operations.

Health insurers and other third-party payors may decide not to cover our diagnostic products or may provide inadequate reimbursement, which could jeopardize our commercial prospects.

In the United States, the regulatory process that allows diagnostic tests to be marketed is independent of any coverage determinations made by third-party payors. For new diagnostic tests, private and government payors decide whether to cover the test, the reimbursement amount for a covered test and the specific conditions for reimbursement. Physicians may order diagnostic tests that are not reimbursed by third-party payors, but coverage determinations and reimbursement levels and conditions are critical to the commercial success of a diagnostic product.

Each third-party payor makes its own decision about which tests it will cover and how much it will pay, although many payors will follow the lead of Medicare. As a result, the coverage determination process is often a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of our products to each payor separately, with no assurance that approval will be obtained. If third-party payors decide not to cover our diagnostic tests or if they offer inadequate payment amounts, our ability to generate revenue from our diagnostic tests could be limited. Even if one or more third-party payors decides to reimburse for our tests, a third-party payor may stop or lower payment at any time, which would reduce revenue. We intend to develop a strategy to advocate for desired coverage and payment levels, which will include aligning ourselves with third-party payors to encourage the acceptance of our products. However, we cannot predict whether third-party payors will cover our tests or offer adequate reimbursement. We also cannot predict the timing of such decisions. In addition, physicians or patients may decide not to order our tests if third-party payments are inadequate, especially if ordering the test could result in financial liability for the patient.

In the United States, the American Medical Association assigns specific Current Procedural Terminology, or CPT, codes, which are a medical nomenclature used to report medical procedures and services under public and private health insurance plans. Once the CPT code is established, the Centers for Medicare and Medicaid Services, or CMS, establishes reimbursement payment levels and coverage rules for Medicare, and private payors establish rates and coverage rules independently. We cannot guarantee that our galectin-3 test will receive its own analyte-specific CPT code and will be approved for reimbursement by Medicare or other third-party payors. Additionally, any or all of our diagnostic tests developed in the future may not be approved for reimbursement or may be approved at a level that limits our commercial success.

In addition, payment for diagnostic tests furnished to Medicare beneficiaries is made based on a fee schedule set by CMS in most instances. In recent years, payments under these fee schedules have decreased and may decrease more, which could jeopardize our commercial prospects. Reimbursement decisions in the European Union and in other jurisdictions outside of the United States vary by country and region and there can be no assurance that we will be successful in obtaining adequate reimbursement.

 

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We expect to face intense competition, often from companies with greater resources and experience than us.

The diagnostics industry is highly competitive and subject to rapid change. The industry continues to expand and evolve as an increasing number of competitors and potential competitors enter the market. Many of these competitors and potential competitors have substantially greater financial, technological, managerial and research and development resources and experience than we do. Some of these competitors and potential competitors have more experience than we do in the development of diagnostic products, including validation procedures and regulatory matters. In addition, we expect that our diagnostic products, if successfully developed, will compete with product offerings from large and well-established companies that have greater marketing and sales experience and capabilities than we do. We are aware of other diagnostic tests under development, which, if successfully developed and commercialized, would compete with our products. Our competitors may include established diagnostics companies, such as Abbott, Beckman Coulter, Roche Diagnostics, General Electric, Inverness Medical Innovations, Ortho Clinical Diagnostics, Mitsubishi, Philips and Siemens. We may also compete with national laboratory services providers with extensive service networks for diagnostic tests, such as Laboratory Corporation of America and Quest Diagnostics, and specialized laboratories, such as Genzyme Genetics and Myriad Genetics. Companies that may compete with us in cardiovascular disease, immune disorders and central nervous system disorders include Athena Diagnostics, Celera Group, Dako, diaDexus, QIAGEN, Rules-Based Medicine and XDx. If we are unable to compete successfully, we may be unable to grow and sustain our revenue.

We are dependent on third parties for the patient samples that are essential to our biomarker discovery and diagnostics product development plans.

To pursue our biomarker discovery and diagnostics product development program, we will need access, over time, to thousands of patient samples, including blood, blood plasma and serum, urine and other fluids. We do not have direct access to a supply of patient samples. As a result, we have made arrangements with third parties, such as academic medical centers, government programs and payors such as Humana, that we believe will give us access to a significant number of patient samples over the coming years. Most of the institutions and physicians from which we obtain biological specimens that we use in our research and validation work are “Covered Entities” under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. Under this law, these parties may have to obtain proper authorization from their patients for the subsequent use of those samples and associated clinical information. We are not presently a Covered Entity or a Business Associate of a Covered Entity subject to HIPAA; however, we may become a Covered Entity or a Business Associate of a Covered Entity in the future, if we provide clinical laboratory testing services. We may lose access to patient samples provided by such third parties, or have that access limited, because the third parties decrease the number of patient samples they provide, due to changes in privacy laws governing the use and disclosure of medical information or due to changes in the laws restricting our ability to obtain patient samples and associated information. In certain instances, we owe the party providing the samples for our research programs payments which may be related to the sales of products derived from those research programs. In addition, we may be forced to actively pursue patient samples from other sources for the diagnostic testing indications we pursue, which could be expensive and time consuming. If we fail to secure and maintain an adequate supply of patient samples, or if our existing supply arrangements are terminated or result in access to fewer samples than expected, our ability to pursue our biomarker discovery and development efforts may be slowed or halted, which could have a material adverse effect on our business, financial condition and results of operations.

We rely on certain suppliers for some of our laboratory instruments and supplies, and we may not be able to find adequate replacements on a timely basis or at all.

We rely on certain suppliers for our laboratory instruments and reagents. We rely on mass spectrometry equipment and other advanced instruments from Applied Biosystems and other vendors to generate the vast majority of data for our biomarker discovery and development projects. If we were to lose any of these suppliers or our suppliers become unwilling or unable to provide these materials in required quantities or on our required timelines, we would have to identify new suppliers with similar instrumentation, reagents and software, capable

 

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of supporting our discovery and development efforts based on our proprietary technologies or possibly modify our discovery and development processes and procedures. We may not be able to identify and contract with acceptable replacement sources on a timely basis, or on acceptable terms, or at all. If we are able to identify other suppliers, there is no guarantee that we would be able to transfer our technologies to new instruments and equipment or substitute reagents or other materials with comparable results. In addition, there can be no assurance that we will be able to enter into agreements with alternate suppliers on a timely basis or on acceptable terms, if at all. We may also become involved in disputes with our third-party suppliers or we may become party to disputes between these suppliers and other parties, which could be expensive and time consuming. Delays or difficulties experienced with any of our third-party suppliers would have a material adverse effect on our business, financial condition and results of operations.

We may need to raise additional capital in the future. If we are unable to secure adequate funds on terms acceptable to us, we may be unable to execute our business plan.

We expect to continue to incur substantial net losses for at least the next several years. We believe that our current cash, cash equivalents and marketable securities, together with the expected net proceeds from this offering, will be sufficient to meet our anticipated cash requirements at least through 2012. However, in the event that we do not receive regulatory clearance or approval in a timely manner, or at all, or if we incur delays in commencing commercialization of our galectin-3 test, or if we encounter other unforeseen adverse business developments, we may exhaust our capital resources prior to this time.

We cannot be certain that additional capital will be available when needed or that our actual cash requirements will not be greater than anticipated. Financing opportunities may not be available to us, or if available, may not be on favorable terms. The availability of financing opportunities will depend on various factors, such as market conditions and our financial condition and outlook. In addition, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us. If we are unable to obtain financing on terms favorable to us, we may be unable to execute our business plan and we may be required to cease or reduce development or commercialization of our product candidates, sell some of all of our technology or assets or merge with another entity.

Declining general economic or business conditions may have a negative impact on our business.

Continuing concerns over U.S. healthcare reform legislation and energy costs, geopolitical issues, the availability and cost of credit and government stimulus programs in the United States and other countries have contributed to increased volatility and diminished expectations for the global economy. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and recession. If the economic climate does not improve or continues to deteriorate, our business, including our access to patient samples and the addressable market for diagnostic tests that we may successfully develop, as well as the financial condition of our suppliers and our third-party payors, could be adversely affected, resulting in a negative impact on our business, financial condition and results of operations.

 

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Risks Related to Our Intellectual Property

If the combination of patents, trade secrets and contractual provisions that we rely on to protect our intellectual property proves inadequate, our ability to successfully commercialize our proposed products will be harmed and we may never be able to operate our business profitably.

Our success depends, in large part, on our ability to protect proprietary methods, discoveries and diagnostic tests that we develop under the patent and other intellectual property laws of the United States and other countries, so that we can seek to prevent others from unlawfully using our inventions and proprietary information. We rely on both patents and trade secrets to protect the proprietary aspects of our methods and discoveries. We have a co-exclusive license to practice and commercialize technology covered by two issued U.S. patents and their foreign counterparts. As of December 31, 2009, we have 19 pending patent applications filed either with the U.S. Patent and Trademark Office or under the Patent Cooperation Treaty, or PCT, and foreign counterparts of certain of these patent applications. A subset of the intellectual property that we own or license relates to our galectin-3 test for heart failure. This intellectual property includes U.S. Patent Application No. 10/575,745 exclusively licensed from ACS Biomarker B.V. and eight corresponding patent applications pending abroad. Any patent issuing from the U.S. patent application could expire as early as 2024. We own a U.S. and a PCT application relating to a specific method and kit for detecting galectin-3. Any patent issuing from this U.S. application could expire as early as 2029. In addition, we own two U.S. provisional patent applications related to methods for clinical evaluation of subjects and therapies based on galectin-3 measurements. For the diagnostic tests that we develop based on our biomarker discoveries, we expect to rely primarily on patent protection. We have filed or have license rights to a number of patent applications related to our proprietary methods and diagnostic tests, but we do not yet have any issued patents in the United States or Europe. Moreover, several of our owned and licensed patent applications are in an early stage of prosecution, and we cannot assure you that any of the pending patent applications will result in patents being issued. In addition, due to technological changes that may affect our proposed products or judicial interpretation of the scope of our patents, our proposed products might not, now or in the future, be adequately covered by our patents.

The patentability of biomarkers and of test methods and products based on biomarkers is well-established in most countries. However, the issue of any patent, including the patents for which we have applied, depends upon a detailed interpretation of the specific patent claims and prior art, and generally is highly uncertain because of the complex legal and factual considerations it involves. In recent years, patentability issues have been the subject of much litigation. For example, Bilski v. Kappos, a case on which the United States Supreme Court recently heard oral arguments, but has not yet decided, poses the issue of whether a claimed method needs to be tied to a particular machine or apparatus, or needs to transform a particular article into a different state or thing, to qualify as patent-eligible subject matter. The result of the case or other legal developments may preclude or limit the patent protection available for our diagnostic tests, such as those we use to develop our proposed products. The patentability of claims currently pending, the validity and enforceability of issued or to be issued patent claims and the commercial value of our patent rights, therefore, are highly uncertain.

In addition, we cannot be certain that we hold the rights to the technology covered by pending patent applications or to other proprietary technology required for us to commercialize our proposed products. Rights in applications filed by us or our licensors may be affected adversely by patent applications filed by others which have not yet been published. For example, because certain U.S. patent applications are confidential until patents issue, such as applications filed prior to November 29, 2000, or applications filed after this date which will not be filed in foreign countries, third parties may have filed patent applications for technology covered by our pending patent applications without our being aware of those applications, and our patent applications may not have priority over those applications. For this and other reasons, we may be unable to secure desired patent rights, thereby losing desired exclusivity or co-exclusivity. It is also possible that one or more organizations will hold patent rights to which we will need a license. If those organizations refuse to grant us a license to such patent rights on reasonable terms, we will not be able to market our proposed products.

 

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If third parties assert that we have infringed their patents and proprietary rights or challenge the validity of our patents and proprietary rights, we may become involved in intellectual property disputes and litigation that would be costly, time consuming, and delay or prevent the development or commercialization of our proposed products.

Our ability to commercialize our proposed products depends on our ability to develop, manufacture, market and sell our proposed products without infringing the proprietary rights of third parties. Third parties may allege that our proposed products or our methods or discoveries infringe their intellectual property rights. Numerous U.S. and foreign patents and pending patent applications, which are owned by third parties, exist in fields that relate to our proposed products and our underlying methodologies and discoveries, including patents and patent applications claiming methods for the discovery of biomarkers or biomarker sets and assay systems and methods designed to exploit them clinically in drug discovery efforts or in selection of patients.

A third party may sue us for infringing its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or to determine the scope and validity of third-party proprietary rights. In addition, a third party may claim that we have improperly obtained or used its confidential or proprietary information. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s attention from other aspects of our business. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

If we are found to infringe upon intellectual property rights of third parties, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively market some or all of our products, which could limit our ability to generate revenue or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid by our collaborators to third parties who have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenue from products developed through collaborations.

Many of our employees were previously employed at universities or other biotechnology, pharmaceutical or diagnostic products companies, including our competitors or potential competitors. While we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed the former employer’s intellectual property, trade secrets or other proprietary information. Litigation based on such allegations may be brought against us, and even if we are successful in defending ourselves, we could incur substantial costs and our management could be distracted. If we fail in defending such allegations, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.

If we are unable to protect our trade secrets, we may be unable to protect our interests in proprietary technology, processes and know-how that is not patentable or for which we have elected not to seek patent protection.

In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how, including particularly our biomarker discovery methodologies. In an effort to protect our unpatented proprietary technology, processes and know-how, we require our employees, consultants, collaborators, contract manufacturers and advisors to execute confidentiality agreements. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, in particular as we are

 

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required to make such information available to a larger pool of people as we seek to expand our discovery and development efforts and commercialize our proposed products. These agreements may be breached, and we may not become aware of, or have adequate remedies in the event of, any such breach. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees and consultants have previous employment or consulting relationships. Also, others may independently develop substantially equivalent technology, processes and know-how or otherwise gain access to our trade secrets. If we are unable to protect the confidentiality of our proprietary technology, processes and know-how, competitors may be able to use this information to develop products that compete with our products, which could adversely impact our business.

If we fail to comply with our obligations in the agreements under which we license development or commercialization rights to products or technology from third parties, we could lose license rights that are important to our business.

Several of our collaboration agreements provide for licenses to us of intellectual property or sharing of rights to intellectual property that is important to our business, and we may enter into additional agreements in the future that provide licenses to us of valuable technology. These licenses impose, and future licenses may impose, various commercialization, milestone and other obligations on us, including the obligation to terminate our use of patented subject matter under certain contingencies. If a licensor becomes entitled to, and exercises, termination rights under a license, we would lose valuable rights and our ability to develop our products. We may need to license other intellectual property to commercialize future products. Our business may suffer if any current or future licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or if we are unable to enter into necessary licenses on acceptable terms.

Risks Related to the Growth of Our Management Team, Workforce, Manufacturing and Facilities

Our future success depends on our ability to retain our Chief Executive Officer and other key employees and to attract, retain and motivate qualified personnel.

Our success depends on our ability to attract, retain and motivate highly qualified management and scientific personnel. In particular, we are highly dependent on Pieter Muntendam, M.D., our President and Chief Executive Officer, and the other principal members of our executive team. All of the arrangements with the principal members of our executive and scientific teams may be terminated by us or the employee at any time without notice. The loss of any of these persons’ expertise would be difficult to replace and could have a material adverse effect on our ability to achieve our business goals. In addition, the loss of the services of any member of our senior management or our scientific staff may impede the achievement of our research, development and commercialization objectives by diverting management’s attention to transition matters and identification of suitable replacements, if any. There can be no assurance that we will be successful in hiring or retaining qualified personnel, and our failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Recruiting and retaining qualified scientific personnel and, in the future, sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among pharmaceutical, biotechnology and diagnostic companies for similar personnel. We also experience competition for the hiring of scientific personnel from universities and research institutions. We do not maintain “key person” insurance on any of our employees. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

 

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We expect to expand our development, clinical research, and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

To accommodate the commercial launch of any diagnostic products that we are able to develop successfully and the demands of being a public company, we expect to experience significant growth in the number of our employees and the scope of our operations. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. For example, we currently have a limited financial staff, consisting of three individuals, and intend to add additional staff to develop our proficiency in financial reporting and other accounting areas. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

If our sole laboratory facility becomes damaged or inoperable, our ability to pursue our discovery and development efforts may be jeopardized.

We currently perform all of our biomarker discovery and development work in our laboratories at our headquarters in Waltham, Massachusetts. At the present time, we do not have redundant laboratory facilities. Our facilities could be harmed or rendered inoperable by natural or man-made disasters, including fire, flooding and power outages, which may render it difficult or impossible for us to perform our biomarker discovery and development work for some period of time. A key component of our discovery engine is our unique access to biological samples, and the resulting data sets and medical histories that form the foundation of our biomarker discovery and clinical validation. Access to suitable samples for discovery or validation is often an important gating factor for our discovery projects. If these biological samples or related data are damaged or compromised, our ability to pursue our discovery and development projects, as well as our reputation, may be jeopardized. In some cases, the samples are unique and irreplaceable. Furthermore, our facilities and the equipment we use to perform our discovery and development work could be costly and time-consuming to repair or replace. Although we maintain insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. If the patient samples to which we have obtained access are damaged or we lose operation of our laboratory facilities for any extended period of time, our discovery and development projects could be delayed, and our reputation and relationships with collaborators could be harmed. In order to establish a redundant laboratory facility, if necessary, we would be required to spend considerable time and money securing adequate space, constructing the facility, recruiting and training employees and establishing the additional operational and administrative infrastructure necessary to support a second facility.

Failure in our information technology and storage systems could significantly disrupt the operation of our proprietary technology platform and our ability to discover and validate biomarkers, which would adversely impact our development and commercialization efforts.

Our ability to execute our business plan depends, in part, on the continued and uninterrupted performance of our information technology systems, or IT systems, which support our discovery and development platform. Our platform integrates molecular measurement technologies based on specialized mass spectrometry, chromatography, nuclear magnetic resonance spectroscopy and multiplexed assay technologies. Due to the sophisticated nature of our proprietary technology platform, we are substantially dependent on our IT systems. IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data, and in particular to operate our proprietary technology platform, could adversely affect our ability to operate our business.

 

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We rely on a single third party to manufacture and supply our product candidates. Any problems experienced by this vendor could result in a delay or interruption in the supply of our product candidates to us until this vendor cures the problem or until we locate and qualify an alternative source of supply.

The manufacture of our diagnostic product candidates requires specialized equipment and utilizes complicated production processes that would be difficult, time-consuming and costly to duplicate. Corgenix Medical Corporation is currently the third-party manufacturer of our galectin-3 test. Any prolonged disruption in the operations of our third-party manufacturer could have a significant negative impact on our ability to manufacture products on our own and would cause us to seek additional third-party manufacturing contracts, thereby increasing our development and any commercialization costs. We may suffer losses as a result of business interruptions that exceed coverage under our manufacturer’s insurance policies. Events beyond our control, such as natural disasters, fire, sabotage or business accidents could have a significant negative impact on our operations by disrupting our product candidate development and commercialization efforts until our third-party manufacturer can repair its facility or put in place third-party contract manufacturers to assume this manufacturing role, which we may not be able to do on reasonable terms, if at all. In addition, if we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer or the reverification of an existing manufacturer could negatively affect our ability to develop product candidates or produce approved products in a timely manner. Any delay or interruption in our clinical studies for the validation and commercialization of our product candidates could negatively affect our business.

If we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage, and such claims may harm our business in other ways.

Our business exposes us to product liability claims that are inherent in the testing, production, marketing and sale of diagnostic products. Although we currently maintain limited product liability insurance, we anticipate needing to secure additional product liability insurance for the development and commercialization of our product candidates. We cannot be certain whether we will be able to secure such insurance on commercially reasonable terms, or at all. A product liability claim in excess of any insurance coverage we may obtain would have to be paid out of our cash reserves and could harm our business. In addition, any injunction or other restriction on our ability to sell against one of our product candidates could harm our business.

If we complete our development of any diagnostic tests, the marketing, sale and use of our tests could lead to the filing of product liability claims if someone were to allege that our product failed to perform as it was designed. A product liability claim could result in substantial damages and be costly and time consuming for us to defend. We cannot provide assurance that our product liability insurance would protect us from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our reputation, result in the recall of our product candidates, or cause current collaborators to terminate existing agreements and potential collaborators to seek other partners, any of which could impact our results of operations.

Our activities involve hazardous materials and may subject us to environmental liability or other costs.

Certain activities of our businesses involve the controlled use of limited quantities of hazardous, biological and radioactive materials and may generate biological waste. We and our manufacturers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and certain waste products. We cannot eliminate the risk of accidental contamination or discharge and liability for any resultant injury from these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials. In the event of an accident or if we otherwise fail to comply with applicable regulations, we could lose our permits or approvals or be held liable for damages or penalized with fines. Although we currently maintain limited insurance to cover claims related to hazardous materials or environmental liability claims, any claims in excess of our insurance coverage would be required to be paid out

 

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of our cash reserves and could harm our business, financial condition and results of operations. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and production efforts.

Risks Related to Regulatory Approval and Other Government Regulations

We may not obtain regulatory clearance for our diagnostic product candidates when expected, if at all.

To market our products in Europe, we must obtain CE mark and may, in some cases, need marketing approval from the European Medicines Agency. In October 2009, we obtained CE Mark in the European Union for our first product, our galectin-3 test for heart failure. In the United States, we intend to seek FDA clearance or approval for all of our products prior to their launch for clinical use, whether offered as a diagnostic kit or laboratory service. In March 2009, we submitted a 510(k) premarket notification to the FDA in order to obtain regulatory clearance to market this test in the United States. Upon review of our 510(k) application, the FDA determined that our device was not substantially equivalent to the legally marketed device to which we claimed substantial equivalence and therefore denied clearance. The FDA indicated that additional clinical and other data was required in support of our filing, and we re-submitted a 510(k) application in December 2009 with additional data that we believe is responsive to the FDA’s comments. We expect to begin marketing our galectin-3 test in the United States in the second half of 2010, subject to clearance from the FDA, but such clearance could be delayed or denied entirely. If the FDA denies our request for 510(k) clearance, we may be required to seek and obtain premarket approval, or PMA. The PMA process is more complex, costly and time-consuming than the 510(k) process. A PMA must be supported by more detailed and comprehensive scientific evidence, including clinical data, to demonstrate the safety and efficacy of the medical device for its intended purpose. Any material delays in our receipt of regulatory clearance or approval for our galectin-3 test and our other product candidates in development, or our failure to obtain such clearances or approvals at all, would have a material adverse effect on our business, financial condition and results of operations.

Changes in regulatory review procedures, approval requirements or enactment of additional regulatory approval requirements may delay or prevent us from marketing our proposed products. The process of obtaining regulatory clearances or approvals to market medical devices, including in vitro diagnostic test kits, from the FDA and similar regulatory authorities outside of the United States can be costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis or at all. Furthermore, each regulatory agency may impose its own requirements and may refuse to grant approval or may require additional data before granting marketing approval even if marketing approval has been granted by other agencies. For example, in seeking clearance from the FDA for our product candidates, we have relied on samples from previously concluded studies sponsored by other parties to determine the clinical utility of our galectin-3 test and we may do so for our other product candidates. While we believe that the FDA has in the past accepted such reliance on samples from previously concluded studies, the FDA may require us to conduct our own prospective studies to demonstrate the clinical utility of our product candidates, which would make the development and validation of our product candidates more costly and time-consuming.

If our products are cleared or approved, we will be subject to ongoing regulation by the FDA and failure to comply with such regulation could cause a material adverse effect on our business, financial condition and results of operations.

After a device is placed on the market, numerous regulatory requirements apply. These include:

 

  §  

compliance with QSR;

 

  §  

labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on marketing; and

 

  §  

medical device reporting regulations, which require 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 it were to recur.

 

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Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:

 

  §  

warning letters;

 

  §  

fines, injunctions, and civil penalties;

 

  §  

recall or seizure of our products;

 

  §  

operating restrictions, partial suspension or total shutdown of production;

 

  §  

refusal to grant 510(k) clearance or PMAs of new products;

 

  §  

withdrawal of 510(k) clearance or PMAs that are already granted; and

 

  §  

criminal prosecution.

Being subject to any of these sanctions could adversely affect our business, financial condition and results of operations.

Even if we are successful in obtaining regulation clearance or approval for our product candidates, we will be subject to regulations under additional federal and state laws.

If we develop diagnostic tests suitable for commercialization, and after receiving all necessary regulatory clearances and approvals, we will be subject to national, regional and local regulations. For example, in the United States, the regulations which we may be subject to include:

 

  §  

the federal Food, Drug and Cosmetic Act and the rules, regulations, guidance documents and other interpretations thereunder relating to the manufacture and marketing of medical products;

 

  §  

the federal Medicare and Medicaid Anti-kickback Law, and state anti-kickback prohibitions;

 

  §  

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, or HIPAA;

 

  §  

the various state laws governing patient privacy; and

 

  §  

the federal civil and criminal False Claims Act.

The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.

If in the future we decide to operate our own laboratory for our diagnostic tests, we will become subject to the Clinical Laboratory Improvement Amendments of 1988, or CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. There can be no assurances that we will be able to obtain CLIA accreditation, or if we do, that we would be able to renew it. If we are unable to obtain CLIA accreditation, we may be limited in our ability to perform testing, which would limit our revenue and harm our business.

Any action brought against us for violation of these laws or regulations, even if we prevail, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines. We could also be required to refund any improperly received payments, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business, financial condition and results of operations.

 

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If our third-party manufacturer fails to comply with the FDA’s quality system regulation, the manufacture of our products could be delayed or interrupted and our products may be subject to product recalls.

If our products are cleared or approved by the FDA, our contract manufacturers will be required to comply with the FDA’s quality system regulation, or QSR, and other regulations which cover, among other things, the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our products. The FDA monitors compliance with QSR through periodic inspections of manufacturing facilities. If our contractors are determined not to be in compliance or if any corrective action plan for noted deficiencies is not sufficient, we could be prevented or forced to delay the manufacture of our products, which could have a material adverse effect on our business, financial condition and results of operations. Moreover, any failure to maintain QSR compliance could force us to cease the manufacture of our products and subject us to other enforcement sanctions, including withdrawal of our products from the U.S. or foreign markets, and delay or interrupt the manufacture of additional products.

If we instead choose in the future to manufacturer our products ourselves, these regulations would apply to us.

Changes in healthcare policy could subject us to additional regulatory requirements that may interrupt possible commercialization of our proposed products and increase our costs.

Healthcare policy has been a subject of extensive discussion in the executive and legislative branches of the federal and many state governments. We have developed our product development and commercialization strategy based on existing healthcare policies. Changes in healthcare policy, such as the creation of broad limits for diagnostic products, could substantially interrupt the sales of future diagnostic tests, increase costs and divert management’s attention.

There are a number of initiatives on the federal and state levels for comprehensive reforms affecting the payment for, the availability of, and the reimbursement for healthcare services in the United States. These initiatives range from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government funded programs, to minor modifications to existing programs. Government payors, such as Medicare and Medicaid, as well as private payors, have increased their efforts to control the cost, utilization and delivery of healthcare services. Cost containment measures and healthcare reforms could adversely affect our ability to sell our products and could adversely affect our revenue.

In late 2009, the House of Representatives and the Senate passed various health reform bills that, if enacted into law, would, among other things, require most individuals to have health insurance, establish new regulations on health plans, create insurance pooling mechanisms and a government health insurance option to compete with private plans and other expanded public healthcare measures. Various healthcare reform proposals have also emerged at the state level. We cannot predict what healthcare initiatives, if any, will be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. However, an expansion in government’s role in the U.S. healthcare industry may lower reimbursements for our product candidates, reduce medical procedure volumes and adversely affect our business. The ultimate content or timing of any future healthcare reform legislation, and its impact on us, is impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may have an adverse effect on our business, financial condition and results of operations.

Risks Related to Our Common Stock and this Offering

An active trading market for our common stock may not develop, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock. Although we have applied to have our common stock approved for listing on The NASDAQ Global Market, an active trading market for our common stock may never develop or be sustained following this offering. If no trading market develops, securities analysts may not initiate or maintain research coverage of our company, which could further depress the market for our common stock.

 

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The initial public offering price of shares of our common stock is, or will be, determined by negotiation between us and the underwriters and may not be indicative of prices that will prevail following the completion of this offering. The market price of shares of our common stock may decline below the initial public offering price, and you may not be able to resell your shares of our common stock at or above the initial public offering price, or at all.

Our stock price is likely to be volatile, and the market price of our common stock after this offering may drop below the price you pay.

The initial public offering price may vary from the market price of our common stock after the offering. If an active market for our stock develops and continues, our stock price nevertheless may be volatile. Market prices for securities of early stage life sciences companies have historically been particularly volatile. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. Some of the many factors that may cause the market price of our common stock to fluctuate include:

 

  §  

our ability to commercialize the products, if any, that we are able to develop;

 

  §  

the progress and results of our biomarker discovery and product candidate development efforts;

 

  §  

actions taken by regulatory authorities with respect to our product candidates, or our sales and marketing activities;

 

  §  

regulatory developments in the United States, the European Union and other jurisdictions;

 

  §  

the outcome of legal actions to which we may become a party;

 

  §  

announcements concerning product development results or intellectual property rights of others;

 

  §  

announcements of technological innovations or new products by us or our competitors;

 

  §  

changes in financial estimates or recommendations by securities analysts;

 

  §  

changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;

 

  §  

restatements of our financial results and/or material weaknesses in our internal controls;

 

  §  

publication of research reports about us or the diagnostic products industry by securities or industry analysts;

 

  §  

fluctuations in our operating results; and

 

  §  

deviations in our operating results from the estimates of securities analysts or other analyst comments.

The stock markets, and the markets for medical diagnostics and biotechnology stocks in particular, have experienced volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Investors may not be able to sell when they desire due to insufficient buyer demand and may realize less than, or lose all of, their investment.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our financial condition, operating results and reputation.

The requirements of being a public company will require greater resources, increase our costs and distract our management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company with equity securities listed on The NASDAQ Global Market, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will need to comply with certain rules, regulations and requirements with which we were not required to comply prior to this offering.

 

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Complying with rules, regulations and requirements will require substantial effort on the part of our board of directors and management and will increase our costs and expenses. We will be required to:

 

  §  

institute a more formalized function of internal control over financial reporting;

 

  §  

prepare and distribute periodic and current public reports;

 

  §  

formalize old and establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;

 

  §  

involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

  §  

establish and maintain an investor relations function, including the provision of certain information on our website.

Compliance with these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage.

The securities laws require, among other things, that we implement and maintain effective internal control for financial reporting and disclosure. In particular, under current regulations, commencing with our fiscal year ending December 31, 2011, we must begin to perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with these requirements. Moreover, if we are not able to comply with these requirements in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by The NASDAQ Stock Market, the Securities and Exchange Commission or other regulatory authorities, which would entail expenditure of additional financial and management resources.

The ownership of our common stock will continue to be highly concentrated and your interests may conflict with the interests of our existing stockholders.

We anticipate that our executive officers, directors and current holders of more than 5% of our outstanding common stock, together with their affiliates and related persons, will beneficially own or control approximately     % of our outstanding shares after this offering, or approximately     % if the underwriters exercise their over-allotment option in full. Accordingly, these stockholders, if acting as a group, or Flagship, which alone would beneficially own     % of our outstanding common stock based on              shares outstanding after this offering, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, and they may in some instances exercise this influence in a manner that advances their best interests and not necessarily those of other stockholders. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control, could deprive you of the opportunity to receive a premium for our common stock as part of a sale and could adversely affect the market price of our common stock.

Management will have broad discretion over the use of the net proceeds from the offering and may not apply the net proceeds effectively or in a manner that is consistent with the uses described in this prospectus.

