S-1/A 1 d553644ds1a.htm AMENDMENT NO. 4 Amendment No. 4
Table of Contents

As filed with the Securities and Exchange Commission on September 12, 2013.

Registration No. 333-190226

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

FOUNDATION MEDICINE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   8071   27-1316416

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

One Kendall Square, Suite B3501

Cambridge MA, 02139

(617) 418-2200

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

 

 

Michael J. Pellini, M.D.

President and Chief Executive Officer

One Kendall Square, Suite B3501

Cambridge, MA 02139

(617) 418-2200

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

 

 

Copies to:

 

Kingsley A. Taft, Esq.

Arthur R. McGivern, Esq.

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, MA 02109

(617) 570-1000

 

Robert W. Hesslein, Esq.

Senior Vice President and General Counsel

Foundation Medicine, Inc.

One Kendall Square, Suite B3501

Cambridge, MA 02139

(617) 418-2200

 

Patrick O’Brien, Esq.

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, Massachusetts 02199-3600 (617) 951-7000

 

 

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

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, as amended, 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, please 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        (Do not check if a smaller reporting company)  x    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

  Amount to be
Registered(1)
   

Proposed

Maximum

Offering

Price Per Share(2)

   

Proposed

Maximum

Aggregate

Offering Price(2)

   

Amount

of Registration
Fee(3)

 

Common stock, par value $0.0001 per share

    5,750,000      $ 16.00      $ 92,000,000      $ 12,548.80   

 

(1) Includes 750,000 shares which the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act.
(3) Of this amount, $11,765 was previously paid in connection with the initial filing of this Registration Statement on July 29, 2013.

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 this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may 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 nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion. Dated September 12, 2013.

Prospectus

5,000,000 Shares

 

LOGO

Foundation Medicine, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Foundation Medicine, Inc.

We are offering 5,000,000 shares to be sold in this offering.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. We have applied to list our common stock on The NASDAQ Global Market under the symbol “FMI.”

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements.

Investing in our common stock involves a high degree of risk. See “Risk Factors” on page 9 to read about factors you should consider before buying shares of the common stock.

 

 

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.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $                    $     

Proceeds to us, before expenses

   $         $     

 

(1) We refer you to “Underwriting” beginning on page 155 for additional information regarding total underwriting compensation.

We have granted the underwriters an option to purchase up to an additional 750,000 shares of common stock from us at the initial price to public less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on             , 2013.

 

Goldman, Sachs & Co.    J.P. Morgan
Leerink Swann    Sanford C. Bernstein

Prospectus dated             , 2013


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-looking Statements

     41   

Use of Proceeds

     43   

Dividend Policy

     45   

Capitalization

     46   

Dilution

     48   

Selected Financial Data

     50   

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

     52   

Business

     79   

Management

     118   

Executive Compensation

     126   

Certain Relationships and Related Party Transactions

     138   

Principal Stockholders

     141   

Description of Capital Stock

     143   

Shares Eligible for Future Sale

     148   

Certain Material U.S. Federal Income Tax Considerations

     150   

Underwriting

     155   

Legal Matters

     159   

Experts

     159   

Where You Can Find More Information

     159   

Index to Financial Statements

     F-1   

 

 

Through and including                , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide you with any information or to make any representation, other than those contained in this prospectus or any free writing prospectus we have prepared. We take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only in circumstances and in jurisdictions where it is lawful to so do. The information contained in this prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

 

 


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case appearing elsewhere in this prospectus. Unless otherwise stated, all references to “us,” “our,” “Foundation,” “we,” the “Company” and similar designations refer to Foundation Medicine, Inc.

Overview

We are a commercial-stage company focused on fundamentally changing the way patients with cancer are treated. We derive revenue from selling products enabled by our molecular information platform to physicians and biopharmaceutical companies. Our platform includes proprietary methods and algorithms for analyzing tumor tissue samples across all types of cancer, as well as information aggregation and concise reporting capabilities. Our products provide genomic information about each patient’s individual cancer, enabling physicians to optimize treatments in clinical practice and enabling biopharmaceutical companies to develop targeted oncology therapies more effectively. We believe we have a significant first mover advantage in providing comprehensive molecular information products on a commercial scale.

FoundationOne, our first clinical product, is, to our knowledge, the only commercially available comprehensive molecular information product designed for use in the routine care of patients with cancer. We commenced our formal commercial launch of FoundationOne for solid tumors in June 2012 and expect to commence our commercial launch of FoundationOne for blood-based cancers, or hematologic malignancies, by early 2014.

We believe a new, comprehensive approach to providing molecular information for use in clinical settings can address an area of significant unmet medical need for patients suffering from advanced, or active metastatic, cancers. We estimate that there are approximately one million patients per year in the United States with newly-diagnosed or recurrent active metastatic cancers who fall into challenging treatment categories, including patients who have rare or aggressive diseases, patients whose disease has progressed after standard treatments, and patients who have tested negative under, or been ineligible for, traditional molecular diagnostic tests. We are initially targeting these patients for FoundationOne because we believe this patient population will currently benefit most from a comprehensive molecular information product. Our estimates are based upon a combination of feedback from our network of oncology thought leaders, data published by the National Cancer Institute in the Cancer Statistics Review, and focused market research that we commissioned. This market research consisted of an analysis of a third party database (that includes public and private cancer-related statistical information on tumor type, disease stage, clinical information, and disease outcomes) supplemented with confirmatory interviews from physicians who practice at a variety of cancer treatment centers, including academic research centers and community hospitals. As the number of available targeted therapies expands and as physicians gain further experience using comprehensive molecular information in their routine treatment decisions, we believe that the potentially addressable market for comprehensive molecular information products will expand over the next five years to include all patients who have metastatic disease, not limited to the challenging treatment categories noted above. We estimate that this potential market expansion could include an additional 800,000 total patients annually, based upon the same combination of sources of information we used to estimate the size of the patient population we are initially targeting for FoundationOne. For additional details on our target patient populations, see “Business—Market Opportunity.” Although we expect existing and future diagnostic

 

 

1


Table of Contents

testing providers to also target these patient populations, we believe FoundationOne is currently the only commercially available comprehensive molecular information product that provides a fully informative genomic profile in a concise and actionable format designed for use in the clinical setting.

We have experienced rapid adoption of FoundationOne. More than 1,500 physicians from large academic centers and community-based practices across more than 25 countries have ordered FoundationOne since its formal commercial launch in June 2012. We believe this rapid adoption of FoundationOne, accomplished with a nascent sales team, demonstrates the demand for and utility of a single, comprehensive product that helps oncologists effectively implement the promise of precision medicine. To further accelerate our growth and extend our competitive advantage, we are expanding our sales force, publishing scientific and medical advances, fostering relationships throughout the oncology community, and developing new products.

Key thought leaders at premier cancer centers have embraced our approach, as evidenced by their routine use of FoundationOne for their patients, as well as by our collaborations on clinical studies, peer-reviewed publications, and presentations at scientific and medical conferences. We believe that this validation of our approach by key thought leaders will also help drive adoption in the community oncology setting, where 85% of the approximately 10,000 oncologists in the United States practice. We believe the increasing use of our products, especially among thought leaders, along with the demonstration of the economic and clinical value of FoundationOne, will also help facilitate favorable reimbursement decisions.

We believe FoundationOne has a sustainable competitive advantage because it:

 

  Ÿ  

Comprehensively identifies clinically actionable information FoundationOne currently assesses 236 biologically relevant cancer genes for all classes of genomic alterations with high sensitivity and specificity, and has identified actionable alterations in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013. FoundationOne identifies genomic alterations that other diagnostic tests cannot. Based on our quantitative analysis, FoundationOne finds more than three times the combined number of actionable genomic alterations identifiable using a collection of six other commercially available and commonly used diagnostic tests;

 

  Ÿ  

Incorporates the latest scientific and medical advances — We have extensive relationships across the scientific and medical oncology communities, including with key thought leaders and biopharmaceutical companies. These relationships help us incorporate new cancer genes, the latest scientific findings, newly available targeted therapeutics, and relevant clinical trials into FoundationOne;

 

  Ÿ  

Readily integrates into routine clinical practice — Our proprietary sample preparation processes and computational biology algorithms allow us to utilize small amounts of routinely collected tumor tissue from a wide variety of sample types, including tissue with low tumor purity. We detect and report the clinically relevant genomic alterations, generally within 14 to 17 days. We are dedicated to providing high-quality support to our customers, from order initiation and sample acquisition through report delivery and follow-up with our medical affairs team;

 

  Ÿ  

Provides actionable information that physicians can use — In a concise report, FoundationOne communicates the actionable genomic alterations in a patient’s cancer and matches these alterations with targeted therapies and relevant clinical trials. Through our online portal, Interactive Cancer Explorer, physicians can access this report and links to peer-reviewed literature; and

 

  Ÿ  

Promotes physician interaction to create a powerful network effect — We are continually augmenting our cancer knowledgebase, and we are expanding the functionality of our Interactive

 

 

2


Table of Contents
 

Cancer Explorer to allow for sharing of genomic and treatment data. Together, we believe these efforts will create a network effect of more users and ultimately more actionable information.

Our molecular information platform is currently used by 18 pharmaceutical partners to enhance the development of targeted oncology therapeutics. We use our core proprietary molecular information platform, computational biology, and information technology capabilities to analyze patient samples from both retrospective and prospective clinical trials. We provide our biopharmaceutical partners comprehensive genomic analysis and information relevant to precision medicine strategies. In addition to generating revenue, these relationships enable us to identify new cancer genes under investigation that can be incorporated into our platform at an early stage, as well as to participate in the newest oncology therapeutics and practice.

We are dedicated to ongoing innovation in our molecular information platform and new product pipeline. For example, we are incorporating RNA-based sequencing technology to analyze the additional gene fusions commonly found in hematologic malignancies and expect to commence our commercial launch of FoundationOne for hematologic malignancies incorporating this technology by early 2014. We are also exploring and developing new products that are scientifically advanced and clinically-relevant including, for example, products utilizing circulating tumor cells and cell-free plasma DNA, which is DNA that circulates in blood plasma outside of cells, and products that expand our offerings into additional areas such as epigenetics, which examines changes in gene expression that occur without changes in the underlying DNA, methylation, which is a chemical signaling mechanism that plays a role in regulation of gene expression, and immune response.

Over time, we will expand our ability to capture, aggregate, analyze, and facilitate the broader exchange of genomic data across the global oncology community. If we, in conjunction with oncologists, pathologists, biopharmaceutical companies, and academic researchers, can successfully capture and utilize this data, we believe we will play an even more integral role in transforming care for the millions of patients suffering from cancer.

We derive our revenue from selling products that are enabled by our molecular information platform. These products include test results sold to our clinical customers as the branded product FoundationOne, and test results sold as an unbranded product to biopharmaceutical customers.

We recorded total revenue of $10.6 million and $11.1 million for the year ended December 31, 2012 and the six months ended June 30, 2013, respectively, and our loss from operations during these periods was $21.9 million and $17.1 million, respectively. Our accumulated deficit totaled $64.2 million as of June 30, 2013.

We are implementing a comprehensive strategy to pursue favorable reimbursement and coverage decisions for FoundationOne and we have been reasonably successful to date in securing reimbursement for tests performed for patients covered by commercial third-party payors. We have not yet, however, received a coverage decision for FoundationOne from any commercial third-party payor or government payor, including Medicare. As a result, there is uncertainty surrounding the amount we will be paid for FoundationOne tests we perform for patients covered by commercial third-party payors and government payors. For example, of the 1,750 FoundationOne tests that we performed during 2012, 398 FoundationOne tests were for patients covered by Medicare for which we have not yet submitted claims for reimbursement. We also performed 641 FoundationOne tests during 2012 that were billed to commercial third-party payors but for which we had not been paid as of December 31, 2012; during the first six months of 2013, we received payment for 404 of these 641 FoundationOne tests. Ultimately, we believe that adoption of our products, increased support for our products by oncology thought leaders, the completion of clinical studies, and the publication of clinical data in medical and scientific journals will demonstrate the clinical utility of our products and foster favorable reimbursement decisions.

 

 

3


Table of Contents

Our Strategy

Our objective is to transform the care of patients with cancer by leading the development and commercialization of proprietary molecular information products that guide the diagnosis and treatment of cancer, and that enhance the development of cancer therapies. To achieve this objective our strategy is to:

 

  Ÿ  

Drive awareness and adoption of FoundationOne and our future clinical products.

 

  Ÿ  

Demonstrate the value of our products to patients, physicians, and payors.

 

  Ÿ  

Enable biopharmaceutical companies to more effectively develop new cancer therapies.

 

  Ÿ  

Invest in product enhancements and new product innovations.

 

  Ÿ  

Empower the broader cancer community with molecular information.

Risk Factors

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

  Ÿ  

We may not be able to generate sufficient revenue from FoundationOne or our relationships with our biopharmaceutical partners to achieve or maintain profitability.

 

  Ÿ  

If commercial third-party payors or government payors fail to provide coverage or adequate reimbursement, or if there is a decrease in the amount of reimbursement for FoundationOne, our revenue and prospects for profitability would be harmed.

 

  Ÿ  

If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenue or achieve and sustain profitability.

 

  Ÿ  

If our sole laboratory facility becomes damaged or inoperable or our new laboratory facility fails to be certified under federal and state licensing requirements, our ability to conduct our business may be jeopardized.

 

  Ÿ  

We rely on a limited number of suppliers or, in some cases, a sole supplier, for some of our laboratory instruments and materials and may not be able to find replacements or immediately transition to alternative suppliers.

 

  Ÿ  

If we are unable to scale our operations to support increased demand for FoundationOne, our business could suffer.

 

  Ÿ  

We depend on our information technology systems, and any failure of these systems could harm our business.

Company and Other Information

We were incorporated under the laws of the State of Delaware in November 2009. Our principal executive office is located at One Kendall Square, Suite B3501, Cambridge MA 02139, and our telephone number is (617) 418-2200. Our website address is www.foundationmedicine.com. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

We own various U.S. federal trademark registrations and applications, and unregistered trademarks and servicemarks, including Foundation Medicine®, FoundationOne™, and Interactive Cancer Explorer™. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 

4


Table of Contents

THE OFFERING

 

Common stock offered by us

5,000,000 shares

 

Common stock to be outstanding after this offering

26,283,454 shares (27,033,454 shares if the underwriters exercise their option to purchase additional shares in full)

 

Underwriters’ option to purchase additional shares

We have granted a 30-day option to the underwriters to purchase up to an aggregate of 750,000 additional shares of common stock.

 

Use of proceeds by us

We estimate that we will receive net proceeds from this offering of approximately $66.9 million based upon an assumed initial public offering price of $15.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use the net proceeds from this offering to fund the expansion of our commercial and laboratory operations, ongoing and new clinical trials, continue building our technology infrastructure and capabilities, as well as for working capital and other general corporate purposes, including funding the costs of operating as a public company. See “Use of Proceeds” for additional information.

 

Risk factors

You should carefully read “Risk Factors” in this prospectus for a discussion of factors that you should consider before deciding to invest in our common stock.

 

Proposed NASDAQ Global Market trading symbol

“FMI”

The number of shares of our common stock to be outstanding after this offering is based on 4,155,428 shares of our common stock outstanding as of August 31, 2013, including 747,171 shares of common stock potentially subject to repurchase by us, and excludes:

 

  Ÿ  

2,150,117 shares of common stock issuable upon the exercise of stock options outstanding as of August 31, 2013 at a weighted-average exercise price of $3.04 per share;

 

  Ÿ  

50,000 shares of common stock issuable upon the exercise of a warrant outstanding at an exercise price of $4.00 per share, which warrant prior to the closing of this offering is exercisable to purchase preferred stock and will be exercisable for common stock following this offering;

 

  Ÿ  

1,355,171 shares of common stock reserved for future issuance under our 2013 Stock Option and Grant Plan, or the 2013 Plan (which includes 512,568 shares reserved for issuance under our Amended and Restated 2010 Stock Incentive Plan that will become available under our 2013 Stock Option and Grant Plan upon our initial public offering); and

 

  Ÿ  

788,503 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, or ESPP.

 

 

5


Table of Contents

Unless otherwise indicated, all information in this prospectus reflects or assumes the following:

 

  Ÿ  

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the closing of this offering;

 

  Ÿ  

a 1-for-4 reverse split of our common stock effected on September 12, 2013;

 

  Ÿ  

the conversion of all of our outstanding 68,512,134 shares of preferred stock into 17,128,026 shares of common stock upon the closing of this offering;

 

  Ÿ  

the conversion of the warrant exercisable into 200,000 shares of preferred stock into a warrant exercisable for 50,000 shares of common stock;

 

  Ÿ  

the 747,171 shares of our common stock subject to potential repurchase by us pursuant to their vesting terms are treated as outstanding shares of our common stock;

 

  Ÿ  

no issuance or exercise of stock options or warrants on or after August 31, 2013; and

 

  Ÿ  

no exercise by the underwriters of their option to purchase up to an additional 750,000 shares of common stock in this offering.

 

 

6


Table of Contents

SUMMARY FINANCIAL DATA

The following summary financial data for the years ended December 31, 2011 and 2012 are derived from our audited financial statements included elsewhere in this prospectus. The summary financial data as of June 30, 2013 and for the six months ended June 30, 2012 and 2013 have been derived from our unaudited financial statements included elsewhere in this prospectus. These unaudited financial statements have been prepared on a basis consistent with our audited financial statements and, in our opinion, contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of such financial data. You should read this data together with our audited financial statements and related notes included elsewhere in this prospectus and the information under the captions “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and our operating results for the six-month period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013 or any other interim periods or any future year or period.

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  
                 (unaudited)  
     (in thousands, except share and per share data)  

Statements of Operations Data:

  

Revenue

   $ 2,057      $ 10,645      $ 2,429      $ 11,120   

Costs and expenses

        

Cost of revenue

     258        5,681        1,830        4,597   

Sales and marketing

     1,555        3,454        1,347        4,686   

General and administrative

     6,992        8,644        3,699        7,905   

Research and development

     9,023        14,777        6,623        11,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     17,828        32,556        13,499        28,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15,771     (21,911     (11,070     (17,147

Interest expense, net

     (421     (421     (221     (141

Other expense, net

     (845     (61     (53     (102
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

     (296     (286     (162     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

   $ (17,333   $ (22,679   $ (11,506   $ (17,482
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share applicable to common stockholders, basic and diluted(1)

   $ (14.06   $ (10.47   $ (6.15   $ (5.92
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, basic and diluted

     1,232,658        2,166,832        1,871,431        2,950,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share applicable to common stockholders, basic and diluted(1)

     $ (1.63     $ (0.87
    

 

 

     

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted

       13,910,719          20,129,030   
    

 

 

     

 

 

 

Comprehensive loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note 2 within the notes to our financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net loss per share of common stock and pro forma basic and diluted net loss per share of common stock.

 

 

7


Table of Contents
     As of June 30, 2013  
     Actual     Pro Forma(1)     Pro Forma
As  Adjusted(2)(3)
 
     (unaudited)  
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 35,965      $ 35,965      $ 102,865   

Working capital

     32,226        32,226        99,126   

Total assets

     52,269        52,269        119,169   

Notes payable, excluding current portion

     634        634        634   

Redeemable convertible preferred stock warrant liability

     328                 

Redeemable convertible preferred stock

     98,740                 

Accumulated deficit

     (64,209     (64,140     (64,140

Total stockholders’ (deficit) equity

   $ (58,851   $ 40,217      $ 107,117   

 

(1) Pro forma to reflect (i) the automatic conversion of all outstanding shares of our preferred stock into shares of our common stock, and the conversion of our outstanding warrant to purchase our Series A preferred stock into a warrant to purchase our common stock, upon the closing of this offering and (ii) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering.
(2) Pro forma as adjusted to reflect the pro forma adjustments described in (1) above, and to further reflect the sale of shares of our common stock offered in this offering, assuming an initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(3) A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $14.0 million, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A one million share increase in the number of shares offered by us together with a concomitant $1.00 increase in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $19.5 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. Conversely, a one million share decrease in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $17.7 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us.

 

 

8


Table of Contents

RISK FACTORS

Before you invest in our common stock, you should understand the high degree of risk involved. You should carefully consider the following risks and other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before you decide to purchase shares of our common stock. The following risks may adversely impact our business, financial condition, and operating results. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Relating to Our Business and Strategy

We may not be able to generate sufficient revenue from FoundationOne or our relationships with our biopharmaceutical partners to achieve and maintain profitability.

We believe our commercial success is dependent upon our ability to successfully market and sell our first molecular information product, FoundationOne for solid tumors, to physicians in clinical practice, to launch and commercialize FoundationOne for blood-based cancers, or hematologic malignancies, to continue to expand our current relationships and develop new relationships with biopharmaceutical partners, and to develop and commercialize new molecular information products. The demand for FoundationOne may decrease or may not continue to increase at historical rates for a number of reasons. In addition, FoundationOne does not yet have coverage contracts with or coverage decisions from commercial third-party payors and government payors, including Medicare. We have experienced early revenue growth from the sale of FoundationOne to physicians, principally since its formal commercial launch in June 2012. We may not be able to continue revenue growth or maintain existing revenue levels.

Our biopharmaceutical partners may decide to decrease or discontinue their use of our molecular information platform due to changes in research and product development plans, failures in their clinical trials, financial constraints, or utilization of internal molecular testing resources or molecular tests performed by other parties, which are circumstances outside of our control. In addition to reducing our revenue, this may reduce our exposure to early stage research that facilitates the incorporation of newly developed information about cancer into our molecular information platform and FoundationOne.

We are currently not profitable. Even if we succeed in increasing adoption of FoundationOne by physicians, maintaining and creating relationships with our existing and new biopharmaceutical partners and developing and commercializing additional molecular information products, we may not be able to generate sufficient revenue to achieve profitability.

FoundationOne may never achieve significant commercial market acceptance.

FoundationOne may never gain significant acceptance in the marketplace and, therefore, may never generate substantial revenue or profits for us. Our ability to achieve commercial market acceptance for FoundationOne will depend on several factors, including:

 

  Ÿ  

our ability to convince the medical community of the clinical utility of our products and their potential advantages over existing molecular tests;

 

  Ÿ  

the willingness of physicians and patients to utilize our products; and

 

  Ÿ  

the agreement by commercial third-party payors and government payors to reimburse our products, the scope and amount of which will affect patients’ willingness or ability to pay for our products and likely heavily influence physicians’ decisions to recommend our products.

 

9


Table of Contents

In addition, physicians may rely on guidelines issued by industry groups, such as the National Comprehensive Cancer Network, medical societies, such as the College of American Pathologists, or other key oncology-related organizations before utilizing any diagnostic test. Although we have a number of company-sponsored clinical trials and clinical trials sponsored by individual physicians, or investigator-initiated clinical trials, underway to demonstrate the clinical utility of FoundationOne, it is not yet, and may never be, listed in any such guidelines.

We believe that the successful completion of clinical trials, publication of scientific and medical results in peer-reviewed journals, and presentations at leading conferences are critical to the broad adoption of FoundationOne. Publication in leading medical journals is subject to a peer-review process, and peer reviewers may not consider the results of studies involving FoundationOne sufficiently novel or worthy of publication.

The failure to be listed in physician guidelines or of our trials to produce favorable results or to be published in peer-reviewed journals could limit the adoption of our products. Failure to achieve widespread market acceptance of FoundationOne would materially harm our business, financial condition and results of operations.

We rely on a limited number of suppliers or, in some cases, sole suppliers, for some of our laboratory instruments and materials and may not be able to find replacements or immediately transition to alternative suppliers.

We rely on several sole suppliers, including Illumina, Inc., or Illumina, for certain laboratory substances used in the chemical reactions incorporated into our processes, or reagents, sequencers, equipment and other materials which we use in our laboratory operations. An interruption in our laboratory operations could occur if we encounter delays or difficulties in securing these reagents, sequencers, or other laboratory materials, and if we cannot then obtain an acceptable substitute. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. We rely on Illumina as the sole supplier of the sequencers and various associated reagents, and as the sole provider of maintenance and repair services for these sequencers. Any disruption in Illumina’s operations could impact our supply chain and laboratory operations of our molecular information platform and our ability to conduct our business and generate revenue.