Although we intend to use the net proceeds of this offering to, among other things, finance working capital needs, including the commercialization of our galectin-3 diagnostic test and the continued development of our product candidates, as well as to fund continuing operations, because of the number and variability of factors that will determine our use of these proceeds, we cannot specify with certainty the particular uses of the net proceeds that

 

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we will receive from this offering. We will have broad discretion in the application of the net proceeds, including for any of the purposes described in “Use of Proceeds” in this prospectus. However, our plans may change, and we could use the net proceeds in ways with which stockholders do not agree, or for corporate purposes that may not result in a significant or any return on your investment. In addition, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

A significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. As of December 31, 2009, our eight largest stockholders beneficially owned, collectively, approximately 90% of our outstanding common stock. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline. Based on              shares outstanding as of December 31, 2009, upon completion of this offering, we will have              outstanding shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares. Of the remaining shares outstanding,              shares of common stock will be subject to a 180-day contractual lock-up with the underwriters, and              shares of common stock will be subject to a 180-day contractual lock-up with us.

In addition, as of December 31, 2009, there were 4,757,831 shares subject to outstanding options that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. Moreover, after this offering, holders of an aggregate of approximately 20,752,097 shares of our common stock or securities exercisable for shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares and to include their shares in registration statements that we may file for ourselves or other stockholders. Holders of warrants exercisable for approximately 92,305 additional shares of our common stock as of December 31, 2009, will have rights, subject to some conditions, to include their shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all              shares of common stock that are issuable or reserved for grant under our stock plans. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to the 180-day lock-up periods under the lock-up agreements described in the “Underwriting” section of this prospectus.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our common stock adversely, the price and trading volume of our common stock 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 industry. If one or more of the analysts who cover us or our industry make unfavorable comments about our market opportunity or product candidates or downgrade our common stock, the market price of our common stock 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 could cause the market price of our common stock or trading volume to decline.

Investors in this offering will pay a much higher price than the book value of our common stock and therefore you will incur immediate and substantial dilution of your investment.

If you purchase our common stock in this offering, you will pay more for our common stock than the amounts paid by existing stockholders for their shares. You will incur immediate and substantial dilution of $             per share, based on the assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus. Further, investors purchasing our common stock in this offering will

 

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contribute approximately     % of the total amount invested by stockholders since our inception, but will only own approximately     % of the shares of our common stock outstanding following the offering. In the past, we also issued options and warrants to acquire our common stock at prices significantly below the initial public offering price. To the extent these outstanding options or warrants are ultimately exercised, you will sustain further dilution. For further information, see “Dilution” elsewhere in this prospectus.

Because we do not intend to pay dividends for the foreseeable future, investors in the offering will benefit from their investment in shares only if our common stock appreciates in value.

We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any dividends in the foreseeable future. In addition, the terms of our loan and security agreement with Silicon Valley Bank currently prohibit us from paying cash dividends on our common stock. As a result, the success of an investment in our common stock will depend upon any future appreciation in their value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which investors in this offering have purchased their shares.

Provisions of our certificate of incorporation, our bylaws and Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove the current members of our board and management.

Certain provisions of our restated certificate of incorporation and restated bylaws that will be in effect upon the completion of this offering could discourage, delay or prevent a merger, acquisition or other change of control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove members of our board of directors. These provisions also could limit the price that investors might be willing to pay in the future for our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions:

 

  §  

allow the authorized number of directors to be changed only by resolution of our board of directors;

 

  §  

establish a classified board of directors, such that not all members of the board of directors may be elected at one time;

 

  §  

authorize our board of directors to issue without stockholder approval preferred stock, the rights of which will be determined at the discretion of the board of directors that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;

 

  §  

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent;

 

  §  

establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings;

 

  §  

limit who may call stockholder meetings; and

 

  §  

require the approval of the holders of     % of the outstanding shares of our capital stock entitled to vote in order to amend certain provisions of our restated certificate of incorporation and restated bylaws.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on our common stock, from merging or combining with us for a prescribed period of time.

 

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Special Note Regarding Forward Looking Statements

This prospectus contains forward looking statements. These statements involve known and unknown risks, uncertainties and other important factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward looking statements. Forward looking statements include, but are not limited to, statements about:

 

  §  

our estimates of future performance, including the expected timing of the launch of our first product;

 

  §  

the timing, costs and other limitations involved in obtaining regulatory clearance or approval for any of our product candidates;

 

  §  

the potential benefits of our product candidates over current medical practices or other diagnostics;

 

  §  

our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in the future;

 

  §  

willingness of third-party payors to reimburse for the cost of our tests;

 

  §  

estimates of market sizes and anticipated uses of our product candidates;

 

  §  

our ability to enter into collaboration agreements with respect to our product candidates and the performance of our collaborative partners under such agreements;

 

  §  

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

  §  

the expected timing, progress or success of our research and development and any commercialization efforts;

 

  §  

our ability to successfully obtain sufficient supplies of samples for our biomarker discovery and development efforts; and

 

  §  

our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements and our needs for additional financing.

In some cases, you can identify forward looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions intended to identify forward looking statements. Forward looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Because of these risks and uncertainties, the forward looking events and circumstances discussed in this prospectus may not transpire. We discuss many of these risks in this prospectus under the heading “Risk Factors.”

Given these uncertainties, you should not place undue reliance on these forward looking statements. Also, forward looking statements represent our estimates and assumptions only as of the date of this document. You should read this document with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we do not undertake any obligation to update or revise any forward looking statements contained in this prospectus whether as a result of new information, future events or otherwise.

 

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Use of Proceeds

We estimate that we will receive net proceeds from this offering of approximately $             million, after deducting the estimated underwriting fees and commissions and offering expenses payable by us, assuming an initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus. If the underwriters’ over-allotment option is exercised in full, we estimate our net proceeds will be approximately $             million.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We expect to use the net proceeds we receive from this offering primarily for the following purposes:

 

  §  

approximately $             million to fund the commercial launch of our lead product candidate, BGM Galectin-3, including establishing a commercial organization and infrastructure;

 

  §  

approximately $             million to fund development, potential regulatory submission and potential commercial launch activities for our other cardiovascular diagnostic product candidates, including our galectin-3 test to identify patients at elevated risk for heart failure following a heart attack, AMIPredict and LipidDx;

 

  §  

approximately $             million for biomarker discovery and potential clinical development of additional diagnostic product candidates; and

 

  §  

the remainder for other general corporate purposes, including capital expenditures, licensing of intellectual property, repayment of debt and working capital.

We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, products or companies that complement our business, although we have no current understandings, commitments or agreements to do so.

This expected use of net proceeds from this offering represents our current intentions based upon our present plans and business conditions. The amounts and timing of our actual expenditures depend on numerous factors, including the ongoing status of and results from our current product discovery, development and commercialization activities, additional collaborations that we may enter into with third parties for our product candidates, and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

Pending use of the net proceeds of this offering, we intend to invest the net proceeds in accordance with our investment policy guidelines, which currently provide for investment of funds in cash equivalents, government obligations, high grade and corporate notes and commercial paper.

 

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Dividend Policy

We have never declared or paid any dividends on our common stock. In addition, the terms of our loan and security agreement with Silicon Valley Bank currently prohibit us from paying cash dividends on our common stock. We currently intend to retain any future earnings to finance our research and development efforts and the expansion of our business and do not intend to declare or pay cash dividends on our capital stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.

 

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Capitalization

The table below sets forth our cash, cash equivalents and marketable securities and capitalization as of December 31, 2009:

 

  §  

on an actual basis;

 

  §  

on an unaudited pro forma basis, after giving effect upon the completion of this offering to (i) the automatic conversion of all shares of our convertible preferred stock into an aggregate of 15,903,552 shares of our common stock; and (ii) the conversion of warrants to purchase 92,305 shares of preferred stock into warrants to purchase 92,305 shares of common stock; and

 

  §  

on an unaudited pro forma as adjusted basis, after giving effect to the pro forma adjustments described above and the sale of             shares of our common stock offered by us in this offering at an assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

You should read this table together with our consolidated financial statements and the related notes thereto, as well as the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The unaudited pro forma and pro forma as adjusted information below is prepared for illustrative purposes only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at pricing.

 

    As of December 31, 2009
     Actual     Pro forma     Pro forma as
adjusted
   

(in thousands)

Cash, cash equivalents and marketable securities

  $ 10,393      $ 10,393      $         
                     

Long-term debt, including current portion

  $ 1,252      $ 1,252      $  
                     

Preferred stock warrant liability

    471            
                     

Redeemable convertible preferred stock:

     

Series A redeemable convertible preferred stock, $0.001 par value, 16,017,067 shares authorized, 15,823,566 shares issued and outstanding, actual; and no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    23,735            

Series A-1 redeemable convertible preferred stock, $0.001 par value, 2,475,247 shares authorized, issued and outstanding, actual; and no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    5,000            

Series C redeemable convertible preferred stock, $0.001 par value, 1,369,863 shares authorized, issued and outstanding, actual; and no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    3,272            

Series D redeemable convertible preferred stock, $0.001 par value, 6,246,151 shares authorized, 6,153,846 issued and outstanding, actual; and no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    39,052            
                     

Total redeemable convertible preferred stock

    71,059            
                     

Stockholders’ (deficit) equity:

     

Series B convertible preferred stock, $0.001 par value, 2,000,000 shares authorized; 1,138,716 shares issued and outstanding, actual; and no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    1,708            

Common stock, $.001 par value, 60,000,000 shares authorized, actual;              shares authorized, pro forma and pro forma as adjusted; 4,912,963 shares issued and outstanding, actual; 20,816,515 shares issued and outstanding, pro forma; and              shares issued and outstanding, pro forma as adjusted

    5     

 

21

  

 

Additional paid-in capital

    12,964        86,186     

Accumulated deficit

    (78,576     (78,576  

Accumulated other comprehensive loss

    (2     (2  
                     

Total stockholders’ (deficit) equity

  $ (63,901   $ 7,629      $  
                     

Total capitalization

  $ 8,881      $ 8,881      $  
                     

 

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Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus, would increase (decrease) each of our unaudited pro forma as adjusted cash and cash equivalents and marketable securities, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $             million, assuming that the number of shares offered by us under this prospectus remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The outstanding share information in the capitalization table above is based on the number of shares outstanding as of December 31, 2009, and excludes:

 

  §  

4,757,831 shares of common stock issuable upon the exercise of outstanding options as of December 31, 2009, with a weighted-average exercise price of $2.67 per share;

 

  §  

259,961 shares of common stock reserved for future issuance under our 2001 Stock Option and Incentive Plan, or our 2001 Stock Plan, as of December 31, 2009; provided, however, that immediately upon completion of this offering, our 2001 Stock Plan will terminate so that no further awards may be granted under our 2001 Stock Plan;

 

  §  

an aggregate of up to              shares of common stock reserved for future issuance under our 2010 Employee, Director and Consultant Equity Incentive Plan, or our 2010 Stock Plan, which will become effective upon completion of the offering; plus shares of our common stock that are represented by awards granted under our 2001 Stock Plan that are forfeited, expire or are cancelled without delivery of shares or which result in the return of shares of our common stock to us, following the termination of the 2001 Stock Plan;

 

  §  

1,567,241 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2009, with a weighted average exercise price of $0.42 per share, on an actual basis and on a pro forma and pro forma as adjusted basis; and

 

  §  

the shares of common stock that will be issued upon the automatic net exercise of a warrant to purchase 23,364 shares of our common stock upon the completion of this offering.

 

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Dilution

If you invest in our common stock, your interest in our net tangible book value will be diluted to the extent of the difference between the initial public offering price and the net tangible book value per share of our common stock immediately after the completion of this offering. Dilution results from the fact that the initial public offering price is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock.

As of December 31, 2009, we had a historical net tangible book value (deficit) of our common stock of $(64.5 million), or approximately $(13.13) per share of common stock. Net tangible book value (deficit) per share represents the amount of our total tangible assets less total liabilities and redeemable convertible preferred stock, divided by 4,912,963, the number of common shares outstanding. Our pro forma net tangible book value as of December 31, 2009 was $7.0 million, or $0.34 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of our common stock outstanding, as of December 31, 2009, after giving effect to the conversion of all of our outstanding preferred stock into 15,903,552 shares of common stock.

After giving effect to the sale by us of shares of our common stock in the offering at the assumed initial public offering price of $            , the mid-point of the price range on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of December 31, 2009 would have been approximately $             million, or approximately $             per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $             per share to new investors purchasing shares of our common stock in the offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after the offering from the amount of cash that a new investor paid for a share of common stock.

The following table illustrates this dilution on a per share basis:

 

              

Assumed initial public offering price per share

      $             

Pro forma net tangible book value as of December 31, 2009

   $ 0.34   

Increase per share attributable to new investors

     
         

Pro forma as adjusted net tangible book value per share after the offering

     
         

Dilution in pro forma net tangible book value per share to new investors

      $  
         

A $1.00 increase (decrease) in the assumed initial public offering price of $            , the mid-point of the price range on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value after this offering by $             million and the pro forma as adjusted net tangible book value per share after this offering by $             per share and would increase (decrease) the dilution per share to new investors in this offering by $             per share, assuming the number of shares offered by us under this prospectus remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of the offering determined at pricing.

The following table shows, as of December 31, 2009, the differences between the number of shares purchased from us, the total consideration paid to us and the average price per share that existing stockholders and new investors paid. The table gives effect to the conversion of all of our outstanding preferred stock into common stock, as described above.

 

     Shares purchased     Total consideration     Average price
per share
      Number    Percentage     Amount    Percentage    

Existing stockholders

   20,816,515           $ 76,027,260           $ 3.65

New investors

            
                          

Total

             $                        $  
                              

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $            , $             and $            , respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

The discussion and tables above assume no exercise of the underwriters’ over-allotment option. If the underwriters’ over-allotment option is exercised in full, the number of shares of our common stock held by existing stockholders will be further reduced to     % of the total number of shares of our common stock to be outstanding after the offering, and the number of shares of our common stock held by investors participating in the offering will be further increased to     % of the total number of shares of our common stock to be outstanding after the offering.

In addition, except as noted, the above discussion and table assume no exercise of stock options or warrants after December 31, 2009. As of December 31, 2009, we had outstanding options to purchase a total of 4,757,831 shares of our common stock at a weighted-average exercise price of $2.67 per share and warrants to purchase a total of 1,567,241 shares of our common stock, with a weighted-average exercise price of $0.42 per share. If all such options and warrants had been exercised as of December 31, 2009, pro forma as adjusted net tangible book value per share, would be $             per share and dilution to new investors would be $             per share.

 

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Selected Consolidated Financial Information

The following table summarizes our selected consolidated financial data for the periods and as of the dates indicated. Our selected consolidated statements of operations data for each of the years in the periods ended December 31, 2007, 2008 and 2009 and our selected consolidated balance sheet data as of December 31, 2008 and 2009 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. Our selected consolidated statements of operations data for each of the years in the periods ended December 31, 2005 and 2006 and our selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 have been derived from our audited consolidated financial statements that are not included in this prospectus. Our results for the periods shown below are not necessarily indicative of the results to be expected for any future periods. Our selected consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and related notes included elsewhere in this prospectus. The audit report on our 2009 consolidated financial statements expresses an unqualified opinion on the consolidated financial statements and includes an explanatory paragraph relating to substantial doubt about our ability to continue as a going concern.

 

     Years ended December 31,  
      2005     2006     2007     2008     2009  
     (in thousands, except share and per share data)  
Consolidated Statements of Operations Data:           

Revenue

   $ 1,532      $ 6,046      $ 8,982      $ 14,580      $ 8,490   

Operating expenses:

          

Cost of revenue

            2,457        7,301        13,822        8,431   

Research and development

     7,131        5,331        5,832        6,858        8,527   

Selling, general and administrative

     2,412        2,450        3,820        4,475        7,520   

Costs related to abandoned stock offering

                   3,154                 

Gain on sale of property and equipment

     (307            (118              
                                        

Total operating expenses

     9,236        10,238        19,989        25,155        24,478   
                                        

Loss from operations

     (7,704     (4,192     (11,007     (10,575     (15,988

Gain on extinguishment of debt

     1,035                               

Interest income

     22        24        302        422        121   

Interest expense(1)

     (1,585     (574     (689     (4,921     (244

Other expense

                                 (26
                                        

Net loss

     (8,232     (4,742     (11,394     (15,074     (16,137

Accretion of redeemable convertible preferred stock

                   (368     (872     (977
                                        

Net loss attributable to common stockholders

   $ (8,232   $ (4,742   $ (11,762   $ (15,946   $ (17,114
                                        

Net loss attributable to common stockholders per share — basic and diluted

   $ (1.75   $ (1.01   $ (2.48   $ (3.31   $ (3.50
                                        

Weighted-average common shares outstanding used in computing per share amounts — basic and diluted

     4,692,561        4,695,285        4,739,746        4,815,984        4,884,831   

Pro forma net loss attributable to common stockholders per share (unaudited) — basic and diluted(2)

           $ (0.78
                

Pro forma weighted-average common shares outstanding used in computing per share amounts (unaudited) — basic and diluted(2)

             20,788,383   

 

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(1) Interest expense in 2008 includes non-cash charges of $3.0 million related to a beneficial conversion feature on convertible debt and $1.0 million related to the non-cash expense arising from the issuance of warrants issued in connection with that convertible debt that were accounted for as debt discount and immediately recognized as interest expense because the debt was due upon demand.

 

(2) Net loss used in computing pro forma basic and diluted net loss per share and the number of weighted-average common shares used in computing pro forma basic and diluted net loss per share in the table above give effect to the automatic conversion of all of our outstanding convertible preferred stock into 15,903,552 shares of common stock upon the completion of this offering as if such conversion had occurred at the beginning of the period.

 

     As of December 31,  
      2005     2006     2007     2008     2009  
     (in thousands)  

Consolidated Balance Sheet Data :

          

Cash, cash equivalents and marketable securities

   $ 1,148      $ 1,010      $ 1,214      $ 24,302      $ 10,393   

Total assets

     3,103        6,169        8,780        35,217        12,625   

Long-term debt and capital leases, including current portion

     5,088        1,310        4,478        2,465        1,252   

Total liabilities

     11,486        9,918        16,330        14,299        5,467   

Redeemable convertible preferred stock

     19,971        28,735        31,035        70,082        71,059   

Convertible preferred stock

     1,708        1,708        1,708        1,708        1,708   

Accumulated deficit

     (31,229     (35,971     (47,365     (62,439     (78,576

Total stockholders’ deficit

     (28,354     (32,484     (38,585     (49,164     (63,901

 

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

You should read the following in conjunction with the “Selected Consolidated Financial Information” and our consolidated financial statements and the related notes thereto that appear elsewhere in this prospectus. In addition to historical information, the following discussion and analysis includes forward looking information that involves risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward looking statements as a result of many factors, including those discussed under “Risk Factors” elsewhere in this prospectus. See also “Special Note Regarding Forward Looking Statements” included elsewhere in this prospectus.

Overview

We are a life sciences company focused on the discovery, development and commercialization of novel diagnostic tests based on biomarkers for high-value market opportunities in healthcare that we identify. We believe that our tests will provide clinicians with improved information to better detect and characterize disease states. We are developing multiple product candidates to address significant unmet needs in cardiovascular and other diseases.

Our lead product candidate, the BGM Galectin-3 test for heart failure, is a novel diagnostic test for measuring galectin-3 levels in blood plasma or serum. We are also developing our galectin-3 test for a second indication as a predictor of heart failure development in patients following acute coronary syndrome, a condition which includes heart attack or a serious form of cardiac chest pain called unstable angina.

We obtained CE Mark in the European Union for a manual galectin-3 test in October 2009, and have begun limited sales and marketing activities in certain countries in the Europe. Subject to clearance from the FDA, we expect to begin marketing the test in the United States in the second half of 2010. We have also entered into a worldwide development and commercialization agreement with Abbott Laboratories and under that agreement have the right to enter into four similar agreements with other diagnostic laboratory instrument manufacturers. Full commercialization of the automated version of our test under the Abbott agreement is expected to commence no sooner than 2012, subject to completion of development of our galectin-3 test on their platform and regulatory submission and clearance with the FDA and in the European Union for use of the assay on their instrument systems.

We were founded in February 2000 as Beyond Genomics, Inc. In October 2004, we changed our name to BG Medicine, Inc. We have incurred substantial losses since our inception, and we expect to continue to incur losses for the next several years. For the years ended December 31, 2007, 2008 and 2009, we incurred net losses of $11.4 million, $15.1 million and $16.1 million, respectively. Through December 31, 2009, we have an accumulated deficit of $78.6 million. To date, we have funded our operations primarily through private placements of preferred and common stock and debt financing, as well as through revenue generated from collaborative research and development and services agreements with pharmaceutical manufacturers, non-profit organizations and other entities.

In the coming years, we expect to devote substantially all of our resources to the development and commercialization of our diagnostic product candidates, as well as the discovery of new biomarkers. Historically, we have generated revenue from our collaborative research and development agreements and biomarker discovery and analysis services agreements, but we do not expect to continue to receive significant revenue from these sources going forward. As we continue our discovery, development and commercialization of diagnostic product candidates, we expect our research and development, sales and marketing, and general and administrative expenses to increase significantly.

During the year ended December 31, 2009, we incurred a net loss totaling $16.1 million and used cash in operating activities totaling $18.0 million. We expect to continue to incur losses and use cash in operating

 

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activities in 2010. Our projected uses of cash include cash to fund operations, including continued research and product development, sales and marketing related to our launch of our first commercial product, capital expenditures, and existing debt service costs. Our existing cash resources are not sufficient to fund our current business plans beyond the second quarter of 2010. We will need additional funds to continue operations and the development and commercialization of our galectin-3 test and AMIPredict.

Material Factors Affecting Our Results of Operations and Financial Condition

We believe that the factors described in the following paragraphs have had and are expected to continue to have a material effect on our operational results and financial condition.

Revenue

To date, our revenue has been generated primarily through initiatives, collaborations and biomarker discovery and analysis services agreements. These services included the analysis of preclinical or clinical samples to identify biomarkers related to, for example, disease mechanism, drug response or toxicity. In some cases, we have retained rights to the biomarkers identified in the course of these agreements. Our revenue has tended to be concentrated, with arrangements with a limited number of large customers generating a significant percentage of revenue in any given year. In the future, we do not expect to generate significant revenue from these collaborative research and development and services agreements. We expect to receive the substantial portion of any future revenue from sales of our diagnostic tests, subject to obtaining regulatory clearance or approval in the United States and other jurisdictions.

We initiated and are leading the HRP Institute for atherothrombotic cardiovascular disease such as heart attack and stroke. This initiative, which we began in 2006, is sponsored by Abbott, AstraZeneca, Merck, Philips and Takeda. To date, we have recognized $23.9 million in revenue from the contributions we received from the HRP Initiative participant companies. Unless we receive additional contributions from existing or new participating companies, we do not expect to recognize further revenues from the HRP Initiative.

Operating Expenses

We classify our operating expenses into three categories: cost of revenue, research and development, and selling, general and administrative. Our operating expenses primarily consist of personnel costs, outside services, laboratory consumables and overhead, license fees, royalties on products, development costs, marketing program costs and legal and accounting fees. Personnel costs for each category of operating expenses include salaries, bonuses, employee benefit costs and stock-based compensation.

Cost of revenue

Our cost of revenue to date consists primarily of research and development expenses incurred to support our initiatives, collaborative research and development agreements and biomarker discovery and analysis services agreements. These expenses include both outside services and internal personnel costs, laboratory consumables, license fees and overhead expenses. Cost of revenue in the future will depend on the timing of regulatory approvals, if any, and the commercial success of our product candidates. For our most advanced diagnostic product candidate, our galectin-3 test for heart failure, our cost of revenue is expected to consist of manufactured kits, royalties and milestone payments under our agreement with our licensor, and freight costs.

Research and development expenses

We incur research and development expenses in connection with our internal biomarker discovery and development efforts. Our research and development expenses consist primarily of direct personnel costs, fees for consultants and outside services, laboratory consumables and overhead expenses. We use consultants and outside services to provide expertise or services which we do not have. We anticipate that research and development expenses will increase significantly, primarily due to our increased biomarker discovery and development efforts related to our product candidates.

 

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Selling, general and administrative expenses

Selling expenses consist primarily of personnel-related expenses for employees engaged in market assessment, market development and pre-launch activities for our product candidates. We expect significant increases in our selling and marketing expenses as we hire additional personnel, establish our sales force, and conduct marketing activities for the commercialization of our product candidates.

General and administrative expenses consist primarily of personnel related expenses, occupancy expenses and professional fees, such as legal, auditing and tax. We expect that our general and administrative expenses will increase significantly as we expand our business operations to accommodate new product offerings and add commercial infrastructure. We expect that general and administrative expenses will also increase due to increased regulatory, legal, insurance, accounting and financial reporting expenses associated with being a public company.

Provision for Income Taxes

We have historically generated operating losses in all jurisdictions in which we may be subject to income taxes. As such, we have not incurred any income taxes. We have accumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recognized. We do not expect to report a provision for income taxes until we have a history of earnings, if ever, that would support the realization of our deferred tax assets.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which we believe to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A summary of our significant accounting policies is contained in the notes to our audited consolidated financial statements, which are included elsewhere in this prospectus. We consider the following accounting policies to be critical to the understanding of the results of our operations:

 

  §  

revenue recognition;

 

  §  

stock-based compensation; and

 

  §  

financial instruments.

Revenue Recognition

Historically, our revenue has been generated through initiatives, collaborations and biomarker discovery and analysis agreements. The services which we provide under these agreements typically include the integrated analysis of preclinical or clinical samples to identify biomarkers related to, among other things, disease mechanisms and drug effects and, in some cases, undertaking clinical studies as part of an initiative to collect biological patient samples. In some cases, we have retained rights to the biomarkers identified in the course of these collaborations. The revenue arrangements have a stated term, and we generally have no obligations or ongoing commitments after the specified term of the arrangement.

We recognize revenue when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and risk of loss has passed; (iii) the seller’s price to the buyer is fixed or

 

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determinable; and (iv) collectability is reasonably assured. Revenue arrangements with multiple deliverables are divided into separate units of accounting when certain criteria are met.

Revenue generated from our collaborations and initiatives includes revenue from research services and technology licensing agreements. Under these arrangements, we are contractually obligated to provide research services and project oversight and administration. The rights to the results of the research, including any intellectual property developed, are licensed to all the members of the collaboration at the inception of the arrangement. We have accounted for all deliverables, which include the research services, oversight and administration and the rights to the intellectual property developed, as a single unit of accounting as there is no standalone value of the individual elements and no evidence of fair value for the undelivered elements. We consider the terms and conditions of each agreement and recognize revenue based upon a proportional performance methodology. This methodology involves recognizing revenue over the term of the agreement, as underlying research costs are incurred, and measured on the basis of input measures such as labor or instrument hours expended. We believe that these input measures approximate the output measures as the costs incurred are directly proportional to the services that are being provided. We make adjustments, if necessary, to the estimates used in its calculations as work progresses and as such changes are known. The principal costs under these agreements are for personnel and instrumentation expenses to conduct research and development but also include costs for materials and other direct and indirect items necessary to complete the research under these agreements. Actual results may vary from our estimates. Payments received on uncompleted long-term contracts may be greater than incurred costs and estimated earnings and have been recorded as deferred revenue. Payments received prior to commencement of a contract are recorded as customer deposits.

The proportional performance revenue methodology relies on estimates of total project costs and costs incurred as of each reporting date. Our estimates of revenue and cost are developed in detail for each revenue arrangement. We believe, based on our experience, that our current systems of management and accounting controls allow us to produce materially reliable estimates of total contract revenue and costs during any accounting period. However, many factors can and do change during the performance period of each revenue arrangement, which can result in changes to these estimates from one financial reporting period to another. Some of the factors that can change the estimate of total contract revenue and cost include changes in the scope of our projects by our customers, the performance of major vendors and subcontractors to deliver on time and in accordance with original budgets, and the accuracy of the original project cost estimate. Changes in estimates of total project costs and our estimates of state of completion can have a material impact on our financial statements and are reflected in our results of operations when they become known. To date, the changes in estimates have not been material in any period.

If we are successful in the commercial launch of our product candidates, product revenue will include revenue from our customer agreements and sales of our diagnostic products.

Stock-Based Compensation

Stock-based compensation expense is recognized based on the grant date fair value. We estimate the fair value of the share-based awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of share-based awards requires the use of highly subjective assumptions, including the fair value of our common stock underlying the award, the expected term of the award and expected stock price volatility. The assumptions used in calculating the fair value of share-based awards granted in the three years ended December 31, 2009 are set forth below:

 

      2007    2008    2009

Risk-free interest rate

   4.47% – 5.06%    3.48%    1.64% – 3.19%

Expected dividend yield

   0%    0%    0%

Expected life

   5.00 – 6.25 years    5.25 – 6.25 years    5.25 – 6.25 years

Expected volatility

   63% – 65%    61% – 63%    64% – 67%

Weighted-average grant date fair value

   $8.28    $2.22    $2.65

 

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The risk-free interest rates are based on the United States Treasury yield curve in effect at the time of grant, with maturities approximating the expected life of the stock options. We have no history of paying dividends nor do we expect to pay dividends over the contractual terms of these options. The expected life of the awards is estimated based on the simplified method, as defined in Staff Accounting Bulletin No. 110, Share-Based Payment, which uses the mid-point between the vesting date and the end of the contractual term. We use the simplified method because we do not have sufficient option exercise data to provide a reasonable basis upon which to estimate the expected term. Because there was no public market for our common stock prior to this offering, we lacked company-specific historical and implied volatility information. Therefore, we estimated our expected stock volatility based on that of publicly-traded peer companies, and we expect to continue to use this methodology until such time as we have adequate historical data regarding the volatility of our publicly-traded stock price.

We are required to recognize compensation expense for only the portion of options that are expected to vest; however, due to the small size of our employee base and the quarterly vesting provisions of our option awards, forfeitures of awards have been nominal. Therefore, we have applied a 0% forfeiture rate in recognizing stock-based compensation expense. If our actual forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be required in future periods. If there are any modifications or cancellations of the underlying unvested securities or the terms of the stock option, we may be required to accelerate, increase or cancel any remaining unamortized stock-based compensation expense.

We also account for equity instruments issued to our non-employee directors and consultants at fair value. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the date on which the counterparty’s performance is complete. Awards to nonemployees have been nominal in the three years ended December 31, 2009.

The following table presents the grant dates and exercise prices of stock options granted during the year ended December 31, 2009, along with estimates for the fair value of the underlying common stock and resultant estimated fair value of the stock options:

 

Date of issuance    Number of
shares
subject to
options
granted
   Per share
exercise
price of
options
   Per share
estimated
fair value
of common
stock(1)
  

Per share

estimated

fair value

of options(2)

January 23, 2009

   923,316    $ 4.50    $ 4.50    $ 2.61

April 7, 2009

   684,290      4.50      4.50      2.62

June 30, 2009

   613,000      4.50      4.50      2.69

November 25, 2009

   44,500      5.67      5.67      3.41
             

Total

   2,265,106         
             

Weighted-average

      $ 4.52    $ 4.52    $ 2.65

 

(1) The per share estimated fair value of common stock represents the determination by our board of directors of the fair value of our common stock as of the date of grant, taking into account various objective and subjective factors.
(2) The per share estimated fair value of options was estimated for the date of grant using the Black-Scholes options pricing model.

Based upon the mid-point of the price range set forth on the cover of this prospectus, the aggregate intrinsic value of our outstanding stock options as of December 31, 2009 was $             million.

Our board of directors has historically estimated the fair value of our common stock, with input from management, as of the date of each stock option grant. Because there has been no public market for our common stock, our board of directors determined the fair value of our common stock by considering a number of objective and subjective factors, including:

 

  §  

the sale price of the most recent preferred stock financing rounds, which was $6.50 per share for the Series D redeemable convertible preferred stock in July 2008;

 

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  §  

the liquidation preferences of our preferred stock, including any additional fundraising activities that may have occurred in the period;

 

  §  

the illiquid nature of our common stock, including the opportunity and timing for any expected liquidity events;

 

  §  

our size and historical operating and financial performance, including our recent operating and financial projections as of each grant date;

 

  §  

achievement of enterprise milestones;

 

  §  

the market value of a peer group comprised of selected publicly-traded companies and guideline transactions identified as being comparable to us; and

 

  §  

market conditions for early-stage diagnostic companies and other life science companies.

Our board of directors considered and applied these and other factors in determining an estimate of the fair value of our common stock on each stock option grant date. With the information discussed above and information provided by management, and in accordance with the guidance set forth by the American Institute of Certified Public Accountants, or the AICPA, in the AICPA Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid, the board of directors arrived at the grant date fair value of each option award as of each grant date. Specifically, we applied the probability-weighted expected return method, as prescribed by the AICPA Practice Aid. Under the probability-weighted expected return method, the fair value of our common stock is estimated based upon an analysis of future values of our company assuming various future outcomes, the timing of which is based on the plans of our board of directors and management. Share value is based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us as well as the rights of each share class. The fair value of our common stock was estimated using a probability weighted analysis of the present value of the investment returns. This valuation method took into consideration the following scenarios:

 

  §  

two different scenarios for the completion of an initial public offering – a short-term view (6 months) and a long-term view (18 months or more);

 

  §  

a sale to a strategic acquirer at a significant premium to the liquidation preference;

 

  §  

a sale to a strategic acquirer at a premium to the liquidation preference; and

 

  §  

a sale to an acquirer below the liquidation preference.

The valuation methodology our board of directors considered to determine the fair value of our common stock was based on the probability-weighted expected return method, liquidation preferences, progress towards a liquidity event and historical market data of liquidity transactions for similar companies.

The fair value through June 30, 2009 was consistent with the fair value at December 31, 2008, which was derived primarily by reference to the completion of the Series D preferred stock financing in July 2008, which was deemed reasonable because our operations and progress towards product development milestones was consistent with the projections that existed at the time of that financing. The fair value of our common stock as of June 30, 2009 was determined to be $4.50 per share. The probability of an initial public offering was estimated to be 55% (30% likely in the short-term and 25% likely in 18 months). The fair value of our common stock through June 30, 2009 also reflected the following factors:

 

  §  

the submission of our 510(k) premarket notification with the FDA for the clearance of our galectin-3 diagnostic test (March 2009);

 

  §  

additions to our senior management team (January - June 2009);

 

  §  

significant deterioration in the U.S. economy and the valuations of comparable companies; and

 

  §  

significant deterioration in the prospects for the funding of early stage companies such as ours.

 

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The fair value of our common stock as of November 25, 2009 was determined to be $5.67 per share. The probability of an initial public offering was estimated to be 60% (40% likely in the short-term and 20% likely in 21 months). The fair value of our common stock as of that date also reflects the following factors:

 

  §  

the decision by the FDA to deny our 510(k) submission for our galectin-3 test (August 2009);

 

  §  

the issuance of CE mark permitting sales of our galectin-3 test in the European Union (November 2009);

 

  §  

the receipt of favorable data from an additional clinical study in support of our galectin-3 test (November 2009), which we submitted to the FDA in December 2009 with our new 510(k) application;

 

  §  

the first shipment of galectin-3 trial kits to our distributor in Europe (November 2009); and

 

  §  

our commercial partnership with Abbott (November 2009).

Since December 31, 2009 through the date of this prospectus, we granted options to purchase 106,159 shares of our common stock at an exercise price of $6.40 per share on January 23, 2010. The fair value of our common stock as of January 23, 2010 was determined to be $6.40 per share, an increase of $0.73 from the prior fair value on November 25, 2009. The probability of an initial public offering was estimated to be 60% (50% likely in the short-term and 10% likely in the next 18 months). The short-term probability was based, in part, on our belief in the increased likelihood of obtaining regulatory clearance from the FDA for our galectin-3 test and completing an initial public offering of our common stock, in light of prevailing market conditions and our relative financial condition at the time. The increase in the fair value of our common stock from November 25, 2009 also reflects the following factors:

 

  §  

our submission of a new 510(k) premarket notification to the FDA for our galectin-3 test (December 2009); and

 

  §  

the holding of an organizational meeting with the representatives of the underwriters for the initial public offering of our common stock contemplated by this prospectus (December 2009).

The difference in the fair value of our common stock as of January 23, 2010 of $6.40 per share and the assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus, or $            , is attributable to                                                          . In addition, we believe that it is reasonable to expect that the completion of this offering will add value to the shares because they will have increased liquidity and marketability.

Total stock-based compensation expense has been recognized in the statement of operations as follows:

 

     Years ended December 31,
      2007    2008    2009

Research and development expenses

   $ 884    $ 452    $ 565

Selling, general and administrative expenses

     1,026      1,152      1,816
                    

Total

   $ 1,910    $ 1,604    $ 2,381
                    

Stock-based compensation expense of approximately $5.6 million was unrecognized for non-vested awards as of December 31, 2009, and is expected to be recognized over a weighted-average period of 2.5 years.

The assumptions used in determining fair value of share-based awards represent management’s and our board of directors’ best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change, and we use different assumptions, our share-based compensation expense could be materially different in the future. We believe that the valuation methodologies used in the valuations are reasonable and consistent with the AICPA Practice Aid.

Valuation models require the input of highly subjective assumptions. Because pre-IPO common stock has characteristics significantly different from that of a publicly traded common stock and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable, single measure of the fair value of our common stock.

 

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The foregoing valuation methodologies are not the only valuation methodologies available to value our awards prior to becoming a public company. We cannot make assurances of any particular valuation of our stock. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future stock prices.

Financial Instruments

We have issued certain freestanding warrants related to shares that are redeemable or contingently redeemable, as well as common stock warrants that are not considered indexed to our own stock. These warrants are required to be carried as liabilities and are measured at fair value. Changes in the fair value of these warrants are recorded in the statement of operations. We measure the fair value of the warrants using a Black-Scholes option pricing model, using similar assumptions to those described above in the section entitled “—Stock-Based Compensation.” The expected term of all warrants is the remaining contractual term. Upon the closing of this offering, the warrants that are exercisable into redeemable shares will be converted into warrants to purchase common stock, and there will be no future impact on the statement of operations related to these warrants. However, the warrants for common stock that are not considered indexed to our own stock will remain outstanding.

The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change, including the changes in fair value of the underlying common stock, our fair value estimates could be materially different in the future.

Results of Operations

Comparison of the Years Ended December 31, 2009 and 2008

Revenue

Revenue decreased by 42%, or $6.1 million, to $8.5 million in 2009 from $14.6 million in 2008, primarily due to the completion of phase 1 of the HRP Initiative and the decreased number of projects completed under our other service agreements. During the year ended December 31, 2009, we recognized revenue from only six months of work related to the HRP Initiative, as well as from three other service agreements, compared to the year ended December 31, 2008, when we recognized revenue from six ongoing studies with the HRP Initiative, as well as under various other agreements. Revenue from the HRP Initiative in 2009 was $6.5 million, or 76% of total revenue, compared with $12.1 million, or 83% of total revenue, in 2008. As of June 30, 2009, we had recognized all of the revenue committed under the initiative.

Operating expenses

The following table sets forth certain information concerning our operating expenses for the periods shown:

 

     Years ended
December 31,
   Change  
      2008    2009    ($)     (%)  
     (in thousands)  

Cost of revenue

   $ 13,822    $ 8,431    $ (5,391   (39 )% 

Research and development

     6,858      8,527      1,669      24   

Selling, general and administrative

     4,475      7,520      3,045      68   
                            

Total operating expenses

   $ 25,155    $ 24,478    $ (677   (3 )% 
                            

Cost of Revenue. Cost of revenue decreased by 39%, or $5.4 million, in the year ended December 31, 2009 from the year ended December 31, 2008. Of the decrease, $3.9 million was attributable to a decrease in third party costs, primarily due to the conclusion of screening, enrollment and baseline evaluation for the BioImage study under the HRP Initiative. The reduction was also due to the decrease in personnel-related costs of $1.5 million as employees were redeployed from the HRP Initiative to internal research and development efforts.

 

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Research and development expenses. Research and development expenses increased by 24%, or $1.7 million, in the year ended December 31, 2009 from the year ended December 31, 2008. The increase was primarily due to the increased activities and personnel-related costs associated with our internal biomarker discovery and development efforts, primarily our galectin-3 program. The galectin-3 program expenses consisted primarily of clinical and regulatory costs associated with the 510(k) submissions.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by 68%, or $3.0 million, in the year ended December 31, 2009 from the year ended December 31, 2008. Marketing expenses increased $2.7 million, primarily due to increased personnel and pre-market activities related to our product candidates, primarily our galectin-3 test. General and administrative expenses increased $270,000 due to increased personnel-related costs.

Interest income and expense. Interest income for the year ended December 31, 2009 decreased by $301,000 to $121,000 from $422,000 in the year ended December 31, 2008 due to lower average cash balances. Interest expense for the year ended December 31, 2009 decreased $4.7 million to $244,000 from $4.9 million in the year ended December 31, 2008. In the year ended December 31, 2009, interest expense was attributable to our outstanding term loan with Silicon Valley Bank, which matures in 2011 and bears interest at 10.25% as well as the amortization of debt discounts on the Silicon Valley Bank that arose from the issuance of warrants. Interest expense in the year ended December 31, 2008 consisted of the beneficial conversion of the convertible debt of $3.1 million, non-cash expenses arising from the issuance of warrants in connection with the term loans and the convertible debt of $1.1 million, and interest on the term loans and convertible debt of $724,000.

Comparison of the Years Ended December 31, 2008 and 2007

Revenue

Revenue increased by 62%, or $5.6 million, to $14.6 million in 2008 from $9.0 million in 2007, primarily due to the increased number of projects conducted under our service agreements. During the year ended December 31, 2008, we recognized revenue from the HRP Initiative and five various other service agreements, compared to the year ended December 31 2007, when we recognized revenue from the HRP Initiative and three other service agreements. Revenue from the HRP Initiative in 2008 was $12.1 million, or 83% of total revenue, compared with $5.1 million, or 57% of total revenue, in 2007.

Operating expenses

The following table sets forth certain information concerning our operating expenses for the periods shown:

 

     Years ended
December 31,
   Change  
      2007     2008    ($)     (%)  
     (in thousands)  

Cost of revenue

   $ 7,301      $ 13,822    $ 6,521      89

Research and development

     5,832        6,858      1,026      18   

Selling, general and administrative

     3,820        4,475      655      17   

Costs related to abandoned stock offering

     3,154             (3,154   (100

Gain on sale of property and equipment

     (118          118      (100
                             

Total operating expenses

   $ 19,989      $ 25,155    $ 5,166      26
                             

Cost of revenue. Cost of revenue increased by 89%, or $6.5 million, in the year ended December 31, 2008 from the year ended December 31, 2007. The increase in cost of revenue is proportional to the increase in revenue from the HRP Initiative. The costs of outside services increased by $6.5 million, primarily due to the third party costs associated with the increased activities from the HRP Initiative of $7.0 million, partially offset by a decrease of $390,000 in other services activities.

Research and development expenses. Research and development expenses increased by 18%, or $1.0 million, in the year ended December 31, 2008 from the year ended December 31, 2007. The costs of outside services

 

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increased by $1.8 million due to increased research and development activity on our product candidates, primarily our galectin-3 and AMIPredict programs, partially offset by a decrease of $780,000 in personnel- related costs due to a staffing reduction. The galectin-3 expenses consisted primarily of product development, as well as clinical and regulatory development costs. The AMIPredict expenses included costs primarily associated with biomarker discovery and research and development.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by 17%, or $655,000, in the year ended December 31, 2008 from the year ended December 31, 2007. Personnel and personnel related costs increased by $700,000 for employees responsible for assessing the commercial opportunity of and developing market awareness and launch plans for our product candidates.

Costs related to abandoned stock offering. In the year ended December 31, 2007, we incurred $3.2 million in legal, accounting and other costs associated with our abandoned initial public offering of common stock. In the year ended December 31, 2008, we did not incur any such expenses.

Interest/Other income and expense. Interest income for the year ended December 31, 2008 increased by $120,000 to $422,000, from $302,000 in the year ended December 31, 2007 due to higher average cash balances. Interest expense for the year ended December 31, 2008 increased by $4.2 million to $4.9 million from $689,000 in the year ended December 31, 2007. In the year ended December 31, 2008, interest expense consisted of $3.1 million attributable to our convertible debt beneficial conversion, $1.1 million in non-cash expenses arising from the issuance of warrants in connection with the term loan and the convertible debt and $724,000 in interest from our term loans and convertible debt. In the year ended December 31, 2007, interest expense consisted of $434,000 attributable to our convertible debt beneficial conversion, $65,000 in non-cash expenses arising from the amortization of debt discounts that arose from the issuance of warrants in connection with loans and $190,000 in interest expense from the various loans.

Liquidity and Capital Resources

As of December 31, 2009, we had $10.4 million of cash, cash equivalents and marketable securities and $6.0 million of working capital. Our primary sources of liquidity have been funds generated from our equity financings, which have included the sale of shares of our common stock and preferred stock, debt financings, including the sale of convertible notes that have since been converted into shares of our preferred stock, and cash payments from our research and development collaborations and service agreements. Through December 31, 2009, we have received gross proceeds of $75.4 million from the sale of shares our preferred stock as follows:

 

  §  

$23.7 million through the sale of 15,823,566 shares of Series A redeemable convertible preferred stock;

 

  §  

$5.0 million through the sale of 2,475,247 shares of Series A-1 redeemable convertible preferred stock;

 

  §  

$1.7 million through the sale of 1,138,716 shares of Series B convertible preferred stock;

 

  §  

$5.0 million through the sale of 1,369,863 shares of Series C redeemable convertible preferred stock;

 

  §  

$6.0 million through convertible promissory notes; which converted into 949,720 shares of Series D redeemable convertible preferred stock; and

 

  §  

$34.0 million through the sale of 5,204,126 shares of Series D redeemable convertible preferred stock.

In November 2007, we entered into a term loan with a financial institution to borrow up to $3.0 million. We have borrowed a total of $3.0 million under the agreement in two separate tranches and as of December 31, 2009, there was $1.3 million of principal outstanding with monthly payments due through January 2011.

 

Net Cash Used

In 2009, we had negative cash flows from operating activities of $18.0 million, which reflects the net loss incurred totaling $16.1 million, offset by $1.8 million of non-cash charges and changes in working capital balances. Cash flows provided by investing activities of $7.5 million consisted of $8.2 million in net proceeds of investments and restricted investments offset by $697,000 in purchases of property, equipment and intangibles. Net cash flows used in financing activities were $1.2 million, including repayment of our term loan and capital leases. As a result, we had negative cash flows for 2009 of $11.7 million.

 

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In 2008, we had negative cash flows from operating activities of $9.6 million, which reflects the net loss incurred totaling $15.1 million, offset by $6.6 million of non-cash charges. Cash flows used in investing activities of $7.5 million consisted of $7.1 million in net purchases of investments and restricted investments and $385,000 in purchases of property and equipment. Net cash flows from financing activities were $36.0 million, including proceeds from the issuance of our Series D redeemable convertible preferred stock, convertible promissory notes and term loan, partially offset by repayment of our term loan, capital leases and equipment notes. As a result, we had positive cash flows in 2008 of $18.8 million.

In 2007, we had negative cash flows from operating activities of $3.9 million, which reflects the net loss incurred totaling $11.4 million, offset by $7.5 million of non-cash charges and changes in working capital balances. Proceeds from the sale of property and equipment and the sale of short-term investments, offset by purchases of restricted investments and purchases of property and equipment, resulted in cash flows used in investing activities of $3.8 million. Net cash flows from financing activities were $8.0 million, including proceeds from the issuance of our Series C redeemable convertible preferred stock, convertible promissory notes, term loan and from the issuance of promissory notes to GE Capital, partially offset by repayment of capital leases and equipment notes. As a result, we had positive cash flows in 2007 of $204,000.

Funding Requirements

We have not generated any product revenue since our inception and do not expect to generate any revenue from the sale of products before the second half of 2010, at the earliest. During the year ended December 31, 2009, we incurred a net loss totaling $16.1 million and used cash in operating activities totaling $18.0 million. We expect to continue to incur losses and use cash in operating activities in 2010. Our projected uses of cash include cash to fund operations, including continued research and product development, sales and marketing related to our launch of our first commercial product, capital expenditures, and existing debt service costs. Our existing cash resources are not sufficient to fund our current business plans beyond the second quarter of 2010. This projection is based on our current operations and planned activities at normal levels and does not assume any cash inflows from partnerships, disposition of additional non-core assets or successful completion of any equity or debt financings.

We will need additional funds to continue operations and the development and potential commercialization of our galectin-3 test and AMIPredict, our two most likely diagnostic tests that could enter the commercial market in the near term, subject to regulatory clearance or approval. We are evaluating additional sources of financing and would consider any of the following options:

 

  §  

partnering opportunities with pharmaceutical or biotechnology companies to pursue the development of our product candidates as companion diagnostic tests to their therapeutic products;

 

  §  

license, sublicense, or other sources of financing relating to the development programs of our product candidates and other intellectual property; or

 

  §  

sale of equity or debt securities, including a proposed initial public offering of our common stock.

If we are unable to obtain financing, or enter into licensing or partnering arrangements on acceptable terms, we will be required to implement aggressive cost reduction strategies. The most significant portion of the research and development expenses, as well as some portion of sales and marketing expenses, are discretionary and are in anticipation of development and commercial launch of our galectin-3 test. These cost reduction strategies could reduce the scope of the activities related to these development and commercialization activities and could harm our long-term financial condition and results of operations.

We believe that the net proceeds from this offering, together with our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash requirements through 2012.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, the costs to complete development of product candidates and the cost to commercialize our future products are forward looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the “Risk Factors” and “Special

 

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Note Regarding Forward Looking Statements” sections of this prospectus. We have based these estimates on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we currently expect. Our future liquidity and capital funding requirements will depend on numerous factors, including:

 

  §  

the rate of progress and cost of our commercialization activities;

 

  §  

the success of our research and development efforts;

 

  §  

the expenses we incur in marketing and selling our products;

 

  §  

the revenue generated by sales of any future products;

 

  §  

the emergence of competing or complementary products;

 

  §  

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

 

  §  

the terms and timing of any collaborative, licensing or other arrangements that we have or may establish.

Contractual Obligations and Commitments

The following table sets forth our payment obligations as of December 31, 2009 under contracts that provide for fixed and determinable payments over the periods indicated.

 

      Total    2010    2011    2012    2013    2014
and
beyond
     (in thousands)

Operating leases

   $ 2,002    $ 616    $ 616    $ 616    $ 154   

Term loan, including interest

     1,379      1,278      101           

Contract services

     1,312      625      487      100      100   
                                       

Total

   $ 4,693    $ 2,519    $ 1,204    $ 716    $ 254   
                                       

We lease approximately 22,000 square feet of office and laboratory space with a term expiring in March 2013. We have a term loan which bears a fixed interest rate of 10.25% and requires us to make payments, which commenced in July 2008, in 30 equal monthly installments. Our contract service obligations relate to biomarker discovery, product development, manufacturing and other business activities. In addition, we may be obligated to pay up to $800,000 in milestone payments under a development agreement, if certain development milestones are met. The table does not include any possible milestone payments, royalties or other fees payable under certain of our license agreements. We are obligated to pay royalties on our galectin-3 test, for which we owe $250,000 as a prepayment if we receive FDA clearance of our 510(k) submission or obtain a patent in the United States or Europe covering a product that incorporates the licensed technology. We believe that we are reasonably likely to make additional license payments in the future, although the amounts and timing are not currently determinable.

We believe that our facilities are adequate to meet our current needs, although if additional space is needed in the future, we believe that such space will be available on commercially reasonable terms. In the future, we expect that we will require additional property, plant and equipment to accommodate our anticipated growth. We may choose to lease or directly purchase such property, plant and equipment depending upon the nature of the purchase, the current lease rate and our cash position.

Off Balance Sheet Arrangements

Since inception, we have not engaged in any off balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

 

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Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board, or FASB, issued guidance that requires an entity to use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. We adopted this guidance beginning January 1, 2009, and the impact of adoption was not material to the consolidated financial statements.

In September 2009, the FASB issued authoritative guidance that modifies the accounting for revenue arrangements with multiple elements. This guidance requires an entity to allocate revenue to each unit of accounting in multiple deliverable arrangements based on the relative selling price of each deliverable. It also changes the level of evidence of stand-alone selling prices required to separate deliverables by allowing an entity to make its best estimate of the stand-alone selling price of the deliverables when more objective evidence of selling price is not available. Implementation of this guidance is required no later than fiscal years beginning after June 15, 2010, and this guidance may be applied prospectively to new or materially modified arrangements after the effective date or retrospectively. Early application is permitted. We have not yet evaluated the impact that this guidance may have on our financial statements.

Qualitative and Quantitative Disclosures About Market Risk

Our exposure to market risk is limited to our cash, cash equivalents and marketable securities, all of which have maturities of less than one year. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we maintain a portfolio of cash equivalents and investments in a variety of securities that management believes to be of high credit quality. The securities in our investment portfolio are not leveraged, are classified as available for sale and are, due to their short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have a material negative impact on the value of our investment portfolio.

Our debt consists of fixed rate term debt that matures in January 2011. We do not believe that an increase in interest rates would have a material negative impact on our financial position or results of operations.

We do not have any material foreign currency exposure.

 

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Business

Overview

We are a life sciences company focused on the discovery, development and commercialization of novel diagnostic tests based on biomarkers for high-value market opportunities in healthcare that we identify. We are developing multiple product candidates for cardiovascular and other diseases and have recently begun limited sales and marketing activities in Europe for our lead product. We believe that our tests will provide clinicians with improved information to better detect and characterize disease states. We believe that this information may enable physicians to achieve better patient outcomes and contain healthcare costs through, for example, earlier diagnosis, segmentation based on underlying disease processes, more accurate prognosis, more personalized treatment selection or monitoring of disease based on disease activity. We focus on blood-based tests due to the ease and low cost of access to evaluable samples for testing and the opportunity for repeat sampling to monitor changes in a patient’s medical condition. We are developing our initial product candidates to address significant unmet needs in cardiovascular disease.

Our lead product candidate, the BGM Galectin-3 test for heart failure, is a novel assay for measuring galectin-3 levels in blood plasma or serum. Galectin-3, a member of the galectin family of proteins, is a biomarker that has been shown to play an important role in heart failure. Heart failure is a condition caused by a combination of diseases or factors that damage or overwork the heart muscle, resulting in its inability to pump blood efficiently to meet the requirements of other body organs. This condition often leads to serious medical complications and is a leading cause of death. According to the American Heart Association, heart failure affects an estimated 5.8 million Americans, with an approximate 670,000 new cases occurring each year, and we believe the prevalence and incidence of heart failure are similar in Europe. In the United States alone, heart failure is expected to cost the healthcare system over an estimated $39 billion in 2010. We have measured galectin-3 in more than five controlled studies involving over 2,000 patients with chronic or acute heart failure. In these studies, galectin-3 was found to be a strong independent predictor of mortality or hospitalization, the primary endpoints of the studies. We believe that the data from these studies indicate that heart failure patients with high levels of galectin-3 have a more progressive form of the disease, which we refer to as galectin-3-dependent heart failure. We believe that our galectin-3 test will provide physicians with meaningful information that may lead to more clinically- and cost-effective management of heart failure patients.

We obtained CE Mark in the European Union for our galectin-3 test in ELISA microtiter format, a form of test kit, in October 2009, and have begun limited sales and marketing activities in certain countries in the Europe. In March 2009, we submitted a 510(k) premarket notification to the FDA in order to obtain regulatory clearance to market this test in the United States. Upon review of our 510(k) application, the FDA determined that our device was not substantially equivalent to the legally marketed device to which we claim substantial equivalence and therefore denied clearance. The FDA indicated that additional clinical and other data was required in support of our filing, and we re-submitted a 510(k) application in December 2009 with additional data that we believe is responsive to the FDA’s comments. Subject to clearance from the FDA, we expect to begin marketing the test in the United States in the second half of 2010.

Consistent with our strategy to become the leading provider of novel high-value content for existing automated diagnostic laboratory instrument platforms, we have entered into a worldwide development and commercialization agreement with Abbott Laboratories, or Abbott, for the inclusion of our galectin-3 test on Abbott’s automated Architect® instrument platform. Under our agreement with Abbott, we have the right to enter into four similar agreements with other diagnostic laboratory instrument manufacturers for use on their respective platforms. Full commercialization of this automated version of our test under the Abbott agreement is expected to commence no sooner than 2012, subject to completion of development of the galectin-3 test on their platform and regulatory submission and clearance with the FDA and in the European Union for use of the test on their instrument systems. We are also developing our galectin-3 test for a second indication as a predictor of heart failure development in patients following acute coronary syndrome, a condition which includes heart attack and a serious form of cardiac chest pain called unstable angina.

 

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In addition to the two indications for our galectin-3 test, we are also developing a test that we refer to as AMIPredict, a multivariate biomarker blood-based test for atherothrombotic cardiovascular disease, commonly known as vulnerable plaque. This test is designed to identify patients with a high risk of suffering a heart attack or stroke within the following two to four years. Our development work to date suggests that AMIPredict could be an improved diagnostic test compared to conventional risk factor-based approaches for heart attack and stroke risk, such as the Framingham Risk Score in the United States and the Systematic Coronary Risk Evaluation in Europe. We are currently planning additional studies intended to validate our previous findings. We plan to conduct these studies in the second half of 2010. In addition to AMIPredict, we are developing LipidDx, a blood-based protein assay, that we believe may aid in the management of common lipid disorders.

Our discovery efforts are focused on leveraging our proprietary technology platform and our initiatives and collaborations to discover new diagnostic tests for clinically and commercially important diseases. In contrast to the prevailing development approach in diagnostics in which companies identify commercial market opportunities for a product following a serendipitous discovery, our platform allows us to initiate a structured process for discovering biomarkers for high-value market opportunities in healthcare that we identify in conjunction with our partners, such as third-party payors. As part of our product development process for internally discovered and licensed biomarkers, we develop and optimize our own first generation assays, conduct clinical development studies utilizing these tests and then seek regulatory clearance or approval if the clinical studies are successful. Initially we expect that most of our products will be manual in vitro diagnostic assays offered in kit form, or for the more complex assays such as multivariate index assays, subject to FDA clearance, offered as a laboratory service. However, if our products are suitable for automated instrument or point-of-care applications, we intend to seek partnerships with leading diagnostic laboratory instrument manufacturers for the development and commercialization of our products on their platforms, such as our agreement with Abbott. We believe that focusing on novel content for existing automated laboratory instruments will facilitate broader and more rapid adoption of our diagnostic tests.

As part of our strategy, we plan to continue to leverage our existing and any new collaborations and initiatives to successfully advance the development and commercialization of our products. For example, in 2006 we initiated and are leading the HRP (“high-risk plaque”) Initiative, for atherothrombotic cardiovascular disease, which consists of a series of pre-competitive, multi-party research and development projects with Abbott, AstraZeneca, Merck, Philips and Takeda. As part of the HRP Initiative, we have conducted several studies and related activities involving approximately 7,000 Humana members enrolled in the study who provided biological specimens to which we have certain rights for our discovery and development projects that we conduct independent of this research initiative. In addition to the HRP Initiative, in 2009, we entered into a five-year Cooperative Research and Development Agreement with the National Heart, Lung, and Blood Institute, part of the National Institutes of Health, or NHLBI, and Boston University to conduct certain biomarker discovery studies in the area of metabolic syndrome and atherosclerotic cardiovascular disease using samples and data from the Framingham Heart Study. We were selected for this collaboration through a peer-reviewed process by NHLBI and have certain rights to multivariate markers discovered as part of the joint research.

The Current Healthcare Landscape and Its Limitations

The increasing cost of healthcare is driving a need for reform. In the United States, for example, healthcare expenditures in 2009 represented approximately 18% of the Gross Domestic Product, or GDP, according to the President’s Council of Economic Advisors. Absent healthcare reform that addresses the cost of healthcare, these expenditures are expected to continue to rise sharply. If the historical growth trend continues, the share of GDP devoted to healthcare in the United States is projected to reach 34% by 2040, according to this same source. Furthermore, with nearly half of current healthcare spending being covered by local, state and federal government, government programs like Medicare and Medicaid will continue to demand an ever increasing share of tax dollars. Current healthcare reform efforts are focused on improving overall financing and purchasing, such as the use of value-based purchasing to drive quality and clinical improvements. Although reform in healthcare financing and administration can offer some opportunity to mitigate increases in healthcare cost, we believe improved medical management is needed to improve patient care outcomes and concurrently reduce the overall cost of care.

 

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Healthcare reform is happening against the backdrop of substantial growth in biomedical information and an increasing complexity of medical care. Scientific experiments and clinical observations have documented the heterogeneity, or differences, in the underlying causes and symptoms among patients, of medical conditions and the variability in patient responses to treatments. Physicians currently have limited information about the underlying cause of disease to enable individualized treatment decisions for patients. Consequently, the current treatment paradigm is commonly based on a one-size-fits-all treatment model and a trial-and-error approach to finding the most suitable treatment for an individual patient. We believe that the combination of disease and patient disparateness and an increasing number of available therapeutic options creates an urgent need and a significant opportunity to more accurately match patients with appropriate treatments. We believe that diagnostic tests can play a central role in the solution to this important medical challenge of matching patients with appropriate treatments and can contribute to improved medical outcomes at reduced cost.

In addition, the current medical treatment model for most diseases continues to largely rely on detection and, in most cases, characterization of disease based on signs observed by physicians and symptoms perceived by the patient. Many disease conditions have a subclinical stage during which these signs and symptoms are not present or are insufficient to prompt the patient to seek medical care. Moreover, when a patient seeks medical care in the early stages of disease, these signs and symptoms are often not specific. With the lack of noticeable clinical symptoms, physicians may make incorrect or inconclusive diagnoses. However, many medical conditions are easier to treat in the early stage of the disease, and long-term complications and high-cost medical interventions can often be avoided when the disease is detected and treated early. These considerations apply to many common serious medical conditions, particularly in cardiovascular and metabolic diseases, and some forms of cancer and central nervous system diseases. We believe that novel diagnostic tests can play a pivotal role in the early detection and characterization of diseases, enabling more effective and often lower cost treatments as compared to the current medical model, which relies on the presence and recognition of signs and symptoms.

Diagnostic Industry Overview

The in vitro diagnostics, or IVD, industry focuses on developing products used to evaluate and analyze biological specimens derived from bodily fluids, such as blood, blood plasma and serum, urine, cells and other substances taken from patients. The information generated may be used by physicians to help identify persons at risk of disease, diagnose disease, stratify disease severity among patients, determine prognosis, monitor disease state and progression, guide and monitor therapy, and aid in the clinical management of patients. According to Kalorama Information, an independent market research firm, the global IVD market was approximately $42 billion in 2007 and is projected to reach $56 billion in 2012, growing at a compound annual growth rate, or CAGR, of 6%. Leading IVD manufacturers include Abbott, Siemens, Roche, Ortho Clinical Diagnostics and Beckman Coulter.

Molecular diagnostics currently represent a significant portion of the IVD market. According to Kalorama Information, the molecular diagnostics market, including a variety of laboratory tests, such as consumer diagnostics (over-the-counter and at-home tests), clinical research, biomarker discovery and testing and novel molecular analyses, was approximately $18 billion in 2006 and is projected to exceed $92 billion in major markets by 2016, representing a CAGR of 18%. The term molecular diagnostics refers to tissue and blood-based laboratory tests that measure DNA, RNA, proteins or metabolites to detect genotypes, mutations or biochemical changes that are markers of these biological characteristics, or biomarkers. Although tissue-based tests, such as certain genomic tests typically used in cancer, provide important new options to clinicians and patients, access to evaluable tissue samples is often difficult and expensive. We believe these factors severely limit the opportunities for tissue-based biomarker tests, in contrast to blood-based tests, which benefit from the ease and low cost of access to evaluable samples.