We believe that there are only a few other equipment manufacturers that are currently capable of supplying and servicing the equipment necessary for our laboratory operations, including sequencers and various associated reagents. The use of equipment or materials furnished by these replacement suppliers would require us to alter our laboratory operations. Transitioning to a new supplier would be time consuming and expensive, may result in interruptions in our laboratory operations, could affect the performance specifications of our laboratory operations or could require that we revalidate FoundationOne. There can be no assurance that we will be able to secure alternative equipment, reagents, and other materials, and bring such equipment, reagents, and materials on line and revalidate them without experiencing interruptions in our workflow. In the case of an alternative supplier for Illumina, there can be no assurance that replacement sequencers and various associated reagents will be available or will meet our quality control and performance requirements for our laboratory operations. If we should encounter delays or difficulties in securing, reconfiguring or revalidating the equipment and reagents we require for our products, our business, financial condition, results of operations and reputation could be adversely affected.

 

10


Table of Contents

If our sole laboratory facility becomes damaged or inoperable or we are required to vacate our existing facility, and our new laboratory facility has not yet been, or fails to be, certified under federal and state licensing requirements, our ability to conduct our genomic analyses and pursue our research and development efforts may be jeopardized.

We currently derive all of our revenue from tests conducted at a single laboratory facility located in Cambridge, Massachusetts. Our facility and equipment could be harmed or rendered inoperable by natural or man-made disasters, including war, fire, earthquake, power loss, communications failure, or terrorism, which may render it difficult or impossible for us to operate our molecular information platform for some period of time. The inability to perform our molecular tests or to reduce the backlog of analyses that could develop if our facility is inoperable, for even a short period of time, may result in the loss of customers or harm to our reputation, and we may be unable to regain those customers or repair our reputation in the future. Furthermore, our facility and the equipment we use to perform our research and development work could be unavailable or costly and time-consuming to repair or replace. It would be difficult, time-consuming, and expensive to rebuild our facility or license or transfer our proprietary technology to a third-party, particularly in light of the licensure and accreditation requirements for a commercial laboratory like ours. Even in the unlikely event we are able to find a third party with such qualifications to enable us to conduct our molecular tests, we may be unable to negotiate commercially reasonable terms.

We intend to move our laboratory into a new facility at our new corporate headquarters in Cambridge, Massachusetts in September 2013. This relocation could disrupt laboratory operations, resulting in an inability to meet customer turnaround time expectations, and could be delayed, resulting in slower realization of laboratory efficiencies anticipated from the use of the new facilities. We might also encounter delays in completing the transfer or issuance of new licenses or other approvals necessary to allow our clinical laboratory operations to commence at the new facility. Adverse consequences resulting from a delay in the laboratory relocation or resulting from an interruption of laboratory operations, including as a result of a failure to be certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, the College of American Pathologists, or CAP, and state licensing requirements, could harm our relationships with our customers and our reputation, and could affect our ability to generate revenue.

We carry insurance for damage to our property and the disruption of our business, but this insurance may not cover all of the risks associated with damage or disruption to our business, may not provide coverage in amounts sufficient to cover our potential losses, and may not continue to be available to us on acceptable terms, if at all.

If we are unable to support demand for FoundationOne and our future products, including ensuring that we have adequate capacity to meet increased demand, or we are unable to successfully manage the evolution of our molecular information platform, our business could suffer.

As our volume grows, we will need to continue to increase our workflow capacity for sample intake, customer service, billing and general process improvements, expand our internal quality assurance program, and extend our platform to support comprehensive genomic analyses at a larger scale within expected turnaround times. We will need additional certified laboratory scientists and other scientific and technical personnel to process higher volumes of our molecular information products. Portions of our process are not automated and will require additional personnel to scale. We will also need to purchase additional equipment, some of which can take several months or more to procure, setup, and validate, and increase our software and computing capacity to meet increased demand. There is no assurance that any of these increases in scale, expansion of personnel, equipment, software and computing capacities, or process enhancements will be successfully implemented, or that we will have adequate space in our laboratory facility to accommodate such required expansion.

 

11


Table of Contents

As additional products are commercialized, such as FoundationOne for hematologic malignancies, we will need to incorporate new equipment, implement new technology systems and laboratory processes, and hire new personnel with different qualifications. For example, we are now scaling up our RNA sequencing capabilities and we believe we will be the first company to perform RNA sequencing for clinical testing at our clinical scale. Failure to manage this growth or transition could result in turnaround time delays, higher product costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of these areas could make it difficult for us to meet market expectations for our products, and could damage our reputation and the prospects for our business.

New product development involves a lengthy and complex process and we may be unable to commercialize FoundationOne for hematologic malignancies or any other products we may develop on a timely basis, or at all.

FoundationOne for hematologic malignancies, for which we expect to commence our commercial launch by early 2014, will take time to commercialize, and its launch may be delayed or may not be successful. There can be no assurance that FoundationOne for hematologic malignancies will be successful in the evaluation of blood-based cancers for a variety of technical and market reasons. Our other new molecular information products, which are in various stages of early development, will take time to develop and commercialize, if we are able to commercialize them at all. There can be no assurance that our new products will be capable of reliably identifying relevant genomic alterations in forms of cancer other than cancers found in solid tumors. Before we can commercialize any new products, we will need to expend significant funds in order to:

 

  Ÿ  

conduct substantial research and development, including validation studies and potentially clinical trials;

 

  Ÿ  

further develop and scale our laboratory processes to accommodate different products; and

 

  Ÿ  

further develop and scale our infrastructure to be able to analyze increasingly large amounts of data.

Our product development process involves a high degree of risk, and product development efforts may fail for many reasons, including:

 

  Ÿ  

failure of the product to perform as expected at the research or development stage;

 

  Ÿ  

lack of validation data; or

 

  Ÿ  

failure to demonstrate the clinical utility of the product.

As we develop products, we will have to make significant investments in product development, marketing and selling resources. In addition, competitors may develop and commercialize competing products faster than we are able to do so.

If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenue or achieve and sustain profitability.

Personalized genomic diagnostics is a new area of science, and we face competition from companies that offer products or have conducted research to profile genes and gene expression in various cancers. Our principal competition comes from diagnostic companies that offer molecular diagnostic tests that capture only a single-marker or test panels that capture a limited number of the most well-known gene alterations, which are also known as hotspot panel tests. In addition, academic research centers, diagnostic companies and next generation sequencing, or NGS, platform developers are offering or developing NGS-based testing.

Our competitors include laboratory companies such as Bio-Reference Laboratories, Inc., Laboratory Corporation of America Holdings, Quest Diagnostics Incorporated, as well as companies

 

12


Table of Contents

such as Abbott Laboratories, Qiagen N.V., Roche Molecular Systems, Inc. and Sequenom, Inc. that manufacture or may manufacture diagnostic testing kits. In addition, companies such as Genomic Health, Inc. and Myriad Genetics, Inc. have well-established commercial organizations that sell molecular diagnostic tests for cancer to physicians and may develop tests which compete with FoundationOne.

Many hospitals and academic medical centers may also seek to perform the type of molecular testing we perform at their own facilities. As such, our competition may include entities such as the University of Michigan, Baylor Medical Genetics Laboratories, Washington University in St. Louis and other academic hospitals and research centers.

In addition to developing kits, certain diagnostic companies also provide NGS platforms. Illumina, Life Technologies Corporation, and other companies develop NGS platforms that are being sold directly to research centers, biopharmaceutical companies and clinical laboratories. While many of the applications for these platforms are focused on the research and development markets and others are focused on testing for non-cancer conditions, each of these companies has launched and will continue to commercialize products focused on the clinical oncology market. We believe diagnostic platform providers will seek to place sequencing machines in laboratories to develop NGS-based laboratory-developed tests, or LDTs. In addition, we believe these companies will also develop their own FDA-approved diagnostic kits, which can be sold to the clients who have purchased their platforms. Also, many private companies are developing information technology-based tools to support the integration of NGS testing into the clinical setting. These companies may also use their patent portfolios, developed in connection with developing their tests, to allege that FoundationOne infringes their patents, and we could face litigation with respect to such allegations and the validity of such patents.

In addition, because our proprietary molecular information platform consists largely of trade-secret protected technology and know-how and has only limited patent protection, new and existing companies could seek to develop molecular tests that compete with ours. These competitors could have technological, financial and market access advantages that are not currently available to us.

The molecular diagnostic industry is subject to rapidly changing technology which could make our molecular information platform, FoundationOne, and other products we develop obsolete.

Our industry is characterized by rapid technological changes, frequent new product introductions and enhancements and evolving industry standards, all of which could make our molecular information platform, FoundationOne, and the other molecular information products we are developing obsolete. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of technological and scientific advances. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There have also been advances in methods used to analyze very large amounts of genomic information. We must continuously enhance our molecular information platform and develop new products to keep pace with evolving standards of care. If we do not update our molecular information platform to reflect new scientific knowledge about cancer biology, information about new cancer therapies, or relevant clinical trials, our molecular information platform could become obsolete and sales of FoundationOne and any new products could decline, which would have a material adverse effect on our business, financial condition, and results of operations.

If our products do not perform as expected, our operating results, reputation, and business will suffer.

Our success depends on the market’s confidence that we can provide reliable, high-quality molecular information products. There is no guarantee that the accuracy and reproducibility we have

 

13


Table of Contents

demonstrated to date will continue, particularly for clinical samples, as our test volume increases. We believe that our customers are likely to be particularly sensitive to product defects and errors, including if our products fail to detect genomic alterations with high accuracy from clinical specimens or if we fail to list or inaccurately include certain treatment options and available clinical trials in our test report. As a result, the failure of our products to perform as expected would significantly impair our operating results and our reputation. We may be subject to legal claims arising from any defects or errors.

We refer to the efficiency of our sequencing process as its yield. The sequencing process yields that we achieve depend on the design and operation of our sequencing process, which uses a number of complex and sophisticated biochemical, informatics, optical, and mechanical processes, many of which are highly sensitive to external factors. An operational or technology failure in one of these complex processes or fluctuations in external variables may result in sequencing processing yields that are lower than we anticipate or that vary between sequencing runs. In addition, we are regularly evaluating and refining our sequencing process. These refinements may initially result in unanticipated issues that further reduce our sequencing process yields or increase the variability of our sequencing yields. Low sequencing yields, or higher than anticipated variability, increases total sequencing costs and reduces the number of samples we can sequence in a given time period, which can cause variability in our operating results and damage our reputation.

If we lose the support of key thought leaders, it may be difficult to establish products enabled by our molecular information platform as a standard of care for patients with cancer, which may limit our revenue growth and ability to achieve profitability.

We have established relationships with leading oncology thought leaders at premier cancer institutions, such as the Memorial Sloan-Kettering Cancer Center, Vanderbilt-Ingram Cancer Center and The US Oncology Network. If these key thought leaders determine that our molecular information platform, FoundationOne or other products that we develop are not clinically effective or that alternative technologies are more effective, or if they elect to use internally developed products, we would encounter significant difficulty validating our testing platform, driving adoption, or establishing our molecular information platform and FoundationOne as a standard of care, which would limit our revenue growth and our ability to achieve profitability.

If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our product development could be delayed.

We deploy our molecular information platform to analyze tissue samples provided by biopharmaceutical partners from their clinical trials. We have entered into agreements with biopharmaceutical companies in the cancer field including, for example, Agios Pharmaceuticals, Inc., ARIAD Pharmaceuticals, Inc., Array BioPharma Inc., AstraZeneca UK Limited, Celgene Corporation, Clovis Oncology, Inc., Eisai Co., Ltd., Johnson & Johnson, Novartis, and Sanofi, among others. In each of the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013, our alliance with Novartis accounted for more than 10% of our revenue. The revenue attributable to Novartis may also fluctuate in the future, which could have an adverse effect on our financial condition and results of operations. In addition, the termination of this relationship could result in a temporary or permanent loss of revenue.

Our success in the future depends in part on our ability to maintain these relationships and to enter into new relationships. This can be difficult due to several factors, including internal and external constraints placed on these organizations, including Novartis, that can limit the number and type of relationships with companies like us that can be considered and consummated; the agreements governing our relationships are generally terminable at will by the our biopharmaceutical customers; our biopharmaceutical customers, including Novartis, may be dissatisfied with our products; and

 

14


Table of Contents

continued usage of our products among particular biopharmaceutical customers, including Novartis, may depend on whether the partner obtains positive data in its clinical trials or other administrative factors that are outside our control. Additionally, certain of our biopharmaceutical partners have contracted with us to provide testing for large numbers of samples, which could strain our testing capacity and restrict our ability to perform additional tests for other customers. If we fail to maintain these relationships, or enter into new ones, our business could suffer.

From time to time we expect to engage in discussions with biopharmaceutical companies regarding commercial opportunities. There is no assurance that any of these discussions will result in a commercial agreement, or if an agreement is reached, that the resulting engagement will be successful or that clinical studies conducted as part of the engagement will produce successful outcomes. Speculation in the industry about our existing or potential engagements with biopharmaceutical companies can be a catalyst for adverse speculation about us, our products, and our technology, which can result in harm to our reputation and our business.

We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.

We anticipate growth in our business operations. This future growth could create strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service, and sales force management. We may not be able to maintain the quality or expected turnaround times of our products, or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial, and management controls, as well as our reporting systems and procedures. We plan to implement new enterprise software systems in a number of areas affecting a broad range of business processes and functional areas. The time and resources required to implement these new systems is uncertain, and failure to complete this in a timely and efficient manner could adversely affect our operations.

We have limited experience in marketing and selling our products, and if we are unable to expand our direct sales and marketing force to adequately address our customers’ needs, our business may be adversely affected.

We have limited experience in marketing and selling FoundationOne, which had its formal commercial launch in June 2012. We may not be able to market, sell, or distribute FoundationOne or other products we may develop effectively enough to support our planned growth. We sell FoundationOne in the United States through our own sales force and outside the United States with the assistance of distribution partners.

Our future sales in the United States will depend in large part on our ability to develop and substantially expand our sales force and to increase the scope of our marketing efforts. Our target market of physicians is a large and diverse market. As a result, we believe it is necessary to develop a sales force that includes sales representatives with specific technical backgrounds. We will also need to attract and develop marketing personnel with industry expertise. Competition for such employees is intense. We may not be able to attract and retain personnel or be able to build an efficient and effective sales and marketing force, which could negatively impact sales and market acceptance of our products and limit our revenue growth and potential profitability.

Our expected future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, and integrate additional employees. Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage this potential future growth effectively, without compromising quality.

 

15


Table of Contents

Outside the United States we enlist distribution partners, and we may potentially enlist local laboratories, to assist with sales, distribution, and customer support. Locating, qualifying, and engaging distribution partners and local laboratories with local industry experience and knowledge will be necessary to effectively market and sell our products outside the United States. We may not be successful in finding, attracting, and retaining distribution partners or laboratories, or we may not be able to enter into such arrangements on favorable terms. Sales practices utilized by our distribution parties that are locally acceptable may not comply with sales practices standards required under United States laws that apply to us, which could create additional compliance risk. If our sales and marketing efforts are not successful outside the United States, we may not achieve significant market acceptance for our products outside the United States, which would materially and adversely impact our business operations.

The loss of any member of our senior management team or our inability to attract and retain highly skilled scientists, clinicians and salespeople could adversely affect our business.

Our success depends on the skills, experience and performance of key members of our senior management team, including Michael J. Pellini, M.D., our President and Chief Executive Officer. The individual and collective efforts of these employees will be important as we continue to develop our molecular information platform and additional products, and as we expand our commercial activities. The loss or incapacity of existing members of our executive management team could adversely affect our operations if we experience difficulties in hiring qualified successors. Our executive officers have employment agreements; however, the existence of an employment agreement does not guarantee the retention of the executive officer for any period of time. We do not maintain “key person” insurance on any of our employees.

Our research and development programs and laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians. We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel among life science businesses, particularly in Cambridge, Massachusetts. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. We may have difficulties locating, recruiting or retaining qualified sales people. Recruiting and retention difficulties can limit our ability to support our research and development and sales programs. All of our employees are at-will, which means that either we or the employee may terminate their employment at any time.

If we were sued for product liability or professional liability, we could face substantial liabilities that exceed our resources.

The marketing, sale and use of our products could lead to the filing of product liability claims were someone to allege that our products identified inaccurate or incomplete information regarding the genomic alterations of the tumor or malignancy analyzed, reported inaccurate or incomplete information concerning the available therapies for a certain type of cancer, or otherwise failed to perform as designed. We may also be subject to liability for errors in, a misunderstanding of, or inappropriate reliance upon, the information we provide in the ordinary course of our business activities. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend.

We maintain product and professional liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional 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 damage our reputation, or cause current clinical partners to terminate existing agreements and potential clinical partners to seek other partners, any of which could impact our results of operations.

 

16


Table of Contents

We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could negatively affect our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

We may pursue acquisitions of businesses and assets. We also may pursue strategic alliances and joint ventures that leverage our proprietary molecular information platform and industry experience to expand our offerings or distribution. We have no experience with acquiring other companies and limited experience with forming strategic partnerships. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a material adverse effect on our financial condition, results of operations, and cash flows. Integration of an acquired company also may disrupt ongoing operations and require management resources that we would otherwise focus on developing our existing business. We may experience losses related to investments in other companies, which could have a material negative effect on our results of operations and financial condition. We may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, or joint venture.

To finance any acquisitions or joint ventures, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of our stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.

International expansion of our business exposes us to business, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States.

We currently have limited international operations, but our business strategy incorporates potentially significant international expansion. We plan to maintain sales representatives and distributor relationships, to conduct physician and patient association outreach activities, to extend laboratory capabilities and to expand payor relationships outside of the United States. Doing business internationally involves a number of risks, including:

 

  Ÿ  

multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses;

 

  Ÿ  

failure by us or our distributors to obtain regulatory approvals for the use of our products in various countries;

 

  Ÿ  

additional potentially relevant third-party patent rights;

 

  Ÿ  

complexities and difficulties in obtaining protection and enforcing our intellectual property;

 

  Ÿ  

difficulties in staffing and managing foreign operations;

 

  Ÿ  

complexities associated with managing multiple payor reimbursement regimes, government payors, or patient self-pay systems;

 

  Ÿ  

logistics and regulations associated with shipping tissue samples, including infrastructure conditions and transportation delays;

 

  Ÿ  

limits in our ability to penetrate international markets if we are not able to conduct our molecular tests locally;

 

  Ÿ  

financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products, and exposure to foreign currency exchange rate fluctuations;

 

17


Table of Contents
  Ÿ  

natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade, and other business restrictions; and

 

  Ÿ  

regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions, or its anti-bribery provisions.

Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.

We could be adversely affected by violations of the FCPA and other worldwide anti-bribery laws.

International customers may currently order FoundationOne and we are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell FoundationOne internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which went into effect in the third quarter of 2011, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures.

Our employees, principal investigators, consultants, and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants, and commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately, or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We currently have a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and our code of conduct and the other precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses, or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, which could have a significant impact on our business. Whether or

 

18


Table of Contents

not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.

We depend on our information technology systems, and any failure of these systems could harm our business.

We depend on information technology and telecommunications systems for significant elements of our operations, including our laboratory information management system, our computational biology system, our knowledge management system, our customer reporting, and our Interactive Cancer Explorer portal. We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including for example, systems handling human resources, financial controls and reporting, contract management, regulatory compliance, and other infrastructure operations. In addition to the aforementioned business systems, we intend to extend the capabilities of both our preventative and detective security controls by augmenting the monitoring and alerting functions, the network design, and the automatic countermeasure operations of our technical systems. These information technology and telecommunications systems support a variety of functions, including laboratory operations, test validation, sample tracking, quality control, customer service support, billing and reimbursement, research and development activities, scientific and medical curation, and general administrative activities. In addition, our third-party billing and collections provider depends upon technology and telecommunications systems provided by outside vendors.

Information technology and telecommunications 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 information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party service providers could prevent us from conducting our comprehensive genomic analyses, preparing and providing reports to pathologists and oncologists, billing payors, processing reimbursement appeals, handling patient or physician inquiries, conducting research and development activities, and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business.

Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.

In the ordinary course of our business, we and our third-party billing and collections provider collect and store sensitive data, including legally protected health information, personally identifiable information, intellectual property and proprietary business information owned or controlled by ourselves or our customers, payors, and biopharmaceutical partners. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems, and cloud-based data center systems. We also communicate, and soon will facilitate the exchange of, sensitive patient data to customers through Interactive Cancer Explorer. These applications and data encompass a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information, including: loss of access risk; inappropriate disclosure risk; inappropriate modification risk; and the risk of our being unable to adequately monitor our controls over the first three risks.

 

19


Table of Contents

The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure, and that of our third-party billing and collections provider, may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance, or other disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and regulatory penalties. Although we have implemented security measures and a formal, dedicated enterprise security program to prevent unauthorized access to patient data, Interactive Cancer Explorer, which is currently accessible through our online portal and will also soon be accessible through our mobile applications, gives broad access to physicians, at which point we lose ability to control access, and there is no guarantee we can continue to protect our online portal or will be able to protect our mobile applications from breach. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to conduct our analyses, provide test results, bill payors or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, collect, process, and prepare company financial information, provide information about our products and other patient and physician education and outreach efforts through our website, manage the administrative aspects of our business, and damage our reputation, any of which could adversely affect our business.

The U.S. Office of Civil Rights may impose penalties on a covered entity for a failure to comply with a requirement of HIPAA. Penalties will vary significantly depending on factors such as the date of the violation, whether the covered entity knew or should have known of the failure to comply, or whether the covered entity’s failure to comply was due to willful neglect. These penalties include civil monetary penalties of $100 to $50,000 per violation, up to an annual cap of $1,500,000. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. The criminal penalties increase to $100,000 and up to five years imprisonment if the wrongful conduct involves false pretenses, and to $250,000 and up to 10 years imprisonment if the wrongful conduct involves the intent to sell, transfer, or use identifiable health information for commercial advantage, personal gain, or malicious harm. The U.S. Department of Justice is responsible for criminal prosecutions under HIPAA. Furthermore, in the event of a breach as defined by HIPAA, the covered entity has specific reporting requirements under the HIPAA regulations. In the event of a significant breach, the reporting requirements could include notification to the general public.

In addition, the interpretation and application of consumer, health-related, and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory, and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. In addition, these privacy regulations may differ from country to country, and may vary based on whether testing is performed in the United States or in the local country. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business.

Economic or business instability may have a negative impact on our business.

Continuing concerns over United States health care reform legislation, geopolitical issues, the availability and cost of credit, and government stimulus programs in the United States and other countries have contributed to volatility for the global economy. If the economic climate does not improve, our business, including our access to patient samples and the addressable market for

 

20


Table of Contents

molecular information products that we may successfully develop, as well as the financial condition of our suppliers and our commercial third-party payors, could be adversely affected, resulting in a negative impact on our business, financial condition, and results of operations. Additionally, the instability has resulted in diminished liquidity and credit availability in the market, which could impair our ability to access capital if required or adversely affect our operations. In the event of further economic slowdown, investment in biopharmaceutical research and development may also experience a corresponding slowdown.

If we use hazardous materials in a manner that causes injury, we could be liable for damages.

Our activities currently require the use of hazardous chemicals. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject on an ongoing basis to federal, state, and local laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could negatively affect our operating results.

Our term loan contains restrictions that limit our flexibility in operating our business.

In November 2010, we entered into a loan and security agreement with Lighthouse Capital Partners, or Lighthouse, secured by a lien on equipment, fixtures or personal property financed pursuant to any agreements with Lighthouse. This loan contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

  Ÿ  

sell, transfer, lease or dispose of certain assets;

 

  Ÿ  

encumber or permit liens on certain assets;

 

  Ÿ  

make certain restricted payments, including paying dividends on, or repurchasing or making distributions with respect to, our common stock; and

 

  Ÿ  

enter into certain transactions with affiliates.

A breach of any of the covenants under the loan and security agreement could result in a default under the loan. Upon the occurrence of an event of default under the loan, the lender could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay those amounts, the lender could proceed against the collateral granted to them to secure such indebtedness.