A biomarker is one or more biological characteristics that can be objectively measured and evaluated as an indicator of normal or pathogenic processes. Since biomarkers correlate with an underlying process within the body, tests to measure these biomarkers can be used effectively to aid physicians in a variety of ways. While genes are typically associated with the presence or absence of a genetic disease predisposition, proteins and

 

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metabolites often reflect the presence, severity or activity of a disease state. Therefore, the presence or amount of proteins or metabolites in the body can often serve as biomarkers for detecting presence of disease states such as cardiovascular disease and monitoring the progress of these diseases during treatment.

Conventional diagnostic assays are typically used to evaluate the concentration of a particular biomarker or other analyte, with the actual concentration providing information to the physicians ordering the test. This measured value is then compared to a determined normal range, a particular target value, a cut-off value, or the patient’s own baseline or prior values. It has increasingly been recognized that the clinical utility of a biomarker may be significantly greater when analyzed as a composite with one or more other biomarkers, often referred to in test form as a multivariate index assay. In its simplest format, multivariate index assays can produce a ratio between two analyte values, but when larger numbers of analytes are measured, mathematical formulas called algorithms are utilized to calculate either a score or a clinical categorization such as low, intermediate or high risk.

Over the past several decades, leading diagnostic laboratory instrument manufacturers have achieved significant improvements in automated testing methods and systems for hematology, chemistry and immunoassays. An immunoassay is a biochemical test that measures the concentration of a substance in a biological liquid, such as blood serum, or a biochemical test that measures the concentration of an analyte using chemical antibodies. In addition to developing and manufacturing these advanced diagnostic laboratory instruments, these manufacturers have established significant manufacturing and supply chain logistics and sales and marketing infrastructures for the diagnostic reagents used by their systems. The diagnostic instrument systems they offer range in size from small hand-held devices for point-of-care usage to large robotic laboratory systems that can handle more than 1,000 samples per hour and hold reagents for more than 50 assays. These immunoassay platforms rely on established antibody methods in which one or more antibodies bind to the analyte, or substance being measured, which is usually a protein. These systems also utilize a method to detect such binding and are able to analyze the absolute concentration of the protein in question. These platforms can be used to run various assays and manufacturers typically offer comprehensive menus of immunoassays, with the majority of analytes overlapping between manufacturers. We believe that this installed base of automated instruments offers an exceptional opportunity to make novel biomarker tests available to laboratories globally without the need for investment in development and commercialization of instrumentation specific to the “content” of the tests. We refer to this strategy as “separation of content and instrument,” which contrasts with the traditional model where manufacturers of automated laboratory instrument platforms also discover and develop their own proprietary content exclusively for their instruments.

The FDA proposed a regulatory framework for in vitro diagnostic multivariate index assays, or IVDMIAs, and issued draft guidance that indicates how it may regulate IVDMIAs. Although the draft guidance has not been finalized, the FDA has cleared three IVDMIAs. In February 2007, the FDA cleared the first premarket notification 510(k) submission of an IVDMIA, Agendia’s MammaPrint® breast cancer recurrence assay. Subsequently, two additional IVDMIA products were cleared under the FDA’s IVDMIA draft guidance. We believe that with these regulatory clearances, representing a variety of multivariate diagnostic tests, a regulatory framework appears to be forming consistent with the FDA’s guidance, and we plan to develop our diagnostic product candidates and seek regulatory clearance in a similar way.

Our Solution

We have discovered biomarkers and are developing novel diagnostic tests based on biomarkers using our proprietary technology platform. As part of our product development process, we develop and optimize our own first generation assays, conduct clinical development studies utilizing the assays and then seek regulatory clearance or approval if the clinical studies are successful. Initially, we expect that most of our product candidates, if cleared or approved by regulatory authority, will be in vitro diagnostic assays in kit form marketed to a variety of clinical laboratories. Alternatively, we expect that our more complex assays, such as IVDMIAs, will be marketed to a few laboratory service providers to be offered as a testing service. In addition, if our product candidates are suitable for automated instrument or point-of-care applications, we plan to seek collaborations with leading diagnostic laboratory instrument manufacturers for the development and

 

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commercialization of our product candidates on their platforms, such as our agreement with Abbott. We have entered into our first such agreement with Abbott for the development of our galectin-3 test on Abbott’s automated Architect instrument platform, and the terms of our agreement with Abbott permit us to enter into four similar non-exclusive collaborations for this test. Based on our first agreement with Abbott, we expect that these collaborations will generally be non-exclusive and that we will often retain primary marketing responsibilities for our products.

We believe that our solution offers several important benefits over existing approaches in diagnostics by:

 

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Enabling us to structure a discovery process for high-value market opportunities. The prevailing development and commercialization approach among life sciences companies is to identify commercial market opportunities for a product following a serendipitous discovery. In contrast, we believe that our proprietary technology platform offers us an opportunity to initiate a structured process for discovering biomarkers for high-value market opportunities that we identify. Our initial focus is on discovering or in-licensing biomarkers, and then developing novel diagnostic tests based on these biomarkers for significant unmet clinical needs in cardiovascular disease.

 

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Providing novel content for advanced diagnostic laboratory instruments. We are focused on discovering, developing and commercializing novel biomarker-based diagnostic content for use on the extensive installed base of advanced diagnostic laboratory instruments.

 

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Improving characterization of disease process. We are developing diagnostic tests to identify disease during the subclinical stage, or before signs and symptoms are present. We believe that early detection and characterization of disease can help physicians better match patients with appropriate treatments, resulting in better clinical outcomes.

 

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Reducing healthcare costs. We are developing novel diagnostic tests for costly disease states that place tremendous demands on healthcare systems. We believe that our tests can help improve medical management and care outcomes, while reducing healthcare costs in our target markets.

Our Strategy

Our objective is to become a leader in discovering, developing and commercializing novel diagnostic tests based on novel biomarkers we discover or in-license from others. We seek to provide physicians with better information for the diagnosis, prognosis, treatment and monitoring of disease, which we believe will result in improved patient outcomes and more efficient use of healthcare resources. We plan to leverage our proprietary technology platform and our initiatives and collaborations to discover and develop new diagnostic tests, including multivariate index assays, for commercially important diseases. Key elements of our strategy include to:

 

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Obtain regulatory clearance or approval for and launch our product candidates. We intend to seek FDA clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDCA, for all of our novel diagnostic tests, including our IVDMIA tests, prior to their launch for clinical use. We believe that this strategy will significantly simplify the regulatory clearance process for our commercialization partners and pave the way for an expedited launch of each product. We have applied for the regulatory clearance of our first product candidate, a galectin-3 test for heart failure, and, subject to receiving FDA clearance, we intend to launch this product in the United States in the second half of 2010. In October 2009, we obtained CE Mark for this test in the European Union and have begun limited sales and marketing activities there.

 

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Leverage our proprietary technology platform and partnerships with third-party payors and government programs to discover clinically-relevant biomarkers for high-value market opportunities. We believe that our proprietary discovery platform is disease and drug-class agnostic, allowing us to be market focused. We believe third-party payors have financial incentives to encourage the market acceptance of diagnostic tests in order to control costs and have the ability to facilitate market penetration of our product candidates. Consequently, we focus on high-value opportunities where the interests of

 

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third-party payors are aligned with those of other key stakeholders, such as patients, physicians, laboratory providers and hospitals.

 

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Partner with leading laboratory service providers to provide widespread access to our tests upon clearance or approval. We intend to partner with leading U.S. national and regional laboratory service providers for the inclusion of our diagnostic tests, upon regulatory clearance or approval, in their laboratories. This strategy provides clinicians convenient regional or national access to our tests, without the need for the local or facility laboratory to offer our assays. These laboratory service providers offer broad menus of assays and can incorporate our in vitro diagnostic products in their existing work flow. We believe this strategy will provide convenient and national access to our biomarker-based tests and help drive market penetration prior to the availability of an automated version of our tests, which may allow widespread adoption by institutional clinical laboratories.

 

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Partner with leading diagnostic laboratory instrument manufacturers for the development and commercialization of novel diagnostic content on their automated or point-of-care instrument platforms. We are positioning ourselves as the leading provider of novel biomarker-based diagnostic content that can be utilized on the existing installed base of advanced diagnostic laboratory instruments. These systems, developed over the past two decades by the leading diagnostic laboratory instrument manufacturers, are content-agnostic and currently offer comprehensive menus of immunoassay tests. This extensive installed base of high-end automated analyzers offers an exceptional opportunity to make our novel biomarker-based diagnostic tests available to laboratories globally without the need for costly investment in our own instrumentation platform. We intend to enter into non-exclusive licenses for our diagnostic tests and product candidates with these companies for the development and commercialization of assays on their platforms. We have entered into a non-exclusive development and commercialization agreement with Abbott for the inclusion of our galectin-3 test on their automated Architect instrument platform, and we have the right to enter into four similar agreements with other diagnostic companies for this test. We believe that focusing on novel content for existing automated laboratory instruments will facilitate broader and more rapid adoption of our diagnostic tests.

 

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Continue to leverage existing and new collaborations to successfully advance the development and commercialization of our product candidates. We intend to continue participating in research collaborations such as those with the Copenhagen Heart Study and the NHLBI, for the Framingham Heart Study. Partnering with these leading studies provides us with unique access to biological samples, and the resulting data sets and medical histories that form the foundation of our biomarker discovery and clinical validation. We also intend to continue establishing collaborations with pharmaceutical companies and leverage these relationships to expand our capabilities and develop new product opportunities.

 

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Retain primary commercial responsibility for our biomarker tests to drive market penetration and clinical support for our products. We intend to retain primary responsibility for our biomarker tests through our various commercial activities, including the development of new indications, management of intellectual property rights, marketplace education, market development and reimbursement strategies and plans. We plan to build scientific support to drive physician awareness and utilization of our products through additional studies and publications, key opinion leader engagement and assist in the positioning of our tests in patient management guidelines. As part of this effort, we intend to deploy a limited specialty sales force and leverage the resources of our collaborators to drive demand for our products.

 

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Product Pipeline

The following table describes the status of our product development projects:

 

Test name / disease area   Description    Stage
Cardiovascular Disease

BGM Galectin-3

Heart Failure

  Galectin-3 as an aid in the stratification of patients with heart failure    Commercialization (European Union)
     510(k) submitted (United States)

BGM Galectin-3

Heart Failure Risk Following Heart Attack

  Galection-3 to identify patients at elevated risk for heart failure following a heart attack    Development
    

AMIPredict

Acute Atherothrombosis

  Multivariate index assay to identify patients at high risk of near-term atherothrombotic event    Development
  (heart attack or stroke)   

LipidDx

Lipid Disorders

  An aid in the management of patients with lipid disorders    Development

We have initiated or are planning to initiate the following discovery projects:

 

Disease area   Description      
Cardiovascular Disease and Metabolic Syndrome   Multiple discovery projects in collaboration with Framingham Heart Study
Multiple Sclerosis   Biomarker of disease activity in multiple sclerosis
Anti-TNF Alpha Drug Response   Biomarker of response to administration of anti-TNF alpha drugs

Our Products and Product Candidates

Creating New Clinical Paradigms in Cardiology

We believe our product discovery and development pipeline addresses several important related unmet needs in cardiovascular medicine and enables several promising new clinical paradigms:

 

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Segmenting Heart Failure. Segmenting patients based on the underlying cause of heart failure to enable more clinically- and cost-effective personalized clinical management of the patient.

 

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Finding Subclinical Heart Failure. Identifying patients at elevated risk for heart failure among patients with previous heart attack before the manifestation of heart failure signs and symptoms.

 

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Finding Those at Greater Risk for Heart Attack and Stroke. Testing for biomarkers related to vulnerable plaque disease to identify and treat those at near-term risk for heart attack or stroke.

 

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Enabling Better Management of Lipid Disorders. Using biomarker testing of patients with lipid disorders to enable patients and providers to more quickly achieve treatment targets with fewer office visits.

 

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BGM Galectin-3 in Heart Failure

Overview

Galectins are a family of proteins that play many important roles in inflammation, immunity and cancer. Galectin-3, a member of this family of proteins, has been shown to play an important role in heart failure in animal and human studies. In animal experiments, administration of galectin-3 to the heart resulted in the formation of cardiac fibrosis, or stiffening, in the heart muscle, a process often referred to as adverse remodeling. In these animal studies, adverse remodeling reduced the heart’s ability to pump normally, causing the animals to develop heart failure. This link between galectin-3 and adverse remodeling is significant, as cardiac remodeling is an important determinant of the clinical outcome of heart failure and is linked to disease progression and poor prognosis. We have obtained an exclusive worldwide license to certain galectin-3 rights from a company that was spun out of the University of Maastricht in The Netherlands pertaining to the application of this protein in heart failure, and we have filed several of our own patent applications related to galectin-3.

We have developed and optimized a novel assay, which we call BGM Galectin-3, for measuring galectin-3 levels in blood plasma or serum. In October 2009, we obtained CE Mark in the European Union for the test in ELISA microtiter format, enabling commercialization of the assay in the European Union and other countries that recognize the CE Mark. We have begun limited sales and marking activities of the assay in certain countries in Europe. In March 2009, we submitted a 510(k) premarket notification to the FDA in order to obtain the regulatory clearance to market this test in the United States. Upon review of our 510(k) application, the FDA determined that our device was not substantially equivalent to the legally marketed device to which we claim substantial equivalence and therefore denied clearance. The FDA indicated that additional clinical and other data was required in support of our filing, and we re-submitted a 510(k) application in December 2009 with additional data that we believe is responsive to the FDA’s comments. Subject to clearance from the FDA, we expect to begin marketing the test in the United States in the second half of 2010.

Commercialization

As part of our commercialization strategy for our galectin-3 test, we have transferred our assay to a contract manufacturer based in the United States and have produced multiple production-scale batches of the assay in ELISA microtiter format. We are in discussions with leading U.S. national and regional laboratory service providers to purchase our galectin-3 test and provide galectin-3 testing services to clinicians nationwide so that clinicians will have convenient regional or national access to our tests. Consistent with our strategy to become the leading provider of novel high-value content for existing automated immunochemistry equipment, we also expect to enter into worldwide, non-exclusive development and commercialization agreements with leading diagnostic laboratory instrument manufacturers. In November 2009, we entered into the first of such agreements with Abbott for the inclusion of our galectin-3 test on Abbott’s automated Architect instrument platform, and we have the right to enter into four similar agreements with other diagnostic laboratory instrument manufacturers for the inclusion of our galectin-3 test on their platforms. Full commercialization of this automated version of our assay under this agreement is expected to commence no sooner than 2012, subject to completion of development of the galectin-3 test on their platform and regulatory submission and clearance with the FDA and the European Union for use on their platform.

Heart Failure Overview

Heart failure is a condition caused by a combination of diseases or factors that damage or overwork the heart muscle, resulting in its inability to pump blood efficiently to meet the needs of other body organs. Heart failure may lead to serious complications and is a leading cause of death. The most common cause of heart failure is coronary artery disease, including heart attack and unstable angina. The cardiac injury caused by coronary artery disease often results in the development of adverse remodeling. Heart failure can be caused by many other factors, including high blood pressure, diabetes and defects of the heart valves or muscle itself. Patients with heart failure typically exhibit non-specific signs and symptoms such as swollen legs or ankles, shortness of breath or weight gain. Although the condition is usually progressive, the rate of progression varies markedly

 

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from no noticeable deterioration over multiple years to rapidly progressive, resulting in death in just weeks or months. Galectin-3 dependent adverse remodeling is a common cause for heart failure progression, and we refer to this as galectin-3 dependent heart failure.

Natriuretic peptides are hormones released by the heart muscle in response to increased cardiac pressure or volume and have proven clinical utility in the diagnosis and management of heart failure. In late 2001, a blood test for B-type natriuretic peptide, or BNP, became commercially available, followed in 2003 by a blood test for N-terminal prohormone BNP, or NT-proBNP. Since the release of the BNP test by Biosite on a point-of-care platform, the U.S. heart failure diagnostics market has experienced significant growth. According to Frost & Sullivan, an independent market research and consulting firm, the BNP and NT-proBNP diagnostics market worldwide was estimated at approximately $570 million in 2009 and is expected to grow to $800 million by 2013, a 9% CAGR.

According to the American Heart Association, an estimated 5.8 million Americans suffer from heart failure, with an approximate 670,000 new cases occurring each year, and we believe the prevalence and incidence of heart failure are similar in Europe. It is estimated that heart failure is responsible for over 282,000 deaths per year in the United States. Once diagnosed, overall mortality for heart failure is high, with one in five dying within a year of diagnosis. Survival is lower in men than in women, with 59% of men and 45% of women dying within five years of diagnosis. The incidence of heart failure increases with age, with approximately 73% of patients discharged from hospitals in the United States with a diagnosis of heart failure aged 65 years or older. Treating these patients is associated with a high rate of hospitalizations and ambulatory care visits, with an estimated 1.1 million hospitalizations in 2006 and an estimated 3.4 million ambulatory care visits in 2007. Re-hospitalization of these patients is a significant factor in the utilization of healthcare resources. A recent review of Medicare claims data for re-hospitalization showed that patients with a discharge diagnosis of heart failure had a 30-day re-hospitalization rate of 27%, the highest among any group of patients. The estimated direct and indirect cost of heart failure in the United States for 2010 is estimated at $39.2 billion, which is likely understated greatly because it is based on data for heart failure as the primary diagnosis or underlying cause of death.

Stratification of Patients with Heart Failure to Improve Patient Care and Outcomes

Patients with heart failure are commonly classified based on signs and symptoms using the New York Heart Association, or NYHA, functional classification scale based on a patient’s symptoms. The scale ranges from Class I patientsthose with no limitation of physical activity and for whom ordinary physical activity does not cause undue fatigue, palpitation or shortness of breath to Class IV patientsthose who are unable to carry out any physical activity without discomfort and who have symptoms of cardiac insufficiency at rest. However, the NYHA functional classification scale does not specifically correlate with underlying disease process. We believe that stratifying patients with heart failure on the basis of underlying disease process will enable more individualized treatment and clinical management, leading to improved clinical outcomes and reduced healthcare costs. Galectin-3 dependent heart failure represents a common cause of heart failure development and rapid progression, and as such, may be measured to define an important segment of patients with this condition.

Natriuretic peptides such as BNP and NT-proBNP do not segment patients with heart failure on the basis of a specific underlying disease process, but the presence of these hormones rather reflects the degree of pressure or volume overload in the heart. In other words, increases in natriuretic peptides reflect the degree of cardiac overload, not the actual underlying cause. Consequently, galectin-3 and natriuretic peptides provide the clinician with information on two independent processes. For this reason, patients with elevated levels of galectin-3 may have normal or elevated levels of natriuretic peptides, and likewise, only a portion of patients with elevated levels of natriuretic peptides may have galectin-3-dependent heart failure. We believe that galectin-3 provides important incremental clinical information to natriuretic peptides in patients with heart failure.

Clinical Development and Validation of Our Galectin-3 Assay for Patients with Heart Failure

Galectin-3 has been known to play a role in health and disease. Galectin-3 can be found in low concentrations in blood of healthy individuals. In a study that we conducted, involving over 1,000 healthy volunteers free from

 

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cardiovascular disease, we measured galectin-3 levels to determine a reference range in blood plasma. Analyzing this data, we found a near normal distribution, with minimal effect of age, gender, or presence of intercurrent conditions such as diabetes and other variables. The mean blood plasma galectin-3 level was found to be 13.3 ng/mL and the median 12.4 ng/mL. The upper limit of the normal range (90% percentile) was found to be 19.0 ng/mL.

We have also measured galectin-3 in more than five controlled studies involving more than 2,000 patients with chronic or acute heart failure. In these studies, galectin-3 was found to be a strong independent predictor of mortality or hospitalization, the primary end-points of these studies, meeting the criteria for statistical significance (p-value <0.005). We believe that the data from these studies supports the premise that galectin-3 may be used to segment and stratify heart failure patients and that patients with galectin-3 dependent heart failure have a more progressive form of the disease associated with increased hospital utilization and premature death. These studies were completed in 2009, and we intend to publish the results of these studies in peer reviewed journals under the authorship of the principal investigators who conducted the studies.

The following two studies illustrate the performance of our galectin-3 assay in heart failure and were submitted in support of our 510(k) application in December 2009:

Study I — Multicenter Study Conducted in Europe

Galectin-3 levels were measured in 582 plasma samples from an independent, controlled, prospective, multi-center clinical study conducted in Europe enrolling NYHA class II, III and IV subjects. The average age of the patients was 71 years and 38% were female. The median follow-up time was greater than 18 months and the primary endpoint was the composite of all-cause mortality and hospitalization for heart failure. Two cutoff values were derived that in turn defined three ordered galectin-3 categories. The association of these galectin-3 categories with the primary endpoint was assessed by Cox regression survival analysis. High galectin-3 levels measured at baseline were found to be significantly associated with increased risk of all-cause mortality and hospitalization for heart failure and, further, remained significantly associated with increased risk upon adjustment for other baseline risk factors of age, gender, NYHA functional classification, left ventricular ejection fraction, diabetes status and smoking status. After accounting for these other baseline risk factors, patients with the highest baseline levels of galectin-3 (>25.9 ng/mL) had an approximately 2.4-fold increased hazard of death or hospitalization for heart failure, relative to patients with low galectin-3 levels (<17.8 ng/mL).

Study II — Multicenter Study Conducted in the United States and Canada

Galectin-3 levels were measured in 895 plasma samples from an independent, controlled, prospective, multi-center clinical study conducted in the United States and Canada. This study represented a sub-study to a study funded by NHLBI. The study involved heart failure patients with left ventricular dysfunction and with NYHA class II, III or IV symptoms. The average age of the patients was 58 years, 29% were female and 36% were non-white. The median follow-up time was approximately 30 months. Participants were categorized based on the galectin-3 risk categories defined in Study I. Cox regression models and Kaplan-Meier analysis were used to evaluate the association of baseline galectin-3 levels in heart failure patients, with the composite endpoint of all-cause mortality and all-cause hospitalization. The study data demonstrated that an elevated baseline galectin-3 level (>25.9 ng/mL) had an approximate 1.5-fold increased hazard of death or hospitalization for heart failure, relative to patients with low galectin-3 levels, even after accounting for other baseline risk factors of age, gender, NYHA functional classification, left ventricular ejection fraction, diabetes status and smoking status.

Clinical Utility and Benefits of Galectin-3 Testing for Patients with Heart Failure

Heart failure is a condition caused by a combination of diseases or factors. Only a segment of heart failure patients have elevated levels of galectin-3, suggesting the presence of galectin-3-dependent heart failure. Clinical studies using our galectin-3 assay have demonstrated that patients with elevated galectin-3 levels have worse prognosis in terms of mortality or risk of hospitalization than comparable patients with low or normal levels of galectin-3. Accordingly, we believe that measurement of galectin-3 in patients with heart failure offers clinically

 

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useful information and that physicians may use information pertaining to risk of adverse outcomes based on galectin-3 blood plasma or serum levels and other clinical parameters in routine clinical management of patients with heart failure, such as:

 

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Spacing of patient visit intervals. We believe physicians may monitor galectin-3 levels to determine the time interval between patient visits, with greater time between visits for patients exhibiting normal galectin-3 levels and more frequent visits for those patients that have elevated galectin-3 levels.

 

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Assessing the need for referral to a cardiologist or heart failure specialist. The majority of heart failure patients are managed by clinicians other than a heart failure specialist. We believe physicians may use galectin-3 levels as a determinant of which patients are at highest risk for adverse outcomes and therefore should be referred to a cardiologist or possibly a heart failure specialist.

 

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Determining proper timing of hospital discharge and appropriate patient care following discharge. Discharge planning often starts soon after a patient’s admission to the hospital. Improved discharge planning for heart failure patients is considered one of the most important steps in reducing costly readmissions following discharge. We believe that elevated galectin-3 levels upon discharge are associated with a significant increase in risk of hospital readmission.

 

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Selecting patients for disease management. Several forms of disease management programs are currently used by healthcare providers and payors for heart failure patients. These programs aim to reduce the use of inpatient care through patient and caregiver support. Components of these programs may include building self-management skills, such as daily weighing and knowing when to contact a physician in case of sudden weight increase; telephonic nurse support, such as appointment and medication reminders, periodic telephonic assessment; promotion of adherence to established guidelines for treatment. We believe that patients with elevated levels of galectin-3 have poor prognosis and therefore are often appropriate candidates for disease management.

 

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Telemonitoring. Remote monitoring technology solutions are increasingly used by clinicians or as part of disease management programs to monitor physical parameters, such as body weight, blood pressure or cardiac measurements, to identify patients at risk for acute decompensation that often require hospitalization, resulting in high cost. We believe that patients exhibiting elevated levels of galectin-3 are at elevated risk of hospitalization and that galectin-3 measurements in conjunction with other clinical parameters and patient history, may be used in selecting patients for telemonitoring services.

 

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Evaluating advanced therapeutic options. An increasing number of advanced therapeutic options are available, such as left ventricular assist devices, cardiac resynchronization therapy, or CRT, cardiac netting, stem-cell therapy and cardiac transplantation. Physicians are using many variables to judge the suitability of patients for such heart failure treatments. We believe that galectin-3 testing may offer additional information to assist clinicians in selecting patients for these advanced and expensive therapeutic options.

In addition to potentially guiding clinical management of patients with heart failure, we believe that biomarkers like galectin-3 may one day form the basis for stratified pharmacotherapy where proper drug treatment is selected, among alternative drugs, based on the patient’s level of galectin-3. We intend to partner with companies developing novel heart failure therapies to study whether galectin-3 can be used as a companion diagnostic to these therapies. We have initiated the first of such partnerships and we have provided our galectin-3 assay to measure samples from a study conducted by a leading pharmaceutical manufacturer. Additionally, we are conducting studies to identify possible differences in treatment outcomes between patients with elevated and low levels of galectin-3. The success of these endeavors and the outcomes of these studies will have a significant impact on the market opportunity for our galectin-3 tests.

 

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BGM Galectin-3 to Identify Patients at Risk for Heart Failure Development Following a Heart Attack

Based on the biology of adverse remodeling in post-myocardial, or heart muscle, injury and consistent with our own observations in heart failure, we predict that elevated levels of galectin-3 will occur in a segment of patients who have suffered a myocardial injury, such as during a heart attack. We expect that elevated levels of galectin-3 in these patients is associated with an elevated risk of heart failure development. We are currently investigating this premise in the condition known as acute coronary syndrome, a condition which includes unstable angina and heart attack. Patients surviving a heart attack remain at high risk of death from adverse remodeling. An estimated 20–40% of individuals in the United States who suffer a heart attack develop heart failure within five years. According to the American Heart Association, an estimated 8.5 million Americans alive today have suffered a heart attack, with an approximate 935,000 new or recurring heart attacks occurring each year in the United States, and we believe the prevalence and incidence of heart failure are similar in Europe.

We are currently conducting a case control study to investigate the performance of galectin-3 measurement as a predictor of future heart failure development in patients following acute coronary syndrome. If successful, we expect to conduct one or more clinical validation studies and seek FDA input as to the regulatory clearance or approval requirements for such a supplemental indication. If we receive positive clinical data, we expect to seek FDA clearance for this supplemental indication for periodic galectin-3 testing in patients following a heart attack, or in the broader indication following acute coronary syndrome, to identify patients at elevated risk of heart failure development before the onset of signs and symptoms.

AMIPredict for Acute Atherothrombosis (Cause of Heart Attack or Stroke)

Overview

We are developing a test that we refer to as AMIPredict, a multivariate biomarker blood-based test for patients at risk for atherothrombotic cardiovascular disease, commonly known as vulnerable plaque. We are designing AMIPredict to identify patients with a high risk of suffering heart attack or stroke within the next two to four years. Our development work to date suggests that AMIPredict could be an improved diagnostic test compared to conventional risk factor-based approaches such as the Framingham Risk Score in the United States and the Systematic Coronary Risk Evaluation, or SCORE, in Europe.

Atherosclerosis Overview

Atherosclerosis is a systemic disease that is characterized by the buildup of lipid-rich plaques within the walls of the large arteries. It progresses through three stages: gradual and continuous plaque buildup that occurs over decades, focal plaque degradation resulting in vulnerable plaques, or plaques at risk of rupture, and acute plaque disruption with superimposed thrombosis, or blood clot formation occurring after plaque rupture. Atherosclerosis is by far the most common cause of coronary heart disease and it underlies the clinical conditions of heart attack, chronic stable angina, stroke and peripheral vascular disease. According to the American Heart Association, it is estimated that in the United States alone, over one million people die annually from the complications of these conditions and that the total yearly cost of treating these diseases exceeds $360 billion.

Atherothrombosis, the final step in atherosclerosis, involves the acute disruption of plaque with superimposed thrombosis. The resulting blood clot formation can block the flow of oxygen-rich blood to the heart or brain, causing heart attacks and strokes. Most heart attacks and strokes occur as the consequence of acute atherothrombosis in individuals with low or intermediate risk profiles according to traditional risk factor-based approaches recommended in the United States and Europe. For example, in the Framingham Heart Study, the Physicians’ Health Study, the Women’s Health Study and the Northwick Park Heart Study, more than 75% of all coronary events occurred in individuals at low or intermediate risk that, consequently, were not offered optimal preventive therapy. In women, this figure may surpass 90%. For this reason, we believe that the detection of degrading arterial wall plaques through a blood test or non-invasive imaging is critical to the development of a shift in clinical paradigm to screening for and treatment of vulnerable plaque disease. Based on 2008 U.S. census

 

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data, we believe there are an estimated 43.3 million men ages 50 or over and 39.8 million women ages 55 or over, or 80 million Americans, who may be at risk for developing vulnerable plaques.

Discovery and Clinical Development of AMIPredict

Study I — CATHGEN Based Study

In 2007, we commenced our first case-control research study to pursue the discovery and development of a new test to detect vulnerable plaque. We analyzed approximately 140 samples from the Duke CATHGEN Research Project belonging to patients who underwent angiography and who developed a heart attack or stroke within two years following the enrollment angiography. The controls in this study were patients who were generally similar to the cases at the time of the enrollment angiography, but who did not develop the cardiovascular event. As a result of this study, we discovered a multivariate biomarker using our proprietary platform, which we believe had promising performance and therefore we initiated a follow on study.

Study II — Copenhagen Heart Study

From 2008 to 2009, we conducted a second case-control study involving samples from approximately 750 participants in either the Copenhagen Heart Study or Copenhagen General Population Study. The sample study comprised samples from approximately 250 individuals who suffered a first heart attack within four years of enrolling in the study and approximately 500 matched controls. The results corroborated earlier findings and allowed us to further refine the multivariate assay. This refined multiplex assay also showed favorable performance and met the study’s clinical endpoints with statistical significance. If confirmed in one or more independent larger case cohort studies, we believe the results of such studies may form the basis for a regulatory submission for a new screening test for individuals over a certain age.

Additional Studies Planned

We are currently planning additional studies intended to validate these previous findings. We plan to conduct these studies in 2010. If our validation studies are successful, we intend to seek FDA input as to the requirements for the filing of a 510(k) submission for this IVDMIA test. We expect that if AMIPredict receives regulatory clearance or approval, this test will be indicated in individuals over a certain age, such as 55 for men and 60 for women. If we successfully develop and receive regulatory clearance or approval for this test, we may elect to establish our own CLIA certified laboratory facility, acquire such facility, or contract with existing specialty, regional or national providers of laboratory services to commercialize our tests. We also expect to pursue key partnerships with leading providers of existing automated immunoassay platforms to develop automated versions of this test on their platforms.

LipidDx for Management of Lipid Disorders

Lipid Disorders Overview

An estimated 36 million adult Americans have elevated levels of cholesterol of greater than 240 mg/dL. The problem of elevated cholesterol is generally well known and well understood among the population, with nearly 75% of adults having been screened for high blood cholesterol in the preceding five years. Reducing plasma cholesterol remains a national priority. According to a study conducted by the Centers for Disease Control, it is estimated that a 10% population-wide decrease in total cholesterol levels would result in an approximate 30% reduction in the incidence of coronary heart disease. Despite the recognition of its importance and the availability of a variety of generally effective pharmacological and non-pharmacological means to reduce levels of plasma cholesterol and triglycerides, overall results remain disappointing. Non-adherence to treatment is an important contributor to this problem. For example, fewer than half of the persons who qualify for any kind of lipid-modifying treatment for coronary heart disease risk reduction are actually receiving such treatment. Of those patients treated, only about one-third are achieving their goal for low-density lipoprotein, or LDL, often referred to as bad cholesterol, while fewer than 20% are at their goal.