Reimbursement and Regulatory Risks Relating to Our Business

If commercial third-party payors or government payors fail to provide coverage or adequate reimbursement, or if there is a decrease in the amount of reimbursement for FoundationOne or future products we develop, if any, our revenue and prospects for profitability would be harmed.

In both domestic and foreign markets, sales of FoundationOne or any future molecular information products we develop will depend, in large part, upon the availability of reimbursement from third-party payors. These third-party payors include government healthcare programs such as Medicare, managed care providers, private health insurers, and other organizations. In particular, we believe that obtaining a positive national coverage decision and favorable reimbursement rate from the Centers for Medicare and Medicaid Services, or CMS, for FoundationOne will be a necessary element in achieving material commercial success. Physicians and patients may not order FoundationOne

 

21


Table of Contents

unless commercial third-party payors and government payors pay for all, or a substantial portion, of the list price, and certain commercial third-party payors may not agree to reimburse FoundationOne if CMS does not issue a positive coverage decision.

There is currently no national coverage decision that determines whether and how our test is covered by Medicare. In the absence of a national coverage decision, local Medicare contractors that administer the Medicare program in various regions have some discretion in determining coverage and therefore payment for tests. Our local Medicare contractor, who would process our claims on behalf of Medicare, requested that we not submit claims for services provided to Medicare patients while the contractor assessed the appropriate coverage and payment for FoundationOne as a whole. Pending the response, no claims have been billed to either Medicare or Medicare patients. Accordingly, we do not currently receive any payment for FoundationOne provided to patients covered by Medicare. If CMS does not issue a positive national coverage decision with respect to FoundationOne, or if CMS denies reimbursement of FoundationOne, withdraws its coverage policies after reimbursement is obtained, reviews and adjusts the rate of reimbursement, or stops paying for FoundationOne altogether, our revenue and results of operations would be adversely affected.

We intend, before the end of 2013, to commence submitting claims to CMS for FoundationOne tests provided to Medicare patients. We will inform our Medicare contractor prior to submitting these claims for services provided to Medicare patients. The response of the Medicare contractor to the submission of such a claim is uncertain and the claim may be denied or paid, in whole or in part. If a claim is denied or paid in part, we may decide to appeal the denied claim or any denied portion of the claim. Alternatively, CMS may defer processing a claim pending a coverage or payment determination. Even if we do receive payments from CMS, the reimbursement rate may be lower than we expect, and if such rate is then adopted by commercial third-party payors, it would have an adverse effect on our revenues and results of operations. In addition, CMS may issue a negative coverage determination for FoundationOne that would apply to future claims. Although we would have the opportunity to submit additional materials to CMS in support of a positive coverage determination for FoundationOne, there is no guarantee that CMS would provide us with a positive coverage decision or reverse a negative coverage decision that it already issued.

Commercial third-party payors and government payors are increasingly attempting to contain healthcare costs by demanding price discounts or rebates and limiting both coverage on which diagnostic products they will pay for and the amounts that they will pay for new molecular diagnostic products. Because of the cost-containment trends, commercial third-party payors and government payors that currently provide reimbursement for, or in the future cover, FoundationOne may reduce, suspend, revoke, or discontinue payments or coverage at any time.

As a result, there is significant uncertainty surrounding whether the use of products that incorporate new technology, such as FoundationOne, will be eligible for coverage by commercial third-party payors and government payors or, if eligible for coverage, what the reimbursement rates will be for those products. The fact that a diagnostic product has been approved for reimbursement in the past, for any particular indication or in any particular jurisdiction, does not guarantee that such a diagnostic product will remain approved for reimbursement or that similar or additional diagnostic products will be approved in the future. Reimbursement of NGS-based cancer products by commercial third-party payors and government payors may depend on a number of factors, including a payor’s determination that products enabled by our molecular information platform are:

 

  Ÿ  

not experimental or investigational;

 

  Ÿ  

medically necessary;

 

  Ÿ  

appropriate for the specific patient;

 

  Ÿ  

cost-effective;

 

22


Table of Contents
  Ÿ  

supported by peer-reviewed publications;

 

  Ÿ  

included in clinical practice guidelines; and

 

  Ÿ  

supported by clinical utility studies.

As a result, our efforts to receive reimbursement on behalf of patients will take a substantial amount of time, and commercial third-party payors and government payors may never cover or provide adequate payment for FoundationOne or future molecular information products we develop. Our strategy to achieve broad reimbursement coverage is focused on demonstrating the clinical utility and economic benefits of FoundationOne, engaging with key members of the oncology community and increasing physician demand, but there is no assurance that we will succeed in any of these areas or that, even if we do succeed, we will receive favorable reimbursement decisions. If adequate third-party reimbursement is unavailable we may not be able to maintain price levels sufficient to realize an appropriate return on investment in product development. Furthermore, if a commercial third-party payor or government payor denies coverage, it may be difficult for us to collect from the patient, and we may not be successful.

In addition, we are currently considered a “non-contracting provider” by commercial third-party payors because we have not entered into specific contracts to provide FoundationOne to their covered patients, and as a result we take on primary responsibility for obtaining reimbursement on behalf of patients. If we were to become a contracting provider in the future, the amount of overall reimbursement we receive may decrease if we were to be reimbursed less money per product performed at a contracted rate than at a non-contracted rate, which could have a negative impact on our revenue. Further, we may be unable to collect payments from patients beyond that which is paid by their coverage and will experience lost revenue as a result.

The United States and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. For example, in some foreign markets, the government controls the pricing of many healthcare products. We expect that there will continue to be federal and state proposals to implement governmental controls or impose healthcare requirements. In addition, the Medicare program and increasing emphasis on managed care in the United States will continue to put pressure on product pricing. Cost control initiatives could decrease the price that we would receive for any products in the future, which would limit our revenue and profitability.

Changes in the way that the FDA regulates products developed, manufactured, validated and performed by laboratories like ours could result in delay or additional expense in offering our products and products that we may develop in the future.

While the FDA currently exercises its enforcement discretion for LDTs by not enforcing its regulations, the FDA has stated that it has a mandate to regulate in this field and that it may address LDT regulation using a risk-based, phased-in approach similar to the existing in vitro diagnostic framework. In particular, as recently as June 2013, the Commissioner of the FDA has stated that “the FDA is working to make sure that the accuracy and clinical validity of high-risks tests are established before they come to market.” Thus, the FDA may seek to more actively regulate, including requiring clearance or approval of, our molecular information products in the future. Moreover, the FDA could disagree with our assessment that FoundationOne is a LDT, including FoundationOne for hematologic malignancies that we are developing with Memorial Sloan-Kettering Cancer Center, and could require us to seek clearance or approval to offer FoundationOne for clinical use. If the FDA requires us to seek clearance or approval to offer FoundationOne or any of our future products for clinical use, we may not be able to obtain such approvals on a timely basis, or at all. 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; civil or criminal penalties; recall or seizure of current or future products; operating restrictions; partial suspension or total shutdown of production;

 

23


Table of Contents

denial of applications; or challenges to clearances or approvals. In July 2010, the FDA’s Office of In-Vitro Diagnostic Device Evaluation and Safety held a public meeting to discuss oversight of LDTs. The FDA highlighted the lack of standardized clinical validation at the test level under current CLIA regulatory guidelines and noted that CLIA does not require post-market surveillance or monitoring of LDTs. The comment period for providing the FDA with written comments expired on August 15, 2010, but the FDA has not yet published additional guidance on the oversight of LDTs. We cannot provide any assurance that FDA regulation, including premarket review, will not be required for our molecular information products. If premarket review is required, our business could be negatively impacted if we are required to stop selling molecular information products pending their clearance or approval or the launch of any new products that we develop could be delayed by new requirements.

In addition, in June 2011, the FDA issued draft guidance regarding the sale and use of products labeled for research use only. Among other things, the draft guidance advises manufacturers to cease the sale of research use only products to customers that the manufacturer knows use the product for clinical diagnostic purposes. Certain of the reagents and other products we use in FoundationOne are labeled as research use only products. If the FDA were to enforce this June 2011 draft guidance, certain of our suppliers may cease selling research use only products to us and any failure to obtain an acceptable substitute could significantly and adversely affect our business, financial condition and results of operations.

Healthcare policy changes, including recently enacted legislation reforming the U.S. health care system, may have a material adverse effect on our financial condition, results of operations and cash flows.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, was enacted in the United States, which made a number of substantial changes in the way health care is financed by both governmental and private insurers. Among other things, the Affordable Care Act:

 

  Ÿ  

requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices, beginning in 2013. This tax may apply to FoundationOne and some or all of our products which are in development.

 

  Ÿ  

mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule of 1.75% for the years 2011 through 2015. In addition, a productivity adjustment is made to the fee schedule payment amount.

 

  Ÿ  

establishes an Independent Payment Advisory Board to reduce the per capita rate of growth in Medicare spending. The Independent Payment Advisory Board has broad discretion to propose policies, which may have a negative impact on payment rates for our products beginning in 2016.

The Medicare Physician Fee Schedule rates for diagnostic tests are updated annually under the current statutory formula. For the past several years, the application of the statutory formula would have resulted in substantial payment reductions if Congress failed to intervene. In the past, Congress passed interim legislation to prevent the decreases. On November 1, 2012, CMS issued its 2013 Physician Fee Schedule Final Rule, or the Final Rule. In the Final Rule, CMS called for a reduction of approximately 26.5% in the 2013 conversion factor that is used to calculate physician reimbursement. However, the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, prevented this proposed cut and keeps the current reimbursement rate in effect until December 31, 2013. If similar proposed reductions are not offset in future years, the resulting decrease in payment could adversely impact our revenue and results of operations.

In addition, many of the Current Procedure Terminology, or CPT, procedure codes that we use to bill our products were recently revised by the American Medical Association, effective January 1, 2013.

 

24


Table of Contents

In the Final Rule, CMS announced that it has decided to keep the new molecular codes on the Clinical Laboratory Fee Schedule, rather than move them to the Physician Fee Schedule as some stakeholders had urged. CMS has also announced that for 2013 it will price the new codes using a “gapfilling” process by which it will refer the codes to the Medicare contractors to allow them to determine an appropriate price. Our reimbursement could be adversely affected by CMS’ action in this area. If it reduces reimbursement for the new test codes, then our revenue will be adversely affected. There can be no guarantees that Medicare and other payors will establish positive or adequate coverage policies or reimbursement rates.

We cannot predict whether future health care initiatives will be implemented at the federal or state level, or how any future legislation or regulation may affect us. The taxes imposed by the new federal legislation and the expansion of government’s role in the U.S. health care industry as well as changes to the reimbursement amounts paid by payors for our product and future products or our medical procedure volumes may reduce our profits and have a materially adverse effect on our business, financial condition, results of operations, and cash flows. Moreover, Congress has proposed on several occasions to impose a 20% coinsurance on patients for clinical laboratory tests reimbursed under the clinical laboratory fee schedule, which would require us to bill patients for these amounts. Because of the relatively low reimbursement for many clinical laboratory tests, in the event that Congress were to ever enact such legislation, the cost of billing and collecting for these tests would often exceed the amount actually received from the patient and effectively increase our costs of billing and collecting.

If we fail to comply with the complex federal, state, local and foreign laws and regulations that apply to our business, we could suffer severe consequences that could materially and adversely affect our operating results and financial condition.

We are subject to the CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA regulations mandate specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance, and inspections. We have a current certificate of accreditation under CLIA to conduct our genomic analyses through our accreditation by CAP. To renew this certificate, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratory.

We are also required to maintain a license to conduct testing in Massachusetts. Massachusetts laws establish standards for day-to-day operation of our clinical reference laboratory, including the training and skills required of personnel and quality control. We also maintain a license to conduct testing in California, Pennsylvania, Maryland, Florida, and Rhode Island. In addition, our clinical reference laboratory is required to be licensed on a product-specific basis by New York State. New York law also mandates proficiency testing for laboratories licensed under New York state law, regardless of whether or not such laboratories are located in New York. Our application for such a license from New York State is currently pending and we operate based on a waiver by New York State of the obligations to have the license. If we are unable to obtain the necessary approvals or if New York State does not extend our waiver, our business could suffer. Moreover, several other states require that we hold licenses to test specimens from patients in those states. Other states may have similar requirements or may adopt similar requirements in the future. Finally, we may be subject to regulation in foreign jurisdictions as we seek to expand international distribution of our products, which may require review of our products in order to offer our services or may have other limitations such as prohibitions on the export of tissue necessary for us to perform our tests that may limit our ability to distribute outside of the United States.

 

25


Table of Contents

Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. Most CLIA deficiencies are not classified as “condition-level” deficiencies, and there are no adverse effects upon the laboratory operations as long as the deficiencies are corrected. Remediation of these deficiencies are routine matters, with corrections occurring within several hours or weeks. More serious CLIA deficiencies could rise to the level of “condition-level” deficiencies, and CMS has the authority to impose a wide range of sanctions, including revocation of the CLIA certification along with a bar on the ownership or operation of a CLIA certified laboratory by any owners or operators of the deficient laboratory. There is an administrative hearing procedure that can be pursued by the laboratory in the event of imposition of such sanctions, during which the sanctions are stayed, but the process can take a number of years to complete. If we were to lose our CLIA certification or CAP accreditation, we would not be able to operate our clinical reference laboratory and conduct our molecular tests, which would result in material harm to our business and results of operations.

Our operations are subject to other extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among others:

 

  Ÿ  

HIPAA, which established comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions, particularly with respect to our online portal, Interactive Cancer Explorer;

 

  Ÿ  

amendments to HIPAA under the Health Information Technology for Economic and Clinical Health Act, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general, and impose requirements for breach notification;

 

  Ÿ  

the federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program;

 

  Ÿ  

the federal Stark physician self-referral law, which prohibits a physician from making a referral for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services, unless the financial relationship falls within an applicable exception to the prohibition;

 

  Ÿ  

the federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government;

 

  Ÿ  

the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state health care program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care program, unless an exception applies;

 

  Ÿ  

other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, prohibitions on the provision of products at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers;

 

26


Table of Contents
  Ÿ  

the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;

 

  Ÿ  

the rules regarding billing for diagnostic tests reimbursable by the Medicare program, which prohibit a physician or other supplier from marking up the price of the technical component or professional component of a diagnostic test ordered by the physician or other supplier and supervised or performed by a physician who does not “share a practice” with the billing physician or supplier;

 

  Ÿ  

state laws that prohibit other specified practices, such as billing physicians for testing that they order; waiving coinsurance, copayments, deductibles, and other amounts owed by patients; billing a state Medicaid program at a price that is higher than what is charged to one or more other payors; and

 

  Ÿ  

similar foreign laws and regulations that apply to us in the countries in which we operate.

Our failure to comply could lead to civil or criminal penalties, exclusion from participation in government health care programs, or prohibitions or restrictions on our laboratory’s ability to conduct commercial activities. We believe that we are in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. If one or more such agencies alleges that we may be in violation of any of these requirements, regardless of the outcome, it could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations and other commercial third-party payors.

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. If we are found to have improperly promoted off-label uses, we may become subject to significant fines and other liability.

FoundationOne delivers to physicians a report that describes a tumor’s genomic alterations and matches them with FDA-approved therapies or open clinical trials for therapies targeting cancers driven by those alterations. In some cases, the therapies identified in our report are not approved for the patient’s tumor type or disease state. The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription drug and device products. In particular, a product may not be promoted for uses or indications beyond those contained in such product’s approved labeling. The U.S. government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If the FDA determines that we have engaged in off-label promotion in our FoundationOne report by providing information regarding approved therapies, we may be subject to civil or criminal fines.

In addition, incentives exist under applicable laws that encourage competitors, employees, and physicians to report violations of rules governing promotional activities for pharmaceutical products. These incentives could lead to so-called whistleblower lawsuits as part of which such persons seek to collect a portion of monies allegedly overbilled to government agencies due to, for example, promotion of pharmaceutical products beyond labeled claims. These incentives could also lead to suits that we have mischaracterized a competitor’s product in the marketplace and, as a result, we could be sued for alleged damages to our competitors. Such lawsuits, whether with or without merit, are typically time-consuming and costly to defend. Such suits may also result in related shareholder lawsuits, which are also costly to defend.

 

27


Table of Contents

We may be subject to fines, penalties, licensure requirements, or legal liability, if it is determined that through our FoundationOne reports we are practicing medicine without a license.

Our FoundationOne reports delivered to physicians provide information regarding FDA-approved therapies and clinical trials that oncologists may use in making treatment decisions for their patients. We make members of our organization available to discuss the information provided in the report. State laws prohibit the practice of medicine without a license. Our customer service representatives provide support to our customers, including assistance in interpreting the FoundationOne report results. A governmental authority or individual actor could allege that the identification of available therapies and clinical trials in our reports and the related customer service we provide constitute the practice of medicine. A state may seek to have us discontinue the inclusion of certain aspects of our reports or the related services we provide or subject us to fine, penalties, or licensure requirements. Any determination that we are practicing medicine without a license may result in significant liability to us.

If the validity of an informed consent from a patient enrolled in a clinical trial with one of our biopharmaceutical partners was challenged, we could be forced to stop using some of our resources, which would hinder our molecular information product development efforts.

We have implemented measures to ensure that all clinical data and genetic and other biological samples that we receive from our biopharmaceutical partners have been collected from subjects who have provided appropriate informed consent for purposes which extend to our product development activities. We seek to ensure these data and samples are provided to us on a subject de-identified manner. We also have measures in place to ensure that the subjects from whom the data and samples are collected do not retain or have conferred on them any proprietary or commercial rights to the data or any discoveries derived from them. Our biopharmaceutical partners conduct clinical trials in a number of different countries, and, to a large extent, we rely upon them to comply with the subject’s informed consent and with local law and international regulation. The collection of data and samples in many different countries results in complex legal questions regarding the adequacy of informed consent and the status of genetic material under a large number of different legal systems. The subject’s informed consent obtained in any particular country could be challenged in the future, and those informed consents could prove invalid, unlawful, or otherwise inadequate for our purposes. Any findings against us, or our biopharmaceutical partners, could deny us access to or force us to stop using some of our clinical samples, which would hinder our molecular information product development efforts. We could become involved in legal challenges, which could consume our management and financial resources.

Ethical, legal and social concerns related to the use of genomic information could reduce demand for our molecular information products.

Genomic testing, like that conducted using our molecular information platform and FoundationOne, has raised ethical, legal, and social issues regarding privacy and the appropriate uses of the resulting information. Governmental authorities could, for social or other purposes, limit or regulate the use of genomic information or genomic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these concerns may lead patients to refuse to use genomic tests even if permissible.

Ethical and social concerns may also influence U.S. and foreign patent offices and courts with regard to patent protection for technology relevant to our business. These and other ethical, legal and social concerns may limit market acceptance of our products or reduce the potential markets for products enabled by our molecular information platform, either of which could have an adverse effect on our business, financial condition, or results of operations.

 

28


Table of Contents

Intellectual Property Risks Related to Our Business

Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or impact our stock price.

Third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. As we continue to commercialize FoundationOne in its current or an updated form, launch new products, and enter new markets, we expect that competitors will claim that our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. We occasionally receive letters from third parties inviting us to take licenses under, or alleging that we infringe, their patents. Third parties may have obtained, and may in the future obtain, patents under which such third parties may claim that the use of our technologies constitutes patent infringement.

We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a material adverse impact on our cash position and stock price. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize, and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement or misappropriation against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products, all of which could have a material adverse impact on our cash position and business and financial condition.

In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products would materially affect our ability to grow and maintain profitability and have a material adverse impact on our business.

Developments in patent law could have a negative impact on our business.

From time to time, the United States Supreme Court, or the Supreme Court, other federal courts, the United States Congress or the United States Patent and Trademark Office, or the USPTO, may change the standards of patentability and any such changes could have a negative impact on our business.

Two cases involving diagnostic method claims and “gene patents” have recently been decided by the Supreme Court. On March 20, 2012, the Supreme Court issued a decision in Mayo Collaborative v. Prometheus Laboratories, or Prometheus, a case involving patent claims directed to optimizing the amount of drug administered to a specific patient. According to that decision, Prometheus’ claims failed to incorporate sufficient inventive content above and beyond mere underlying natural correlations to allow the claimed processes to qualify as patent-eligible processes that apply natural laws. On June 13, 2013, the Supreme Court subsequently decided Association for Molecular Pathology v. Myriad Genetics, or Myriad, a case brought by multiple plaintiffs challenging the validity of patent claims held by Myriad Genetics, Inc. relating to the breast cancer susceptibility genes BRCA1 and BRCA2, holding that isolated genomic DNA that exists in nature, such as the DNA constituting the BRCA1 and BRCA2 genes, is not patentable subject matter, but that cDNA, which is an artificial construct created from RNA transcripts of genes, may be patent eligible.

On July 3, 2012, the USPTO issued a memorandum to patent examiners providing interim guidelines for examining process claims for patent eligibility in view of the Supreme Court decision in

 

29


Table of Contents

Prometheus. The guidance indicates that claims directed to a law of nature, a natural phenomenon, or an abstract idea that do not meet the eligibility requirements should be rejected as non-statutory subject matter. We cannot assure you that our efforts to seek patent protection for our technology and products will not be negatively impacted by the decisions described above, rulings in other cases or changes in guidance or procedures issued by the USPTO.

We cannot fully predict what impact the Supreme Court’s decisions in Prometheus and Myriad may have on the ability of biopharmaceutical companies or other entities to obtain or enforce patents relating to genes or genomic discoveries in the future. Despite the USPTO memorandum described above, the Prometheus decision is new and the contours of when certain method claims allegedly directed to laws of nature or natural phenomenon meet the patent eligibility requirements are not clear and may take many years to develop via interpretation in the courts. There are many patents claiming diagnostic methods based on similar or related correlations that issued before Prometheus, and although some of these patents may be invalid under the standard set forth in Prometheus, until successfully challenged, these patents are presumed valid and enforceable, and certain third parties could allege that we infringe, or request that we obtain a license to, these patents. Whether based on patents issued prior to or after Prometheus, we could have to defend ourselves against claims of patent infringement, or choose to license rights, if available, under patents claiming such methods. Moreover, although the Supreme Court has held in Myriad that isolated genomic DNA is not patent-eligible subject matter, certain third parties could allege that activities that we may undertake infringe other classes of gene-related patent claims, and we could have to defend ourselves against these claims by asserting non-infringement and/or invalidity positions, or pay to obtain a license to these claims. In any of the foregoing or in other situations involving third-party intellectual property rights, if we are unsuccessful in defending against claims of patent infringement, we could be forced to pay damages or be subjected to an injunction that would prevent us from utilizing the patented subject matter in question if we are unable to obtain a license on reasonable terms. Such outcomes could materially affect our ability to offer our products and have a material adverse impact on our business. Even if we are able to obtain a license or successfully defend against claims of patent infringement, the cost and distraction associated with the defense or settlement of these claims could have a material adverse impact on our business.

In addition, the Leahy-Smith America Invents Act, or the America Invents Act, which was signed into law in 2011, includes a number of significant changes to U.S. patent law. These changes include a transition from a “first-to-invent” system to a “first-to-file” system, changes to the way issued patents are challenged, and changes to the way patent applications are disputed during the examination process. These changes may favor larger and more established companies that have greater resources to devote to patent application filing and prosecution. The USPTO has developed new and untested regulations and procedures to govern the full implementation of the America Invents Act, and many of the substantive changes to patent law associated with the America Invents Act, and, in particular, the first-to-file provisions, became effective on March 16, 2013. Substantive changes to patent law associated with the America Invents Act may affect our ability to obtain patents, and if obtained, to enforce or defend them. Accordingly, it is not clear what, if any, impact the America Invents Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend any patents that may issue from our patent applications, all of which could have a material adverse effect on our business.

We may be unable to protect or enforce our intellectual property effectively, which could harm our competitive position.

Obtaining and maintaining a strong patent position is important to our business. Our patent applications are in the early stages of prosecution and none have yet issued as patents. Patent law relating to the scope of claims in the technology fields in which we operate is complex and uncertain, so we cannot be assured that we will be able to obtain or maintain patent rights, or that the patent

 

30


Table of Contents

rights we may obtain will be valuable, provide an effective barrier to competitors or otherwise provide competitive advantages. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, or demonstrate that we did not derive our invention from another, we may have to participate in interference or derivation proceedings in the USPTO or in court that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot be assured our patent applications will prevail over those filed by others. Also, our intellectual property rights may be subject to other challenges by third parties. Patents we obtain could be challenged in litigation or in administrative proceedings such as ex parte reexam, inter partes review, or post grant review in the United States or opposition proceedings in Europe or other jurisdictions.

Obtaining and maintaining a patent portfolio entails significant expense and resources. Part of the expense includes periodic maintenance fees, renewal fees, annuity fees, various other governmental fees on patents and/or applications due in several stages over the lifetime of patents and/or applications, as well as the cost associated with complying with numerous procedural provisions during the patent application process. We may or may not choose to pursue or maintain protection for particular inventions. In addition, there are situations in which failure to make certain payments or noncompliance with certain requirements in the patent process can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we choose to forgo patent protection or allow a patent application or patent to lapse purposefully or inadvertently, our competitive position could suffer.

Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. We may or may not choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements and invention assignment agreements with our employees, consultants and third-parties, to protect our confidential and proprietary information. For example, significant elements of FoundationOne, including aspects of sample preparation, computational-biological algorithms, and related processes and software, are based on unpatented trade secrets and know-how that are not publicly disclosed. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our competitive position could be harmed.

 

31


Table of Contents

We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.

Third parties may assert ownership or commercial rights to inventions we develop.

Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. For example, we rely on certain third parties to provide us with tissue samples and biological materials that we use to conduct our genomic analyses. We have written agreements with collaborators that provide for the ownership of intellectual property arising from our collaborations. These agreements provide that we must negotiate certain commercial rights with collaborators with respect to joint inventions or inventions made by our collaborators that arise from the results of the collaboration. In some instances, there may not be adequate written provisions to address clearly the resolution of intellectual property rights that may arise from a collaboration. If we cannot successfully negotiate sufficient ownership and commercial rights to the inventions that result from our use of a third-party collaborator’s materials where required, or if disputes otherwise arise with respect to the intellectual property developed with the use of a collaborator’s samples, we may be limited in our ability to capitalize on the market potential of these inventions. In addition, we may face claims by third parties that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such inventions. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property, or may lose our exclusive rights in that intellectual property. Either outcome could have an adverse impact on our business.

Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

We employ individuals who were previously employed at universities or other diagnostic or biopharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants 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 our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties.

 

32


Table of Contents

Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Risks Relating to Our Financial Condition and Capital Requirements

We are an early, commercial-stage company and have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

We are an early, commercial-stage company and have a limited operating history. We were incorporated in Delaware and began operations in November 2009. Our limited operating history, particularly in light of our business model based upon sales of novel products enabled by our molecular information platform and the rapidly evolving genomic analysis industry, may make it difficult to evaluate our current business and predict our future performance. Any assessment of our profitability or prediction about our future success or viability is subject to significant uncertainty. We have encountered and will continue to encounter risks and difficulties frequently experienced by early, commercial-stage companies in rapidly evolving industries. If we do not address these risks successfully, our business will suffer.

We have a history of net losses. We expect to incur net losses in the future and we may never achieve sustained profitability.

We have historically incurred substantial net losses, including a net loss of $22.4 million in 2012. From our inception in 2009 through June 30, 2013, we had an accumulated deficit of $64.2 million. We expect our losses to continue as a result of ongoing research and development expenses and increased sales and marketing costs. These losses 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 research, 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. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations, and cash flows.

We may need to raise additional capital to fund our existing operations, develop our molecular information platform, commercialize new products and expand our operations.

Based on our current business plan, we believe the net proceeds from this offering, together with our current cash and cash equivalents and anticipated cash flow from operations, will be sufficient to meet our anticipated cash requirements over at least the next 12 months and for the foreseeable future. If our available cash balances, net proceeds from this offering, and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our products as a result of lower than currently expected rates of reimbursement from commercial third-party payors and government payors or other risks described in this prospectus, we may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding, or seek other debt financing.

We may consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons, including to:

 

  Ÿ  

increase our sales and marketing efforts to drive market adoption of FoundationOne and address competitive developments;

 

  Ÿ  

fund development and marketing efforts of any future products;

 

33


Table of Contents
  Ÿ  

further expand our clinical laboratory operations;

 

  Ÿ  

expand our technologies into other types of cancers;

 

  Ÿ  

acquire, license or invest in technologies;

 

  Ÿ  

acquire or invest in complementary businesses or assets; and

 

  Ÿ  

finance capital expenditures and general and administrative expenses.

Our present and future funding requirements will depend on many factors, including:

 

  Ÿ  

our ability to achieve revenue growth;

 

  Ÿ  

our rate of progress in establishing reimbursement arrangements with domestic and international commercial third-party payors and government payors;

 

  Ÿ  

the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts;

 

  Ÿ  

our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for FoundationOne;

 

  Ÿ  

our rate of progress in, and cost of research and development activities associated with, products in research and early development;

 

  Ÿ  

the effect of competing technological and market developments;

 

  Ÿ  

costs related to international expansion; and

 

  Ÿ  

the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products.

The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity securities issued also could provide for rights, preferences, or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences, and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or products, or grant licenses on terms that are not favorable to us.

The credit markets and the financial services industry have experienced a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse, or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. These events have generally made equity and debt financing more difficult to obtain. Accordingly, additional equity or debt financing might not be available on reasonable terms, if at all. In addition, our current loan and security agreement with Lighthouse restricts our ability to raise funds through additional debt or other financing options. If we cannot secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more research and development programs or sales and marketing initiatives. In addition, we may have to work with a partner on one or more of our development programs, which could lower the economic value of those programs to us.

We will incur significant costs as a result of operating as a public company and our management expects to devote substantial time to public company compliance programs.

As a public company, we will incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the

 

34


Table of Contents

Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NASDAQ Stock Market, or NASDAQ. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel will devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and as a result of the new corporate governance and executive compensation related rules, regulations, and guidelines prompted by the Dodd-Frank Act and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.

To comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Securities Exchange Act of 1934, or the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our operating results, cause us to fail to meet our reporting obligations, or result in a restatement of our prior period financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our ordinary shares could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on NASDAQ.

We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore not yet required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report. This assessment will need to include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm. We are just beginning the costly and challenging process of compiling the system and processing documentation needed to comply with such requirements. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material

 

35


Table of Contents

weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.

Our independent registered public accounting firm may not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, depending on whether we choose to rely on certain exemptions set forth in the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our ordinary shares.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to use its pre-change net operating loss carryforwards or other tax attributes, or NOLs, to offset future taxable income or reduce taxes. Our past issuances of stock and other changes in our stock ownership may have resulted in ownership changes within the meaning of Section 382 of the Code; accordingly, our pre-change NOLs may be subject to limitation under Section 382. If we determine that we have not undergone an ownership change, the Internal Revenue Service could challenge our analysis, and our ability to use our NOLs to offset taxable income could be limited by Section 382 of the Code. Future changes in our stock ownership, including in connection with this offering and some of which are outside of our control, could result in ownership changes under Section 382 of the Code further limiting our ability to utilize our NOLs. Furthermore, our ability to use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to use a material portion of the NOLs, even if we attain profitability.

Risks Related to Our Common Stock

We expect that our stock price may fluctuate significantly.

Prior to this offering, you could not buy or sell our common stock publicly. Although we anticipate our common stock being approved for listing on NASDAQ, an active trading market for our shares may never develop or be sustained following this offering. We will negotiate and determine the initial public offering price with the underwriters based on several factors. This price may vary from the market price of our common stock after this offering. You may be unable to sell your shares of common stock at or above the initial offering price. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

  Ÿ  

actual or anticipated fluctuations in our financial condition and operating results;

 

  Ÿ  

actual or anticipated changes in our growth rate relative to our competitors;

 

  Ÿ  

competition from existing products or new products that may emerge;

 

  Ÿ  

announcements by us, our biopharmaceutical partners or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;

 

  Ÿ  

failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

  Ÿ  

issuance of new or updated research or reports by securities analysts;

 

36


Table of Contents
  Ÿ  

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

  Ÿ  

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

  Ÿ  

additions or departures of key management or scientific personnel;

 

  Ÿ  

disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies;

 

  Ÿ  

changes to reimbursement levels by commercial third-party payors and government payors, including Medicare, and any announcements relating to reimbursement levels;

 

  Ÿ  

announcement or expectation of additional debt or equity financing efforts;

 

  Ÿ  

sales of our common stock by us, our insiders or our other stockholders; and

 

  Ÿ  

general economic and market conditions.

These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and NASDAQ and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

Our principal stockholders will exercise significant control over our company.

Assuming they do not purchase shares in this offering, investment funds affiliated with Third Rock Ventures and Kleiner Perkins Caufield & Byers, and Google Ventures 2011, L.P., our current largest stockholders, will beneficially own, in the aggregate, shares representing approximately 47.7% of our outstanding capital stock immediately after this offering. Although we are not aware of any voting arrangements that will be in place among these stockholders following this offering, if these stockholders were to choose to act together, as a result of their stock ownership, they may be able to influence our management and affairs and control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation, or sale of all or substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on shares outstanding as of August 31, 2013, upon the completion of this offering, we will have 26,283,454 outstanding shares of common stock, assuming no exercise of outstanding options. Of these shares, assuming no shares are purchased in this offering by our existing stockholders, 5,018,750 shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market.

After the lock-up agreements pertaining to this offering expire and based on shares outstanding as of August 31, 2013, an additional 21,264,704 shares will be eligible for sale in the public market. In

 

37


Table of Contents

addition, upon issuance, the 2,150,117 shares subject to outstanding options under our stock option plans, the 1,355,171 shares reserved for future issuance under our stock option plans and the 788,503 shares reserved for future issuance under our employee stock purchase plan will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the completion of this offering, holders of approximately 17,178,026 shares of our common stock, including 50,000 shares issuable upon exercise of our outstanding warrant, will have the right to require us to register these shares under the Securities Act of 1933, as amended, or the Securities Act, pursuant to an investors’ rights agreement. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

We will have broad discretion in how we use the net proceeds of this offering. We may not use these proceeds effectively, which could affect our results of operations and cause our stock price to decline.

We will have considerable discretion in the application of the net proceeds of this offering, including for any of the purposes described in the section entitled “Use of Proceeds.” We intend to use the net proceeds from this offering for expansion of our commercial and laboratory operations, ongoing and new clinical trials, supporting our molecular information platform, and for working capital and other general corporate purposes. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of this offering. We may use the net proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are electing not to take advantage of such extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.0 billion or more; (ii) the last

 

38


Table of Contents

day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases.

We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of our indebtedness with Lighthouse prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our common stock if the price of our common stock increases.

Investors in this offering will pay a higher price than the book value of our common stock.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. You will incur immediate and substantial dilution of $10.77 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus. In the past, we issued restricted stock, options and a warrant to acquire capital stock at prices significantly below the assumed initial public offering price. To the extent any outstanding options or warrants are ultimately exercised, you will sustain further dilution.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our certificate of incorporation, bylaws and Delaware law contain or will contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include or will include provisions:

 

  Ÿ  

creating a classified board of directors whose members serve staggered three-year terms;

 

  Ÿ  

authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

 

  Ÿ  

limiting the liability of, and providing indemnification to, our directors and officers;

 

  Ÿ  

limiting the ability of our stockholders to call and bring business before special meetings;

 

  Ÿ  

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

39


Table of Contents
  Ÿ  

controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings; and

 

  Ÿ  

providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

40


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

  Ÿ  

the evolving treatment paradigm for cancer, including physicians’ use of molecular information and targeted oncology therapeutics and the market size for molecular information products;

 

  Ÿ  

physicians’ need for molecular information products and any perceived advantage of our products over those of our competitors, including the ability of our molecular information platform to help physicians treat their patients’ cancers, our first mover advantage in providing comprehensive molecular information products on a commercial scale or the sustainability of our competitive advantages;

 

  Ÿ  

our ability to generate revenue from sales of products enabled by our molecular information platform to physicians in clinical practice and our biopharmaceutical partners, including our ability to increase adoption of FoundationOne and expand existing or develop new relationships with biopharmaceutical partners;

 

  Ÿ  

our ability to increase the commercial success of FoundationOne;

 

  Ÿ  

our plans or ability to obtain reimbursement for FoundationOne, including expectations as to our ability or the amount of time it will take to achieve successful reimbursement from third-party payors, such as commercial insurance companies and health maintenance organizations, and government insurance programs, such as Medicare and Medicaid;

 

  Ÿ  

the outcome or success of our clinical trials;

 

  Ÿ  

the ability of our molecular information platform to enhance our biopharmaceutical partners’ ability to develop targeted oncology therapies;

 

  Ÿ  

our ability to comprehensively assess cancer tissue simultaneously for all known genomic alterations across all known cancer-related genes, including our ability to update our molecular information platform to interrogate new cancer genes and incorporate new targeted oncology therapies and clinical trials;

 

  Ÿ  

our ability to scale our molecular information platform, including the capacity to process additional tests at high specificity and sensitivity as our volume increases;

 

  Ÿ  

our ability to capture, aggregate, analyze, or otherwise utilize genomic data in new ways;

 

  Ÿ  

the acceptance of our publications in peer-reviewed journals or of our presentations at scientific and medical conference presentations;

 

  Ÿ  

our relationships with our suppliers from whom we obtain laboratory reagents, equipment, or other materials which we use in our molecular information platform, some of which are sole source arrangements;

 

  Ÿ  

our plans and ability to develop and commercialize new products, including to commence our commercial launch of FoundationOne for hematologic malignancies by early 2014;

 

41


Table of Contents
  Ÿ  

the expansion of the capabilities of our Interactive Cancer Explorer portal and the development and launch of its associated applications in 2014;

 

  Ÿ  

the impact of the relocation our laboratory into a new facility in 2013;

 

  Ÿ  

federal, state, and foreign regulatory requirements, including potential FDA regulation of FoundationOne and the other tests performed using our molecular information platform;

 

  Ÿ  

our ability to protect and enforce our intellectual property rights, including our trade secret protected proprietary rights in our molecular information platform;

 

  Ÿ  

our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing; and

 

  Ÿ  

anticipated trends and challenges in our business and the markets in which we operate.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

42


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of 5,000,000 shares of common stock in this offering will be approximately $66.9 million based upon an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that our net proceeds will be approximately $77.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $14.0 million, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A one million share increase in the number of shares offered by us together with a concomitant $1.00 increase in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase the net proceeds to us from this offering by approximately $19.5 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. Conversely, a one million share decrease in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease the net proceeds to us from this offering by approximately $17.7 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and to facilitate our access to the public equity markets. We currently expect to use the net proceeds from this offering as follows:

 

  Ÿ  

approximately $18.0 million for the expansion of our commercial operations, including the growth of our sales force within the United States and internationally;

 

  Ÿ  

approximately $10.0 million for the expansion of our laboratory operations to support future growth;

 

  Ÿ  

approximately $12.0 million to fund ongoing and new clinical trials to demonstrate the utility of our products and support our reimbursement efforts; and

 

  Ÿ  

approximately $10.0 million to continue the expansion of our technology infrastructure and capabilities for our molecular information platform.

We expect expenditures in connection with these above-described items will utilize the substantial majority of the expected net proceeds from the offering. We expect to use the remainder of any net proceeds from this offering for new product development, including costs related to the development of products in areas such as epigenetics, methylation, and immune response, capital expenditures, including costs related to required expansion in connection with increased demand, and working capital and other general corporate purposes, including the costs of operating as a public company. Although we currently anticipate that we will use the net proceeds from this offering as described above, there may be circumstances where a reallocation of funds is necessary. The amounts and timing of our actual expenditures will depend upon numerous factors, including our commercialization efforts, demand for our products, rates of reimbursement, the costs of equipment,

 

43


Table of Contents

the progress of our research and development efforts, our operating costs and the other factors described under “Risk Factors” in this prospectus. Accordingly, our management will have flexibility in applying the net proceeds from this offering. An investor will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds.

The costs and timing of our commercialization efforts are highly uncertain, are subject to substantial risks and can often change. Accordingly, we may change the allocation of use of these proceeds among the uses described above as a result of contingencies such as the demand for our products, rates of reimbursement, the costs of equipment, the progress of our research and development efforts and operating costs and expenditures. Although we may use a portion of the net proceeds of this offering for the acquisition or licensing, as the case may be, of additional technologies, other assets or businesses, or for other strategic investments or opportunities, we have no current understandings, agreements or commitments to do so.

Pending these uses, we intend to invest the net proceeds in high quality, investment grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government, or hold as cash.

 

44


Table of Contents

DIVIDEND POLICY

We have never declared or paid any dividends on our capital stock. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors. In addition, the terms of our outstanding indebtedness restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends.

 

45


Table of Contents

CAPITALIZATION

The following table sets forth our cash, cash equivalents and capitalization as of June 30, 2013:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to give effect to (i) the conversion of all outstanding shares of our preferred stock into an aggregate of 17,128,026 shares of common stock upon the closing of this offering, (ii) the conversion of our outstanding warrant to purchase 200,000 shares of our Series A preferred stock into a warrant to purchase 50,000 shares of our common stock upon closing of this offering, and (iii) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and

 

  Ÿ  

on a pro forma as adjusted basis to give further effect to our sale in this offering of 5,000,000 shares of common stock at an assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and the financial statements and related notes appearing elsewhere in this prospectus.

 

     As of June 30, 2013  
     Actual     Pro Forma     Pro Forma
As Adjusted
 
     (unaudited)  
     (in thousands, except share and per
share data)
 

Cash and cash equivalents

   $ 35,965      $ 35,965      $ 102,865   
  

 

 

   

 

 

   

 

 

 

Notes payable

   $ 2,346      $ 2,346      $ 2,346   

Warrant to purchase preferred stock

     328                 

Series A redeemable convertible preferred stock, $0.0001 par value; 43,950,000 shares authorized, 43,750,000 issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)

     43,045                 

Series B redeemable convertible preferred stock, $0.0001 par value; 24,762,134 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)

     55,695                 

Stockholders’ (deficit) equity:

      

Undesignated preferred stock, par value $0.0001; no shares authorized, issued or outstanding (actual); 5,000,000 shares authorized, no shares issued or outstanding (pro forma and pro forma as adjusted)

                     

Common stock, $0.0001 par value; 96,000,000 shares authorized, 4,153,024 shares issued and outstanding (actual)(1), 96,000,000 shares authorized, 21,281,058 issued and outstanding (pro forma)(1); 150,000,000 shares authorized, 26,281,058 shares issued and outstanding (pro forma as adjusted)(1)

            2        2   

Additional paid-in capital

     5,358        104,355        171,254   

Accumulated deficit

     (64,209     (64,140     (64,140
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (58,851     40,217        107,117   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 42,563      $ 42,563      $ 109,463   
  

 

 

   

 

 

   

 

 

 

 

(1) Shares issued and outstanding include 962,703 shares of unvested common stock which are subject to repurchase by us as of June 30, 2013.

 

46


Table of Contents

The information above is illustrative 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 this offering determined at pricing.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the estimated price range shown on the cover page of this prospectus, would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization on a pro forma as adjusted basis by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares offered by us would increase (decrease) cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization on a pro forma as adjusted basis by approximately $14.0 million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A one million share increase in the number of shares offered by us together with a concomitant $1.00 increase in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $19.5 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. Conversely, a one million share decrease in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $17.7 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

The actual, pro forma and pro forma as adjusted information set forth in the table excludes (i) 2,172,892 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2013 with a weighted-average exercise price of $3.04 per share, (ii) 50,000 shares of common stock issuable upon the exercise of a warrant outstanding as of June 30, 2013 at an exercise price of $4.00 per share, which warrant prior to the closing of this offering is exercisable for shares of preferred stock, (iii) 1,355,171 shares of common stock reserved for future issuance under our 2013 Stock Option and Grant Plan (which includes 492,218 shares reserved for issuance under our Amended and Restated 2010 Stock Incentive Plan that will become available under our 2013 Stock Option and Grant Plan upon our initial public offering), and (iv) 788,503 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan.

 

47


Table of Contents

DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering.

The net tangible book value of our common stock as of June 30, 2013 was $(58.9) million, or $(18.45) per share of common stock. Net tangible book value per share represents our total tangible assets less our total tangible liabilities, divided by the number of shares of common stock before giving effect to the conversion of all outstanding shares of preferred stock into shares of common stock, upon the completion of this offering. The pro forma net tangible book value of our common stock as of June 30, 2013 was $40.2 million, or approximately $1.98 per share of common stock. Pro forma net tangible book value gives effect to the conversion of all outstanding shares of preferred stock into 17,128,026 shares of common stock and the conversion of the outstanding warrant to purchase Series A preferred stock into a warrant to purchase shares of common stock upon the closing of this offering.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after the completion of this offering. After giving effect to (i) the automatic conversion of all outstanding shares of preferred stock into shares of common stock immediately prior to completion of this offering and (ii) our sale of 5,000,000 shares in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of June 30, 2013 would have been $4.23 per share. This represents an immediate increase in net tangible book value of $2.25 per share to existing stockholders and an immediate dilution in net tangible book value of $10.77 per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

      $ 15.00   

Pro forma net tangible book value per share as of June 30, 2013

   $ 1.98      

Increase in net tangible book value per share attributable to new investors

     2.25      
  

 

 

    

Pro forma as adjusted net tangible book value per share at June 30, 2013 after giving effect to the offering

      $ 4.23   
     

 

 

 

Dilution per share to new investors

      $ 10.77   

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the pro forma as adjusted net tangible book value, by $0.18 per share and the dilution to new investors by $0.82 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated expenses payable by us. Similarly, each increase (decrease) of one million shares offered by us would increase (decrease) the pro forma as adjusted net tangible book value by $0.37 per share and the dilution to new investors by $0.37 per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. A one million share increase in the number of shares offered by us together with a concomitant $1.00 increase in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase the pro forma as adjusted net tangible book value by approximately $0.58 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. Conversely, a one million share decrease in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $15.00 per share, the

 

48


Table of Contents

midpoint of the price range set forth on the cover of this prospectus, would decrease the pro forma as adjusted net tangible book value by approximately $0.55 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value would be $4.51 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $10.49 per share.

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2013, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by existing stockholders (giving effect to the conversion of all of our preferred stock into 17,128,026 shares of common stock prior to the completion of this offering) and by investors participating in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses, at an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus.

 

     Shares Purchased     Total Consideration     Avg price /
share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     21,281,058         81   $ 99,923,000         57   $ 4.70   

New investors

     5,000,000         19        75,000,000         43        15.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     26,281,058         100   $ 174,923,000         100   $ 6.66   

The above discussion and tables are based on 4,153,032 shares of common stock issued and outstanding as of June 30, 2013 and also reflects the conversion of all outstanding shares of preferred stock into an aggregate of 17,128,026 shares of common stock immediately prior to the completion of this offering, and excludes:

 

  Ÿ  

2,172,892 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2013 at a weighted-average exercise price of $3.04 per share;

 

  Ÿ  

50,000 shares of common stock issuable upon the exercise of a warrant outstanding as of June 30, 2013 at an exercise price of $4.00 per share, which warrant prior to the closing of this offering is exercisable to purchase Series A preferred stock;

 

  Ÿ  

1,355,171 shares of common stock reserved for future issuance under our 2013 Stock Option and Grant Plan, or the 2013 Plan (which includes 492,218 shares reserved for issuance under our Amended and Restated 2010 Stock Incentive Plan that will become available under our 2013 Stock Option and Grant Plan upon our initial public offering); and

 

  Ÿ  

788,503 shares of common stock reserved for future issuance under our ESPP.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the total consideration paid by new investors by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares in full, pro forma as adjusted net tangible book value as of June 30, 2013 will increase to $117.6 million, or $4.51 per share, representing an increase to existing stockholders of $2.53 per share, and there will be an immediate dilution of an additional $10.49 per share to new investors.

To the extent that outstanding options and warrants are exercised or shares are issued under our ESPP, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.

 

49


Table of Contents

SELECTED FINANCIAL DATA

You should read the following selected historical consolidated financial data below together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, related notes and other financial information included elsewhere in this prospectus. The selected financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the financial statements and related notes included elsewhere in this prospectus.