 

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Failure to achieve treatment targets in lipid disorders is complex and based on many factors. Some patients are not prescribed standard therapy, while for some patients, standard therapy does not work, thus requiring some process of trial and error by the physician to find the right medication or combination therapy. In addition, some patients discontinue treatment because of adverse side effects, lack of subjective benefits, or cost associated with the medication. Finally, there exists a certain set of patients who are unable to achieve treatment goals despite optimal treatment.

Clinical Development of LipidDx

We are currently conducting several studies to investigate the clinical utility of LipidDx, a blood-based protein assay, in the management of common lipid disorders and to assess its contribution to cardiovascular risk assessment. If successful, we expect to conduct one or more clinical validation studies and seek FDA input as to the requirements for 510(k) clearance for this indication.

Our Discovery Pipeline

Our biomarker discovery efforts are market and opportunity driven, starting with identifying an unmet clinical need and product opportunity. Obtaining suitable samples for discovery or validation is often an important gating factor for our discovery projects. We continue to evaluate our discovery priorities and as a result, our discovery pipeline will undergo periodic changes due to project completions, new emerging opportunities, issues related to access of samples, and changes in medical care or treatment options.

Cardiovascular Disease and Metabolic Syndrome

In 2009, we entered into a Cooperative Research and Development Agreement, or CRADA, with NHLBI and Boston University to conduct certain biomarker discovery studies in the area of metabolic syndrome and atherosclerotic cardiovascular disease using samples and data from the Framingham Heart Study. A CRADA is an agreement between the federal government and one or more nongovernment parties for conducting specified research or development that could lead to useful, marketable products that benefit public health. The Framingham Heart Study is one of the leading cardiovascular research studies, the results of which have been published in approximately 2,000 scientific articles since its inception in 1948. Research from the Framingham Heart Study has provided the scientific basis for many of the generally established clinical paradigms related to cardiovascular disease, such as management of obesity, hypertension and lipid disorders.

Under this CRADA with NHLBI and Boston University, we have certain rights to multivariate markers discovered as part of the joint research. In 2009, we successfully completed the pilot phase of this project and we are currently conducting the first of three case control studies representing phase one of the collaboration. Three related topics will be investigated in the current phase of the research:

 

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blood-based biomarkers predicting the onset of first major cardiovascular event;

 

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blood-based biomarkers of metabolic syndrome, a condition comprised of a cluster of ailments, such as increased blood pressure, elevated insulin levels, excess body fat around the waist or abnormal cholesterol levels that occur together, which increase a patient’s risk of heart disease, stroke and diabetes; and

 

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blood-based biomarkers corresponding to coronary artery calcium scoring, a widely accepted marker of cardiovascular disease based on a special X-ray exam.

The CRADA contemplates research to be conducted over a five-year period. We have received specimens from the Framingham Heart Study at our facility and plan to conduct the first of these experiments in 2010.

 

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Multiple Sclerosis — Marker of Disease Activity

Multiple Sclerosis, or MS, is a serious medical condition that affects approximately 350,000 people in the United States and an estimated 3.0 million individuals worldwide according to Espicom Business Intelligence, a provider of market information. MS is a debilitating disease in which a patient’s immune system degrades the protective sheath that covers the nerves. This disease interferes with the communication between the brain and the rest of the body. Ultimately, the disease may result in deterioration of the nerves themselves, a process that is irreversible. The most common form of MS is characterized by an irregular pattern of remissions and exacerbations of disease symptoms. By allowing doctors to monitor the underlying disease activity, biomarkers have the potential to markedly change and advance care for individuals with MS. We have access to certain samples from patients with MS and are planning to conduct one or more discovery studies in 2010.

TNF Alpha Blockers — Markers of Treatment Response

TNF alpha blockers represent an important class of drugs used in the treatment of several autoimmune diseases, such as moderate to severe rheumatoid arthritis, active psoriatic arthritis, active ankylosing spondylitis and Crohn’s disease. Enbrel, Remicade and Humira are the most commonly prescribed TNF alpha blockers on the market.

Response to TNF alpha blockers varies among patients and use of these agents has been associated with certain serious adverse side effects. Blood biomarkers that predict treatment response prior to initiation of therapy or blood biomarkers that reflect the biological effects leading to treatment response, will enable improved patient selection and more personalized treatment of patients with these agents.

We have developed a protocol with our partner Humana and intend to commence a discovery study for these biomarkers in 2010.

Our Discovery and Product Development Process

We rely on internal discovery and in-licensing of technology in our disease fields of interest. We use a multi-phased discovery and development process which is outlined below:

Discovery. Our biomarker discovery phase generally starts with identifying an unmet clinical need and product opportunity. We may involve Humana, a pharmaceutical or device manufacturer, or a patient advocacy organization in the evaluation of the unmet need and planned discovery. We then develop a target product profile for the new test to guide the discovery and development process and support stage-gate decisions. The target product profile may be reviewed and adapted from time to time.

In this phase, we apply our proprietary technology platform on a large scale to discover and validate novel biomarkers that may be used for developing novel diagnostic tests. Our platform integrates molecular measurement technologies based on specialized mass spectrometry, chromatography, nuclear magnetic resonance spectroscopy and multiplexed assay technologies. Through this platform, we are able to detect, quantify and characterize over 1,000 biological molecules, including proteins, protein variants, lipids, fatty acids, amino acids and many other compounds that may be key indicators of health, disease and drug response, from less than a few drops of blood or other bodily fluids. Our biomarker discovery workflow includes three main elements: molecular measurement, statistical analysis and bioinformatics. We believe that our technology platform represents a significant competitive advantage in our ability to discover and develop new biomarkers.

Development. Following the completion of one or more discovery studies in support of a project, we will review the results to determine if the results are consistent with our target product profile. We will then determine if the results warrant continuation to the next phase. We generally seek to verify our discovery results prior to initiation of a development project for a given test.

The development process is designed to be consistent with industry standards and practices, and when applicable, is guided by FDA or European Union final or draft guidance documents, and standards and guidance documents published by the Clinical Laboratory Standards Institute and other recognized entities. Although our discovery

 

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may have been based on our advanced mass spectrometry platform, for commercialization, we intend to seek, when possible, low cost generally accepted and widely available means to measure the same analyte, such as common sandwich ELISA assay formats. Our development process includes the development and optimization of an assay and acquisition of suitable specimens and data from appropriate clinical studies for the endpoints to support the targeted claims. As part of this process, we also seek appropriate institutional review board or ethical committee approval. Finally, we test the clinical samples using the assay and we then analyze the clinical data and prepare the appropriate regulatory submission documents.

Launch. Prior to the launch of a product, we plan to contract with third-party manufacturers for our in vitro diagnostic kits or laboratory service providers for our regulated laboratory service, and commence the transfer of technology and validation in preparation for commercial product introduction.

Automated Assay Format Development. Following the completion of our validation studies or submission of regulatory filings, we plan to seek development and commercialization partnerships with leading diagnostic laboratory instrument manufacturers for a non-exclusive license for a given assay. Once we have entered into such an agreement, we intend to initiate the collaborative development of the assay for the manufacturer’s automated platform, which we believe may take on average between 24 and 36 months.

Our Collaborations

Our key research, development and commercialization collaborations are summarized below.

Abbott

In November 2009, we entered into a strategic collaboration with Abbott Laboratories, to develop and commercialize Galectin-3 assay kits and related control kits and calibrators, or Galectin-3 Products, utilizing our Galectin-3 technology and patent rights, for use on Abbott’s Architect® Immunochemistry Diagnostics Platform, or the Abbott Architect, and other Abbott diagnostic systems. As part of the collaboration, we entered into a non-exclusive license and distribution agreement with Abbott, or the Abbott Agreement, pursuant to which we provided Abbott and its affiliates with a non-exclusive, worldwide license under our patent rights related to galectin-3 to commercialize Galectin-3 Products for use on the Abbott Architect and other Abbott diagnostic systems. We also entered into an umbrella product development agreement, or the Umbrella Agreement, with Abbott and Fujirebio Diagnostics, Inc., or Fujirebio, and a funding agreement with Fujirebio, pursuant to which Fujirebio will develop and seek regulatory approval of the Galectin-3 Products for use on the Abbott Architect and we will fund, based on the achievement of development milestones, the development by Fujirebio of the Galectin-3 Product for use on the Abbott Architect.

Under the Abbott Agreement, Abbott is prohibited from sublicensing its rights to commercialize our Galectin-3 Products and, except for the Galectin-3 Products described above, is prohibited from developing Galectin-3 assays covered by our patent rights. Before commercializing a Galectin-3 Product for use on a point-of-care platform, Abbott must first notify us of its desire to do so, and we have agreed to negotiate in good faith to amend the Abbott Agreement to provide for product access fees and other terms on which Abbott may do so. We have the right to enter into up to four additional licenses of our patent rights related to Galectin-3 for the commercialization of Galectin-3 Products during the five year period from the date on which Abbott makes its first commercial sale of Galectin-3 Products, and unlimited additional licenses thereafter , provided that (i) such other licensees’ Galectin-3 assays are commercialized only under the other licensees’ names and brands and only with respect to diagnostic platforms or technologies that are owned or controlled by such licensees and (ii) if another licensee receives financial terms that would reasonably be believed to be more favorable than those granted to Abbott, Abbott will be entitled to the benefit of such favorable terms. Under the Abbott Agreement, Abbott will pay us a product access fee and a marketing service fee for each Galectin-3 Product they sell. Under certain circumstances, based primarily on market prices for Galectin-3 assays, Abbott will be entitled to product fee reductions to be determined by negotiation, or if the parties fail to agree, by arbitration.

Abbott is required to use its commercially reasonable efforts to promote, market, sell and distribute the Galectin-3 Products worldwide. We are required to use our commercially reasonable efforts to pursue certain

 

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clinical development objectives, perform certain marketing services in the United States and certain foreign countries, and develop and implement a reimbursement strategy for Galectin-3 assays in those countries.

Unless terminated earlier, the agreement will expire on the expiration date of the last-to-expire patent in our patent rights related to Galectin-3. Either party may terminate the agreement upon 60 days written notice of a material breach of the agreement that is not cured within such 60 days, and Abbott may terminate the agreement upon 30-days written notice upon the occurrence of certain events. In addition, if Abbott voluntarily discontinues the Galectin-3 development pursuant to the Umbrella Agreement or discontinues the commercialization of Galectin-3 Products, then it may terminate the agreement upon 30-days written notice, but is required to either, in Abbott’s discretion, (i) pay us an amount equal to the amount we paid Fujirebio pursuant to the Umbrella Agreement, or (ii) allow us to sell Galectin-3 Products developed by Fujirebio under the Umbrella Agreement pursuant to the terms and conditions of a distribution arrangement negotiated in good faith between us and Abbott.

ACS Biomarker

We have exclusively licensed from ACS Biomarker B.V., or ACS Biomarker, a portion of the intellectual property rights covering our galectin-3 tests. In May 2007, we entered into a biomarker product license and collaboration agreement with ACS Biomarker, a company that was formed with technology exclusively licensed from the University of Maastricht in The Netherlands, and other parties. ACS Biomarker was founded to develop and commercialize cardiovascular biomarkers discovered at the Cardiovascular Research Institute Maastricht. Pursuant to the agreement, as supplemented by two licensing addenda entered into in May 2007, ACS Biomarker granted to us an exclusive, worldwide sublicense to develop and commercialize two proprietary cardiovascular biomarkers for heart failure, galectin-3 and thrombospondin-2 and a proprietary cardiovascular multivariate biomarker for the early confirmation of a suspected heart attack. Each of these biomarkers is licensed by ACS Biomarker from the University of Maastricht. Our licenses are perpetual in duration and permit us to sublicense the rights to third parties. In addition, we sublicensed from ACS Biomarker the rights to certain peptides for use in diagnosing atherothrombic vascular disease. We also have the right to exclusively negotiate a license to any additional biomarkers for which ACS Biomarker holds rights and determines to offer to any third party, but ACS Biomarker is not obligated to grant us rights to such biomarkers.

Under the terms of the agreement, we have executed certain plans for the development of the licensed biomarkers and are required to establish a scientific advisory board to provide input and guidance on the development plan. As consideration for the licenses, we were required to pay ACS Biomarker an up-front payment and are required to pay milestone payments and royalty prepayments to the extent that we achieve specified development and regulatory milestones. Additionally, we are obligated to pay ACS Biomarker royalties on any net sales, together with a percentage of any sublicense revenue, from our galectin-3 tests and any other products that we develop utilizing the licensed intellectual property. As of December 31, 2009, we have paid $750,000 in up-front and milestone payments and have not paid any royalties on sublicense revenue or net sales.

The agreement has an initial five-year term through 2012 and automatically renews for additional one year periods unless either party gives not less than 30-days written notice of termination to the other party. Either party may terminate the agreement if the other party fails to perform a material obligation under the agreement, or upon the occurrence of certain bankruptcy events involving the other party. The licenses granted by ACS Biomarker to us will survive any such termination, except that if ACS Biomarker terminates the agreement for our failure to perform any material obligation (including our payment obligations or any obligation under any implementation plan), the exclusive licenses granted to us under the agreement will be converted into non-exclusive licenses.

Humana

In May 2007, we entered into a strategic agreement with Humana Inc., one of the largest health benefits companies in the United States, with more than 11 million medical members, and the second largest provider of Medicare benefits in the United States. Under the terms of the agreement, we and Humana intend to collaborate

 

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with the goal of accelerating the development of blood-based biomarkers and identifying the role of blood-based biomarkers in improving health outcomes and containing healthcare costs through individualized medicine. In furtherance of this goal, we and Humana may conduct biomarker discovery and validation studies among Humana members, for which we will pay Humana. For example, we have developed a protocol with Humana and intend to commence a discovery study for TNF alpha blocker related biomarkers in 2010. We may also conduct research on the design and testing of methods to promote adoption of individualized medicine among covered populations. We believe that this agreement will allow us to conduct biomarker studies faster, at lower cost and in a manner that better reflects the intended use of biomarkers as compared to traditional academic research studies. We expect that the results of these studies may provide the basis for authoritative cost-benefit calculations for our diagnostic product candidates. Pursuant to the agreement, we will offer any blood-based biomarker diagnostic products that we develop from data or services provided by Humana to Humana on preferred terms to the extent sold by Humana to Humana members. In addition, in the event we commercialize blood-based biomarker diagnostic products under this partnership, we will be required to make certain payments to Humana based on such products.

The agreement has an initial three-year term and automatically renews for an additional period of 12 months unless either party gives not less than 120 days written notice of termination to the other party. Either party may terminate the agreement upon 60-days written notice if the other party is in material default of any of its material obligations under the agreement, or upon the occurrence of certain bankruptcy events involving the other party.

Our Initiatives

HRP Initiative

In 2006, we initiated and are leading the HRP initiative for atherothrombotic cardiovascular disease. The HRP initiative consists of a series of pre-competitive, multi-party research and development projects, which are administered and coordinated by us pursuant to participation agreements with Abbott, AstraZeneca, Merck, Philips and Takeda. The overall goals of the HRP initiative are to advance the understanding, recognition and management of atherothrombotic cardiovascular disease, to provide a roadmap for the development and registration of screening, diagnostic and therapeutic interventions for high-risk plaque and to promote the use of these interventions by patients, pharmaceutical companies and third-party payors. We believe the HRP initiative is the most extensive coordinated biomarker discovery and validation project ever undertaken.

The specific goals of the initiative include:

 

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Discovering and validating a blood-based biomarker for high-risk plaque suitable for high-volume patient screening;

 

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Developing and validating novel non-invasive imaging methods to characterize and classify patients with high-risk plaque and establishing the relationship between such imaging methods and blood biomarkers;

 

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Developing a regulatory framework for high-risk plaque-related products; and

 

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Establishing an authoritative third-party source for high-risk plaque-related information.

Pursuant to the participation agreements, each of Abbott, AstraZeneca, Merck, Philips and Takeda has provided the aggregate of $5.0 million to support the HRP initiative, with a portion of the funds provided by Philips in the form of in-kind contributions, as described in the participation agreement. As of December 31, 2009, all of the funds provided under the HRP initiative have been expended and we are currently seeking additional funds for the continuation of work in the initiative. As set forth in the participation agreements, the HRP initiative is governed by a joint steering committee, or JSC, which is comprised of designees of participating companies, and is led by a scientific program board consisting of academic experts in the cardiovascular field, which advises the JSC and assists in the design of the research protocols. The JSC is responsible for overseeing the conduct and

 

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progress of the HRP initiative, including finalizing and approving program activities, program and activity budgets, external communications, patent filings, third-party licensing and commercialization of data and rights under the HRP initiative. We will own any inventions and data that are conceived in the conduct of the HRP initiative and have agreed to grant each participating company a non-exclusive, perpetual, royalty-free license to all such inventions and data for any and all uses. Each participation agreement expires upon the earlier of the completion of the HRP initiative or the fifth anniversary of such agreement, unless otherwise terminated by the parties.

We have conducted several studies and related activities as part of the HRP Initiative, including a clinical study, referred to as the BioImage Study, involving approximately 7,000 Humana members who underwent a comprehensive clinical evaluation in temporary research facilities which we set-up in Illinois and Florida, and who provided plasma, serum, RNA and DNA as well as access to medical and pharmacy claims from a period preceding and following their enrollment in the study. Approximately 6,000 of these individuals also underwent certain non-invasive imaging investigations. We are currently following this cohort for a minimum of three years using their medical claims and other information to determine the occurrence of certain cardiovascular events and other outcomes. Biological specimens and associated data from the BioImage Study represent important assets to which we have certain rights for our discovery and development projects that we conduct independent of the HRP Initiative.

As part of the HRP Initiative we also conducted a plaque biomarker discovery study with the Cardiovascular Research Institute Maastricht, in which we measured over 1,500 proteins and metabolites in atherosclerotic plaque of patients undergoing carotid endarterectomy, a surgical procedure in which a vascular surgeon removes the inner lining of the carotid artery to eliminate plaque buildup, to study the biology of inflamed plaque lesions in comparison with plaque lesions that previously ruptured.

We also provided funding for a diagnostic-economic study conducted by Humana and the Brookings Institute to develop an advanced economic model and software application to model the cost-benefit of the new clinical paradigm of screening for vulnerable plaque using a blood test followed by pharmacotherapy to reduce cardiac events. The model used Humana medical claims and cost data with an objective to approximate the real cost and economic benefit that could be accrued by a typical U.S. payor.

Framingham Heart Study and Boston University

We were selected for this project through a peer reviewed process by NHLBI, part of the National Institutes of Health, to participate in the NHLBI-Framingham Heart Study Biomarkers of Cardiovascular Risk Initiative, also known as the Systems Approach to Biomarker Research in Cardiovascular Disease, or SABRe CVD. The research will be conducted in collaboration with Boston University School of Medicine and School of Public Health, or Boston University.

In the first quarter of 2009, we executed a five-year CRADA with NHLBI and Boston University to conduct biomarker discovery studies involving blood samples and data from the Framingham Heart Study. This collaboration is the first time that the Framingham Heart Study is partnering with a commercial entity in a CRADA research project. We have certain commercial rights to biomarker inventions resulting from this research.

The Framingham Heart Study is a prospective, community-based, family study that began in 1948 among residents of Framingham, Massachusetts, to study the development of cardiovascular disease over time. The Framingham Heart Study has previously provided insights that have led to new clinical paradigms related to, among others, hypertension, lipid disorders, obesity and smoking. The findings of the Framingham Heart Study have been published in over 2,000 scientific articles. This cooperative research program commenced in the second quarter of 2009 and we have successfully completed the feasibility stage of the research. The CRADA contemplates research to be conducted over a five-year period. We have received specimens from the Framingham Heart Study at our facility and plan to conduct the first of these experiments in 2010.

 

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Intellectual Property

The focus of our work is the discovery, development and commercialization of novel diagnostic tests based on biomarkers. Through our research and development efforts, we have developed expertise in proprietary methods using experimental design, biological sample preparation, high throughput biomolecular analyses exploiting high-performance chromatography, mass spectrometry, immunological techniques, nuclear magnetic resonance spectrometry, analytical chemistry, data normalization, statistical analyses, integration of diverse instrument-generated data sets, specialized bioinformatics methods to interpret data sets, and quality assurance and control. We seek to protect these methods as trade secrets and, in some cases, by filing patent applications.

We seek to protect the diagnostic tests that we have developed based on our biomarker discoveries primarily through patents. The patentability of test methods and products based on biomarkers is well-established in most countries. Because we use an empirical as well as a hypothesis-driven approach to biomarker discovery, we measure many different molecules in each biological specimen. Thus, we may be able to identify multiple biomarkers and biomarker combinations that are associated with a clinical outcome of interest. We believe that this may enhance our ability to obtain patents for diagnostic tests based on our discoveries. However, due to technological changes that may affect our proposed products or judicial interpretation of the scope of our patents, our proposed products might not, now or in the future, be adequately covered by our patents.

We have a co-exclusive license to practice and commercialize technology covered by two issued U.S. patents and their foreign counterparts that relate to our methods for discovering biomarkers. In addition, as of December 31, 2009, we have 19 pending patent applications filed either with the U.S. Patent and Trademark Office or under the Patent Cooperation Treaty, or PCT, and foreign counterparts of certain of these patent applications. Where we consider it to be strategic to our business, we file patent applications in other countries or regions including Europe, Canada, Australia and Japan, or we file international applications under the PCT reserving our right to file such applications in countries who are party to the treaty. Of our pending U.S. and PCT patent applications, six applications relate to methods for discovering biomarkers, 12 applications relate to diagnostic products that are related to our biomarker discoveries, and one application relates to therapeutic methods that are related to our biomarker discoveries. We intend, where appropriate, to file additional patent applications and to in-license additional technology covered by patents or patent applications relating to new methods, discoveries or products. A subset of the intellectual property that we own or license relates to our galectin-3 test for heart failure. This intellectual property includes U.S. Patent Application No. 10/575,745 exclusively licensed from ACS Biomarker B.V. and eight corresponding patent applications pending abroad. Any patent issuing from the U.S. patent application could expire as early as 2024. We own a U.S. and PCT application relating to a specific method and kit for detecting galectin-3. Any patent issuing from this U.S. application could expire as early as 2029. In addition, we own two U.S. provisional patent applications related to methods for clinical evaluation of subjects and therapies based on galectin-3 measurements.

In addition to our internal biomarker discovery and diagnostic product development efforts, for which we plan to seek to obtain exclusive ownership rights, we participate in a Cooperative Research and Development Agreement, or CRADA, with NHLBI and Boston University to conduct certain biomarker discovery studies in the area of metabolic syndrome and atherosclerotic cardiovascular disease using samples and data from the Framingham Heart Study, through which we expect to obtain certain rights to patentable subject matter. We also expect to obtain certain ownership rights to intellectual property conceived in the conduct of the HRP Initiative, a study of atherothrombotic cardiovascular disease that we initiated, and from our research, development and commercialization collaboration with Humana, as well as from our other initiatives or collaborations that we may undertake.

We maintain a policy of requiring our employees and consultants to execute confidentiality and invention assignment agreements upon commencement of their relationships with us. These agreements are designed both to enable us to protect and maintain the confidentiality of our trade secret information by prohibiting unauthorized disclosure or use of our technology, and to secure title to technology developed by us or on our behalf so that it may be protected through patent filings or other means.

 

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Sales and Marketing

We intend to retain worldwide marketing rights to our products and we plan to be primarily responsible for generating demand, increasing market adoption, working with payors to make reimbursement and coverage determinations and ensuring that our biomarker-based tests realize their market potential. We plan to collaborate with our partners on the promotion of our tests, including the development of commercial plans by our partners, which will be governed by our partnership agreements. For promoting the utility of our tests to clinicians, laboratory decision makers, patients and other stakeholders, we intend to leverage the commercial capabilities of our partners, including diagnostic laboratory instrument manufacturers of automated assays for our tests and laboratory service providers. We intend to develop a limited sales force that will focus on promoting the utility of our tests with physicians, which will complement the sales activities by our partners. We have hired a senior executive to build our sales force and expect to have a limited specialty sales team in time for the U.S. launch of our galectin-3 test in 2010, pending FDA clearance. We have entered into an agreement with Kordia N.V. for the initial sales and distribution of our galectin-3 test in selected European countries.

Manufacturing

We intend to use established manufacturers for our products that have experience with manufacturing diagnostic products using similar assay technologies that are also subject to FDA clearance and oversight. In 2009, we entered into a development and manufacturing agreement with Corgenix Medical Corporation. Corgenix develops, manufacturers, distributes and markets in vitro diagnostic products based on ELISA technology using the microtiter format. Under this exclusive agreement, Corgenix will manufacture the BGM Galectin-3 test for distribution in the United States, Europe and elsewhere.

Competition

We believe that our technology platform and our ability to discover novel diagnostic tests addressing unmet medical needs represent a unique competitive advantage. However, the molecular diagnostics industry is highly competitive and subject to rapid change. Our competitors include a number of large, well-established diagnostic companies and laboratory service providers, as well as an increasing number of new companies entering the market. Many of these competitors have financial and other resources substantially greater than our own. In addition, many of our competitors have substantially greater experience than we do in developing and commercializing diagnostic products.

Established diagnostics companies, such as Abbott Diagnostics, Beckman Coulter, Roche Diagnostics, General Electric, Inverness Medical Innovations, Ortho Clinical Diagnostics, Mitsubishi, Philips and Siemens have expanded into the molecular diagnostics area to complement their legacy routine testing businesses. In addition, commercial laboratories with extensive service networks for diagnostic tests, such as Laboratory Corporation of America and Quest Diagnostics, have expanded their testing capabilities to include molecular diagnostics. Specialized laboratories, such as Genzyme Genetics and Myriad Genetic, also offer molecular diagnostic testing services.

Recent entrants to the field include companies that have developed new enabling technologies. We have identified a number of companies with competing technologies and approaches in molecular diagnostics. Companies that may compete with us in our current areas of focus, namely, cardiovascular disease, immune disorders and central nervous system disorders, include Athena Diagnostics, Celera Group, Dako, diaDexus, QIAGEN, Rules-Based Medicine, and XDx.

Regulatory

We intend to seek regulatory clearance, or if required, approval, for all of our diagnostic tests currently under development in the United States, European Union member states and other countries in which we believe that there are commercial opportunities the tests. The FDA recommends that sponsors such as us interact with the agency early and often in the development of these types of diagnostic products. We intend to follow this

 

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recommendation in an effort to reduce development risks and facilitate the regulatory process. In light of the importance of the U.S. market for our potential products, and because of the opportunity to seek and receive early FDA input on development programs, we will prioritize U.S. regulatory plans and submissions over other jurisdictions. In addition, we intend to identify opportunities to prepare and submit applications to European Union member states in compliance with EU-Directive 98/79/EC and other applicable standards. We plan to prioritize European Union member states based on market size, regulatory approvals and other considerations.

U.S. Regulations

Food and Drug Administration

In the United States, in vitro diagnostics are regulated by the FDA as medical devices. We plan to seek FDA clearance or approval for all of our diagnostic products currently under development. There are two regulatory pathways to receive authorization to market in vitro diagnostics, a 510(k) premarket notification and a premarket approval application, or PMA. The FDA makes a risk-based determination as to which pathway a particular in vitro diagnostic is eligible. In March 2009, we submitted a 510(k) premarket notification to the FDA in order to obtain the regulatory clearance to market this test in the United States. Upon review of our 510(k) application, the FDA determined that our device was not substantially equivalent to the legally marketed device to which we claim substantial equivalence and therefore denied clearance. The FDA indicated that additional clinical and other data was required in support of our submission, and we re-submitted a 510(k) application in December 2009 with additional data that we believe is responsive to the FDA’s comments.

The information that must be submitted to the FDA in order to obtain clearance or approval to market a new medical device varies depending on how the medical device is classified by the FDA. Medical devices are classified into one of three classes on the basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls, including labeling, premarket notification and adherence to FDA’s quality system regulation, which are device-specific good manufacturing practices. Class II devices are subject to general controls and special controls, including performance standards and postmarket surveillance. Class III devices are subject to most of the previously identified requirements as well as to premarket approval. Class I devices are exempt from premarket submissions to the FDA; most Class II devices require the submission of a 510(k) premarket notification to the FDA; and Class III devices require submission of a PMA. Most in vitro diagnostic kits are regulated as Class I or II devices and are either exempt from premarket notification or require a 510(k) submission.

510(k) Premarket Notification

A 510(k) notification requires the sponsor to demonstrate that a medical device is substantially equivalent to another marketed device, termed a “predicate device”, that is legally marketed in the United States and for which a PMA was not required. A device is substantially equivalent to a predicate device if it has the same intended use and technological characteristics as the predicate; or has the same intended use but different technological characteristics, where the information submitted to the FDA does not raise new questions of safety and effectiveness and demonstrates that the device is at least as safe and effective as the legally marketed device. Under current FDA policy, if a predicate device does not exist, the FDA may make a risk-based determination based on the complexity and clinical utility of the device that the device is eligible for de novo 510(k) review instead of a requiring a PMA. The de novo 510(k) review process is similar to clearance of the 510(k) premarket notification, despite the lack of a suitable predicate device.

The FDA’s performance goal review time for a 510(k) application is 90 days from the date of receipt, however, in practice, the review often takes longer. In addition, the FDA may require information regarding clinical data in order to make a decision regarding the claims of substantial equivalence. Clinical studies of in vitro diagnostic products are typically designed with the primary objective of obtaining analytical or clinical performance data. If the FDA believes that the device is not substantially equivalent to a predicate device, it will issue a “Not

 

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Substantially Equivalent” letter and designate the device as a Class III device, which will require the submission and approval of a PMA before the new device may be marketed. Under certain circumstances, the sponsor may petition the FDA to make a risk-based determination of the new device and reclassify the new device as a Class I or Class II device.

Premarket Approval

The PMA process is more complex, costly and time consuming than the 510(k) process. A PMA must be supported by more detailed and comprehensive scientific evidence, including clinical data, to demonstrate the safety and efficacy of the medical device for its intended purpose. If the device is determined to present a “significant risk,” the sponsor may not begin a clinical trial until it submits an investigational device exemption, or IDE, to the FDA and obtains approval from the FDA to begin the trial.

After the PMA is submitted, the FDA has 45 days to make a threshold determination that the PMA is sufficiently complete to permit a substantive review. If the PMA is complete, the FDA will file the PMA. The FDA is subject to a performance goal review time for a PMA is 180 days from the date of filing, although in practice this review time is longer. Questions from the FDA, requests for additional data and referrals to advisory committees may delay the process considerably. Indeed, the total process may take several years and there is no guarantee that the PMA will ever be approved. Even if approved, the FDA may limit indication for which the device may be marketed. The FDA may also request additional clinical data as a condition of approval or after the PMA is approved. Any changes to the medical device may require a supplemental PMA to be submitted and approved.

Laboratory Developed Tests

Although the FDA has consistently claimed that it has the regulatory authority to regulate laboratory-developed tests that are validated by the developing laboratory and has imposed labeling requirements for the results of tests utilizing analyte-specific reagents, it has generally exercised enforcement discretion and has not otherwise regulated most tests performed by laboratories that are certified under the Clinical Laboratory Improvement Act, or CLIA. In recent years, the FDA indicated that it was reviewing the regulatory requirements that will apply to laboratory-developed tests, and in September 2006, the FDA published a draft guidance document, which it revised in September 2007, or the Draft Guidance, that may be relevant to some of the tests we develop. The Draft Guidance describes the FDA’s position regarding potential regulation of in vitro diagnostic multivariate index assays, or IVDMIAs, and the revision provided additional examples of the types of tests that would be subject to the Draft Guidance. An IVDMIA is a test system that employs data, derived in part from one or more in vitro assays, and an algorithm that usually, but not necessarily, runs on software, to generate a result that diagnoses a disease or condition or is used in the cure, mitigation, treatment, or prevention of disease.

In February 2007, the FDA cleared a 510(k) submission for Agendia’s MammaPrint® breast cancer recurrence test as the first IVDMIA cleared since the first version of the Draft Guidance was published. This was a complex test, based on profiling of 70 genes to determine if the patient was likely to develop a metastatic form of the disease in the future. In August 2008 the FDA cleared AlloMap by XDx as an aid in the management of patients following cardiac transplantation, and in September 2009 the FDA cleared OVA1 by Vermillion as an aid in the management of a patient with possible ovarian cancer. With these clearances, a regulatory framework appears to be forming in line with the Draft Guidance. The clearance of these complex tests suggests that the 510(k) process is the likely route for most, if not all, of the diagnostic tests that we are currently developing, and we intend to seek clearance under Section 510(k) for each of our diagnostic tests. Nevertheless, the FDA may require us to submit PMAs for our pipeline product candidates. We intend to conduct early and ongoing dialog with the FDA on each of our pipeline product candidates in order to obtain clarity around the classification and requirements prior to the commencement of larger-scale studies.

CLIA

Laboratories that perform testing on human specimens for the purpose of providing information for diagnosis, prevention or treatment of disease or assessment of health are subject to CLIA. This law imposes quality

 

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standards for laboratory testing to ensure the accuracy, reliability and timeliness of patient test results. The FDA is responsible for the categorization of commercially marketed IVD tests under CLIA into one of three categories based upon the potential risk to public health in reporting erroneous results. The categories were devised on the basis of the complexity of the test, and includes waived tests, tests of moderate complexity, and tests of high complexity. Laboratories performing moderate- or high-complexity testing must meet the CLIA requirements for proficiency testing, patient test management, quality control, quality assurance and personnel.

In the event that we choose to set up a clinical laboratory to offer a testing service following FDA clearance of our tests, we will be required to hold certain federal, state and local licenses, certifications and permits to conduct our business. Any clinical laboratory with which we might contract or to which we might sell our diagnostic tests would also be subject to these same requirements. Under CLIA, we will be required to hold a certificate applicable to the type of work we perform and to comply with standards covering personnel, facilities administration, quality systems and proficiency testing. We believe that some of the tests that we are developing will be high-complexity tests. CLIA certified laboratories are typically subject to survey and inspection every two years to assess compliance with program standards.

We may also seek accreditation by the College of American Pathologists, or CAP, and licensed by some states. The CAP Laboratory Accreditation Program is an internationally recognized program that utilizes teams of practicing laboratory professionals as inspectors, and accreditation by CAP can often be used to meet CLIA and state certification requirements.

We currently do not intend to offer a testing service for any laboratory-developed tests, or LDTs, as defined under CLIA.

HIPAA and Other Privacy Laws

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, established for the first time comprehensive protection for the privacy and security of health information. The HIPAA standards apply to three types of organizations, or “Covered Entities”: health plans, healthcare clearing houses, and healthcare providers which conduct certain healthcare transactions electronically. Covered Entities and their Business Associates must have in place administrative, physical, and technical standards to guard against the misuse of individually identifiable health information. Additionally, some state laws impose privacy protections more stringent than HIPAA. Most of the institutions and physicians from which we obtain biological specimens that we use in our research and validation work are Covered Entities and must obtain proper authorization from their patients for the subsequent use of those samples and associated clinical information. We are not presently subject to HIPAA; however, we may become subject to the requirements of HIPAA in the future if we provide clinical laboratory testing services or enter into specific kinds of relationships with a Covered Entity or a Business Associate of a Covered Entity.

Our activities must also comply with other applicable privacy laws. For example, there are also international privacy laws that impose restrictions on the access, use, and disclosure of health information. All of these laws may impact our business. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability to obtain tissue samples and associated patient information could significantly impact our business and our future business plans.

European Regulations

In the European Union, IVD medical devices are regulated under EU-Directive 98/79/EC, or the IVD Directive, and corresponding national provisions. The IVD Directive requires that medical devices meet the essential requirements set out in an annex of the directive. These requirements include the safety and efficacy of the devices. According to the IVD Directive, the Member States presume compliance with these essential requirements in respect of devices which are in conformity with the relevant national standards transposing the

 

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harmonized standards of which the reference numbers have been published in the Official Journal of the European Communities. These harmonized standards include ISO 13485:2003, the quality standard for medical device manufacturers.

IVD medical devices, other than devices for performance evaluation, must bear the CE marking of conformity when they are placed on the market. The CE mark is a declaration by the manufacturer that the product meets all the appropriate provisions of the relevant legislation implementing the relevant European Directive. As a general rule, the manufacturer must follow the procedure of the EC Declaration of conformity to obtain this CE marking. In the fourth quarter of 2009 we obtained CE Mark for the BGM Galectin-3 test for use as an aid in the stratification of patients with heart failure.

Each European country must adopt its own laws, regulations and administrative provisions necessary to comply with the IVD Directive. Member States may not create any obstacle to the placing on the market or the putting into service within their territory of devices bearing the CE marking according to the conformity assessment procedures.

Development

Article 152 of the EC-Treaty requires a high level of human health protection to be ensured in the definition and implementation of all Community policies and activities. Community action, which complement national policies, must be directed towards improving public health, preventing human illness and diseases, and obviating sources of danger to human health. On the basis of article 152(4)(a) of the EC-Treaty, the European Legislator is required to contribute to the achievements of these objectives through adopting measures setting high standards of quality and safety of organs and substances of human origin, blood and blood derivatives. These measures, however, may not prevent any Member State, however, from maintaining or introducing more stringent protective measures.

The use of bodily material, which already has been taken from humans, is not regulated by the European Legislator through specific directives. However, in the European Union the protection of individuals with regard to the processing of personal data is regulated under EU-Directive 95/46/EC, or the PD Directive. If specimens, such as blood plasma and urine, taken from patients relate to an identified or identifiable natural person, the use of such specimens fall within the scope of the PD Directive.

Member States prohibit the processing of personal data concerning health, unless processing of the data is required for the purposes of preventive medicine, medical diagnosis, the provision of care or treatment or the management of healthcare services, and where those data are processed by a health professional subject under national law or rules established by national competent bodies to the obligation of professional secrecy or by another person also subject to an equivalent obligation of secrecy. Individual European countries are free to further restrict the collection and the use of such bodily material

Reimbursement

United States

In the United States, payments for diagnostic tests come from several sources, including third party payors such as insurance companies and health maintenance organizations; government health programs such as Medicare and Medicaid; and patients; and, in certain circumstances, hospitals or referring laboratories (who then bill health third-party payors for testing). If we offer our diagnostic tests as a service through our own CLIA certified laboratory, we would be responsible for billing and collection of fees for the tests. Otherwise, billing and collection would be the responsibility of the companies that purchase or license our products.

Code Assignment. In the United States, a third-party payor’s decisions regarding coverage and payment are driven, in large part, by the specific Current Procedural Terminology, or CPT, code used to identify a test. The American Medical Association, or AMA, publishes the CPT Code , which is a listing of descriptive terms and identifying codes for reporting medical services and procedures. The purpose of the CPT Code is to provide a

 

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uniform language that accurately describes medical, surgical, and diagnostic services and therefore to ensure reliable nationwide communication among healthcare providers, patients, and third-party payors.

A manufacturer of in vitro diagnostic kits or a provider of laboratory services may request establishment of a Category I CPT code for a new product. Assignment of a specific CPT code ensures routine processing and payment for a diagnostic test by both private and government third-party payors.

The AMA has specific procedures for establishing a new CPT code and, if appropriate, for modifying existing nomenclature to incorporate a new test into an existing code. If the AMA concludes that a new code or modification of nomenclature is unnecessary, the AMA will inform the requestor how to use one or more existing codes to report the test.

While the AMA’s decision is pending, billing and collection may be sought under an existing, non-specific CPT code. A manufacturer or provider may decide not to request assignment of a CPT code and instead use an existing, non-specific code for reimbursement purposes. However, use of such codes may result in more frequent denials and/or requests for supporting clinical documentation from the third-party payor and in lower reimbursement rates, which may vary based on geographical location.

Coverage Decisions. When deciding whether to cover a particular diagnostic test, private and government third-party payors generally consider whether the test is a covered benefit and, if so, whether it is reasonable and necessary for the diagnosis or treatment of illness and injury. Most third-party payors do not cover experimental services. Coverage determinations often are influenced by current standards of practice and clinical data, particular at the local level. The Centers for Medicare & Medicaid Services, or CMS, which is the government agency responsible for overseeing the Medicare program, has the authority to make coverage determinations on a national basis, but most Medicare coverage decisions are made at the local level by contractors that administer the Medicare program in specified geographic areas. Private and government third-party payors have separate processes for making coverage determinations, and private third-party payors may or may not follow Medicare’s coverage decisions. If a third-party payor has a coverage determination in place for a particular diagnostic test, billing for that test must comply with the established policy. Otherwise, the third-party payor makes reimbursement decisions on a case-by-case basis.

Payment. Payment for covered diagnostic tests is determined based on various methodologies, including prospective payment systems and fee schedules. In addition, private third-party payors may negotiate contractual rates with participating providers or set rates as a percentage of the billed charge. Diagnostic tests furnished to Medicare inpatients generally are included in the bundled payment made to the hospital under Medicare’s Inpatient Prospective Payment System. Payment for diagnostic tests furnished to Medicare beneficiaries in most other circumstances is made based on the Clinical Laboratory Fee Schedule, under which a payment amount is assigned to each covered CPT code. The law technically requires fee schedule amounts to be adjusted annually by the percentage increase in the consumer price index, or CPI, for the prior year, but Congress has frozen payment rates in certain years. For the 2010 calendar year the Clinical Laboratory Fee Schedule, or CLFS, was reduced across all listed tests by 1.9%. Currently, the ceiling for established tests is set at 74% of the median of all contractor fee schedule amounts for a particular test and 100% of the median for diagnostic tests for which no limitation amount was established prior to 2001. Medicaid programs generally pay for diagnostic tests based on a fee schedule, but reimbursement varies by state.

European Union

In the European Union the reimbursement mechanisms used by private and public health insurers vary by country. For the public systems reimbursement is determined by guidelines established by the legislator or responsible national authority. As elsewhere, inclusion in reimbursement catalogues focuses on the medical usefulness, need, quality and economic benefits to patients and the healthcare system. Acceptance for reimbursement comes with cost, use and often volume restrictions, which again can vary by country.

 

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Legal Proceedings

We are not currently subject to any material legal proceedings.

Facilities

We lease approximately 22,000 square feet of office and laboratory space at 610 Lincoln Street North, Waltham, Massachusetts 02451. The term of our lease expires in March 2013. We believe that our facilities are adequate to meet our current needs, although if additional space is needed in the future, we believe that such space will be available on commercially reasonable terms.

Employees

As of December 31, 2009, we employed 51 full-time employees, of whom 25 had advanced degrees, 32 were engaged in research and development, 10 performed sales and marketing functions and 9 performed general and administrative functions. We plan to continue to expand our research and development and commercialization activities. To support this growth, we will need to expand managerial, research and development, operations, finance and other functions. None of our employees is represented by a labor union, and we consider our relationships with our employees to be good.

 

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Management

Executive Officers and Directors

Our executive officers and directors and their respective ages and positions as of January 25, 2010 are as follows:

 

Name    Age    Position

Executive Officers

     

Pieter Muntendam, M.D.

   51    President, Chief Executive Officer and Director

Michael W. Rogers

   49    Executive Vice President, Chief Financial Officer and Treasurer

C. Douglas White

   48    Executive Vice President and General Manager, Diagnostics

Neal F. Gordon, Ph.D.

   48    Senior Vice President, Biomarker Discovery

Non-Employee Directors

     

Noubar Afeyan, Ph.D.(2).

   47    Chairman of the Board

Harrison M. Bains(1)(3)

   66    Director

Stéphane Bancel

   37    Director

Timothy Harris, Ph.D.(1)(2)

   59    Director

Stelios Papadopoulos, Ph.D.(1)(3)

   61    Vice Chairman of the Board

Pieter van der Meer, M.Sc.(2)(3)

   39    Director

 

(1) Member of our Audit Committee. Mr. Bains is the chairman of the committee.
(2) Member of our Compensation Committee. Dr. Harris is the chairman of the committee.
(3) Member of our Nominating and Governance Committee. Dr. Papadopoulos is the chairman of the committee.

Pieter Muntendam, M.D., joined us as President in November 2004 and was appointed as Chief Executive Officer in December 2005. He also has served as a member of our board of directors since November 2004. He is a biopharmaceutical and healthcare executive with over 20 years of business experience ranging from early stage enterprises to multinational corporations. Dr. Muntendam joined us from NetNumina Solutions, Inc., a professional services company, where he served as Director of the Biopharma Healthcare Practice from April 2003 to October 2004. Prior to joining NetNumina, he co-founded Vitivity Inc., a subsidiary of Millennium Pharmaceuticals, Inc., and served as Vice President, Medicine from July 2001 to April 2003. He founded the health management firm ProMedex Inc. in 1996, where he served as President and Chief Executive Officer and chairman of the board until ProMedex was acquired by Landacorp, Inc. in 2001. Prior to that, he served as Vice President of Care Management at Glaxo Wellcome (now GlaxoSmithKline plc), where he was responsible for the development and implementation of its entry strategy within the field of care and disease management. Dr. Muntendam began his career with Organon International Inc. in December of 1982, after which he was appointed Vice President of Research and Development, International at Johnson & Johnson, and appointed as a member of the boards of directors for two Johnson & Johnson operating companies. Dr. Muntendam received his M.D. from Leiden University in the Netherlands.

Michael W. Rogers joined us in June 2009 as our Executive Vice President, Chief Financial Officer and Treasurer. Prior to joining us and since 1999, Mr. Rogers held the position of Executive Vice President, Chief Financial Officer and Treasurer at Indevus Pharmaceuticals, Inc., which was acquired by Endo Pharmaceuticals in 2009. In 1998, Mr. Rogers was Executive Vice President and Chief Financial and Corporate Development Officer at Advanced Health Corporation, a publicly-traded healthcare information technology company. From 1995 to 1997, he was Vice President, Chief Financial Officer and Treasurer of AutoImmune, Inc., a publicly-traded biopharmaceutical company. From 1994 to 1995, Mr. Rogers was Vice President, Investment Banking at Lehman Brothers, Inc. From 1990 to 1994, he was associated with PaineWebber, Inc., serving most recently as Vice President, Investment Banking Division. Mr. Rogers received an M.B.A. from the Darden School at the University of Virginia and a B.A. from Union College.

C. Douglas White joined us in February 2009 as our Executive Vice President and General Manager, Diagnostics. Mr. White has 24 years of experience in the in vitro diagnostics market serving in multiple senior

 

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executive roles. His roles have included the leadership and development of markets and commercial organizations at Digene, Bayer and Chiron Diagnostics. Prior to joining us and since August 2007, Mr. White was Senior Vice President of Sales and Marketing, Americas and Chair of the Americas Management Counsel at QIAGEN. In his role at QIAGEN, he was part of the executive leadership team responsible for the integration of Digene Corporation into QIAGEN. During his tenure at Digene from March 2003 through July 2007, Mr. White served as the Senior Vice President of Commercial Operations, where he was responsible for all commercial activities in the Americas and Asia Pacific in addition to the global product management organization. Prior to joining Digene, from 1999 to 2002, Mr. White held several executive positions in the diagnostic industry, including Vice President of U.S. Sales and Marketing as well as Vice President of Global Product Management, Nucleic Acid Diagnostics at Bayer Diagnostics. He was Vice President, Marketing for Chiron Diagnostics and served in several different management roles in sales, market development, strategic and tactical marketing through his career at Chiron from 1995 to 1998 and Abbott Diagnostics from 1985 to 1994. Mr. White has a B.A. in Political Science from Washington College.

Neal F. Gordon, Ph.D., joined us in January 2009 as Senior Vice President, Biomarker Discovery. Dr. Gordon has 20 years of experience in the biotechnology industry serving both as a senior executive and in product development. From July 2004 to December 2008, Dr. Gordon was President of Epitome Biosystems, where he spearheaded the development and subsequent market introduction of a line of multiplexed protein immunoassay products. From 1998 to 2004, Dr. Gordon was at Antigenics Inc., first as Vice President of Process Development and then as Senior Vice President of Manufacturing Operations. Dr. Gordon joined Antigenics in 1998, following 10 years at PerSeptive Biosystems, which is now part of Life Technologies, Inc. As part of the founding technology team, he led the development, application and market launch of technologies for the purification and analysis of proteins, including the BIOCAD perfusion chromatography workstation, and prior to that he was a product development engineer at Proctor & Gamble. Dr. Gordon obtained a bachelors degree in chemical engineering from McGill University, and a Ph.D. in biochemical engineering from Massachusetts Institute of Technology.

Noubar Afeyan, Ph.D., is one of our co-founders and has served on our board of directors since our inception in 2000. He has served as Managing Partner and Chief Executive Officer of Flagship Ventures, an early stage venture capital firm, since he co-founded the firm in 2000. Prior to founding Flagship Ventures in 2000, Dr. Afeyan participated in co-founding and helping launch the following ventures: PerSeptive Biosystems, ChemGenics Pharmaceuticals, EXACT Sciences, Antigenics, Color Kinetics and Celera Genomics. During the past five years, Dr. Afeyan has served on the board of directors of Antigenics and Color Kinetics and currently serves as a director of Helicos Biosciences. Additionally, he currently serves as a director of the following private companies: Affinnova, Inc., BIND Biosciences, Inc., Eleven Biotherapeutics, Ensemble Discovery Corp., Joule Biotechnologies, Inc. and LS9, Inc. He earned his Ph.D. in biochemical engineering from the Massachusetts Institute of Technology (MIT) following a B.S. in chemical engineering from McGill University. Dr. Afeyan has authored numerous scientific publications and patents and is currently a Senior Lecturer at MIT in both the Sloan School of Management and the Biological Engineering department.

Harrison M. Bains has served on our board of directors since June 2007. Mr. Bains served as Vice President and Treasurer of Bristol Myers Squibb Company from 1988 until his retirement in 2004. Mr. Bains’ career also includes serving as Senior Vice President of the Primary Industries Group at Chase Manhattan Bank in 1987 and 1988 and 11 years with RJR Nabisco and two of its predecessor companies as Senior Vice President and Treasurer. He currently serves as the chair of the board of directors and the chair of the audit committee of MGI Funds, Inc. He is a member of the boards of trustees of the University of Redlands, the Greater Newark Conservancy, the Park Avenue Armory, the Civil War Preservation Trust and Summer Search. Mr. Bains earned an M.B.A. from the University of California, Berkeley and a B.A. in economics from the University of Redlands. He also completed the Advanced Management Program at Harvard Business School.

Stéphane Bancel has served on our board of directors since January 2010. Mr. Bancel has served as Chief Executive Officer of bioMérieux, a leader in the field of in vitro diagnostics for clinical and industrial applications since January 2007, and prior to that, served as Vice President of Strategy from July 2006 to

 

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December 2006. From 2000 to 2006, Mr. Bancel worked for Eli Lilly Laboratories in the United States, Great Britain and Belgium, where he successively held the positions of Managing Director, Executive Director for Global Manufacturing Strategy, Global Supply Chain and U.S. Distribution, and Supply Chain Manager. From 1995 to 1998, Mr. Bancel worked with bioMérieux in Japan, where he managed the industrial microbiology business for the Asia-Pacific region. During the past five years, Mr. Bancel has served on the board of directors of Targanta Therapeutics Corp. and he currently serves on the board of directors of bioMérieux and Knome. Mr. Bancel is a graduate of the Ecole Centrale Paris Engineering School. He holds an M.S. in biochemical engineering from the University of Minnesota and an M.B.A. from Harvard Business School.

Timothy Harris, Ph.D., has served on our board of directors since April 2007. Dr. Harris has served as the Director of the Advanced Technology Program at SAIC Frederick since 2007 and Chief Technology Officer for SAIC Frederick since 2008. Prior to holding these positions, he served as the President and Chief Executive Officer of Novasite Pharmaceuticals Inc. from January 2005 to September 2006. Prior to that, he served as Chief Executive Officer for Structural GenomiX, Inc. (now part of Eli Lilly), a drug discovery and development company focused on innovative cancer therapeutics from 2003 to 2004 and as its President and Chief Executive Officer from 1999 to 2003. Dr. Harris started his career in biotechnology in 1981 as a group leader in Molecular Biology at Celltech Group (now UBC Pharma) and from 1989 to 1993 was Director of Biotechnology at Glaxo Group Research in the U.K. From 1993 until 1999, Dr. Harris was Chief Scientific Officer and Vice President of Research and Development at Sequana Therapeutics Inc. in San Diego, which became Axys Pharmaceuticals, Inc. in 1998 and was subsequently acquired by Celera Genomics. During the past five years, Dr. Harris has served on the board of directors of Dendreon Corp. and he currently serves on the boards of directors of Novation Pharmaceuticals, Inc. and Origen Therapeutics, Inc. and is Chairman of the Scientific Advisory Board of Bionomics Inc. in Australia. Dr. Harris received his Ph.D. in molecular virology from the University of Birmingham, U.K.

Stelios Papadopoulos, Ph.D., has served on our board of directors since 2003 and as Vice Chairman of our board of directors since April 2007. Since 2000, he has served as Chairman of Fondation Sante, a private charitable foundation whose mission is to improve the health and education of those in need, whether countries, regions or individuals. Dr. Papadopoulos served as Vice Chairman of Cowen and Company, LLC from 2003 until 2006 and as Managing Director from 2000 until 2003. While at Cowen and Company, LLC, he worked as an investment banker focused on the biotech and pharmaceutical sectors. Prior to joining Cowen and Company, LLC, he worked as an investment banker at PaineWebber, Incorporated, from 1987 to 2000, where he was Chairman of PaineWebber Development Corp., a PaineWebber subsidiary focusing on biotechnology from 1996 to 2000. Dr. Papadopoulos is a co-founder and Chairman of the Board of Exelixis, Inc., and he is a co-founder and member of the boards of directors of Anadys Pharmaceuticals, Inc. and Cellzome, Inc. Dr. Papadopoulos currently serves on the board of directors of Biogen Idec, Inc., Regulus Therapeutics, Inc. and Joule Biotechnologies, Inc. and during the past five years, he also served on the board of directors of GenVec, Inc. and SGX Pharmaceuticals, Inc. He is also a member of the board of visitors of Duke University School of Medicine and the board of directors of the National Marrow Donor Program. Dr. Papadopoulos holds a Ph.D. in biophysics and an M.B.A. in finance, both from New York University.

Pieter van der Meer, M.Sc., has served on our board of directors since February 2002. Since January 2005, he has served as a Managing Director of Gilde Healthcare Partners, a venture capital firm, where he focuses on start-up and early stage investments in healthcare companies with novel technologies, platforms and drug discovery approaches. Mr. van der Meer also represents Gilde on the boards of directors of certain of its portfolio companies, including Agendia B.V. and Acacia Pharma Ltd. He is also a member of the project screening committee at Amsterdam & Leiden Universities. Mr. van der Meer joined Gilde in 1998 after working several years with KPMG Management Consulting, where he was closely involved with due diligence and strategic projects in venture capital and the pharmaceutical sector across Europe. Mr. van der Meer earned his M.Sc. in chemistry at Leiden University where he specialized in bio-organic synthesis and molecular modeling.

 

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Board Composition

Our restated certificate of incorporation and restated bylaws, each of which will become effective completion of this offering, provide that the authorized number of directors may be changed only by resolution of the board of directors. We currently have seven directors. In accordance with our restated certificate of incorporation and restated bylaws, our board of directors will be divided into three classes with staggered three-year terms. At each annual meeting of stockholders commencing with the meeting in 2011, the successors to the directors whose terms then expire will be elected to serve until the third annual meeting following the election. At the closing of this offering, our directors will be divided among the three classes as follows:

 

  §  

the Class I directors will be Dr. Harris and Dr. Muntendam and their terms will expire at the annual meeting of stockholders to be held in 2011;

 

  §  

the Class II directors will be Mr. Bains and Mr. Bancel and their terms will expire at the annual meeting of stockholders to be held in 2012; and

 

  §  

the Class III directors will be Dr. Afeyan, Dr. Papadopoulos and Mr. van der Meer and their terms will expire at the annual meeting of stockholders to be held in 2013.

Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that each class will consist of approximately one-third of the directors.

Director Independence

Our board of directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, our board has determined that the following directors are “independent directors” as defined by the applicable rules and regulations of The NASDAQ Stock Market, or NASDAQ: Mr. Bains, Mr. Bancel, Dr. Harris, Dr. Papadopoulos and Mr. van der Meer.

Committees of the Board of Directors

Our board of directors has an audit committee, a compensation committee and a nominating and governance committee. The composition and function of each of these committees are described below.

Audit Committee. Our audit committee is comprised of Mr. Bains (chairman), Dr. Harris and Dr. Papadopoulos. Our board of directors has determined that Mr. Bains is an audit committee financial expert, as defined by the rules of the Securities and Exchange Commission. Our audit committee is authorized to:

 

  §  

approve and retain the independent auditors to conduct the annual audit of our financial statements;

 

  §  

review the proposed scope and results of the audit;

 

  §  

review and pre-approve audit and non-audit fees and services;

 

  §  

review accounting and financial controls with the independent auditors and our financial and accounting staff;

 

  §  

review and approve transactions between us and our directors, officers and affiliates;

 

  §  

recognize and prevent prohibited non-audit services; and

 

  §  

establish procedures for complaints received by us regarding accounting matters; oversee internal audit functions, if any.

We believe that the composition of our audit committee meets the independence requirements of the applicable rules of the Securities and Exchange Commission and NASDAQ on the date of this prospectus.

 

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Compensation Committee. Our compensation committee is currently comprised of Dr. Harris (chairman), Dr. Afeyan and Mr. van der Meer. Prior to the completion of the offering, we expect that Dr. Afeyan will step down from the compensation committee. Upon completion of the offering, all members of the compensation committee will qualify as independent under the current definition promulgated by NASDAQ. Our compensation committee is authorized to:

 

  §  

review and recommend the compensation arrangements for management;

 

  §  

establish and review general compensation policies with the objective to attract and retain superior talent, to reward individual performance and to achieve our financial goals;

 

  §  

administer our stock incentive and purchase plans; and

 

  §  

oversee the evaluation of the board of directors and management.

Nominating and Governance Committee. Prior to the completion of the offering, we will form a nominating and governance committee, which we anticipate will be comprised of Dr. Papadopoulos (chairman), Mr. van der Meer and Mr. Bains. Upon completion of the offering, all members of the nominating and governance committee will qualify as independent directors under the current definition promulgated by NASDAQ. Our nominating and governance committee will be authorized to:

 

  §  

identify and nominate candidates for election to the board of directors; and

 

  §  

develop and recommend to the board of directors a set of corporate governance principles applicable to our company.

Compensation Committee Interlocks and Insider Participation

No member of our compensation committee has at any time been an employee of ours. None of our executive officers serves as a member of our board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Code of Business Conduct and Ethics

Prior to the completion of the offering, we will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.bg-medicine.com. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

Limitation of Directors’ and Officers’ Liability and Indemnification

The Delaware General Corporation Law authorizes corporations to limit or eliminate, subject to specified conditions, the personal liability of directors to corporations and their stockholders for monetary damages for breach of their fiduciary duties. Our existing certificate of incorporation and the restated certificate of incorporation to be effective upon the completion of this offering limits the liability of our directors to the fullest extent permitted by Delaware law.

We have obtained director and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us. Our restated certificate of incorporation and restated bylaws to be effective upon the completion of this offering also provide that we will indemnify and advance expenses to any of our directors and officers who, by reason of the fact that he or she is one of our officers or directors, is involved in a legal proceeding of any nature. We will repay certain expenses incurred by a director or officer in connection with any civil, criminal, administrative or investigative action or proceeding, including actions by us or in our name. Such indemnifiable expenses include, to the maximum extent permitted by law, attorney’s fees, judgments, fines, settlement amounts and other expenses reasonably incurred in connection with legal proceedings. A director or officer will not receive indemnification if he or she is found not to have acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interest.

 

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We have entered into agreements to indemnify our directors and officers. These agreements provide that we will, among other things, indemnify and advance expenses to our directors and officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us arising out of such person’s services as our director or officer, or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers.

Such limitation of liability and indemnification does not affect the availability of equitable remedies. In addition, we have been advised that in the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable.

There is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.

 

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Compensation

Compensation Discussion and Analysis

The primary objectives of the compensation committee of our board of directors with respect to executive compensation are to attract and retain the best possible executive talent, to motivate our executive officers to enhance our growth and profitability and increase stockholder value and to reward superior performance and contributions to the achievement of corporate objectives. The focus is to tie short- and long-term cash and equity incentives to the achievement of measurable corporate and individual performance goals and to align executives’ incentives with stockholder value creation. To achieve these objectives, the compensation committee has developed and maintains a compensation plan that ties a substantial portion of our executives’ overall compensation to our research, clinical, regulatory and financial and operational performance. Because we believe that the performance of every employee is important to our success, we are mindful of the effect our executive compensation and incentive program has on all of our employees.

Determining and Setting Executive Compensation

The compensation committee of our board of directors, pursuant to its charter, has the responsibility of formulating, evaluating and approving the compensation of our directors and named executive officers, and assisting the full board of directors in establishing and administering appropriate incentive compensation and equity-based plans. The compensation committee, with the input of management, develops our compensation plans by utilizing publicly available compensation data and subscription compensation survey data for national and regional companies in the biotechnology industry. Specifically, we use survey data obtained from the Radford Global Life Sciences Executive Pre-IPO Report, or the Radford Report, prepared by AON Consulting, Inc., to benchmark base salaries. We believe that these data provide us with appropriate compensation benchmarks because these companies are in our industry and have similar organizational structures and stages of development, and accordingly, tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the compensation data we have collected from the Radford Report, as well as various subsets of these data, in particular, the data for companies with an outside (non-employee) investment level of over $80.0 million.

In addition, our compensation committee periodically engages third-party compensation consultants to analyze our existing compensation policies and recommend changes to those policies based on current market data and compensation trends in our industry. The compensation committee did not engage a compensation consultant in 2009. Using the Radford Report and any information provided by compensation consultants, the compensation committee evaluates the competitive nature of our various forms of compensation, including salary and benefits as well as equity-based compensation, relative to other biotechnology and pharmaceutical companies.

The compensation committee has approved a pay-for-performance compensation philosophy, which is intended to bring base salaries and total executive compensation in line with approximately the 50th percentile of the companies in our industry of similar size to us represented in the compensation data we review.

We have worked within the framework of this pay-for-performance philosophy to determine each component of an executive’s initial compensation package based on numerous factors, including:

 

  §  

the individual’s particular background and circumstances, including training and prior relevant work experience;

 

  §  

the individual’s role with us and the compensation paid to similar persons in the companies represented in the compensation data that we review;

 

  §  

the demand for people with the individual’s specific expertise and experience at the time of hire;

 

  §  

performance goals and other expectations for the position;

 

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  §  

comparison to other executives within our company having similar levels of expertise and experience; and

 

  §  

uniqueness of industry skills.

The terms of the compensation for our President and Chief Executive Officer, Dr. Pieter Muntendam, and our other named executive officers are derived from our employment arrangements with them and from annual performance reviews conducted by the compensation committee in the case of our President and Chief Executive Officer, and by our President and Chief Executive Officer and the compensation committee in the case of our other named executive officers. The employment arrangements provide, among other things, the named executive officer’s initial annual base salary, annual bonus target and initial stock option grant. Following the execution of these employment arrangements, the compensation paid to each executive is subject to adjustment based on our annual performance evaluation process. Annual base salary increases and annual bonus awards, if any, for our President and Chief Executive Officer are determined by the compensation committee. Our President and Chief Executive Officer recommends annual base salary increases and the amount of annual bonus awards, if any, for the other named executive officers, which are reviewed and approved by the compensation committee.