The following selected statements of operations data for the years ended December 31, 2011 and 2012 and the balance sheet data as of December 31, 2011 and 2012 are derived from our audited financial statements appearing elsewhere in this prospectus. The selected statements of operations data for the six months ended June 30, 2012 and 2013 and the balance sheet data as of June 30, 2013 have been derived from our unaudited financial statements included elsewhere in this prospectus. In our opinion, these unaudited financial statements have been prepared on a basis consistent with our audited financial statements and contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of such financial data. You should read this data together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and our operating results for the six-month period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013 or any other interim periods or any future year or period.

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  
                 (unaudited)  
     (in thousands, except share and per share data)  

Statements of Operations Data:

        

Revenue

   $ 2,057      $ 10,645      $ 2,429      $ 11,120   

Costs and expenses

        

Cost of revenue

     258        5,681        1,830        4,597   

Sales and marketing

     1,555        3,454        1,347        4,686   

General and administrative

     6,992        8,644        3,699        7,905   

Research and development

     9,023        14,777        6,623        11,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     17,828        32,556        13,499        28,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15,771     (21,911     (11,070     (17,147

Interest expense, net

     (421     (421     (221     (141

Other expense, net

     (845     (61     (53     (102
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

     (296     (286     (162     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

   $ (17,333   $ (22,679   $ (11,506   $ (17,482
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share applicable to common stockholders, basic and diluted(1)

   $ (14.06   $ (10.47   $ (6.15   $ (5.92
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, basic and diluted

     1,232,658        2,166,832        1,871,431        2,950,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share applicable to common stockholders, basic and diluted(1)

     $ (1.63     $ (0.87
    

 

 

     

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted

       13,910,719          20,129,030   
    

 

 

     

 

 

 

Comprehensive loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note 2 within the notes to our financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net loss per share of common stock and pro forma basic and diluted net loss per share of common stock.

 

50


Table of Contents
     December 31,     June 30,  
     2011     2012     2013  
                 (unaudited)  
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 10,852      $ 54,838      $ 35,965   

Working capital

     7,521        49,856        32,226   

Total assets

     18,065        66,039        52,269   

Notes payable, excluding current portion

     3,041        1,441        634   

Redeemable convertible preferred stock warrant liability

     94        225        328   

Redeemable convertible preferred stock

     32,455        98,658        98,740   

Accumulated deficit

     (24,426     (46,819     (64,209

Total stockholders’ deficit

   $ (22,303   $ (43,397   $ (58,851

 

51


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our “Selected Financial Data” and our financial statements, related notes, and other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described in, or implied by, the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed above in the section entitled “Risk Factors.”

Overview

We are a commercial-stage company focused on fundamentally changing the way patients with cancer are treated. We derive revenue from selling products enabled by our molecular information platform to physicians and biopharmaceutical companies. Our platform includes proprietary methods and algorithms for analyzing tumor tissue samples across all types of cancer, as well as information aggregation and concise reporting capabilities. Our products provide genomic information about each patient’s individual cancer, enabling physicians to optimize treatments in clinical practice and enabling biopharmaceutical companies to develop targeted oncology therapies more effectively.

FoundationOne, our first clinical product, is, to our knowledge, the only commercially available comprehensive molecular information product designed for use in the routine care of patients with cancer. In November 2011, we first offered for sale FoundationOne for clinical use to a limited network of key oncology thought leaders and their colleagues and leading academic centers. We then commenced our formal commercial launch of FoundationOne for solid tumors in June 2012 and expect to commence our commercial launch of FoundationOne for blood-based cancers, or hematologic malignancies, by early 2014. Prior to commercial sales of FoundationOne for clinical use, we generated revenue from our molecular information platform under relationships with biopharmaceutical partners, starting in December 2010. Our molecular information platform is currently used by 18 biopharmaceutical partners to enhance the development of targeted oncology therapies. To accelerate our growth and enhance our competitive advantage, we are extending our sales force, publishing scientific and medical advances, fostering relationships throughout the oncology community, and developing new products.

We have experienced rapid adoption of FoundationOne. More than 1,500 physicians from large academic centers and community-based practices have ordered FoundationOne since its formal commercial launch in June 2012. We believe this rapid adoption of FoundationOne, accomplished with a nascent sales team, demonstrates the demand for and utility of a single comprehensive product that helps oncologists effectively implement the promise of precision medicine.

Since our inception in 2009, we have devoted substantially all of our resources to the development of our molecular information platform, the commercialization of FoundationOne for solid tumors, and the development of new products such as FoundationOne for hematologic malignancies. We have incurred significant losses since our inception, and as of June 30, 2013, our accumulated deficit was $64.2 million. We expect to continue to incur operating losses over the near term as we expand our commercial operations, conduct clinical trials, and invest in our molecular information platform and additional product offerings.

Financial Operations Overview

Revenue

We derive our revenue from selling products that are enabled by our molecular information platform. The information provided in our test results is branded as FoundationOne for our clinical

 

52


Table of Contents

customers and is not branded for our biopharmaceutical customers. For the years ended December 31, 2011 and 2012, and the six months ended June 30, 2013, revenue totaled $2.1 million, $10.6 million, and $11.1 million, respectively.

The principal focus of our commercial operations currently is to continue to drive adoption of products enabled by our molecular information platform. In particular, we seek to increase sales volume of FoundationOne for solid tumors in the clinical setting. For the year ended December 31, 2012, which included only seven months of sales of FoundationOne subsequent to its formal commercial launch in June 2012, and for the six months ended June 30, 2013, we performed approximately 1,750 and 2,766 FoundationOne tests for ordering physicians, respectively. Similarly, we seek to increase the volume of tests enabled by our molecular information platform that we perform for our biopharmaceutical customers. For the year ended December 31, 2012, we performed approximately 1,350 tests, and for the six months ended June 30, 2012 and 2013, we performed approximately 479 and 1,218 tests for our biopharmaceutical customers, respectively.

For many physician orders within the United States, the payment we ultimately receive depends upon the rate of reimbursement from commercial third-party payors and government payors. Currently we are not a participating provider with any commercial third-party payors and therefore do not have specific coverage decisions for the FoundationOne test with established payment rates. Currently, commercial third-party payors reimburse our claims based upon the stacked CPT codes, the predominant methodology, or based on other methods such as percentages of charges or other formulas that are not made known to us. In addition, a small portion of payors outsource our claims to preferred provider organizations or third-party administrators, who process our claims and pay us directly at negotiated rates. Coverage and payment is determined by the third-party payor on a case-by-case basis. We are not currently a participating provider in any state Medicaid program and therefore do not have coverage decisions under which our test is covered by these Medicaid programs. We are a participating provider in the Medicare program but we do not have a coverage decision and have not yet submitted claims for our test to Medicare. We may also negotiate rates with patients, if the patient is responsible for payment. Our efforts in obtaining reimbursement based on individual claims, including pursuing appeals or reconsiderations of claim denials, take a substantial amount of time, and bills may not be paid for many months. Furthermore, if a third-party payor denies coverage after final appeal, payment may not be received at all.

We currently recognize revenue on a cash basis from commercial third-party payors and from patients who make co-payments, pay deductibles, or pay other amounts that we have been unable to collect from their third-party payors because the payment is not fixed or determinable and collectibility is not reasonably assured, including due to the fact that we do not have coverage decisions in place and have a limited history of collecting claims. We expect to use judgment in assessing whether the fee is fixed or determinable and whether collectibility is reasonably assured as we continue to gain payment experience with third-party payors and patients. Costs associated with performing tests are recorded as tests are processed. These costs are recorded regardless of when or whether revenue is recognized with respect to those tests. Because we currently recognize revenue on a cash basis from commercial third-party payors, the costs of those FoundationOne tests are recognized in advance of any associated revenues. Because of the increasing period-to-period FoundationOne test volumes that we have observed to date, our revenue from these payors is lower and our net loss is higher than if we were recognizing revenue from these payors on an accrual basis in the period during which the work was performed and costs were incurred.

There is currently no national coverage decision that determines whether and how our test is covered by Medicare. In the absence of a national coverage decision, local Medicare contractors that administer the Medicare program in various regions have some discretion in determining coverage and therefore payment for tests. Our local Medicare contractor, who would process our claims on behalf of Medicare, requested that we not submit claims for services provided to Medicare patients while the

 

53


Table of Contents

contractor assessed the appropriate coverage and payment for FoundationOne as a whole. Pending the response, no claims have been billed to either Medicare or Medicare patients and we have not generated any revenue from these FoundationOne tests. As a result, while we incur costs to perform these FoundationOne tests, we are not currently generating revenue from the sale of FoundationOne for patients covered by Medicare. Our net loss is therefore higher than if we were recognizing revenue from the sale of FoundationOne for patients covered by Medicare. FoundationOne tests for patients covered by Medicare represented approximately 28% and 29% of total FoundationOne tests ordered by physicians in the United States during 2012 and the six months ended June 30, 2013, respectively.

We intend to seek a national coverage determination from our Medicare contractor, which, if obtained, will establish a standard for the reimbursement for our Medicare claims. If we do not receive definitive direction from our Medicare contractor regarding our submission of claims for services provided to Medicare patients, we intend, before the end of 2013, to commence submitting claims to Medicare for FoundationOne tests provided to Medicare patients. The response of the Medicare contractor to the submission of such a claim is uncertain and the claim may be denied or paid, in whole or in part. If a claim is denied or paid in part, we may decide to appeal the denied claim or any denied portion of the claim. Our Medicare contractor may also issue a negative coverage determination for FoundationOne that would apply to future claims or may defer processing a claim pending a coverage or payment determination. If a claim is paid by our Medicare contractor, either upon acceptance of the claim or following a successful appeal of a denied claim, we will generate revenue from Medicare for FoundationOne testing.

We expect that the current lack of coverage decisions and the uncertainty of reimbursement on a case-by-case basis may continue to negatively impact our revenue and earnings, particularly as FoundationOne test volumes increase period-to-period. Following our achievement of a coverage decision from a commercial third-party payor or government payor or once we have a sufficient history of claims collections with any such payor that we conclude the fee for FoundationOne tests for individuals insured by such payor is sufficiently fixed or determinable and collectability is reasonably assured, we will begin to recognize revenue from such payor on an accrual basis. As of June 30, 2013, we had cash and cash equivalents of approximately $36.0 million. We do not believe that the adverse impacts on our liquidity related to the absence of coverage decisions from commercial third-party payors and government payors will materially adversely affect our business or prospects over at least the next 12 months and likely not for the foreseeable future. If we are not able to obtain coverage decisions from commercial third-party payors and government payors over the longer term, however, and our available cash balances, net proceeds from this offering, and cash flow from claims for reimbursement on behalf of each patient on a case-by-case basis and other operations are insufficient to satisfy our liquidity requirements, we may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.

We recognize revenue from the sale of our products to certain hospitals, cancer centers, other institutions, and patients at the time results are reported to physicians if all revenue recognition criteria have been met.

We also receive a small portion of revenue from patients who make co-payments and pay deductibles. In addition, while we take on the primary responsibility for obtaining third-party reimbursement on behalf of patients, including appeals for any initial denials, we ultimately do bill patients for amounts that we have been unable to collect from their third-party payors. While we are not currently seeking reimbursement from Medicare or billing Medicare patients, we may decide to provide appropriate notices to patients covered by Medicare to enable us to bill a patient for all or part of a claim that is denied coverage by our Medicare contractor. We offer a comprehensive patient assistance program to support patients whose incomes are below certain thresholds and to allow for extended payment terms, as necessary, given the patient’s economic situation.

 

54


Table of Contents

Revenue from our biopharmaceutical customers are based on a negotiated price per test or on the basis of agreements to provide certain testing volumes or other deliverables over defined periods. We recognize revenue upon delivery of the test results, or over the period that testing volume or other deliverables are provided, as appropriate.

We expect our revenue to increase over time as we expand our commercial efforts within and outside of the United States. Positive reimbursement decisions from commercial third-party payors and government payors, such as Medicare and Medicaid, would eliminate much of the uncertainty around payment, should allow us to recognize revenue earlier, and increase our overall revenue growth from ordering physicians within the United States. We also expect to grow our biopharmaceutical customer base. Over time, we expect that our revenue from ordering physicians within and outside of the United States will significantly exceed revenue from our biopharmaceutical customers, given the higher percentage of patients with cancer who are treated outside of clinical trial settings.

Cost of Revenue and Operating Expenses

We allocate certain overhead expenses, such as rent, utilities, and depreciation to cost of revenue and operating expense categories based on headcount and facility usage. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category.

Cost of Revenue

Cost of revenue consists of personnel expenses, including salary, bonuses, employee benefits and stock-based compensation expenses, cost of laboratory supplies, depreciation of laboratory equipment and amortization of leasehold improvements, shipping costs, and certain allocated overhead expenses. We expect these costs will increase in absolute dollars as we increase our sales volume, but will decrease as a percentage of revenue over time as our sales increase and we gain operating efficiencies. During the year ended December 31, 2012 and the six months ended June 30, 2013, our cost of revenue represented approximately 53% and 41%, respectively, of our total revenue. Our cost of revenue during the year ended December 31, 2011 was primarily attributable to a pilot agreement with a biopharmaceutical customer.

Costs associated with performing tests are recorded as tests are processed. These costs are recorded regardless of whether revenue is recognized with respect to those tests. Because we currently recognize revenue on a cash basis from commercial third-party payors and patients who make co-payments, pay deductibles or pay other amounts that we have been unable to collect from their insurers, the costs of those tests are often recognized in advance of any associated revenues.

Sales and Marketing Expenses

Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, reimbursement, and business development personnel who are focused on our biopharmaceutical customers. These expenses consist principally of salaries, commissions, bonuses, employee benefits, travel, and stock-based compensation, as well as marketing and educational activities, and allocated overhead expenses. We expense all sales and marketing costs as incurred.

During the years ended December 31, 2011 and 2012, and the six months ended June 30, 2013, our sales and marketing expenses represented approximately 76%, 32%, and 42%, respectively, of our total revenue. We expect our sales and marketing costs to continue to increase in absolute dollars as we expand our sales force, increase our presence within and outside of the United States, and increase our marketing activities to drive further awareness and adoption of FoundationOne and our future products.

 

55


Table of Contents

General and Administrative Expenses

Our general and administrative expenses include costs for our executive, accounting and finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, travel, and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expense all general and administrative expenses as incurred.

We expect that our general and administrative expenses will increase after this offering, primarily due to the costs of operating as a public company, such as additional legal, accounting, corporate governance, and investor relations expenses, and higher directors’ and officers’ insurance premiums.

Research and Development Expenses

Our research and development expenses consist primarily of costs incurred for new product research and development, significant product improvements, clinical trials to evaluate the clinical utility of FoundationOne, the development of our knowledgebase for genomic and clinical data, and the development of our online tools, such as our online portal and mobile applications for Interactive Cancer Explorer. Costs to develop our online tools are recorded as research and development unless they meet the criteria to be capitalized as internal-use software costs. These activities include the following costs:

 

  Ÿ  

personnel-related expenses such as salaries, bonuses, employee benefits, and stock-based compensation;

 

  Ÿ  

fees for contractual and consulting services;

 

  Ÿ  

costs to manage and synthesize our medical data and to expand our knowledgebase;

 

  Ÿ  

clinical trials;

 

  Ÿ  

laboratory supplies; and

 

  Ÿ  

allocated overhead expenses.

We expect that our overall research and development expenses will continue to increase in absolute dollars as we continue to innovate our molecular information platform, develop additional products, expand our genomic and medical data management resources, and conduct our ongoing and new clinical trials.

Interest Expense, Net

Interest expense, net consists primarily of interest expense on our loan balance and the amortization of debt discounts. Interest income consists of interest earned on our cash and cash equivalents. During the years ended December 31, 2011 and 2012, and the six months ended June 30, 2013, interest income was not material, although we expect our interest income to increase as we invest the net proceeds from this offering.

Other Expense, Net

Other expense, net consists of changes in the fair value of our investor rights obligation, which was the right to purchase additional shares of our Series A convertible preferred stock at a fixed price per share upon the achievement of certain pre-defined milestones that was settled in 2011, and changes in the fair value of our preferred stock warrant liability. These other expenses are offset, in part, by other income from grants received by us, including a grant from the Internal Revenue Service’s Qualifying Therapeutic Discovery Program.

 

56


Table of Contents

Results of Operations

Comparison of Years Ended December 31, 2011 and 2012

 

     Years Ended
December 31,
    Change  
     2011     2012     $     %  
     (in thousands, except percentages)  

Statements of Operations Data:

        

Revenue

   $ 2,057      $ 10,645      $ 8,588        418

Costs and expenses

        

Cost of revenue

     258        5,681        5,423        2,102   

Sales and marketing

     1,555        3,454        1,899        122   

General and administrative

     6,992        8,644        1,652        24   

Research and development

     9,023        14,777        5,754        64   
  

 

 

   

 

 

   

 

 

   

Total costs and expenses

     17,828        32,556        14,728        83   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (15,771     (21,911     (6,140     39   

Interest expense, net

     (421     (421     —          —     

Other expense, net

     (845     (61     784        93   
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (17,037   $ (22,393   $ (5,356     31
  

 

 

   

 

 

   

 

 

   

Revenue

Total revenue for the year ended December 31, 2012 was $10.6 million and consisted of $8.0 million in revenue from our biopharmaceutical customers and $2.6 million in revenue from FoundationOne tests ordered by clinical physicians. During 2012, we performed approximately 1,350 tests for our biopharmaceutical customers and approximately 1,750 FoundationOne tests for ordering physicians.

For our biopharmaceutical customer revenue that was based on a negotiated price per test, the average revenue per test in 2012 was approximately $3,700. We expect this average revenue per test for biopharmaceutical customers to remain fairly consistent over time. Approximately $4.4 million of our biopharmaceutical revenue in 2012 represented minimum guaranteed payments under contracts with multiple element arrangements that were not negotiated on a price per test basis.

In 2012, the average revenue per FoundationOne test for clinical use that met our revenue recognition criteria during 2012 was approximately $3,800. This average revenue per FoundationOne test does not account for 641 FoundationOne tests that were billed to commercial third-party payors during 2012 and were not paid during 2012, or for the 398 FoundationOne tests that we performed during 2012 for patients covered by Medicare but for which claims were not submitted during 2012. Thus, our average revenue per FoundationOne test excludes tests for which we have not yet recognized revenue. Because we recognize revenue on a cash basis from commercial third-party payors and from patients who make co-payments, and our efforts to obtain payment for individual claims can take a substantial amount of time, there is typically a significant lag between the time the FoundationOne test is performed and the time we actually recognize the revenue from such test. As a result, if we were to include tests for which we have not recognized revenue in our average revenue per test calculation for a particular period, it would imply that we will not receive any revenue for such tests. Despite our lack of coverage decisions, we have been reasonably successful in securing reimbursement from commercial third-party payors for tests performed in prior periods. Similarly with respect to tests performed for patients covered by Medicare, we intend to submit claims to Medicare for these tests pending receipt of definitive direction from our Medicare contractor. We also expect to

 

57


Table of Contents

receive revenue from patients who make co-payments, pay deductibles, or pay other amounts that we have been unable to collect from third-party payors. While receipt of payment from third-party payors, Medicare, and patients in respect of these claims is not currently fixed and determinable and collectability is not reasonably assured, we do expect to receive revenue in the future for tests performed in this period. However, it is difficult to predict future revenue from the previously performed FoundationOne tests because the test is in an early stage of commercialization and we have limited payment history. As a result, we cannot be certain that the revenue per test we recognize in the future will equal or exceed the average revenue per test reported above.

We billed commercial third-party payors for these 641 FoundationOne tests performed during 2012 (but for which we had not recognized revenue as of December 31, 2012) at $5,800 per test, the current list price for FoundationOne, which represents a maximum potential revenue to us of $3.7 million, if collected in full. We will continue to make requests for payment and/or appeal payment decisions made by commercial third-party payors. Because we are in an early stage of commercialization, we have limited payment experience, and it is therefore difficult to predict future revenue from the previously performed FoundationOne tests.

Pending receipt of definitive direction from our Medicare contractor, we have not submitted claims to Medicare for the 398 FoundationOne tests performed during 2012 for patients covered by Medicare nor have we billed Medicare patients for these tests. Based upon the current $5,800 per test list price for FoundationOne, the 398 tests we performed for Medicare patients in 2012 represent a maximum potential revenue to us of $2.3 million, if collected in full. We currently expect to submit claims to Medicare for FoundationOne tests previously performed by us for patients covered by Medicare; however, we will continue to assess our ability to bill Medicare or Medicare patients for these tests, pending receipt of definitive direction from our Medicare contractor. Notwithstanding our current intentions to seek payment for these tests, our Medicare contractor may deny our claim, in whole or in part, we may never receive any revenue from any of the 398 FoundationOne tests that we performed during 2012 for patients covered by Medicare and even if we do receive revenue from these tests, we do not expect to receive the full $5,800 list price per test.

The cumulative amount of FoundationOne tests that have been billed to commercial third-party payors and completed for patients covered by Medicare for which we have not recognized revenue was 641 and 401 (3 of which were conducted during 2011), respectively, as of December 31, 2012. If commercial third-party payors or government payors agree to pay us for these FoundationOne tests in the future, we will recognize revenue for such FoundationOne tests in the period in which our revenue recognition criteria are met. Any revenue that we receive in respect of these previously performed FoundationOne tests will favorably impact our liquidity and results of operations in future periods.

Our revenue during 2011 was primarily attributable to a pilot agreement with a biopharmaceutical customer.

None of our revenue recognized in the year ended December 31, 2011 was associated with customers outside of the United States. The majority of our revenue from customers outside of the United States in the year ended December 31, 2012 was generated from two customers from whom we recognized revenue of $0.8 million.

Cost of Revenue

Cost of revenue increased to $5.7 million for the year ended December 31, 2012 from $0.3 million for the year ended December 31, 2011. This increase was caused primarily by our performance of tests for our ordering physicians and for our biopharmaceutical customers. The average cost per test does not differ materially by customer. Additional volume led to higher reagent and consumable costs,

 

58


Table of Contents

additional laboratory personnel-related costs, and higher depreciation expense related to new equipment purchases. Our cost of revenue during the year ended December 31, 2011 was primarily attributable to a pilot agreement with a biopharmaceutical customer.

Sales and Marketing Expenses

Sales and marketing expenses increased by 122% to $3.5 million for the year ended December 31, 2012 from $1.6 million for the year ended December 31, 2011. The increase was primarily due to an increase of $1.3 million in personnel-related costs as the result of hiring 10 employees over the course of the year in our sales, marketing, client service, and reimbursement departments, and an increase of $0.6 million in marketing costs related to our commercial launch of FoundationOne.

General and Administrative Expenses

General and administrative expenses increased by 24% to $8.6 million for the year ended December 31, 2012 from $7.0 million for the year ended December 31, 2011. The increase was primarily due to a $2.4 million increase in employee-related expenses, including a $1.4 million increase in stock-based compensation, to support and expand our legal, finance, and human resources infrastructure. This increase was offset by a $0.8 million decrease in legal fees driven by establishing an in-house legal team.

Research and Development Expenses

Research and development expenses increased by 64% to $14.8 million for the year ended December 31, 2012 from $9.0 million for the year ended December 31, 2011. The increase was primarily due to a $2.1 million increase in employee and contractor-related expenses, including stock-based compensation, to support our molecular information platform and product development, a $1.9 million increase in expenses related to clinical trials to evaluate the clinical utility of FoundationOne, a $1.5 million increase in technology expenses related to data management, FoundationOne report design and functionality, and customer interface development, and a $0.3 million increase in lab supplies to support product development.

Interest Expense, Net

Interest expense, net was $0.4 million for the years ended December 31, 2012 and 2011.

Other Expense, Net

Other expense, net decreased to $0.1 million for the year ended December 31, 2012 from $0.8 million for the year ended December 31, 2011. Other expense, net for the year ended December 31, 2011 included a $1.1 million fair value adjustment for our investor rights obligation and an insignificant fair value adjustment for our warrant liability, offset by $0.2 million in grant income from the Internal Revenue Service’s Qualifying Therapeutic Discovery Program. The investor rights obligation was settled and reclassified to additional paid-in capital in 2011. We recorded $0.1 million associated with the change in fair value of our warrant liability in the year ended December 31, 2012. Upon completion of this offering, the preferred stock warrant will automatically convert into a warrant to purchase common stock, and is expected to be reclassified into additional paid-in capital at that time unless exercised earlier.