Our annual performance evaluation process is described below. The details of our employment arrangements with our named executive officers are described in the section titled “Compensation — Employment Arrangements with Our Named Executive Officers.”

Compensation Components

The compensation program for our named executive officers consists principally of base salary, annual cash incentive compensation, long-term compensation in the form of stock options and severance and change of control benefits.

Base Salary

Base salaries for our named executive officers are established based on the scope of their responsibilities and their prior relevant background, training and experience, taking into account competitive market compensation paid by the companies represented in the compensation data we review for similar positions and the overall market demand for similar executives at the time of hire. We believe that executive base salaries should generally target the 50th percentile of the range of salaries for executives in similar positions and with similar responsibilities in the biotechnology companies of similar size to us represented in the compensation data we review. A named executive officer’s base salary is also evaluated together with other components of the executive’s compensation to ensure that the executive’s total compensation is in line with our overall compensation philosophy.

Base salaries are reviewed annually as part of our performance management evaluation process and may be increased for merit reasons, based on the named executive officer’s success in meeting or exceeding individual performance goals and an assessment of whether corporate goals were achieved. We also assess whether there are any significant differences in how a person is compensated compared to industry benchmarks by utilizing data from the Radford Report to benchmark the biotechnology industry. If through this assessment we determine that an employee’s compensation is below a certain benchmark level, we may recommend a market adjustment. Additionally, we review base salaries and make adjustments as warranted for changes in the scope of a named executive officer’s role or responsibilities and any internal inequities we identify.

Annual Bonus

The compensation committee designs the annual incentive component of our compensation program. We provide this opportunity as a way to attract and retain highly skilled and experienced executives and to motivate them to achieve annual corporate and individual goals. Our practice has been to provide all employees with the

 

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opportunity to earn an annual bonus up to a certain percentage of their annual base salaries, which may be composed of cash, stock options or a combination of cash and stock options. A significant element of the cash compensation of our named executive officers is an annual performance-based bonus. An executive’s target bonus is generally set as a percentage of base salary to reward strong performance and retain employees in a competitive labor market. As described in more detail above under “— Establishment of Company and Individual Goals and Annual Performance Evaluations,” bonuses are based on the achievement of corporate goals, including research, development, financial and operational milestones, as well as the achievement of individual goals.

Our named executive officers have bonus targets ranging from 25% to 35% of their base salaries, with the exception of our President and Chief Executive Officer who has a target bonus percentage of 50% of his base salary. The compensation committee has set the target bonus percentage for our President and Chief Executive Officer at a higher level than those of our other named executive officers in order to bring the overall compensation paid to our President and Chief Executive Officer in line with the 50th percentile of the companies in our industry of similar size to us represented in the Radford Report. In determining bonus awards for each of our named executive officers, the compensation committee weighs the achievement of company goals and the achievement of individual goals. The amount of a named executive officer’s bonus compensation typically increases in relation to such named executive officer’s responsibilities and ability to meet individual goals and our achievement of the corporate goals. The compensation committee believes that making a significant portion of a named executive officer’s bonus contingent on corporate performance more closely aligns the named executive officer’s interests with those of our stockholders.

The target bonus percentages are based on competitive practices for each comparable position in the survey data reviewed. This practice is designed to enable us to attract senior level employees and add an additional compensation opportunity in the form of variable pay. As part of the annual review process, performance of each employee is evaluated against the goals that were established at the beginning of the year. A determination is made as to the percentage of the maximum target bonus to be awarded. Bonus awards for these employees are determined by the compensation committee based on overall corporate performance together with a subjective assessment by their manager of each employee’s achievement of the previously established performance goals which relate to the employee’s area of responsibility.

Long-Term Incentives

We believe that long-term performance will be enhanced through stock and equity awards that reward our executives for maximizing stockholder value over time and that align the interests of our executives and management with those of our stockholders. The compensation committee believes that the use of stock and equity awards offers the best approach to achieving our compensation goals because equity ownership ties a significant portion of an executive’s compensation to the performance of our company’s stock. We have historically elected to use stock options as the primary long-term equity incentive vehicle.

Stock Options. Stock options are awarded based on various factors, including the responsibilities of the individual named executive officer, his or her past performance, anticipated future contributions, prior option grants (including the vesting schedule of such prior grants) and the executive’s total cash compensation. We have used and expect to continue to use stock options as a long-term incentive vehicle because we believe that:

 

  §  

stock options and the vesting period of stock options attract and retain executives;

 

  §  

stock options are inherently performance-based because stock options enhance the executives’ incentive to increase our stock price and maximize stockholder value; and

 

  §  

stock options help to provide a balance to the overall executive compensation program as base salary and our annual performance bonus program focus on short-term compensation, while stock options reward executives for increases in stockholder value over the longer term, as we generally grant stock options vesting over a four-year period.

 

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For a description of the terms and conditions of our stock option plan, see “Compensation — Equity Incentive Plans.”

Generally, the compensation committee awards stock options to our named executive officers and other employees on an annual basis. Stock options typically vest over four years and have an exercise price equal to the fair market value of our common stock on the date of grant, as determined by our board of directors.

Initial Stock Option Awards. We typically make an initial award of stock options to new executive officers in connection with the commencement of their employment. These grants generally have an exercise price equal to the fair market value of our common stock on the grant date and a vesting schedule of 25% on the first anniversary of the date of hire and the remainder at 6.25% per quarter thereafter. The initial stock option awards are intended to provide the executive with incentive to build value in the organization over an extended period of time and to maintain competitive levels of total compensation. The size of the initial stock option award is determined based on numerous factors, including the executive’s skills and experience, the executive’s responsibilities with us, internal equity and an analysis of the practices of national and regional companies in the biotechnology industry similar in size to us, as set forth above.

Stock Option Grants as Component of Annual Bonus. We have also used stock option awards as a component of our annual bonus program. The compensation committee believes that stock options provide management with a strong link to long-term corporate performance and the creation of stockholder value. Our bonus awards earned in 2008 and 2009 were comprised of a combination of cash and stock options.

Other Compensation

We maintain benefits that are provided to all employees, including medical, dental and life insurance coverage and a 401(k) plan. In addition, we may assist with certain expenses associated with an executive joining our company. We believe that these forms of compensation create additional incentives for an executive to join our company in a position where there is high market demand.

Termination-Based Change of Control Compensation

Upon termination of employment under certain circumstances, our named executive officers are entitled to receive varying types of compensation. Elements of this compensation may include payments based upon a number of months of base salary, acceleration of vesting of equity, and continued health insurance coverage and other similar benefits. We believe that our termination-based compensation and acceleration of vesting of equity awards, including the severance package for our President and Chief Executive Officer, are comparable to those offered to executives of other similar companies based upon the market information we have reviewed. We also have granted severance and acceleration of vesting of equity benefits to our executives in the event of a change of control if the executive is terminated within a certain period of time of the change of control. Although, a limited amount of stock options held by our named executive officers accelerates solely upon a change of control, we believe this “double trigger” requirement maximizes stockholder value because it prevents an unintended windfall to management in the event of a friendly or non-hostile change of control. Under this structure, unvested equity awards would continue to incentivize our executives to remain with us after a change of control, and therefore, the “double trigger” approach is more appropriate than a “single trigger” acceleration mechanism contingent only upon a change of control. The specifics of each named executive officer’s arrangements are described in further detail below under “Compensation — Potential Payments Upon Termination or Change of Control.”

Relationship of Elements of Compensation

Our compensation structure is primarily comprised of base salary, annual performance bonus and stock options. In setting executive compensation, the compensation committee considers the aggregate compensation payable to

 

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a named executive officer and the form of the compensation. The compensation committee seeks to achieve an appropriate balance between immediate cash rewards and long-term financial incentives for the achievement of both annual and long-term financial and non-financial objectives.

The compensation committee manages the expected impact of salary increases and performance bonuses by requiring that the size of any salary increases and bonuses be tied to the attainment of corporate and individual goals. For example, the size of each employee’s bonus is determined not only by individual performance, but also by whether we have met our corporate goals.

The compensation committee views the award of stock options as a primary long-term retention benefit. The compensation committee has made the award of stock options a significant component of total compensation and also ties the earning of these awards to long-term vesting schedules, generally four years. If an employee leaves our employ before the completion of the vesting period, then that employee would not receive any benefit from the non-vested portion of his award. We believe that this feature makes it more attractive to remain with us and these arrangements do not require substantial cash payments by us.

The compensation committee reviews from time to time the mix of the compensation elements for named executive officers against comparable companies in our industry. The size and mix of each element in a compensation package is based on the impact of the position on the company, market practice and overall corporate and individual performance relative to stated corporate goals. The level of incentive compensation typically increases in relation to a named executive officer’s responsibilities and ability to meet individual and corporate goals. The compensation committee believes that making a significant portion of a named executive officer’s compensation contingent on corporate performance more closely aligns the named executive officer’s interests with those of our stockholders.

The compensation committee may decide, as appropriate, to modify the mix of base salary, annual and long-term incentives to best fit a named executive officer’s specific circumstances or if required by competitive market conditions for attracting and retaining skilled personnel. For example, the compensation committee may make the decision to award more cash and not award stock options. The compensation committee may also decide to award additional stock options to a named executive officer if the total number of stock option grants received during an individual’s employment with us does not adequately reflect the executive’s current position. We believe that this discretion and flexibility allows the compensation committee to better achieve our compensation objectives.

Establishment of Company and Individual Goals and Annual Performance Evaluations

Company Goals

Our compensation committee establishes our company goals at the beginning of each year and these goals are used to assess corporate performance for the year. The key strategic, corporate, financial and operational goals that may be identified by our compensation committee include:

 

  §  

clinical diagnostic development;

 

  §  

targeted biomarker development;

 

  §  

commercialization of our diagnostic product candidates; and

 

  §  

implementation of appropriate financing or business development strategies.

Our company goals for 2009 included the following:

 

  §  

file a 510(k) premarket notification for our galectin-3 test for heart failure with the FDA;

 

  §  

commercially launch our galectin-3 test for heart failure;

 

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  §  

partner with leading diagnostic laboratory instrument manufacturers;

 

  §  

build a commercial organization to support our planned transition to a company offering products for sale; and

 

  §  

hire key executive team members.

Our company goals for 2010 include                                                   .

Individual Goals

At the beginning of each year, individual goals for our named executive officers are established by our President and Chief Executive Officer and individual goals for our President and Chief Executive Officer are established by the compensation committee. These goals represent significant milestones that must be met by each executive. Factors are identified and specified that will be used to measure success in reaching each goal. Objectives are established based on the executive’s principal areas of responsibility. For example, our scientific executives will have measurable objectives established for areas such as key research or scientific milestones.

The performance of our named executive officers in 2009 was evaluated against the 2009 individual goals listed below:

Pieter Muntendam, M.D., President and Chief Executive Officer — add key members to the executive team; lead the executive team in all aspects of devising, planning and executing corporate, financial and strategic business plans and objectives, research and development initiatives and commercialization activities; interface with the board of directors and existing and potential stockholders; and further our corporate growth.

Michael W. Rogers, Executive Vice President, Chief Financial Officer and Treasurer — prepare the company for the initial public offering process; be strategically involved in all financial transactions of the company; lead the five-year strategic planning process; and plan for year-end audit activities.

C. Douglas White, Executive Vice President and General Manager, Diagnostics — build our diagnostic organization and infrastructure; coordinate completion and management of corporate collaborations; lead the marketing, medical affairs, quality and regulatory teams; and manage the marketing and commercial operations budget.

Neal F. Gordon, Ph.D., Senior Vice President, Biomarker Discovery — enhance our internal in vitro diagnostics product development group; continue to leverage our systems biology-based discovery platform; and expand our technology platform capabilities by developing new targeted measurement strategies for both proteins and lipid metabolites.

The individual goals of our executives for 2010 include                                                   .

Evaluations

After the completion of each fiscal year, we evaluate individual and corporate performance against stated goals for the year. Consistent with our overall compensation philosophy, each executive undergoes an annual performance evaluation. This evaluation leads to a recommendation for annual salary increases, bonuses and equity awards, if any, which are then reviewed and approved by our compensation committee. The performance of our named executive officers is generally assessed by our President and Chief Executive Officer. In the case of our President and Chief Executive Officer, his performance is assessed primarily by the compensation committee. Our compensation committee evaluates the named executive officers’ and our overall corporate performance relative to the approved goals and determines the percentage of company goals achieved.

 

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Compensation granted to our named executive officers, including our President and Chief Executive Officer, is tied to the achievement of the corporate and individual goals. For 2009, the compensation committee determined to reward the achievement of such goals through the payment of cash bonuses and stock option awards, as described in more detail below. Annual bonuses, as well as base salary increases and annual stock option awards, are granted within the discretion of the compensation committee and, to the extent granted, are implemented during the first calendar quarter of the year.

2009 Compensation of Named Executive Officers

Base Salary

In January 2010, the compensation committee conducted its annual management performance evaluation process for 2009. Following its assessment of company and individual performance and review of the data from the Radford Report, the compensation committee determined to maintain 2009 base salaries for our named executive officers for 2010.

Annual Bonus Awards Earned in 2009

The amounts of annual bonus awards earned by each of our named executive officers for performance during 2009 were determined in January 2010 by the compensation committee. The compensation committee examined our operating and financial results and evaluated the performance of each named executive officer against the corporate goals and each named executive officer’s individual goals. Based on the subjective assessment of the company’s 2009 goals described above, the compensation committee determined that we achieved 70% of our corporate goals. The bonuses earned by our named executive officers in 2009 were paid in a combination of cash and fully-vested stock options as set forth in the table below.

 

Name   Cash bonus   Stock option award (shares)(1)
 

Pieter Muntendam, M.D.

  $50,750   16,916

President and Chief Executive Officer

   

Michael W. Rogers

  $12,000   4,000

Executive Vice President, Chief Financial
Officer and Treasurer

   

C. Douglas White

  $30,000   4,037

Executive Vice President and General
Manager, Diagnostics

   

Neal F. Gordon, Ph.D.

  $19,688   6,563

Senior Vice President, Biomarker Discovery

   

 

(1) The options to purchase shares of our common stock were fully vested, with exercise prices of $6.40 per share, the fair market value of our common stock on the date of grant, January 23, 2010.

 

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Summary Compensation Table

The following table sets forth the compensation paid or accrued during the fiscal year ended December 31, 2009 to (1) our chief executive officer, who also acted in the capacity as principal financial officer during the fiscal year until June 2009, when we hired Michael Rogers to serve as our chief financial officer, (2) our chief financial officer, and (3) our two other highest paid executive officers. We refer to these officers as our named executive officers. We did not have any other executive officers during fiscal 2009, nor have we hired any additional executive officers to date.

 

Name and principal position    Salary    Bonus(1)    

Option

awards(2)

   Total

Pieter Muntendam, M.D.

   $ 290,000    $ 50,750      $ 940,588    $ 1,281,338

President and Chief Executive Officer(3)

          

Michael W. Rogers(4)

     96,667      24,000 (5)      1,324,476      1,445,143

Executive Vice President, Chief Financial Officer and Treasurer

          

C. Douglas White

     240,625      30,000        1,038,277      1,308,902

Executive Vice President and General Manager, Diagnostics

          

Neal F. Gordon, Ph.D.

     225,000      19,688        454,450      699,138

Senior Vice President, Biomarker Discovery

          

 

(1) With the exception of Michael Rogers, represents only the cash portion of bonus paid for 2009 performance. See “Compensation Discussion and Analysis — Compensation Components — Annual Bonus Awards Earned in 2009” for stock option portion of bonus paid for 2009 performance.
(2) The value of each of the option awards was computed in accordance with ASC Topic 718 without consideration of forfeitures. Valuation assumptions are described in the notes to financial statements appearing elsewhere in this prospectus. See our discussion of stock-based compensation under “Management’s Discussion and Analysis — Critical Accounting Policies and Estimates — Stock-Based Compensation.” The incentive stock options generally have a 10-year term and the non-qualified stock options generally have an eight-year term and, in the aggregate, vest with respect to one-fourth of the shares of our common stock on the first anniversary of the grant date and quarterly thereafter until the fourth anniversary of the grant date as described below under “— Grants of Plan-Based Awards Table and “— Outstanding Equity Awards at Fiscal Year-End.”
(3) In addition to his roles as President and Chief Executive Officer, Dr. Muntendam acted in the capacity of principal financial officer in 2009 until June 2009.
(4) Mr. Rogers joined us as our chief financial officer in June 2009.
(5) For performance in 2009, Mr. Rogers received a bonus of $12,000 in cash and fully vested options to purchase 4,000 shares of our common stock at an exercise price of $6.40 per share on January 23, 2010.

Grants of Plan-Based Awards Table

The following table presents information concerning grants of plan-based awards to our named executive officers during 2009.

 

Name and principal position    Grant date    

All other option

awards: number

of securities

underlying

options

   

Per share

exercise

or base

price of

option or

stock awards

  

Grant date fair

value of stock and

option awards(1)

Pieter Muntendam, M.D.

   1/23/2009 (3)    81,878 (5)    $ 4.50    $ 222,199

President and Chief Executive Officer(2)

   1/23/2009 (4)    286,938 (5)      4.50      718,389

Michael W. Rogers(6)

   6/30/2009 (3)    22,222 (7)      4.50      63,703

Executive Vice President, Chief Financial Officer and Treasurer

   6/30/2009 (4)    477,778 (7)      4.50      1,260,773

C. Douglas White

   4/7/2009 (3)    88,888 (8)      4.50      246,253

Executive Vice President and General Manager, Diagnostics

   4/7/2009 (4)    311,112 (8)      4.50      792,024

Neal F. Gordon, Ph.D.

   1/23/2009 (3)    77,603 (9)      4.50      210,603

Senior Vice President, Biomarker Discovery

   1/23/2009 (4)    97,397 (9)      4.50      243,847

 

(1) The value of option awards granted to our named executive officers was computed in accordance with ASC Topic 718 without consideration of forfeitures. See our discussion of stock-based compensation under “Management’s Discussion and Analysis — Critical Accounting Policies and Estimates — Stock-Based Compensation.” Valuation assumptions are described in the notes to financial statements appearing elsewhere in this prospectus.
(2) In addition to his roles as President and Chief Executive Officer, Dr. Muntendam acted in the capacity of principal financial officer in 2009 until June 2009.

 

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(3) Represents an incentive stock option with a term of 10 years.
(4) Represents a non-qualified stock option with a term of eight years.
(5) Represents shares granted pursuant to an incentive stock option agreement and a non-qualified stock option agreement for an aggregate amount of 368,816 shares. In the aggregate, 25% of the total number of shares subject to these options vested on January 1, 2010 and the remainder vests 6.25% per quarter thereafter.
(6) Mr. Rogers joined us as our chief financial officer in June 2009.
(7) Represents shares granted pursuant to an incentive stock option agreement and a non-qualified stock option agreement for an aggregate amount of 500,000 shares. In the aggregate, 25% of the total number of shares subject to these options vests on June 30, 2010 and the remainder vest 6.25% per quarter thereafter.
(8) Represents shares granted pursuant to an incentive stock option agreement and a non-qualified stock option agreement for an aggregate amount of 400,000 shares. In the aggregate, 25% of the total number of shares subject to these options vested on February 16, 2010 and the remainder vests 6.25% per quarter thereafter.
(9) Represents shares granted pursuant to an incentive stock option agreement and a non-qualified stock option agreement for an aggregate amount of 175,000 shares. In the aggregate, 25% of the total number of shares subject to these options vested on January 1, 2010 and the remainder vests 6.25% per quarter thereafter.

Employment Arrangements with Our Named Executive Officers

Pieter Muntendam, M.D. We entered into a letter agreement with Dr. Muntendam in December 2004. Dr. Muntendam’s annual base salary is currently $290,000. Pursuant to the letter agreement, Dr. Muntendam has the opportunity to earn an annual performance bonus of up to 50% of his salary, based on achievement of a series of personal and corporate objectives that our board of directors and Dr. Muntendam define annually, and is also eligible to receive annual stock option grants based on our corporate performance. When Dr. Muntendam joined us as our President and, at the time, Chief Operating Officer, he received an option to purchase 303,738 shares of our common stock at an exercise price of $0.54 per share, all of which shares have vested.

In December 2005, Dr. Muntendam began serving as our Chief Executive Officer and received an option to purchase 163,551 shares of our common stock at an exercise price of $0.54 per share, all of which shares have vested. In November 2006 and January 2009, Dr. Muntendam received additional options to purchase 233,644 and 368,816 shares of our common stock at exercise prices of $0.54 and $4.50 per share, respectively. Each of these option grants vests one year after the date of grant and the balance vests quarterly over three additional years. Dr. Muntendam’s letter agreement does not have a defined term.

As a condition of employment, Dr. Muntendam has entered into a non-competition and non-solicitation agreement pursuant to which he has agreed not to compete with us for a period of twelve months after the termination of his employment.

Dr. Muntendam is entitled to certain benefits in connection with a termination of his employment or a change of control discussed below under “—Potential Payments Upon Termination or Change of Control.”

Michael W. Rogers. We entered into a letter agreement with Mr. Rogers, our Executive Vice President, Chief Financial Officer and Treasurer, on June 30, 2009. Mr. Rogers’ annual base salary is currently $275,000. Pursuant to his letter agreement, Mr. Rogers was guaranteed a minimum bonus payment of $24,000 for 2009 and has the opportunity to earn an annual performance bonus of up to 35% of his annual salary, based on the achievement of certain milestones that our board of directors and Dr. Muntendam define annually. For performance in 2009, Mr. Rogers received a bonus of $12,000 in cash and fully vested options to purchase 4,000 shares of our common stock at an exercise price of $6.40 per share on January 23, 2010. Upon commencement of his employment with us, Mr. Rogers received an option to purchase 500,000 shares of our common stock at an exercise price of $4.50 per share. One quarter of the option vests in June 2010 and the balance vests quarterly over three additional years. These options may be exercised immediately for shares of restricted stock, which are subject to a repurchase right by us that lapses on the same vesting schedule as the options. Mr. Rogers’ letter agreement does not have a defined term.

As a condition of employment, Mr. Rogers has entered into a non-competition and non-solicitation agreement pursuant to which he has agreed not to compete with us for a period of twelve months after the termination of his employment.

Mr. Rogers is entitled to certain benefits in connection with a termination of his employment or a change of control discussed below under “—Potential Payments Upon Termination or Change of Control.”

 

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C. Douglas White. We entered into a letter agreement with Mr. White, our Executive Vice President and General Manager, Diagnostics, on February 16, 2009. Mr. White’s annual base salary is currently $275,000. Pursuant to his letter agreement, Mr. White was guaranteed a minimum bonus payment of $30,000 for 2009 and has the opportunity to earn an annual performance bonus of up to 35% of his annual salary, based on the achievement of certain milestones that our board of directors and Dr. Muntendam define annually. Upon commencement of his employment with us, Mr. White received an option to purchase 400,000 shares of our common stock at an exercise price of $4.50 per share. One quarter of the option vests in February 2010 and the balance vests quarterly over three additional years. Mr. White’s letter agreement does not have a defined term.

As a condition of employment, Mr. White has entered into a non-competition and non-solicitation agreement pursuant to which he has agreed not to compete with us for a period of twelve months after the termination of his employment.

Mr. White is entitled to certain benefits in connection with a termination of his employment or a change of control discussed below under “—Potential Payments Upon Termination or Change of Control.”

Neal F. Gordon, Ph.D. We entered into a letter agreement with Dr. Gordon, our Senior Vice President, Biomarker Discovery, on January 1, 2009. Dr. Gordon’s annual base salary is currently $225,000. Pursuant to his letter agreement, Dr. Gordon has the opportunity to earn an annual performance bonus of up to 25% of his annual salary, based on the achievement of certain milestones that our board of directors and Dr. Muntendam define annually. Upon commencement of his employment with us, Dr. Gordon received an option to purchase 175,000 shares of our common stock at an exercise price of $4.50 per share. One quarter of the option vested in January 2010 and the balance vests quarterly over three additional years. Dr. Gordon’s letter agreement does not have a defined term.

As a condition of employment, Dr. Gordon has entered into a non-competition and non-solicitation agreement pursuant to which he has agreed not to compete with us for a period of twelve months after the termination of his employment.

Dr. Gordon is entitled to certain benefits in connection with a termination of his employment or a change of control discussed below under “—Potential Payments Upon Termination or Change of Control.”

Confidential Information and Assignment of Inventions Agreements

Each of our named executive officers has also entered into a standard form agreement with respect to confidential information and assignment of inventions. Among other things, this agreement obligates each named executive officer to refrain from disclosing any of our proprietary information received during the course of employment and to assign to us any inventions conceived or developed during the course of employment.

 

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Outstanding Equity Awards at Fiscal Year-End

The following table presents the outstanding equity awards held by each of the named executive officers as of December 31, 2009.

 

Name and principal position    Number of
securities
underlying
unexercised
options
exercisable
    Number of
securities
underlying
unexercised
options
unexercisable
    Option
exercise
price
  

Option

expiration
date

 

Pieter Muntendam, M.D.

   303,378           $ 0.54    December 16, 2014   

President and Chief Executive Officer(1)

   163,551             0.54    December 8, 2015   
   175,233 (2)    58,411 (2)      0.54    November 28, 2016   
        286,938 (3)      4.50    January 23, 2017 (4) 
        81,878 (3)      4.50    January 23, 2019 (5) 

Michael W. Rogers

        477,778 (7)      4.50    June 30, 2017 (4) 

Executive Vice President, Chief Financial Officer and Treasurer(6)

        22,222 (7)      4.50    June 30, 2019 (5) 

C. Douglas White

        311,112 (8)      4.50    April 7, 2017 (4) 

Executive Vice President and General Manager, Diagnostics

        88,888 (8)      4.50    April 7, 2019 (5) 

Neal F. Gordon, Ph.D.

        97,397 (9)      4.50    January 23, 2017 (4) 

Senior Vice President, Biomarker Discovery

        77,603 (9)      4.50    January 23, 2019 (5) 

 

(1) In addition to his roles as President and Chief Executive Officer, Dr. Muntendam acted in the capacity of principal financial officer until June 2009.
(2) 25% of the total number of shares subject to the option vested on November 28, 2006 and the remainder vests 6.25% per quarter thereafter.
(3) Represents shares granted pursuant to an incentive stock option agreement and a non-qualified stock option agreement for an aggregate amount of 368,816 shares. In the aggregate, 25% of the total number of shares subject to these options vested on January 1, 2010 and the remainder vests 6.25% per quarter thereafter.
(4) Represents a non-qualified stock option.
(5) Represents an incentive stock option.
(6) Mr. Rogers joined us as our chief financial officer in June 2009.
(7) Represents shares granted pursuant to an incentive stock option agreement and a non-qualified stock option agreement for an aggregate amount of 500,000 shares. In the aggregate, 25% of the total number of shares subject to these options vest on June 30, 2010 and the remainder vests 6.25% per quarter thereafter.
(8) Represents shares granted pursuant to an incentive stock option agreement and a non-qualified stock option agreement for an aggregate amount of 400,000 shares. In the aggregate, 25% of the total number of shares subject to these options vested on February 16, 2010 and the remainder vests 6.25% per quarter thereafter.
(9) Represents shares granted pursuant to an incentive stock option agreement and a non-qualified stock option agreement for an aggregate amount of 175,000 shares. In the aggregate, 25% of the total number of shares subject to these options vested on January 1, 2010 and the remainder vests 6.25% per quarter thereafter.

Option Exercises and Stock Vested at Fiscal Year End

There were no options exercised by any of the named executive officers during 2009.

Pension Benefits

None of our named executive officers participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us.

Non-qualified Deferred Compensation

None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us. The compensation committee may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the compensation committee determines that doing so is in our best interests.

 

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Severance Benefits and Change of Control Arrangements

We have agreed to provide severance benefits and change of control arrangements to our current executives, as described below.

Pieter Muntendam, M.D. Pursuant to the terms of Dr. Muntendam’s letter agreement, should we terminate Dr. Muntendam’s employment without cause, and conditioned upon his execution of a separation agreement which contains, among other things, a general release of claims, Dr. Muntendam will receive severance pay equivalent to six months of his annual base salary.

We also have entered into an amended and restated change of control cash severance agreement with Dr. Muntendam. If Dr. Muntendam is not offered comparable employment with the successor upon a change of control, or he begins employment with the successor, but resigns for good reason or is terminated without cause within twelve months following the change of control, then Dr. Muntendam has the right to receive a severance payment in an amount equal to twelve months of base salary then in effect, one-half of which is payable within thirty days following the triggering event and the balance upon the earlier of twelve months following the triggering event or his death. Dr. Muntendam also has the right to continuation of benefits then in effect for a period of twelve months following the triggering event.

Further, pursuant to the terms of certain of Dr. Muntendam’s option agreements, if Dr. Muntendam is terminated without cause upon a change of control, 50% of the unvested options subject to the option agreement will accelerate in full. Additionally, pursuant to the terms of certain other option agreements, upon a change of control, the unvested options subject to the option agreement will accelerate by nine months.

Michael W. Rogers. Pursuant to the terms of Mr. Rogers’ letter agreement, should we terminate Mr. Rogers’ employment without cause, and conditioned upon his execution of a separation agreement which contains, among other things, a full and general release of claims, Mr. Rogers will receive severance pay equivalent to nine months of his annual base salary and, if we are subject to the Consolidated Omnibus Budge Reconciliation Act, or COBRA, nine months of COBRA premiums at our normal rate of contribution for employees. If, within one year following a change of control, Mr. Rogers is (i) terminated without cause or (ii) not offered a comparable position prior to such change of control that includes a compensation and benefits package substantially similar to that provided in Mr. Rogers’ letter agreement with us, and conditioned upon his execution of a separation agreement which contains, among other things, a full and general release of claims, Mr. Rogers will receive severance pay equivalent to twelve months of his annual base salary and, if we are subject to COBRA, twelve months of COBRA premiums at our normal rate of contribution for employees.

Further, pursuant to the terms of Mr. Rogers’ letter agreement, upon a change of control, 50% of Mr. Rogers’ unvested options shall become immediately vested and exercisable, and if within one year following such change of control, Mr. Rogers is terminated without cause or there is a material adverse change in his authority, job duties or responsibilities, all unvested options shall become immediately vested and exercisable. Additionally, pursuant to the terms of Mr. Rogers’ option agreement, upon a change of control, Mr. Rogers’ unvested options will accelerate by nine months.

C. Douglas White. Pursuant to the terms of Mr. White’s letter agreement, should we terminate Mr. White employment without cause, and conditioned upon his execution of a separation agreement which contains, among other things, a full and general release of claims, Mr. White will receive severance pay equivalent to six months of his annual base salary and, if we are subject to COBRA, six months of COBRA premiums at our normal rate of contribution for employees. If, within one year following a change of control, Mr. White is (i) terminated without cause, (ii) assigned employment responsibilities which are not of comparable responsibility and status as Mr. White’s employment responsibilities prior to such change of control or (iii) required to relocate a distance that is more than 50 miles from his principal place of business prior to such change of control, and conditioned upon his execution of a separation agreement which contains, among other things, a full and general release of claims, Mr. White will receive severance pay equivalent to nine months of his annual base salary and, if we are subject to COBRA, nine months of COBRA premiums at our normal rate of contribution for employees.

 

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We also have entered into a change of control cash severance agreement with Mr. White. If Mr. White is not offered comparable employment with the successor upon a change of control, or he begins employment with the successor, but resigns for good reason or is terminated without cause within twelve months following the change of control, then Mr. White has the right to receive a severance payment in an amount equal to nine months of base salary then in effect, one-half of which is payable within thirty days following the triggering event and the balance upon the earlier of six months following the triggering event or his death. Mr. White also has the right to continuation of benefits then in effect for a period of nine months following the triggering event.

Further, pursuant to the terms of Mr. White’s letter agreement, upon a change of control, 50% of Mr. White’s unvested options shall become immediately vested and exercisable, and if within one year following such change of control, Mr. White is terminated without cause or there is a material adverse change in his authority, job duties or responsibilities, all unvested options shall become immediately vested and exercisable. Additionally, pursuant to the terms of Mr. White’s option agreements, upon a change of control, Mr. White’s unvested options will accelerate by nine months.

Neal F. Gordon, Ph.D. Pursuant to the terms of Dr. Gordon’s letter agreement, should we terminate Dr. Gordon’s employment without cause, and conditioned upon his execution of a separation agreement which contains, among other things, a general release of claims, Dr. Gordon will receive severance pay equivalent to six months of his annual base salary and six months of health benefit continuation at the time of such termination.

We also have entered into a change of control cash severance agreement with Dr. Gordon. If Dr. Gordon is not offered comparable employment with the successor upon a change of control, or he begins employment with the successor, but resigns for good reason or is terminated without cause within six months following the change of control, then Dr. Gordon has the right to receive a severance payment in an amount equal to six months of base salary then in effect, one-half of which is payable within thirty days following the triggering event and the balance upon the earlier of six months following the triggering event or his death. Dr. Gordon also has the right to continuation of benefits then in effect for a period of six months following the triggering event.

Further, pursuant to the terms of Dr. Gordon’s letter agreement, upon a change of control, all unvested options shall become immediately vested and exercisable.

Each executive is bound by non-disclosure, inventions transfer, non-solicitation and non-competition covenants that prohibit the executive from competing with us during the term of his or her employment and for twelve months after termination of employment. We believe that the severance and change of control packages for our executive officers are consistent with severance and change of control packages offered to executive officers of comparable companies as represented by compensation data we have reviewed.

 

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Potential Payments Upon Termination or Change of Control

The following tables set forth, as of December 31, 2009, the quantitative estimates of the benefits that would have accrued to each of our named executive officers in the event of their termination under certain circumstances or as a result of a change of control.

Pieter Muntendam, M.D., President and Chief Executive Officer

 

Executive benefits and payments

upon termination or change of control

  Termination by
the company
without cause
  

Termination by the
company without
cause or by
executive for
good reason following

change of control

    Occurrence of a
change of control
without termination
 

Base salary

  $145,000    $290,000      N/A   

Acceleration of vesting of equity

  N/A    ( 1)    ( 1) 

Number of stock options and value upon termination(2)

  N/A    185,456 shares

$            

  

  

  185,456 shares

$            

  

  

Post-term benefits

  N/A    $16,987      N/A   

Total:

  $145,000    $                  $               

 

(1) 50% of the unvested options granted to Dr. Muntendam on November 28, 2006 will vest upon a change of control and options granted to Dr. Muntendam on January 23, 2009 will accelerate by nine months upon a change of control.
(2) Calculated based on an assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus, less the applicable per share exercise price.

Michael W. Rogers, Executive Vice President, Chief Financial Officer and Treasurer

 

Executive benefits and payments

upon termination or change of control

 

Termination

by the
company
without
cause

 

Termination by
the company
without cause
following

change of

control

 

Executive not
offered
comparable
position
following

change of

control

  Occurrence of a
change of
control without
termination or
material adverse
change in duties
 

Occurrence of

a change of

control with
material
adverse change
in duties

Base salary

  $206,250   $275,000   $275,000   N/A   N/A

Acceleration of vesting of equity

  N/A   100% of unvested options   Nine months acceleration and 50% of unvested options   Nine months acceleration and 50% of unvested options   100% of
unvested options

Number of stock options and value upon termination(1)

  N/A  

500,000 shares

$            

 

328,125 shares

$            

 

328,125 shares

$            

 

500,000 shares

$            

Post-term benefits

  $12,741   $16,987   $16,987   N/A   N/A

Total:

  $218,991   $               $               $               $            

 

(1) Calculated based on an assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus, less the applicable per share exercise price.

C. Douglas White, Executive Vice President and General Manager, Diagnostics

 

Executive benefits and payments

upon termination or change of control

 

Termination

by the
company
without
cause

 

Termination by the
company without
cause or by
executive with
good reason or
executive not
offered
comparable
position following

change of control

 

Executive not
offered
comparable
position or
relocated
following

change of control

  Occurrence of a
change of control
without
termination or
material adverse
change in duties
 

Occurrence of

a change of

control with
material
adverse change
in duties

Base salary

  $137,500   $275,000   $206,250   N/A   N/A

Acceleration of vesting of equity

  N/A  

100% of

unvested

options

  Nine months acceleration and 50% of unvested options   Nine months acceleration and 50% of unvested options   100% of unvested
options

Number of stock options and value upon termination(1)

  N/A  

400,000 shares

$            

 

275,000 shares

$            

 

275,000 shares

$            

 

400,000 shares

$            

Post-term benefits

  $8,494   $16,987   $12,741   N/A   N/A

Total:

  $145,994   $               $               $               $            

 

(1) Calculated based on an assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus, less the applicable per share exercise price.

 

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Neal F. Gordon, Ph.D., Senior Vice President, Biomarker Discovery

 

Executive benefits and payments

upon termination or change of control

   Termination by
the company
without cause
  

Termination by
executive with
good reason or
executive not
offered
comparable
position following

change of control

   Occurrence of a
change of control
without
termination or
material adverse
change in duties

Base salary

   $112,500    $112,500    N/A

Acceleration of vesting of equity

   N/A    100% of unvested options    100% of unvested options

Number of stock options and value upon termination(1)

   N/A   

175,000 shares

$            

  

175,000 shares

$            

Post-term benefits

   $8,494    $8,494    N/A

Total:

   $120,994    $                $            

 

(1) Calculated based on an assumed initial public offering price of $             per share, the mid-point of the price range on the cover page of this prospectus, less the applicable per share exercise price.

Compensation of Directors

The following table shows the total compensation paid or accrued during the fiscal year ended December 31, 2009 to each of our non-employee directors who served during the year.

 

Name    Fees earned or
paid in cash
  

Option

awards(1)

   All other
compensation
   Total

Noubar B. Afeyan, Ph.D.

               

Harrison M. Bains

      $ 101,829       $ 101,829

Joseph Davie, M.D., Ph.D.(2)

        18,558         18,558

Timothy Harris, Ph.D.

        101,829         101,829

Stelios Papadopoulos, Ph.D.

               

Pieter van der Meer, M.Sc.

               

 

(1) The value of each of the option awards was computed in accordance with ASC Topic 718 without consideration of forfeitures. Valuation assumptions are described in the notes to financial statements appearing elsewhere in this prospectus. See our discussion of stock-based compensation under “Management’s Discussion and Analysis — Critical Accounting Policies and Estimates — Stock-Based Compensation.” The options generally have an eight-year term and vest with respect to one-fourth of the shares of our common stock on the first anniversary of the grant date and quarterly thereafter until the fourth anniversary of the grant date.
(2) Dr. Davie resigned from our board of directors effective December 30, 2009.

In January 2010, Stéphane Bancel was elected as a member of our board of directors. In connection with Mr. Bancel’s agreement to serve on our board of directors, we granted him an option to purchase 54,018 shares of our common stock at an exercise price of $6.40.

In recent years we have not had a policy in place, nor have we paid any compensation to our non-employee directors for serving on our board of directors other than as set forth above or for reimbursement of reasonable out-of-pocket expenses incurred for attending meetings of our board of directors or any committees thereof.

In              2010, our board of directors adopted the Non-Employee Director Compensation Policy that will become effective following the completion of this offering. The policy is designed to ensure that the compensation aligns the directors’ interests with the long-term interests of the stockholders, that the structure of the compensation is simple, transparent and easy for stockholders to understand and that our directors are fairly compensated. Directors who are also our employees, such as Dr. Muntendam, will not receive additional compensation for their services as directors.

 

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Under the policy, upon initial election or appointment to the board of directors, new non-employee directors receive a non-qualified stock option to purchase              shares of our common stock at an exercise price equal to the fair market value on the date of grant that vests one year from the date of grant. Each year of a non-employee director’s tenure, the director will receive a non-qualified stock option to purchase              shares of our common stock at an exercise price equal to the fair market value on the date of grant that vests one year from the date of grant. The options become fully vested and exercisable upon a change of control.

In addition, each non-employee director will be paid an annual retainer of $            , or $              in the case of the chairperson, for their services. Committee members will receive additional annual retainers as follows:

 

Committee    Chairman    Member

Audit Committee

   $                 $             

Compensation Committee

     

Nominating and Governance Committee

     

Equity Incentive Plans

2001 Stock Option and Incentive Plan

Our 2001 Stock Plan was adopted by our board of directors in June 2001 and approved by our stockholders in March 2002. As of December 31, 2009, there were 5,017,792 shares of our common stock authorized for issuance under the 2001 Stock Plan, as amended.

The purpose of the 2001 Stock Plan is to provide stock options and other equity awards to our employees, officers, directors, consultants and advisors. The 2001 Stock Plan is administered by our board of directors and the compensation committee, which has the discretion to delegate to one or more of our executive officers the power to grant stock based awards up to a maximum number of shares allocable to any one grantee. Under the 2001 Stock Plan, the board of directors or its delegate may grant incentive stock options, non-qualified stock options, restricted stock awards and other stock based awards and may set the terms of these awards, including the vesting schedule, exercise price and the duration of the exercise period of options and the terms of repurchase provisions of restricted stock. As of December 31, 2009, there were outstanding options to purchase 4,757,831 shares of our common stock under the 2001 Stock Plan and 259,961 shares of our common stock available for future grant. Our board of directors approved the termination of the 2001 Stock Plan to take effect upon the completion of this offering, after which time no additional options will be granted under the 2001 Stock Plan, but options previously granted under the 2001 Stock Plan will continue to be governed by the terms of the plan.

2010 Employee, Director and Consultant Equity Incentive Plan

In              2010, our board of directors and our stockholders approved the 2010 Employee, Director and Consultant Equity Incentive Plan, or the 2010 Stock Plan, which will become effective upon completion of this offering. The 2010 Stock Plan will expire in              2020. Under our 2010 Stock Plan, we may grant incentive stock options, non-qualified stock options, restricted and unrestricted stock awards and other stock based awards. There will be              shares of our common stock authorized for issuance under the 2010 Stock Plan. In addition, any shares of our common stock that are presently subject to outstanding options under our 2001 Stock Plan but which are unissued on or after the date that the 2010 Stock Plan is adopted upon the cancellation, surrender or termination of such options, shall be added to the shares of our common stock authorized under the 2010 Stock Plan to be available for future issuance; provided, however, that no more than shares of our common stock, the number of options outstanding under our 2001 Stock Plan upon stockholder approval of the 2010 Stock Plan, shall be added to the 2010 Stock Plan pursuant to this provision.

 

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In addition, the 2010 Stock Plan contains an “evergreen” provision, which allows for an annual increase in the number of shares of our common stock available for issuance under the plan on the first day of each fiscal year during the period beginning on the first day of fiscal year 2011 and ending on the second day of fiscal year 2020. The annual increase in the number of shares shall be equal to the lowest of:

 

  §  

             shares of our common stock;

 

  §  

5% of the number of shares of our common stock outstanding as of the close of business on the immediately preceding day; and

 

  §  

an amount determined by our board of directors.

The board of directors has authorized our compensation committee to administer the 2010 Stock Plan. In accordance with the provisions of the plan, the compensation committee will determine the terms of options and other awards. The compensation committee or the independent members of our board of directors will determine:

 

  §  

which employees, directors and consultants shall be granted options and other awards;

 

  §  

the number of shares of our common stock subject to options and other awards;

 

  §  

the exercise price of each option, which generally shall not be less than fair market value on the date of grant;

 

  §  

the schedule upon which options become exercisable;

 

  §  

the termination or cancellation provisions applicable to options;

 

  §  

the terms and conditions of other awards, including conditions for repurchase, termination or cancellation, issue price and repurchase price; and

 

  §  

all other terms and conditions upon which each award may be granted in accordance with our plan.

No participant may receive awards for more than shares of our common stock in any fiscal year.

In addition, our board of directors or any committee to which the board of directors delegates authority may, with the consent of the affected plan participants, reprice or otherwise amend outstanding awards consistent with the terms of our plan.

Upon a merger or other reorganization event, our board of directors, or the board of directors of any corporation assuming our obligations, may, in its sole discretion, take any one or more of the following actions pursuant to our plan, as to some or all outstanding awards:

 

  §  

provide that outstanding options shall be assumed or substituted by the successor corporation;

 

  §  

terminate unexercised outstanding options immediately prior to the consummation of such transaction unless exercised by the optionee;

 

  §  

make or provide for a cash payment to the participants equal to the difference between the merger price times the number of shares of our common stock subject to such outstanding options, to the extent then exercisable at prices not in excess of the merger price, and the aggregate exercise price of all such outstanding options, in exchange for the termination of such options;

 

  §  

provide that all or any outstanding options shall become exercisable in full immediately prior to such event; and

 

  §  

provide that outstanding awards shall be assumed or substituted by the successor corporation, become realizable or deliverable, or restrictions applicable to an award will lapse, in whole or in part, prior to or upon the merger or reorganization event.

 

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Pension Plan and Other Benefits

We have a defined contribution retirement plan in which all employees are eligible to participate. Our plan is intended to qualify under Section 401(k) of the Internal Revenue Code so that contributions by employees and by us to our plan and income earned on plan contributions are not taxable to employees until withdrawn or distributed from the plan, and so that contributions, including employee salary deferral contributions, will be deductible by us when made. We do not currently provide matching contributions under this plan but may choose to do so in the future. We also contribute to medical, disability and other standard insurance for our employees. Our non-employee directors do not receive pension, retirement or similar benefits from us. We have in the past provided our employees severance payments for involuntary termination in an amount equal to two weeks per year of service, not to exceed 10 weeks, and expect to continue this practice in the future.

 

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Principal Stockholders

The following table presents information about the beneficial ownership of our common stock as of December 31, 2009, and as adjusted to reflect the shares offered by this prospectus, by:

 

  §  

each existing stockholder we know to beneficially own 5% or more of our common stock, which we call our principal stockholders;

 

  §  

each of our directors;

 

  §  

each of our named executive officers; and

 

  §  

all of our current directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Shares of common stock that may be acquired by an individual or group within 60 days following December 31, 2009, pursuant to the exercise of options or warrants, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

The percentage of shares owned before the offering is based on 20,816,515 shares of our common stock outstanding as of December 31, 2009, which gives effect to the automatic conversion of all shares of our convertible preferred stock outstanding at December 31, 2009 into an aggregate of 15,903,552 shares of our common stock effective immediately prior to the completion of this offering. The percentage of shares owned after the offering is based on              shares of our common stock to be outstanding after the offering, excluding shares of our common stock to be issued upon the automatic net exercise of a warrant to purchase 23,264 shares of common stock upon the completion of this offering.

Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such stockholders.

 

          Percentage of shares
beneficially owned
Beneficial owner(1)    Number of shares
beneficially owned
   Before
offering
    After
offering

Principal Stockholders

       

Entities affiliated with Flagship Ventures(2)

   9,565,111    44.4  

General Electric Pension Trust(3)

   1,538,462    7.4     

Gilde Europe Food & Agribusiness Fund B.V.(4)

   3,006,856    14.1     

Humana Inc. (5)

   1,068,271    5.1     

Koninklijke Philips Electronics N.V. (6)

   1,156,657    5.6     

Legg Mason Capital Management Special Investment Trust, Inc.(7)

   1,538,462    7.4     

SMALLCAP World Fund, Inc.(8)

   1,538,462    7.4     

Directors

       

Noubar Afeyan, Ph.D.(9)

   9,565,111    44.4     

Harrison M. Bains(10)

   8,761    *     

Stéphane Bancel(11)

      *     

Timothy Harris, Ph.D.(12)

   9,637    *     

Stelios Papadopoulos, Ph.D.(13)

   1,347,646    6.2     

Pieter van der Meer, M.Sc(14)

   3,006,856    14.1     

Named Executive Officers

       

Pieter Muntendam, M.D.(15)

   770,136    3.6     

Michael W. Rogers(16)

      *     

C. Douglas White(17)

   100,000    *     

Neal Gordon, Ph.D.(18)

   43,750    *     

All Directors and Executive Officers as a group (10 persons)(19)

   14,851,897    62.8  

 

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* Less than 1%

 

(1) Except as set forth below, the address of all directors, executive officers and stockholders is c/o BG Medicine, Inc., 610 Lincoln Street North, Waltham, Massachusetts 02451.

 

(2) Consists of 3,383,177 shares held by NewcoGen Group LLC, 209,546 shares and warrants to purchase 37,586 shares held by AGTC Advisors Fund, L.P.; 3,466,695 shares and warrants to purchase 621,863 shares held by Applied Genomic Technology Capital Fund, L.P.; 684,853 shares and warrants to purchase 30,017 shares held by NewcoGen Equity Investors LLC; 372,918 shares and warrants to purchase 3,923 shares held by NewcoGen-Elan LLC; 99,206 shares and warrants to purchase 2,249 shares held by NewcoGen-Long Reign Holding LLC; 402,354 shares and warrants to purchase 8,463 shares held by NewcoGen-PE LLC; 7,054 shares held by OneLiberty Advisors Fund 2000 L.P; 134,043 shares held by OneLiberty Ventures 2000 L.P.; and 98,980 shares and warrants to purchase 2,184 shares held by ST NewcoGen LLC. Noubar B. Afeyan, Ph.D., one of our directors, is managing partner of Flagship Ventures and may be deemed to share voting and investment power with respect to all shares held by Flagship Ventures. Dr. Afeyan disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any. The address for all of the Flagship entities is One Memorial Drive, 7th Floor, Cambridge, Massachusetts 02140.

 

(3) General Electric Pension Trust is an employee benefit plan trust for the benefit of the employees and retirees of General Electric Company and its subsidiaries. GE Asset Management Incorporated is a registered investment adviser and acts as Investment Manager for the Trust. GE Asset Management may be deemed to beneficially share ownership of the shares owned by the Trust, but has no pecuniary interest in such shares. GE expressly disclaims beneficial ownership of all shares owned by the Trust. General Electric Pension Trust’s address is c/o GE Asset Management Incorporated, 3001 Summer Street, Stamford, Connecticut 06905.

 

(4) Consists of 2,568,594 shares and warrants to purchase 438,262 shares. The manager of the stockholder is Gilde Agribusiness Management B.V., which is indirectly owned by three managing partners, Pieter van der Meer, Edwin de Graaf and Marc Olivier Perret, through a holding entity, Gilde Healthcare Holding B.V. Gilde Healthcare Holding B.V. is owned in equal thirds by the three managing partners. Gilde Europe Food & Agribusiness Partners II C.V. has a 20% carried interest in the stockholder. Pieter van der Meer, Edwin de Graaf and Marc Olivier Perret together have a controlling interest in Gilde Europe Food & Agribusiness Partners II C.V. Accordingly, Pieter van der Meer, Edwin de Graaf and Marc Olivier Perret may be deemed to share voting and investment power with respect to the shares. The stockholder’s address is Newtonlaan 91, P.O. Box 85067, 3508 Utrecht, AB, the Netherlands.

 

(5) Consists of 975,964 shares and warrants to purchase 92,307 shares. The stockholder’s address is 500 West Main Street, Louisville, Kentucky 40202.

 

(6) The stockholder’s address is Breitner Center HBT-16, P.O. Box 77900, Amstelplein 2, 1070 MX Amsterdam, the Netherlands.

 

(7) Legg Mason Capital Management Special Investment Trust, Inc. (“Special Investment Trust”) and Legg Mason Capital Management, Inc., the manager of Special Investment Trust, share voting and dispositive power with respect to these shares, and therefore may be deemed beneficial owners of the shares. Special Investment Trust’s address is c/o Legg Mason Capital Management, 100 Light Street, Baltimore, Maryland 21202.

 

(8) The stockholder’s address is c/o Capital Research and Management Company, 333 South Hope Street, Los Angeles, California 90071.

 

(9) Reflects securities beneficially owned by entities affiliated with Flagship Ventures as set forth in footnote 2, for which Dr. Afeyan is the Managing Partner and Chief Executive Officer and is entitled to vote the shares. Dr. Afeyan disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein, if any.

 

(10) Consists of options to purchase shares of common stock held by Mr. Bains which are exercisable within 60 days following December 31, 2009.

 

(11) On January 23, 2010, Mr. Bancel was granted an option to purchase 54,018 shares at an exercise price of $6.40 per share, none of which are exercisable within 60 days following December 31, 2009 or included in the table above.

 

(12) Consists of options to purchase shares of common stock held by Dr. Harris which are exercisable within 60 days following December 31, 2009.

 

(13) Consists of 563,057 shares, warrants to purchase 223,842 shares and options to purchase 560,747 shares which are exercisable within 60 days following December 31, 2009.

 

(14) Reflects securities beneficially owned by entities affiliated with Gilde Healthcare Partners as set forth in footnote 4, for which Mr. van der Meer is the General Manager and is entitled to vote the shares. Mr. van der Meer disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein, if any.

 

(15) Consists of 16,135 shares, warrants to purchase 4,672 shares and options to purchase 749,329 shares of common stock which are exercisable within 60 days following December 31, 2009.

 

(16) On June 30, 2009, Mr. Rogers was granted an option to purchase 500,000 shares at an exercise price of $4.50 per share, none of which are exercisable within 60 days following December 31, 2009 or included in the table above.

 

(17) Consists of options to purchase shares of common stock held by Mr. White which are exercisable within 60 days following December 31, 2009.

 

(18) Consists of options to purchase shares of common stock held by Dr. Gordon which are exercisable within 60 days following December 31, 2009.

 

(19) See footnotes 9 through 18.

 

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Certain Relationships and Related Person Transactions

Except as disclosed below, the members of our board of directors, executive officers, principal stockholders and related persons have had no interest in any transactions to which we were a party since January 1, 2007 or which were entered into by us prior thereto and under which we or the other parties still have ongoing obligations.

Sales of Securities

Convertible Notes and Warrants

During the period December 2007 to March 2008, we issued to Flagship Ventures and its affiliates and Gilde Europe Food & Agribusiness Fund B.V., two of our principal stockholders, and to Stelios Papadopoulos, a director, an aggregate principal amount of $4,000,000 in convertible promissory notes. In connection with the issuance of these notes, we also issued warrants to purchase 184,610 shares of our common stock at an exercise price of $0.01 per share that expire 10 years from the issue date. In July 2008, the holders of these convertible notes converted them into an aggregate of 640,511 shares of our Series D redeemable convertible preferred stock at a price of $6.50 per share. Upon the closing of this offering, these shares will be converted into 640,511 shares of our common stock.

In June 2008, we issued to Humana Inc., one of our principal stockholders, a convertible promissory note in the principal amount of $2,000,000. In connection with the issuance of this note, we also issued a warrant to purchase 92,307 shares of our common stock at an exercise price of $0.01 per share that expires 10 years from the issue date. In July 2008, Humana Inc. converted this convertible note into 309,209 shares of our Series D redeemable convertible preferred stock at a price of $6.50 per share. Upon the closing of this offering, these shares will be converted into 309,209 shares of our common stock.

Series C Preferred Stock

In May 2007, we issued 1,369,863 shares of our Series C redeemable convertible preferred stock to Humana Inc., one of our principal stockholders, at a price of $3.65 per share for aggregate gross proceeds of approximately $5.0 million. Upon the closing of this offering, these shares will be converted into 666,755 shares of our common stock.

Series D Preferred Stock

In July 2008, we issued 6,153,846 shares of our Series D redeemable convertible preferred stock at a price of $6.50 per share for aggregate gross proceeds of approximately $40.0 million to our principal stockholders, Flagship Ventures and its affiliates; Gilde Europe Food & Agribusiness Fund B.V.; Humana Inc.; Legg Mason Capital Management Special Investment Trust, Inc.; General Electric Pension Trust; SMALLCAP World Fund, Inc. and one of our directors, Stelios Papadopoulos, and certain other stockholders. The gross proceeds and the shares issued in this offering include the proceeds from and the shares issued upon conversion of the convertible notes disclosed above. Upon the closing of this offering, these shares will be converted into 6,153,846 shares of our common stock.

Agreements with Stockholders

In connection with the Series D redeemable convertible preferred stock financing, we entered into the Third Amended and Restated Stockholders’ Voting and Co-Sale Agreement and the Fourth Amended and Restated Investor Rights Agreement, each dated as of July 10, 2008, with Flagship Ventures and its affiliates; Gilde Europe Food & Agribusiness Fund B.V.; Stelios Papadopoulos; Humana Inc.; Legg Mason Capital Management Special Investment Trust, Inc.; General Electric Pension Trust; SMALLCAP World Fund, Inc. and certain of our other stockholders. These agreements will terminate immediately prior to completion of the offering, other than the portions of the Fourth Amended and Restated Investor Rights Agreement relating to registration rights, which will continue in effect following completion of the offering and entitle the holders of such rights to have us

 

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register their shares of our common stock for sale in the United States. See “Description of Capital Stock—Registration Rights of Existing Securityholders.”

In May 2007, we entered into a strategic agreement with Humana Inc., one of our principal stockholders. Under the terms of the agreement, we and Humana have agreed to collaborate with the goal of accelerating the development of blood-based biomarkers and identifying the role of blood-based biomarkers in improving health outcomes and containing healthcare costs through individualized medicine. In furtherance of this goal, we and Humana have agreed to facilitate biomarker discovery and validation studies among Humana members, for which we will pay Humana. We have also agreed to conduct research on the design and testing of methods to promote adoption of individualized medicine among covered populations. Pursuant to the agreement, we have agreed to offer any blood-based biomarker diagnostic products that we develop from data or services provided by Humana to Humana on preferred terms to the extent sold by Humana to Humana members. In addition, in the event we commercialize blood-based biomarker diagnostic products under this partnership, we will be required to make certain payments to Humana based on such products. The current term of the agreement lasts through May 2011 and automatically renews for an additional period of 12 months unless either party gives not less than 120 days written notice of termination to the other party. During 2007, 2008 and 2009, we made payments to Humana in the amounts of $421,123, $976,000 and $262,165, respectively, in connection with the HRP Initiative. We expect to make additional payments to Humana of $133,580 and $166,975 in 2010 and 2011, respectively.

Humana also owns shares of our Series C redeemable convertible preferred stock and Series D redeemable convertible preferred stock, as well as warrants to purchase shares of our common stock, as described above under “— Sales of Securities.”

Agreements with Directors and Executive Officers

Please see “Compensation” for additional information regarding compensation of our executive officers and directors.

We have entered into a letter agreement with Dr. Muntendam, our President and Chief Executive Officer, and into other agreements with our named executive officers. For information regarding these agreements, please refer to the section entitled “Compensation — Employment Arrangements with Our Named Executive Officers.”

We have entered into indemnification agreements with our directors and executive officers. See “Management — Limitation of Directors’ and Officers’ Liability and Indemnification.”

Policy for Approval of Related Person Transactions

Pursuant to the written charter of our audit committee, the audit committee is responsible for reviewing and approving, prior to our entry into any such transaction, all transactions in which we are a participant and in which any parties related to us, including our executive officers, our directors, beneficial owners of more than 5% of our securities, immediate family members of the foregoing persons and any other persons whom our board of directors determines may be considered related parties, has or will have a direct or indirect material interest.

In reviewing and approving such transactions, the audit committee shall obtain, or shall direct our management to obtain on its behalf, all information that the committee believes to be relevant and important to a review of the transaction prior to its approval. Following receipt of the necessary information, a discussion shall be held of the relevant factors if deemed to be necessary by the committee prior to approval. If a discussion is not deemed to be necessary, approval may be given by written consent of the committee. This approval authority may also be delegated to the chairman of the audit committee in some circumstances. No related party transaction shall be entered into prior to the completion of these procedures.

The audit committee or its chairman, as the case may be, shall approve only those related party transactions that are determined to be in, or not inconsistent with, the best interests of us and our stockholders, taking into account all available facts and circumstances as the committee or the chairman determines in good faith to be necessary. These facts and circumstances will typically include, but not be limited to, the benefits of the transaction to us;

 

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the impact on a director’s independence in the event the related party is a director, an immediate family member of a director or an entity in which a director is a partner, stockholder or executive officer; the availability of other sources for comparable products or services; the terms of the transaction; and the terms of comparable transactions that would be available to unrelated third parties or to employees generally. No member of the audit committee shall participate in any review, consideration or approval of any related party transaction with respect to which the member or any of his or her immediate family members is the related party.

 

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Description of Capital Stock

The following description of our capital stock and provisions of our certificate of incorporation and bylaws are summaries and are qualified by reference to the certificate of incorporation and the bylaws that will become effective upon the completion of this offering. Copies of these documents have been filed with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the completion of this offering.

Pursuant to our certificate of incorporation to be effective upon completion of this offering, we will be authorized to issue              shares of common stock, $0.001 par value per share, and              shares of preferred stock, $0.001 par value per share, none of which will be designated or issued. Our board of directors may establish the rights and preferences of the preferred stock from time to time.

Upon completion of this offering, all of our shares of convertible preferred stock will convert into an aggregate of 15,903,552 shares of our common stock, and the warrants to exercise shares of our preferred stock, as noted in the table below, will become exercisable for an equivalent number of shares of our common stock. Accordingly, no shares of our preferred stock will be outstanding immediately following completion of this offering. Assuming such conversion, as of December 31, 2009, we would have had shares of our common stock outstanding held of record by 53 stockholders.

Common Stock

Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, and do not have cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for dividend payments. The holders of common stock have no preferences or rights of conversion, exchange, pre-emption or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. In the event of any liquidation, dissolution or winding-up of our affairs, holders of common stock will be entitled to share ratably in our assets that are remaining after payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding shares of preferred stock, if any.

Preferred Stock

Preferred stock, if issued, would have priority over common stock with respect to dividends and other distributions, including the distribution of assets upon liquidation. Our board of directors has the authority, without further stockholder authorization, to issue from time to time up to              shares of preferred stock in one or more series and to fix the terms, limitations, voting rights, relative rights and preferences and variations of each series. Although we have no present plans to issue any other shares of preferred stock, the issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could decrease the amount of earnings and assets available for distribution to the holders of common stock, could adversely affect the rights and powers, including voting rights, of the common stock, and could have the effect of delaying, deterring or preventing a change of control of us or an unsolicited acquisition proposal.

 

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Warrants

As of December 31, 2009, we had warrants outstanding for the number of shares of our common and preferred stock, at the exercise prices and expiration dates, set forth below. Warrants entitle the holder to purchase shares of our common or preferred stock, as applicable, at the specified exercise price at any time prior to the expiration date. All of these warrants have net exercise provisions under which the holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares of our common and preferred stock based on the fair market value of the underlying shares of our common or preferred stock, as applicable, at the time of exercise of the warrant, after deduction of the aggregate exercise price.

 

Number of shares(1)   

Weighted-
average

exercise price

   Expiration date

23,364(2)

   $ 3.21    April 30, 2012

856,695

     0.02    July 28, 2015

46,726

     0.02    September 8, 2015

46,726

     0.02    September 28, 2015

46,726

     0.02    November 14, 2015

46,726

     0.02    December 15, 2015

98,126

     0.02    March 10, 2016

46,726

     0.02    July 10, 2016

3,115(3)

     3.21    December 22, 2016

3,157(3)

     3.21    March 23, 2017

1,873(3)

     3.21    June 22, 2017

1,423(3)

     3.21    September 24, 2017

46,153(4)

     6.50    November 9, 2017

184,610

     0.01    March 28, 2018

46,152(4)

     6.50    March 28, 2018

92,307

     0.01    June 23, 2018

Total: 1,590,605

   $ 0.46   

 

(1) Except as noted, all of the warrants are exercisable for shares of common stock.
(2) This warrant will be automatically exercised for shares of our common stock pursuant to net exercise provisions contained in the warrant upon the completion of this offering based on the difference between the public offering price on the cover page of this prospectus and the exercise price.
(3) These warrants contain price based anti-dilution provisions providing for adjustments to the exercise price upon the issuance of shares of our common stock at a price less than the exercise price, excluding shares of our common stock issuable upon exercise of options, warrants, conversion of convertible securities, stock splits or other distributions on our securities.