 

59


Table of Contents

Comparison of Six Months Ended June 30, 2012 and 2013

 

     Six Months Ended
June 30,
    Change  
     2012     2013     $     %  
     (unaudited)  
     (in thousands, except percentages)  

Statement of Operations Data:

        

Revenue

   $ 2,429      $ 11,120      $ 8,691        358

Costs and expenses

        

Cost of revenue

     1,830        4,597        2,767        151   

Sales and marketing

     1,347        4,686        3,339        248   

General and administrative

     3,699        7,905        4,206        114   

Research and development

     6,623        11,079        4,456        67   
  

 

 

   

 

 

   

 

 

   

Total costs and expenses

     13,499        28,267        14,768        109   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (11,070     (17,147     (6,077     55   

Interest expense, net

     (221     (141     80        36   

Other expense, net

     (53     (102     (49     (92
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (11,344   $ (17,390   $ (6,046     53
  

 

 

   

 

 

   

 

 

   

Revenue

Total revenue for the six months ended June 30, 2013 was $11.1 million and consisted of $6.0 million in revenue from our biopharmaceutical customers and $5.1 million in revenue from FoundationOne tests ordered by clinical physicians. During the six months ended June 30, 2013, we performed 1,218 tests for our biopharmaceutical customers and 2,766 FoundationOne tests for our ordering clinical physicians.

For our biopharmaceutical customer revenue that was based on a negotiated price per test, the average revenue per test in the first six months of 2013 was approximately $3,800. We expect this average revenue per test for biopharmaceutical customers to remain fairly consistent over time. Approximately $4.0 million of our biopharmaceutical revenue in the six months ended June 30, 2013 represented minimum guaranteed payments under contracts with multiple element arrangements that were not negotiated on a price per test basis.

In the first six months of 2013, we recognized revenue from 404 FoundationOne tests performed for clinical use during 2012 that were paid during the first six months of 2013.

During the six months ended June 30, 2013 the average revenue per FoundationOne test for clinical use that met our revenue recognition criteria during this period was approximately $3,700. This average revenue per FoundationOne test does not account for 1,117 FoundationOne tests that were billed to commercial third-party payors during the six months ended June 30, 2013 and were not paid during the six months ended June 30, 2013 or for the 611 FoundationOne tests that we performed during the six months ended June 30, 2013 for patients covered by Medicare but for which claims were not submitted during the six months ended June 30, 2013. We do not have comparable data from the first six months of 2012 because we had not yet formally launched FoundationOne. Thus, our average revenue per FoundationOne test excludes tests for which we have not yet recognized revenue. Because we recognize revenue on a cash basis from commercial third-party payors and from patients who make co-payments, and our efforts to obtain payment for individual claims can take a substantial amount of time, there is typically a significant lag between the time the FoundationOne test is performed and the time we actually recognize the revenue from such test. As a result, if we were to

 

60


Table of Contents

include tests for which we have not recognized revenue in our average revenue per test calculation for a particular period, it would imply that we will not receive any revenue for such tests. Despite our lack of coverage decisions, we have been reasonably successful in securing reimbursement from commercial third-party payors for tests performed in prior periods. Similarly with respect to tests performed for patients covered by Medicare, we intend to submit claims to Medicare for these tests pending receipt of definitive direction from our Medicare contractor. We also expect to receive revenue from patients who make co-payments, pay deductibles, or pay other amounts that we have been unable to collect from third-party payors. While receipt of payment from third-party payors, Medicare, and patients in respect of these claims is not currently fixed and determinable and collectability is not reasonably assured, we do expect to receive revenue in the future for tests performed in this period. However, it is difficult to predict future revenue from the previously performed FoundationOne tests because the test is in an early stage of commercialization and we have limited payment history. As a result, we cannot be certain that the revenue per test we recognize in the future will equal or exceed the average revenue per test reported above.

We billed commercial third-party payors for these 1,117 FoundationOne tests performed during the six months ended June 30, 2013 (but for which we had not recognized revenue as of June 30, 2013) at $5,800 per test, the current list price for FoundationOne, which represents a maximum potential revenue to us of $6.5 million, if collected in full. We will continue to make requests for payment and/or appeal payment decisions made by commercial third-party payors. Because we are in an early stage of commercialization, we have limited payment experience, and it is therefore difficult to predict future revenue from the previously performed FoundationOne tests.

Pending receipt of definitive direction from our Medicare contractor, we have not submitted claims to Medicare for the 611 FoundationOne tests performed during the six months ended June 30, 2013 for patients covered by Medicare nor have we billed Medicare patients for these tests. Based upon the current $5,800 per test list price for FoundationOne, the 611 tests we performed for Medicare patients during the six months ended June 30, 2013 represent a maximum potential revenue to us of approximately $3.5 million, if collected in full. We currently expect to submit claims to Medicare for FoundationOne tests previously performed by us for patients covered by Medicare; however, we will continue to assess our ability to bill Medicare or Medicare patients for these tests, pending receipt of definitive direction from our Medicare contractor. Notwithstanding our current intentions to seek payment for these tests, our Medicare contractor may deny our claim, in whole or in part, we may never receive any revenue from any of the 611 FoundationOne tests that we performed during the six months ended June 30, 2013 for patients covered by Medicare and even if we do receive revenue from these tests, we do not expect to receive the full $5,800 list price per test.

The cumulative amount of FoundationOne tests that have been billed to commercial third-party payors and completed for patients covered by Medicare for which we have not recognized revenue was 1,354 and 1,012, respectively, as of June 30, 2013. If commercial third-party payors or government payors agree to pay us for these FoundationOne tests in the future, we will recognize revenue for such FoundationOne tests in the period in which our revenue recognition criteria are met. Any revenue that we receive in respect of these previously performed FoundationOne tests will favorably impact our liquidity and results of operations in future periods.

Our revenue during the six months ended June 30, 2012 consisted primarily of revenue from our biopharmaceutical customers. For biopharmaceutical customer revenue that was based on a negotiated price per test, the average revenue per test was approximately $3,500 in the first six months of 2012 over approximately 300 tests.

Revenue from our international customers did not represent a significant driver of the increased revenue from the first six months of 2012 to the first six months of 2013.

 

61


Table of Contents

Cost of Revenue

Cost of revenue increased to $4.6 million for the six months ended June 30, 2013 from $1.8 million for the six months ended June 30, 2012. The increase was due to sales of FoundationOne for clinical use to ordering physicians and to increased testing volume with our biopharmaceutical customers, which drove higher reagent and consumable costs, additional laboratory personnel-related costs, and higher depreciation expenses related to equipment purchases. We expect our cost of revenue to increase as we expand our sales force and drive higher test volume from both our biopharmaceutical customers and our ordering physicians.

Sales and Marketing Expenses

Sales and marketing expenses increased by 248% to $4.7 million for the six months ended June 30, 2013 from $1.3 million for the six months ended June 30, 2012. The increase primarily resulted from a $2.1 million increase in personnel-related costs related to the expansion of our sales force, a $0.5 million increase in facilities expenses, an increase of $0.4 million in marketing expenses and an increase of $0.3 million in travel-related expenses.

General and Administrative Expenses

General and administrative expenses increased by 114% to $7.9 million for the six months ended June 30, 2013 from $3.7 million for the six months ended June 30, 2012. The increase was primarily driven by a $2.2 million increase in personnel-related costs, including a $1.4 million increase in stock-based compensation, a $1.5 million increase in facilities expenses and billing fees and a $0.4 million increase in legal fees.

Research and Development Expenses

Research and development expenses increased by 67% to $11.1 million for the six months ended June 30, 2013 from $6.6 million for the six months ended June 30, 2012. The increase was mainly related to a $1.7 million increase in personnel-related costs associated with new hires, including a $0.1 million increase in stock-based compensation, a $0.9 million increase in technology infrastructure spending, a $0.6 million increase in facilities expenses and a $1.3 million increase in clinical trial spending.

Interest Expense, Net

Interest expense, net was $0.2 million and $0.1 million for the six months ended June 30, 2012 and 2013, respectively.

Other Expense, Net

Other expense, net was insignificant for the six months ended June 30, 2012 and 2013.

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations since our inception in November 2009, and as of June 30, 2013, we had an accumulated deficit of $64.2 million. We expect that our sales and marketing, research and development, and general and administrative expenses will continue to increase. We expect these increased costs to be funded by our product revenue, subject to the rate of reimbursement we receive from commercial third-party payors and government payors, our existing cash and cash equivalents, and the net proceeds of this offering. We may also seek additional capital to fund our operations through equity offerings, debt financings, other third-party funding, or a combination thereof.

 

62


Table of Contents

We have funded our operations principally from the sale of preferred stock, product revenue and the incurrence of indebtedness. Since we have not received a coverage decision for FoundationOne from any commercial third-party payor and have a limited history of collecting claims, we currently recognize revenue on a cash basis from commercial third-party payors. We will continue to make requests for payment and/or appeal payment decisions made by commercial third-party payors. In addition, we currently expect to submit claims to Medicare for FoundationOne tests previously performed by us for patients covered by Medicare and we may receive payment for a portion of these FoundationOne tests, although our requests for payments could be denied in whole. If commercial third-party payors or government payors agree to pay us for these FoundationOne tests in the future, we will recognize revenue for such FoundationOne tests in the period in which our revenue recognition criteria are met. Any revenue that we receive in respect of these previously performed FoundationOne tests will favorably impact our liquidity in future periods.

In November 2010, we entered into a loan and security agreement, or the loan and security agreement, with Lighthouse Capital Partners, or Lighthouse, for $5.0 million, which was fully drawn by June 21, 2011. As of June 30, 2013, $2.3 million of principal and deferred interest payments were outstanding under the loan and security agreement. Under the terms of the loan and security agreement, we are precluded from entering into certain financing, restructuring and other transactions, including disposing of certain assets, and are subject to various non-financial covenants, including requirements that we maintain standard levels of insurance, maintain our assets in good condition, and file all required tax returns. The loan and security agreement also restricts our ability to pay dividends without the prior written consent of Lighthouse. We believe we were in compliance with all covenants under the loan and security agreement as of June 30, 2013.

As of June 30, 2013, we had cash and cash equivalents of approximately $36.0 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in money market mutual funds consisting of U.S. government-backed securities.

We have occasionally received letters from third parties inviting us to take licenses under, or alleging that we infringe, their patents. While any potential infringement claims could pose an uncertainty for our business, no notice of alleged infringement that we have received to date has led to a lawsuit or a license, and, as a result, no such claim has had an impact on our results of operations.

Cash Flows

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  
                 (unaudited)  
     (In thousands)  

Net cash provided by (used in):

        

Operating activities

   $ (14,133   $ (17,249   $ (11,002   $ (13,710

Investing activities

     (5,410     (3,183     (1,678     (3,023

Financing activities

     28,986        64,418        9,455        (2,140
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 9,443      $ 43,986      $ (3,225   $ (18,873
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities.    Net cash used in operating activities in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

The net cash used in operating activities was $14.1 million for the year ended December 31, 2011, and consisted primarily of a net loss of $17.0 million adjusted for non-cash items including depreciation of

 

63


Table of Contents

$1.5 million, the change in fair value of the investor rights obligation of $1.1 million, non-cash interest expense of $0.1 million, stock-based compensation of $0.1 million, and a net decrease in operating assets and liabilities of $0.1 million. The significant items in the change in operating assets and liabilities include decreases in accounts payable of $0.3 million and deferred revenue of $1.1 million and an increase in inventory of $0.3 million, offset, in part, by a decrease in accounts receivable of $1.0 million, an increase in accrued expenses of $0.6 million and an increase in deferred rent of $0.4 million.

The net cash used in operating activities was $17.2 million for the year ended December 31, 2012, and consisted primarily of a net loss of $22.4 million adjusted for non-cash items including depreciation of $2.9 million, stock-based compensation expense of $1.5 million, and a net increase in operating assets and liabilities of $0.5 million. The significant items in the change in operating assets and liabilities include increases in accrued expenses of $1.4 million, accounts payable of $0.1 million, and deferred revenue of $1.6 million, partially offset by increases in accounts receivable of $1.9 million, prepaid expenses and other current assets of $0.2 million, and inventory of $0.5 million.

The net cash used in operating activities was $11.0 million for the six months ended June 30, 2012, and consisted primarily of a net loss of $11.3 million adjusted for non-cash items including depreciation of $1.3 million and stock-based compensation expense of $0.5 million and a net increase in operating assets and liabilities of $1.5 million. The significant items in the change in operating assets and liabilities include increases in accounts receivable of $1.9 million, prepaid expenses and other current assets of $0.3 million and inventory of $0.3 million and a decrease in accounts payable of $0.2 million, partially offset by increases in accrued expenses of $0.6 million and deferred revenue of $0.5 million.

The net cash used in operating activities was $13.7 million for the six months ended June 30, 2013, and consisted primarily of a net loss of $17.4 million adjusted for non-cash items including depreciation of $2.1 million, stock-based compensation expense of $2.0 million, and a net increase in operating assets and liabilities of $0.5 million. The significant items in the change in operating assets and liabilities include increases in accounts receivable of $1.9 million, and an increase in prepaid expenses and other current assets of $0.5 million, partially offset by an increase in accounts payable of $0.4 million, an increase in deferred rent of $0.8 million and an increase in deferred revenue of $0.5 million.

Investing Activities.    Net cash used in investing activities consisted of purchases of fixed assets and an increase in restricted cash related to a security deposit. Net cash used in investing activities for the years ended December 31, 2011 and 2012 was $5.4 million and $3.2 million, respectively, and consisted of purchases of property and equipment. Net cash used in investing activities for the six months ended June 30, 2012 was $1.7 million and consisted of purchases of property and equipment. Net cash used in investing activities for the six months ended June 30, 2013 was $3.0 million and consisted of an increase in restricted cash of $1.7 million related to our new laboratory and office facilities, and purchases of property and equipment of $1.3 million.

Financing Activities.    Net cash provided by financing activities for the year ended December 31, 2011 of $29.0 million included $26.3 million of net proceeds from the sale of Series A preferred stock and $3.0 million in net proceeds from our loan facility, offset, in part, by $0.4 million in loan principal repayments. Net cash provided by financing activities for the year ended December 31, 2012 was $64.4 million and reflects the sale of Series A preferred stock for net proceeds of $10.2 million and the sale of Series B preferred stock for net proceeds of $55.7 million, offset, in part, by $1.6 million in loan principal payments. Net cash provided by financing activities for the six months ended June 30, 2012 was $9.5 million and reflects the sale of Series A preferred stock for net proceeds of $10.2 million, offset in part by $0.8 million in loan principal payments. Net cash used in financing activities for the six months ended June 30, 2013 was $2.1 million and consisted of loan principal repayments and issuance costs related to our planned initial public offering.

Operating Capital Requirements

We expect to incur additional operating losses in the near future and our operating expenses will increase as we continue to expand our sales force, increase our marketing efforts to drive market

 

64


Table of Contents

adoption of FoundationOne for solid tumors, launch FoundationOne for hematologic malignancies, invest in clinical trials, innovate our molecular information platform, and develop new product offerings. Our liquidity requirements have and will continue to consist of sales and marketing expenses, research and development expenses, capital expenditures, working capital, debt service, and general corporate expenses. As demand for FoundationOne continues to increase from physicians and biopharmaceutical companies, we anticipate that our capital expenditure requirements will also increase in order to build additional capacity. We expect that we will use a portion of the net proceeds of this offering, in combination with our existing cash and cash equivalents, for these purposes and for the increased costs associated with being a public company. The amount by which we increase our sales and marketing expenses and research and development expenses will be dependent upon the net proceeds of this offering and cannot currently be estimated. We expect that our planned expenditures will be funded from our ongoing operations, as well as from the net proceeds of this offering.

Based on our current business plan, we believe the net proceeds from this offering, together with our current cash and cash equivalents and anticipated cash flow from operations, will be sufficient to meet our anticipated cash requirements over at least the next 12 months and for the foreseeable future. We may consider raising additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons. In the future, we expect our operating and capital expenditures to increase as we increase our headcount, expand our sales and marketing activities and continue to invest in new product offerings. As sales of FoundationOne grow, we expect our accounts receivable balance to increase. Any increase in accounts payable and accrued expenses may not be completely offset by increases in accounts receivable, which could result in greater working capital requirements.

If our available cash balances, net proceeds from this offering, and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our products as a result of lower than currently expected rates of reimbursement from commercial third-party payors and government payors or other risks described in this prospectus, we may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding, or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.

These estimates 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 section “Risk Factors” of this prospectus. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be materially adversely affected.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2012.

 

     Total      2013      2014-2015      2016-2018      Thereafter  
     (in thousands)  

Operating lease(1)

   $ 2,900       $ 1,007       $ 1,893       $  —         $  —     

Notes payable(2)

     3,424         1,874         1,550         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,324       $ 2,881       $ 3,443       $  —         $ —     

 

65


Table of Contents

 

(1) We lease 22,506 square feet for office and laboratory space in Cambridge, Massachusetts under an operating lease that expires in July 2015.
(2) We entered into a loan agreement with Lighthouse to borrow up to $5,000,000 at a fixed interest rate of 8.25% on November 2010. The final payment will be made on December 31, 2014. Our notes payable balance includes interest payments.

The following table summarizes our contractual obligations at June 30, 2013.

 

     Total      2013      2014-2015      2016-2018      Thereafter  
     (in thousands)  

Operating leases(1)

   $ 29,536       $ 580       $ 6,862       $ 11,423       $ 10,671   

Notes payable(2)

     2,487         937         1,550         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,023       $ 1,517       $ 8,412       $ 11,423       $ 10,671   

 

(1) Our operating leases include the following:

 

  Ÿ  

22,506 square feet of office and laboratory space in Cambridge, Massachusetts under a lease that expires in July 2015;

 

  Ÿ  

approximately 10,000 square feet of office space in Cambridge, Massachusetts under a lease that expires in March 2014; and

 

  Ÿ  

61,591 square feet of office and laboratory space in Cambridge, Massachusetts under a lease that expires in February 2021.

 

(2) We entered into a loan agreement with Lighthouse to borrow up to $5,000,000 at a fixed interest rate of 8.25% on November 2010. The final payment is due on December 31, 2014. Our notes payable balance includes interest payments.

In July 2013, we entered into a Supply, Service and Support Agreement with Illumina, Inc., pursuant to which we agreed to purchase a minimum quantity of reagents and other consumables and access to services and capital equipment over a five-year term. Our minimum purchase commitment over the term of the agreement is approximately $6.1 million as of the effective date of the agreement.

Net Operating Loss Carryforwards

We have deferred tax assets of approximately $18.0 million as of December 31, 2012, which have been fully offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits. The deferred tax assets are primarily composed of federal and state tax net operating loss, or NOL, carryforwards and research and development tax credit carryforwards. As of December 31, 2012, we had federal NOL carryforwards of approximately $39.9 million and state NOL carryforwards of $39.1 million available to reduce future taxable income, if any. These federal NOL carryforwards expire at various times through 2029 and the state NOL carryforwards begin to expire in 2014. In general, if we experience a greater than 50 percent aggregate change in ownership of certain significant stockholders over a three-year period, or a Section 382 ownership change, utilization of our pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state laws. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization and may be substantial. If we experience a Section 382 ownership change in connection with this offering or as a result of future changes in our stock ownership, some of which changes are outside our control, the tax benefits related to the NOL carryforwards may be limited or lost.

 

66


Table of Contents

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk related to changes in interest rates. As of December 31, 2012, we had cash and cash equivalents of $54.8 million held primarily in money market mutual funds consisting of U.S. government-backed securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate one percent change in interest rates would not have a material effect on the fair market value of our portfolio.

Application of Critical Accounting Policies

We have prepared our financial statements in accordance with U.S. generally accepted accounting principles. Our preparation of these financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in note 2 to our financial statements included later in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We currently derive revenue from selling products that are enabled by our molecular information platform. We recognize revenue when all of the following criteria are present: persuasive evidence of an arrangement exists; delivery has occurred; the fee is fixed or determinable; and collectability is reasonably assured. We receive payments from: commercial third-party payors; certain hospitals and cancer centers with which we have direct bill relationships; individual patients; and our biopharmaceutical customers.

We currently recognize revenue on a cash basis for sales of our products for which we receive payments from commercial third-party payors and patients who make co-payments, pay deductibles or other amounts that we have been unable to collect from their third-party payors since the fee is not fixed or determinable and collectability is not reasonably assured. Our products are delivered electronically and, as such, there are no shipping and handling fees incurred by us or billed to our customers. We believe our products are exempt from state sales taxation due to the nature of our products. As a result, we do not charge our customers state sales tax. Because we have limited payment experience with third-party payors and patients, we have not concluded that the fee is fixed or determinable or that collectability is reasonably assured, and therefore, we recognize revenue on a cash basis. We expect to use judgment in our assessment of whether the fee is fixed or determinable and whether collectability is reasonably assured in determining when to recognize revenue in the future as we continue to gain payment experience with third-party payors and patients.

 

67


Table of Contents

We recognize revenue from the sale of our products to certain hospitals, cancer centers, other institutions and patients at the time results of our tests are reported to physicians, assuming all revenue recognition criteria have been met.

Our arrangements with biopharmaceutical customers are based on a negotiated price per test or an agreement to provide certain testing volume over a defined period. We recognize revenue from sales of our products to biopharmaceutical customers upon delivery of the test results or over the period the testing volume is provided, as appropriate.

For revenue arrangements with multiple deliverables, each deliverable is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer and whether a general right of return exists. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. We use judgment in identifying the deliverables in our arrangements, and in assessing whether each deliverable is a separate unit of accounting. We also use judgment in determining the period over which the deliverables are recognized in certain of our arrangements.

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.

Stock-based Compensation

We have included stock-based compensation as part of our cost of revenue and our operating expenses in our statements of operations and comprehensive loss as follows:

 

     Years Ended
December 31,
     Six Months
Ended

June 30,
 
     2011      2012      2012      2013  
                   (unaudited)  
     (in thousands)  

Cost of revenue

   $ 1       $ 22       $ 5       $ 17   

Sales and marketing

             31         5         45   

General and administrative

     69         1,388         465         1,816   

Research and development

     3         94         33         117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73       $ 1,535       $ 508       $ 1,995   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

68


Table of Contents

We account for stock-based compensation arrangements with our employees, consultants, and non-employee directors using a fair value method, which requires us to recognize compensation expense for costs related to all share-based payments. To date, our stock-based awards have included grants of stock options and restricted stock. The fair value method requires us to estimate the fair value of stock-based awards to employees and non-employees on the date of grant using the Black-Scholes option-pricing method. The fair value is then recognized, net of estimated forfeitures, as stock-based compensation expense over the requisite service period, which is typically the vesting period, of the award. Stock-based awards granted to non-employees are subject to periodic revaluation over their vesting term.

The Black-Scholes option-pricing model requires the input of subjective assumptions, including expected stock price volatility and the expected life of stock options. As a private company, we do not have sufficient history to estimate the volatility of our common stock price or the expected term of our stock options. We calculate expected volatility based on historical volatility data of a representative group of companies that are publicly traded. We selected representative companies with comparable characteristics to us, including risk profiles, position within the industry, and with historical stock price information sufficient to meet the expected term of the stock-based awards. We compute the historical volatility of this selected group using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to use the representative group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future stock option grants.

We determine the expected term of stock options according to the “simplified” method. Under this method, the expected term is calculated as the average of the time-to-vesting and the contractual life of the stock option. The assumed dividend yield is based on our expectation that we will not pay dividends in the foreseeable future, which is consistent with our history of not paying dividends. We determine the risk-free interest rate by using the equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant. We estimate forfeitures at the time of grant and revise our estimates, as appropriate, but actual future forfeiture rates may differ. If actual results differ significantly from these estimates, stock-based compensation expense and our statements of operations and comprehensive loss could be materially impacted. For the years ended December 31, 2011 and 2012, and the six months ended June 30, 2012 and 2013, we estimated the fair value of stock options at their respective grant dates using the following assumptions:

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  

Expected volatility

     68.6     68.0     69.0     67.1

Risk-free interest rate

     2.56     1.29     1.35     1.35

Expected stock option term (in years)

     6.25        6.25        6.25        6.25   

Expected dividend yield

                            

There is a high degree of subjectivity involved when using option-pricing models to estimate stock-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of stock-based awards is determined using an option-pricing model, that value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our stock options, the compensation expense that we record in the future may differ significantly from what we have historically reported.

 

69


Table of Contents

Determination of the Fair Value of Common Stock on Grant Dates

We are a privately held company with no active public market for our common stock. Therefore, our board of directors, with the assistance and upon the recommendation of management and based upon independent third party valuations, has for financial reporting purposes periodically determined the estimated per share fair value of our common stock at various dates using contemporaneous valuations consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Aid. We performed these contemporaneous valuations as of August 31, 2011, November 5, 2012, February 15, 2013, and May 10, 2013. In conducting these contemporaneous valuations, our board of directors considered all objective and subjective factors that it believed to be relevant in each valuation conducted, including management’s best estimate of our business condition, prospects, and operating performance at each valuation date. Within the contemporaneous valuations performed by our board of directors, a range of factors, assumptions, and methodologies were used. The significant factors included:

 

  Ÿ  

the fact that we are a privately held company with illiquid securities;

 

  Ÿ  

our stage of commercialization;

 

  Ÿ  

the likelihood of achieving a liquidity event for shares of our common stock, such as an initial public offering, given prevailing market conditions;

 

  Ÿ  

our historical operating results;

 

  Ÿ  

valuations of comparable public companies;

 

  Ÿ  

our discounted future cash flows, based on our projected operating results; and

 

  Ÿ  

our capital structure, including the rights and preferences of our various classes of equity.

The dates of our contemporaneous valuations have not always coincided with the dates of our stock-based compensation grants. In such instances, our board of directors’ estimates have been based on the most recent contemporaneous valuation of our shares of common stock and its assessment of additional objective and subjective factors it believed were relevant and which may have changed from the date of the most recent contemporaneous valuation through the date of the grant.

There are significant judgments and estimates inherent in these valuations. These judgments and estimates include assumptions regarding our future operating performance, stage of commercial growth, reimbursement from commercial third-party payors and government payors, the timing of a potential initial public offering or other liquidity event, and the determination of the appropriate valuation method at each valuation date. If we had made different assumptions, our stock-based compensation expense, net loss applicable to common stockholders, and net loss per share applicable to common stockholders could have been significantly different.

 

70


Table of Contents

The following table summarizes by grant date the number of shares of common stock subject to stock options granted from January 1, 2012 through the date of this prospectus, as well as the associated per share exercise price and the per share estimated fair value of the underlying common stock.

 

Date of Issuance

   Type of
Award
     Number
of
Shares
     Exercise Price
Per Share
     Common Stock Fair
Value Per Share

on Grant Date
 

January 10, 2012

     Option         464,908       $ 0.84       $ 0.84   

March 27, 2012

     Option         215,623         0.84         0.84   

May 24, 2012

     Option         127,999         0.84         1.80   

June 1, 2012

     Option         142,875         0.84         1.80   

July 24, 2012

     Option         107,622         0.84         1.80   

December 18, 2012

     Option         194,621         3.96         3.96   

March 7, 2013

     Option         635,422         4.16         4.16   

May 21, 2013

     Option         268,700         7.12         7.12   

May 22, 2013

     Option         80,000         7.12         7.12   

Common Stock Valuation Methodologies

Our board of directors estimated our enterprise value as of the various valuation dates using a market approach and an income approach, which are acceptable valuation methods in accordance with the Practice Aid. Under the market approach, enterprise value can be estimated by evaluating recent arm’s length transactions involving the sale of our preferred stock to investors and by comparisons to similar publicly traded companies. Under the income approach, enterprise value can be estimated using the discounted cash flow method. Additionally, each valuation reflects a marketability discount, resulting from the illiquidity of our common stock.

As provided in the Practice Aid, there are several approaches for allocating enterprise value of a privately held company among the securities held in a complex capital structure. The possible methodologies include the probability-weighted expected return method, or PWERM, the option-pricing method, or OPM, the current-value method, or a hybrid of the PWERM and the OPM, which we refer to as the hybrid method. Under the PWERM, shares are valued based upon the probability-weighted present value of expected future returns, considering various future outcomes available to us, as well as the rights of each share class. The OPM treats common stock and preferred stock as call options on the enterprise’s value. The exercise prices associated with these call options vary according to the liquidation preference of the preferred stock, the preferred stock conversion price, the exercise prices of common stock options, and other features of a company’s equity capital structure. The current-value method, which is generally only used for early stage companies, is based on first determining enterprise value using a market, income or asset-based approach, and then allocating that value to the preferred stock based on its liquidation preference or conversion value, whichever would be greater.

August 31, 2011 Valuation

We, with the assistance of a third-party valuation specialist, performed a contemporaneous valuation of our common stock as of August 31, 2011, and determined the fair value to be $0.84 per share as of that date. We used the back-solve method of the OPM, which derives the implied equity value for one type of equity security from a contemporaneous transaction involving another type of equity security. We applied the OPM back-solve method to solve for the equity value and corresponding value of common stock based on the $1.00 per share price paid for our Series A preferred stock. In August 2011, two unrelated investors, who had not previously invested in Foundation, purchased shares of our Series A preferred stock at a price of $1.00 per share. Given the proximity to the Series A preferred stock financing, we believed the per share issuance price of the Series A preferred stock provided an indication of the fair value of our equity as of August 31, 2011.

 

71


Table of Contents

The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeds the value of the liquidation preference at the time of a liquidity event, such as a strategic sale or merger. The common stock is modeled as a call option on the underlying equity value at a predetermined exercise price. In the model, the exercise price is based on a comparison with the total equity value rather than, as in the case of a regular call option, a comparison with a per share stock price. The OPM uses the Black-Scholes option-pricing model to price the call options. This model defines the securities’ fair values as functions of the current fair value of a company and uses assumptions, such as the anticipated timing of a potential liquidity event and the estimated volatility of the equity securities.

We estimated the time to liquidity as 2.27 years based on then-current plans and estimates of our board of directors and management regarding a liquidity event. The risk-free rate was estimated as the interpolated 2.3 year yield on government bonds. We estimated annual volatility of 58% based on the observed historical volatility of publicly-traded shares issued by companies which are comparable to ours.

We applied a discount for lack of marketability to the value indicated for our common stock. We believed that a discount was appropriate because our common stock was unregistered, and because the holder of a minority interest in the common stock might not be able to influence the timing of a liquidity event. Our estimate of the appropriate discount for lack of marketability was based on quantitative methods, including the Protective Put Method (Chaffe) and the Asian Protective Put Method, consistent with the Practice Aid. We applied an estimated discount for lack of marketability of 25% to the value indicated for our common stock.

The following table summarizes the significant assumptions used to determine the fair value of our common stock of $0.84 as of August 31, 2011:

 

Years to liquidity

     2.27   

Annual volatility

     58

Risk-free interest rate

     0.21

Discount for lack of marketability (DLOM)

     25

As a result of the fact that there were no material changes to our business from August 31, 2011 to March 27, 2012, we utilized the August 31, 2011 valuation to determine the exercise price of option grants in January and March 2012.

November 5, 2012 Valuation

We, with the assistance of a third-party valuation specialist, performed a contemporaneous valuation of our common stock as of November 5, 2012, and determined the fair value to be $3.96 per share as of that date. We applied the OPM back-solve method to solve for our equity value and corresponding value of common stock based on the $2.26 per share price paid for our Series B preferred stock. In September 2012, several unrelated investors, who had not previously invested in Foundation, purchased shares of our Series B preferred stock at a price of $2.26 per share. Given the proximity to the Series B preferred stock financing and the arms-length nature of the transaction, we believed the per share issuance price of the Series B preferred stock provided an indication of the fair value of our equity as of November 5, 2012.

We estimated the time to liquidity as 2.50 years based on then-current plans and estimates of our board of directors and management regarding a liquidity event. The risk free rate was estimated as the

 

72


Table of Contents

interpolated 2.5 year yield on government bonds. We estimated annual volatility based on the observed historical volatility of publicly-traded shares issued by companies which are comparable to ours.

We applied a discount for lack of marketability to the value indicated for our common stock. Our estimate of the appropriate discount for lack of marketability took into consideration put option methodologies consistent with the Practice Aid. We applied an estimated discount for lack of marketability of 25% to the value indicated for our common stock.

The following table summarizes the significant assumptions used to determine the fair value of our common stock of $3.96 as of November 5, 2012:

 

Years to liquidity

     2.50   

Annual volatility

     49

Risk-free interest rate

     0.38

Discount for lack of marketability (DLOM)

     25

In preparing our December 31, 2012 financial statements, we concluded that the fair value of the common stock underlying the stock options granted between May 24, 2012 and July 24, 2012 with an exercise price of $0.84 per share was $1.80 per share for financial statement and reporting purposes. Our estimate of $1.80 per share was based on an analysis of the contemporaneous valuations of our common stock on August 31, 2011 and November 5, 2012, and an evaluation of the key business milestones which increased the fair value of our common stock during that period. The increase in the fair value of our common stock from $0.84 to $1.80 was primarily attributable to the formal commercial launch of FoundationOne in early June 2012. We utilized the $1.80 per share fair value in determining stock-based compensation expense for the above-mentioned grants for the year ended December 31, 2012 and the six months ended June 30, 2013.

The primary factors that supported the increase in the fair value of our common stock from $0.84 per share to $3.96 per share on November 5, 2012 were:

 

  Ÿ  

we commenced our formal commercial launch of FoundationOne for solid tumors in June 2012;

 

  Ÿ  

we secured $42.5 million in additional financing in September 2012;

 

  Ÿ  

in connection with the September financing, the participation and dividend rights of the previously outstanding preferred stock were modified, and those modifications were beneficial to holders of common stock; and

 

  Ÿ  

we continued to sign additional agreements with biopharmaceutical customers, which we believe demonstrated early demand for our product.

We utilized the November 5, 2012 valuation to determine the exercise price of options granted on December 18, 2012.

February 15, 2013 Valuation

We, with the assistance of a third-party valuation specialist, performed a contemporaneous valuation of our common stock as of February 15, 2013 and determined the fair value to be $4.16 per share as of that date. During the first quarter of 2013, management and our board of directors believed that a future initial public offering, or IPO, would be possible to the extent we continued to experience strong market adoption for FoundationOne, and received reasonable rates of reimbursement from commercial third-party payors. Without significant market penetration or reimbursement from commercial third-party and government payors, we believed that an IPO in 2013 would be unlikely.

To estimate our enterprise value, we used the hybrid method. The hybrid method is a PWERM where the equity value in one of the scenarios is calculated using an OPM. The hybrid method

 

73


Table of Contents

considers one IPO scenario and one OPM scenario. For the OPM scenario, the type of liquidity event or outcome is undefined. In order to estimate the investment return for the IPO scenario, we considered the price per share of our Series B preferred stock, the expected timing of an IPO, and an estimated rate of return on the Series B investment. In December 2012, three new investors, that had not previously invested in Foundation, purchased shares of our Series B preferred stock at a price of $2.26 per share. We assumed an IPO would occur 1.50 years after the investment, priced at a level to provide the Series B investors with an annual rate of return of 20%.

As a corroborative calculation, we considered the guideline public company, or GPC, method under the market approach. We considered various GPC’s for the February 15, 2013 valuation and concluded that the value we assumed for our IPO was consistent as a multiple of projected revenue with the multiples indicated by the GPC method.

In the OPM scenario, we applied the back-solve method to solve for the equity value and corresponding value of common stock based on the $2.26 per share price for the additional sale of Series B preferred stock to three new investors in December 2012. Given the proximity to the Series B preferred stock financing in December 2012, and the fact that this financing included and was led by unrelated investors, we believed the per share issuance price of the Series B preferred stock provided an indication of the fair value of our equity as of February 15, 2013. The values indicated for the shares of our preferred stock and common stock by the IPO scenario and the OPM scenario were probability weighted to estimate the fair value of our common stock as of the February 15, 2013 valuation date.

As a corroborative calculation to the OPM, we also considered the discounted cash flow method under the income approach. We converted our projected future cash flows to present value by applying a discount rate of 25%, which we selected based on studies of the rates of return expected by venture capitalists for companies in the bridge and IPO stage of development. The discounted cash flow method yielded an enterprise value which was consistent with the enterprise value indicated by the OPM back-solve method.

For the February 15, 2013 valuation, we estimated the fair value of our common stock by assigning a 90% weighting to the estimated fair value using the OPM back-solve method and a 10% weighting to the estimated fair value under the IPO scenario. We believed that the 90% weighting on the OPM back-solve method was appropriate due to the proximity of an additional issuance of our Series B preferred stock in December 2012 to the valuation date, and the fact that this December financing included and was led by unrelated investors. The weighting for the IPO scenario was deemed appropriate because at the time of the valuation, we believed that there was a possibility of following a successful Series B financing with an IPO, but given the following risks the probability of an IPO was assessed at only 10%:

 

  Ÿ  

there remained uncertainty as to the rate of adoption of FoundationOne given that we only had two quarters of commercial experience, and we believed that our ability to demonstrate a significant and sustained rate of market penetration was necessary to position us for a successful IPO;

 

  Ÿ  

on January 1, 2013, new Centers for Medicare and Medicaid Services, or CMS, reimbursement codes, which are used by commercial third-party payors and CMS, for molecular testing services took effect. There was significant uncertainty as to whether, and to what extent, we would get reimbursed for FoundationOne by commercial third-party payors and government payors. Because these codes had just taken effect, we did not then have sufficient experience with reimbursement under these new codes necessary to proceed with an IPO; and

 

  Ÿ  

we had not commenced a process to pursue an IPO of our common stock, our board of directors had not authorized any such process, and planning for an IPO can take a significant amount of time.

 

74


Table of Contents

After weighting the two scenarios, we applied a discount for lack of marketability of 25%, which yielded an estimated value attributable to common stockholders of $4.16 per share. The discount for lack of marketability of 25% was based on quantitative methods, including the Protective Put Method (Chaffe) and the Asian Protective Put Method, consistent with the Practice Aid.

The following table summarizes the significant assumptions used in the hybrid method to determine the fair value of our common stock as of February 15, 2013:

 

     IPO     OPM  

Probability weighting

     10     90

Years to liquidity

     1.37        2.22   

Annual volatility

     NA        48

Risk-free rate

     NA        0.26

Discount for lack of marketability (DLOM)

     25     25

The primary factors that supported an increase in the fair value of our common stock from $3.96 per share at December 18, 2012 to $4.16 per share at February 15, 2013 were:

 

  Ÿ  

we hired 17 new employees, including a Chief Business Officer and three additional members of our sales force; and

 

  Ÿ  

we made progress in scaling our laboratory and information technology capabilities to support our growth expectations.

May 10, 2013 Valuation

As a result of favorable capital market conditions, the strong initial adoption of FoundationOne, and the observed reimbursement trends from commercial third-party payors for FoundationOne under the new CMS reimbursement codes that took effect on January 1, 2013, an IPO became more probable in the near-term. During the second quarter of 2013, we began preparations for an IPO, including the selection of underwriters and outside legal counsel. We, our external advisors, the proposed underwriters and their advisors held an organizational meeting in May 2013 to formally begin the IPO process and the underwriter due diligence process.

As a result of these changes in facts and circumstances, we, with the assistance of a third-party valuation specialist, completed another contemporaneous valuation analysis as of May 10, 2013. To estimate our enterprise value, we used the hybrid method. For the IPO scenario, we used the GPC method under the market approach to estimate our enterprise value in an IPO. We estimated our value in an IPO based on GPC multiples of projected revenue.

As a corroborative calculation, we considered the annual rate of return for our Series B preferred stock investors based on our estimated value in an IPO. This calculation supported the value determined under the GPC method.

In the OPM scenario, we estimated our equity value using the discounted cash flow method under the income approach. We converted our projected future cash flows to present value by applying a discount rate of 25%, which we selected based on studies of the rates of return expected by venture capitalists for companies in the bridge and IPO stage of development.

We assigned a 60% probability of the IPO scenario and a 40% probability to the OPM scenario. The primary factors that supported these probabilities, and the primary reasons for the increase in the fair value of our common stock from $4.16 per share to $7.12 per share at May 21, 2013, were:

 

  Ÿ  

FoundationOne test volume and our customer base increased significantly during March, April, and the first week of May 2013;

 

75


Table of Contents
  Ÿ  

reimbursement received from commercial third-party payors under the new CMS reimbursement codes that took effect on January 1, 2013;

 

  Ÿ  

we entered into a collaboration with Memorial Sloan-Kettering Cancer Center for the development of FoundationOne for hematologic malignancies;

 

  Ÿ  

we entered into agreements with new and existing biopharmaceutical partners;

 

  Ÿ  

several of our scientific discoveries were accepted for publication and we were selected for several high profile presentations, including at the American Society of Clinical Oncology, or ASCO;

 

  Ÿ  

our decision to accelerate our field sales hiring plan based on observed adoption of FoundationOne; and

 

  Ÿ  

as a result of favorable capital market conditions and the factors noted above, we began the process of preparing for an IPO.

After weighting the two scenarios, we applied a discount for lack of marketability of 15%, which yielded an estimated value attributable to common stockholders of $7.12 per share. This discount for lack of marketability was based on quantitative methods, including the Protective Put Method (Chaffe) and the Asian Protective Put Method, consistent with the Practice Aid.

The following table summarizes the significant assumptions used in the hybrid method to determine the fair value of our common stock as of May 10, 2013:

 

     IPO     OPM  

Probability weighting

     60     40

Years to liquidity

     0.39        1.99   

Annual volatility

     NA        47

Risk-free rate

     NA        0.26

Discount for lack of marketability (DLOM)

     15     15

Estimated offering price

We and our underwriters determined the estimated price range set forth on the cover of this prospectus, which is $14.00 to $16.00 per share. In comparison, our estimate of the fair value of our common stock was $7.12 per share as of May 21, 2013. The May 21, 2013 valuation used a hybrid method in which the probability weighting for the IPO and option pricing model (OPM) scenarios was 60% and 40%, respectively, and the value per share for the IPO and OPM scenarios was $10.16 and $5.72, respectively (excluding a 15% discount for lack of marketability). Based on a 100% weighting of the IPO scenario and no discount for lack of marketability, the estimated value per share on May 21, 2013 would have been $10.16. We note that, as is typical in initial public offerings, the estimated price range for this offering was not derived using a formal determination of fair value, but was determined based upon discussions between us and the underwriters. Among the factors considered in setting the estimated range were prevailing market conditions and estimates of our business potential, the general condition of the securities market and the market prices of, and demand for, publicly-traded common stock of generally comparable companies.

In addition, we believe that the difference in value reflected between the midpoint of the estimated range and the board of directors’ determination of the fair value of our common stock on May 21, 2013 was primarily the result of the following company-specific and market and other external factors:

Company-specific factors:

 

  Ÿ  

The number of FoundationOne tests delivered to our ordering physicians has grown significantly, increasing from 1,140 tests delivered during the first quarter of 2013 to 1,626 tests

 

76


Table of Contents
 

delivered during the second quarter of 2013. In addition, we continue to experience significant growth in tests delivered during the third quarter of 2013. We have also expanded our sales force from 10 to 18 individuals since May 21, 2013, which significantly increases our commercial outreach.

 

  Ÿ  

We have continued to receive reimbursement from commercial third-party payors under the new Centers for Medicare and Medicaid Services reimbursement codes that took effect on January 1, 2013.

 

  Ÿ  

We are advancing the development of our second commercial product, FoundationOne for hematologic malignancies, and we remain on schedule to conduct our formal commercial launch of this product by early 2014. We have prepared a significant number of scientific abstracts for potential presentation at the American Society of Hematology, one of the leading medical conferences in hematologic malignancies, and we believe there is growing demand for this product offering in the marketplace.

 

  Ÿ  

On May 30, 2013, the US Oncology Network, one of the largest networks of integrated, community-based oncology practices in the United States, announced that we are its preferred provider for molecular diagnostic testing in cancer care. We believe this relationship is further validation of our approach, and will help to further extend our commercial outreach into community oncology practices.

 

  Ÿ  

Since May 21, 2013, we began billing under two new agreements with highly reputable hospitals to provide FoundationOne tests to their physicians, for which we receive direct payments at negotiated rates.

 

  Ÿ  

Since May 21, 2013, we entered into two new biopharmaceutical agreements through which we will provide our molecular information products.

 

  Ÿ  

In July 2013, we entered into a five-year supply, service and support agreement with Illumina through which Illumina will provide us with products and services that support the gene sequencing component of our molecular testing activities. This new agreement provides an established supply and pricing arrangement during the term of the agreement. We believe this new agreement reduces the risk of interruption to our supply chain and to our laboratory operations.

 

  Ÿ  

We have made significant progress in the construction of our new laboratory facility, which will enable us to more than double our operating capacity.

Market and other external factors:

 

  Ÿ  

Based upon preliminary discussions with our investors and potential investors, we believe there will be strong interest in investing in a company with our profile and at our stage of development.

 

  Ÿ  

Since our May 21, 2013 valuation, the market specific to initial public offerings has continued to perform well. There have been approximately 17 initial public offerings within the healthcare sector since May 21, 2013, and as of August 21, 2013, the average increase in price per share from the offering price across those companies was approximately 30%. Approximately 60% of initial public offerings in the healthcare sector during 2013 have occurred since our May 21, 2013 valuation.

 

  Ÿ  

There has been growing awareness among physicians and the public generally of the treatment benefits of a precision medicine approach to utilizing targeted therapeutics that are based on the specific genomic alterations driving individual cancer growth.

 

  Ÿ  

The estimated initial public offering price range necessarily assumes that the initial public offering has occurred, that a public market for our common stock has been created and that all

 

77


Table of Contents
 

outstanding shares of our preferred stock have been converted into common stock in connection with the initial public offering, and therefore excludes any discount for lack of marketability of our common stock, which was factored in the May 21, 2013 valuation.

 

  Ÿ  

Our preferred stock has substantial economic rights and preferences superior to our common stock. The midpoint of the estimated price range assumes the conversion of our preferred stock to common stock upon the completion of this offering and the corresponding elimination of such superior economic rights and preferences.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in the United States. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

 

78


Table of Contents

BUSINESS

Overview

We are a commercial-stage company focused on fundamentally changing the way patients with cancer are treated. We derive revenue from selling products enabled by our molecular information platform to physicians and biopharmaceutical companies. Our platform includes proprietary methods and algorithms for analyzing tumor tissue samples across all types of cancer, as well as information aggregation and concise reporting capabilities. Our products provide genomic information about each patient’s individual cancer, enabling physicians to optimize treatments in clinical practice and enabling biopharmaceutical companies to develop targeted oncology therapies more effectively. We believe we have a significant first mover advantage in providing comprehensive molecular information products on a commercial scale.

Our first clinical product, FoundationOne, is, to our knowledge, the only commercially available comprehensive molecular information product designed for use in the routine care of patients with cancer. We commenced our formal commercial launch of FoundationOne for solid tumors in June 2012 and expect to commence our commercial launch of FoundationOne for blood-based cancers, or hematologic malignancies, by early 2014. To accelerate our growth and enhance our competitive advantage, we are extending our sales force, publishing scientific and medical advances, fostering relationships throughout the oncology community, and developing new products.

The cancer treatment paradigm is evolving rapidly. Today, physicians increasingly use precision medicines to target cancers based on the specific genomic alterations driving their growth. Physicians need molecular information about their patients’ unique cancers to determine the optimal course of treatment. However, most currently available molecular diagnostic tests capture only a limited number of the most common and known genomic alterations. We believe this narrow approach often fails to identify relevant targeted treatment options.

We believe the oncology community needs a single product that can assess the known biologically relevant genomic alterations and distill complex molecular information into a concise and actionable format and we designed FoundationOne to be that product. We believe a new, comprehensive approach to providing molecular information for use in clinical settings can address an area of significant unmet medical need for patients suffering from advanced, or active metastatic, cancers. We estimate that there are approximately one million patients per year in the United States with newly-diagnosed or recurrent active metastatic cancers who fall into challenging treatment categories, including patients who have rare or aggressive diseases, patients whose disease has progressed after standard treatments, and patients who have tested negative under, or been ineligible for, traditional molecular diagnostic tests. We are initially targeting these patients for FoundationOne because we believe this patient population will currently benefit most from a comprehensive molecular information product. Our estimates are based upon a combination of feedback from our network of oncology thought leaders, data published by the National Cancer Institute in the Cancer Statistics Review, and focused market research that we commissioned. This market research consisted of an analysis of a third party database (that includes public and private cancer-related statistical information on tumor type, disease stage, clinical information, and disease outcomes) supplemented with confirmatory interviews from physicians who practice at a variety of cancer treatment centers, including academic research centers and community hospitals. As the number of available targeted therapies expands and as physicians gain further experience using comprehensive molecular information in their routine treatment decisions, we believe that the potentially addressable market for comprehensive molecular information products will expand over the next five years to include all patients who have metastatic disease, not limited to the challenging treatment categories noted above. We estimate that this potential market expansion could include an additional 800,000 total patients annually, based upon

 

79


Table of Contents

the same combination of sources of information we used to estimate the size of the patient population we are initially targeting for FoundationOne. For additional details on our target patient populations, see “Business—Market Opportunity” of this prospectus. Although we expect existing and future diagnostic testing providers to also target these patient populations, we believe FoundationOne is currently the only commercially available comprehensive molecular information product that provides a fully informative genomic profile in a concise and actionable format designed for use in the clinical setting.

We believe we have built the only molecular information platform that comprehensively assesses cancer tissue simultaneously for all four classes of genomic alterations across all cancer-related genes with the sensitivity and specificity required for routine medical practice. FoundationOne has identified at least one genomic alteration that is actionable, meaning the alteration is associated with an FDA-approved targeted therapy or with a clinical trial, in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013. FoundationOne delivers this complex molecular information in a concise report that matches detected molecular alterations with potentially relevant treatment options and clinical trials. The FoundationOne report is also available to physicians through an online portal and soon through interactive mobile applications.

We have experienced rapid adoption of FoundationOne. More than 1,500 physicians from large academic centers and community-based practices across more than 25 countries have ordered FoundationOne since its formal commercial launch in June 2012. We believe this rapid adoption of FoundationOne, which has been accomplished with a nascent sales team, demonstrates the demand for and utility of a single, comprehensive product that helps oncologists effectively implement the promise of precision medicine.

We believe FoundationOne has a sustainable competitive advantage because it:

 

  Ÿ  

Comprehensively identifies clinically actionable information FoundationOne currently assesses 236 biologically relevant cancer genes for all classes of genomic alterations with high sensitivity and specificity, and has identified actionable alterations in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013. FoundationOne identifies genomic alterations that other diagnostic tests cannot. Based on our quantitative analysis, FoundationOne finds more than three times the combined number of actionable genomic alterations identifiable using a collection of six commercially available and commonly used diagnostic tests;

 

  Ÿ  

Incorporates the latest scientific and medical advances — We have extensive relationships across the scientific and medical oncology communities, including with key thought leaders and leading biopharmaceutical companies. These relationships help us incorporate new cancer genes, the latest scientific findings, newly available targeted therapeutics, and relevant clinical trials into FoundationOne;

 

  Ÿ  

Readily integrates into routine clinical practice — Our proprietary sample preparation processes and computational biology algorithms allow us to utilize small amounts of routinely collected tumor tissue from a wide variety of sample types, including tissue with low tumor purity. We detect and report the clinically relevant genomic alterations, generally within 14 to 17 days. We are dedicated to providing high-quality support to our customers, from order initiation and sample acquisition through report delivery and follow-up with our medical affairs team;

 

  Ÿ  

Provides actionable information that physicians can use — In a concise report, FoundationOne communicates the actionable genomic alterations in a patient’s cancer and matches these alterations with targeted therapies and relevant clinical trials. Through our online portal, Interactive Cancer Explorer, physicians can access this report and links to topical peer-reviewed literature; and

 

80


Table of Contents
  Ÿ  

Promotes physician interaction to create a powerful network effect — We are continually augmenting our cancer knowledgebase, and we are expanding the functionality of our Interactive Cancer Explorer to allow for sharing of genomic and treatment data. Together, we believe these efforts will create a network effect of more users and ultimately more actionable information.

Key opinion leaders and leading cancer researchers, including oncologists at premier cancer institutions, such as Memorial Sloan-Kettering Cancer Center, Vanderbilt-Ingram Cancer Center, and The US Oncology Network, have embraced our approach and products. We believe that our relationships with thought leaders help validate our platform, drive adoption of our products in community oncology settings, and establish our leadership position in the field of molecular information related to cancer. We believe that the increasing use of our products, particularly among thought leaders, and the demonstration of the economic and clinical value of FoundationOne will help facilitate favorable reimbursement decisions. In addition to routinely using FoundationOne for clinical cases, many thought leaders collaborate with us on clinical studies, peer-reviewed publications, and medical and scientific conference presentations. Our effort in building these relationships furthers our ultimate goal—to facilitate better-informed treatment decisions for patients with cancer.

Our molecular information platform also is currently used by 18 biopharmaceutical partners to enhance their development of targeted oncology therapies. We use our core proprietary testing platform, computational biology, and information technology capabilities to analyze patient samples from both retrospective and prospective clinical trials. We provide our biopharmaceutical partners comprehensive genomic analysis and information relevant to precision medicine strategies. In addition to generating revenue, these relationships enable us to identify new cancer genes under investigation that can be incorporated into our platform at an early stage, as well as to participate in the newest oncology therapeutics and practice. We are actively working to expand these relationships.

We are dedicated to ongoing innovation in our molecular information platform and new product pipeline. Our product development investments have already yielded improvements to FoundationOne and the platform generally, enabling us to analyze more genes using less tissue while reducing turn-around time. Already more than 40% of FoundationOne customers use Interactive Cancer Explorer, the online portal we developed in consultation with Google Ventures, one of our investors, and launched in December 2012. We are also incorporating RNA-based sequencing technology to analyze the additional gene fusions commonly found in hematologic malignancies and expect to commence our commercial launch of FoundationOne for hematologic malignancies incorporating this technology by early 2014. In addition, we are exploring and developing new scientifically-advanced and clinically-relevant products that include, for example, products utilizing circulating tumor cells and, or cell-free plasma DNA, which is DNA that circulates in blood plasma outside of cells, and products that expand our offerings into additional areas such as epigenetics, which examines changes in gene expression that occur without changes in the underlying DNA, methylation, which is a chemical signaling mechanism that plays a role in regulation of gene expression, and immune response.

The increasing availability and understanding of molecular information about cancer is driving a revolution in the treatment of cancer. We seek to leverage the vast array of genomic data generated by our molecular information platform together with clinical data to position ourselves at the nucleus of this new treatment paradigm. Our biopharmaceutical partners have already begun using our data to further refine clinical trial design and drug development. In a recent example of the power of our molecular information platform, after a biopharmaceutical partner’s Phase 2 trial that used a narrowly focused test to screen trial subjects failed to meet its primary endpoint, we performed our comprehensive genomic analysis on trial subjects. Our analysis helped our biopharmaceutical partner predict a response to the drug, created new hypotheses to test in upcoming Phase 3 trials, and may have increased the target population who could benefit from this therapeutic approach.

 

81


Table of Contents

Over time, we will expand our ability to capture, aggregate, analyze, and facilitate the broader exchange of genomic data across the global oncology community. We are investing in our technology architecture to allow oncologists to share clinical data. Through Interactive Cancer Explorer, which is currently accessible through an online web portal and will also soon be accessible through mobile applications, we are building a data platform that efficiently captures and allows for the analysis of data that will create a network effect leading to more users and ultimately more useful data. If we, in conjunction with oncologists, pathologists, biopharmaceutical companies, and academic researchers, can successfully capture and utilize this data, we believe we will play an even more integral role in transforming care for the millions of patients suffering from cancer.

Our Strategy

Our objective is to transform the care of patients with cancer by leading the development and commercialization of proprietary genomic information products that guide the diagnosis and treatment of cancer, and that enhance the development of cancer therapies. To achieve this objective, our strategy is to:

 

  Ÿ  

Drive awareness and adoption of FoundationOne and our future clinical products — We are building an experienced, oncology-focused sales force, collaborating with thought leaders to validate our platform and influence utilization of our products, promoting physician interaction, engaging with patient advocacy and other key oncology stakeholders, and pursuing payment and reimbursement for our products.

 

  Ÿ  

Demonstrate the value of our products to patients, physicians, and payorsTo illustrate the value of our products, we are educating physicians and payors about the patients most likely to benefit from our products, conducting clinical trials and health economic studies, and communicating our data through peer-reviewed journals and conference presentations.

 

  Ÿ  

Enable biopharmaceutical companies to more effectively develop new cancer therapies — We are expanding our commercial relationships with biopharmaceutical partners to enable us to discover and interrogate new cancer genes, to assist in the development of novel targeted therapeutics, to improve clinical trial efficiency and outcomes, and to continue our involvement at the cutting edge of cancer treatment.

 

  Ÿ  

Invest in product enhancements and new product innovations — We are developing new molecular information products, such as FoundationOne for hematologic malignancies, conducting research and development into potential products to monitor disease progression utilizing circulating tumor cells and cell-free plasma DNA, and introducing powerful tools, such as our Interactive Cancer Explorer portal, to access and disseminate our molecular information.

 

  Ÿ  

Empower the broader cancer community with molecular information — We are investing in technology to allow oncologists to collaborate and share response rates and other clinical information. We have launched Interactive Cancer Explorer, and intend to make this information accessible through additional applications in 2014. Over time, we will expand our capacity to capture, aggregate, analyze and facilitate the broader exchange of genomic data across the global oncology community—a strategy that we believe eventually will create a network effect stimulating physician participation and the development of substantial amounts of data that, in turn, will positively impact the treatment of cancer.

 

82


Table of Contents

Our Industry

Despite enormous investment in research and the introduction of new treatments, cancer remains a critical area of unmet medical need. According to a 2012 American Cancer Society report, “Cancer Treatment and Survivorship Facts & Figures 2012-2013,” in 2012 in the United States, more than 13 million people were suffering from cancer and 1.6 million people were newly diagnosed with the disease. The global cancer burden is growing. The World Health Organization predicts in its Global Action Against Cancer publication that in 2020 there will be 16 million new cancer cases and 10 million cancer deaths globally. A recent report by the American Cancer Society, “The Global Economic Cost of Cancer,” estimates that the total annual economic impact of premature death and disability from cancer worldwide is approximately $900 billion.

According to the American Society of Clinical Oncology, there are more than 10,000 practicing oncologists treating patients with cancer in the United States. Whereas a small portion of oncologists practice in major academic-based cancer centers, the National Cancer Institute estimates that approximately 85% of the oncologists in the United States practice in community-based settings where the vast majority of patients with cancer are treated.

The diagnosis of cancer is complex and multidimensional. Practicing oncologists order multiple tests, including currently available molecular diagnostic tests, to better understand the genomic alterations that are driving their patients’ cancer growth. According to a Genomeweb web posting, “Clinical MDx Testing Growing Twice as Fast as Routine Dx; $58B by 2026?”, the global market for molecular diagnostic tests characterizing cancer was estimated to be $7.0 billion in 2011 and is projected to grow by more than 15% annually.

Cancer Treatment is Evolving to a Molecular-Based Paradigm

Cancer is not a single disease. The term cancer describes a class of diseases characterized by uncontrolled cell growth. Cells can experience uncontrolled growth if there are alterations to DNA, such as damage or mutations, and therefore disruption to the genes and proteins regulating cell division.

Surgery is often the first line of therapy for cancer where possible and, according to the American Cancer Society, most patients with cancer will have some type of surgery. Surgery often presents the greatest chance for a cure, especially if the cancer has been detected early in its development and has not spread to other parts of the body. Many patients, however, require therapeutic intervention beyond surgery alone.

Physicians have used radiation as a cancer therapy since the early 20th century, and modern radiation techniques deliver therapy with significant precision. Nevertheless, even today, radiation’s use and efficacy is limited because the high doses necessary to kill cancer cells often cause damage to healthy cells in the treatment area and fail to kill all cancer cells, particularly if the cancer has spread to other parts of the body.

Physicians began using chemotherapy in the 1940s as a drug therapy approach that acts by killing cells that divide rapidly, one of the main properties of most cancer cells. These cytotoxic therapies are often prescribed by a trial and error approach—both because certain chemotherapies have limited efficacy with some patients and the treatment effect might be inconsistent, and because the therapies’ indiscriminate destruction of healthy cells involved in critical biological functions can cause severe toxic side effects in some patients.

More recently, oncologists are integrating a precision medicine approach by utilizing therapeutics that target cancers based on the specific genomic alterations driving their growth. We believe the

 

83


Table of Contents

oncology community is generally beginning to change clinical practice so that oncologists treat each individual’s cancer according to its unique genomic alterations that impact the underlying biological pathways within the patient’s tumors, rather treating a patient’s tumors based on their initial anatomical location in the body, such as the breast, colon or lung. In addition, as a result of advancements in cancer biology and genomic technology that enable the identification of new cancer genes, biopharmaceutical companies are directing more research and development resources towards targeted therapies. There are currently more than 40 approved targeted oncology therapies on the market and approximately 950 unique clinical trials testing more than 470 targeted oncology therapies. In 2011, global spending on the targeted oncology therapies totaled $21.7 billion as compared to just $2.0 billion in 2002.

The rapid increase in molecular information about cancer and the increasing array of targeted oncology therapeutics are making it more difficult for physicians to make treatment decisions. The National Comprehensive Cancer Network estimates that 50% to 75% of cancer therapies in the United States are used off label, meaning that physicians prescribe therapies for clinical indications in manners different from those approved by FDA. Off-label usage of traditional cytotoxic therapies is often driven by physicians struggling to treat a patient’s disease after it fails to respond to initial treatment regimens. Targeted therapies are used off label by oncologists who have expertise in genomics or access to diagnostic tools that allow them to make informed decisions about off-label use of targeted therapies.

In order to maximize the utility of diverse cancer-related molecular information to better guide the use of targeted therapies, we believe a new approach is needed. Specifically, the oncology community needs a single product that can assess the known and biologically relevant genomic alterations, and distill complex molecular information into a concise and actionable format.

Current Challenges of Diagnosing Cancer on a Molecular Level

Today, physicians are faced with numerous challenges when making decisions on how to best utilize currently available molecular diagnostics for cancer, including:

 

  Ÿ  

the inherent limitations of molecular diagnostic tests that are typically capable of identifying only single marker or test panels that capture a limited number of genomic markers and address only a subset of the four classes of genomic alterations found in cancers, which are also known as hotspot panel tests;

 

  Ÿ  

insufficient and/or poor quality tumor biopsy tissue relative to the amount and quality needed to perform all desired or required tests; and

 

  Ÿ  

the difficulty of integrating existing molecular diagnostic tests into clinical practice, including the decisions about which tests to order and how to effectively match the genomic information provided by tests with current targeted therapies or clinical trials.

Single-Marker or Hotspot Panel Tests May Miss Actionable Information

Most currently available molecular diagnostic tests are single-marker or hotspot panel tests that capture only one or a limited number of the most common, well-known gene alterations that these tests are designed to target. There are four classes of genomic alterations that are clinically relevant to the treatment of cancer: base pair substitutions; copy number alterations; short insertions and deletions; and gene rearrangements and fusions. Hotspot panel tests generally are only able to identify base pair substitutions and specific gene rearrangements, cannot detect copy number alterations, and sometimes lack the sensitivity to identify short insertions and deletions.

The following table summarizes the uses and inherent limitations of the current testing methods utilized in commercially available single-marker and hotspot panel tests for cancer that are most

 

84


Table of Contents

commonly ordered according to results of a 2008 survey of oncologists and hematologists published in the Journal of Clinical Pathology article, “Molecular testing for somatic cancer mutations: a survey of current and future testing in UK laboratories.” Although oncologists may order these tests to look for one or a limited number of specific gene alterations, we believe the inherent limitations of tests using these methods are understood by pathologists and genomicists who perform the tests and the oncologists who order them.

 

Name

  

Uses

   Limitations
Polymerase chain reaction, or PCR-based tests, a technology used for amplifying DNA sequences   

Enable the detection of short fragment DNA or RNA sequences.

   Single-gene tests for specific
and limited number of mutations.

 

Only identify known and select
base substitutions and short
insertions or deletions, such as
BRAF V600E.

   
Immunohistochemical, or IHC, stains, a process used to diagnose abnormal cells   

Utilize antibody proteins to identify certain antigens that are unique to various types of cancer.

   Only identify the expressed
presence of a known and select
protein or specific protein
marker, such as HER2, related
to a particular genomic
alteration.
   
FISH-based DNA probes, a mechanism for detecting DNA sequences through the use of fluorescent technology    Reveal specific genomic abnormalities, including insertion/deletions and rearrangements.    Only detect select gene
rearrangements, such as EML4-
ALK.

 

Difficult to test for multiple
markers.

Since current hotspot panel tests typically cannot detect many genomic alterations present in cancer, physicians who use these tests may fail to identify actionable information about their patients’ cancers that could inform a preferable treatment approach. We believe the limitations of this narrowly-focused approach of looking for a limited number of pre-selected genomic alterations will be further compounded as more actionable genomic alterations are identified and additional targeted therapies are developed.

Limited Tissue Availability and Poor Tissue Quality Restrict Testing Options

Many clinical tumor samples are provided from standard biopsies, needle biopsies or fine needle aspirates that yield very small tissue amounts. Small amounts of tissue samples limit the number of diagnostic tests a physician can order, and ordering one or a limited number of tests that look for one or a limited number of genomic alterations necessarily increases the likelihood that a physician may fail to identify other genomic alterations and ultimately therapeutic options.

Clinical tumor specimens also often have low tumor purity, meaning that the relevant genomic alterations occur in low frequencies within the sample and are difficult to detect. Moreover, the vast majority of clinical samples are stored as formalin-fixed and paraffin-embedded, or FFPE, specimens. FFPE preservation can damage DNA and RNA. Low tumor purity or damage to DNA or RNA may limit the availability of hotspot tests to identify certain genomic alterations.

Molecular Diagnostics are Difficult to Integrate into Clinical Practice

Physicians today face an increasingly difficult decision about which single-marker or hotspot tests to order. There are a growing number of tests, each specific to a different cancer type and each having

 

85


Table of Contents

limited ability to detect multiple genomic alterations. Typically, only a small amount of tumor biopsy is available, forcing the physician to order only a subset of desired diagnostic tests, often one test at a time in a serial manner. Furthermore, tests are usually selected based on the traditional treatment paradigm of the cancer’s location in the body or by simple trial and error.

Running multiple, disjointed tests also poses logistical challenges associated with routing samples to several different laboratories and high costs associated with conducting multiple tests. Moreover, limited tissue availability may prevent relevant tests from being ordered, tests conducted may miss genomic alterations, and the results may not be delivered soon enough to be used during the typical treatment cycle for a patient. Even if a physician has enough tumor sample to order a sufficient number of hotspot and individual molecular tests to identify relevant genomic alterations and receives the results of all of these tests in a timely fashion, the physician would commonly receive a series of uncoordinated individual reports from different laboratories that are difficult to interpret and synthesize. Compounding these challenges, especially in the community oncology setting, is how to effectively match the genomic information provided by tests with current targeted therapies or clinical trials for a particular patient. As a result of one or a combination of these current limitations, physicians may fail to identify or to prescribe a potentially appropriate targeted oncology therapy or to direct a patient to a potentially appropriate clinical trial.

The Opportunity for a Single, Comprehensive Molecular Information Solution

In order to harness the potential of understanding the genomic drivers of a patient’s cancer and new therapies targeted at specific genomic alterations, we believe the oncology community needs a new approach: a single molecular information platform that can assess a solid tumor or hematologic malignancy for the presence of biologically relevant genomic alterations. This solution would also provide actionable assistance to physicians in matching the genomic alterations identified in their patients’ cancers with relevant available therapeutic alternatives and clinical trials.

Our Solution — A Single Molecular Information Platform to Improve Patient Care

 

LOGO

Our molecular information platform, which includes proprietary technology, methods and computational algorithms, is the product of years of research and development and significant capital investment. Through this platform we deliver comprehensive genomic insights into cancer to support physicians in the improvement of clinical patient care, to support biopharmaceutical companies in the development of novel cancer therapeutics, and to drive further research and development to advance

 

86


Table of Contents

our understanding of oncology. The first molecular information product enabled by our platform is branded as FoundationOne for our clinical customers.

FoundationOne Integrates Complex Molecular Information into Routine Clinical Care

FoundationOne is, to our knowledge, the first commercially available comprehensive molecular information product for analysis of routine cancer specimens in a clinical setting. We believe FoundationOne is the only molecular information product that can comprehensively assess cancer tissue simultaneously for all four classes of genomic alterations with sufficient sensitivity and specificity for routine medical practice. Moreover, FoundationOne delivers this complex molecular information in a concise report that matches detected molecular alterations with potentially relevant treatment options and clinical trials. We perform FoundationOne in our laboratory located in Cambridge, Massachusetts, which is certified under the Clinical Laboratory Improvement Amendments, or CLIA, accredited by the College of American Pathologists, or CAP, and licensed by Massachusetts and other states.

Optimization and Automation Enables FoundationOne Workflow to Deliver Report in 14-17 days.

 

LOGO

A Comprehensive Clinical Assessment of Actionable Alterations in Cancer Genes

FoundationOne reports on the genes known to be altered in human solid tumors that are validated targets for therapy or are unambiguous drivers of cancer. We have selected this set of genes based upon the advice of an international group of key opinion leaders in oncology and cancer biology, input offered by our biopharmaceutical partners and our extensive review of the relevant literature. The current version of FoundationOne interrogates 236 genes (representing 3,734 exons, which are sequences of DNA molecules, or nucleotides, involved in DNA replication that encode for proteins) across all four classes of genomic alterations, as well as 47 introns, which are sequences of nucleotides involved in DNA replication that do not encode for proteins, of 19 genes commonly involved in rearrangements. The test includes those genes implicated in cancers for which a targeted therapy is FDA-approved and for which targeted therapies are in current or near-term clinical development. We update FoundationOne periodically to reflect new scientific and medical knowledge about cancer biology, including newly relevant cancer genes along with newly available targeted therapeutics and clinical trials.

 

87


Table of Contents

We believe FoundationOne’s ability to identify actionable genomic alterations far exceeds that of other commercially available molecular diagnostic tests. We define an actionable alteration as an identified genomic alteration in an analyzed cancer cell associated with an FDA-approved targeted therapy in the tumor type, an FDA-approved targeted therapy in another tumor type or an open clinical trial for which the alteration confers eligibility. Our comparative quantitative analysis demonstrated that running four commercially available tests that also utilize NGS plus two relevant and commonly-used hotspot tests together would collectively identify only a maximum of 31% of the actionable genomic alterations that can be identified by FoundationOne. We presented this comparative quantitative analysis at the American Society of Clinical Oncology, or ASCO, in 2013 and have included it in a manuscript that has been accepted for publication in a high-profile scientific journal.

FoundationOne’s ability to identify actionable alterations is greater than other commercially available molecular tests, in part, because we believe FoundationOne:

 

  Ÿ  

interrogates many more cancer-related genes than other molecular diagnostic tests;

 

  Ÿ  

examines the entire coding region of each gene analyzed, enabling much broader interrogation of potential alterations for each gene;

 

  Ÿ  

is the only molecular diagnostic product that can comprehensively assess cancer tissue simultaneously for all classes of genomic alterations; and

 

  Ÿ  

assesses tumor samples with high sensitivity and specificity across all four classes of genomic alterations for a wide array of cancer-related genes.

FoundationOne has identified at least one actionable genomic alteration in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013 because of its high sensitivity and specificity of interrogation of cancer-related genes for all classes of genomic alterations. We had previously applied this same methodology in an analysis of our first 2,221 clinical cases and determined that FoundationOne identified at least one actionable genomic alteration in 76% of reported clinical cases. We presented the results of this earlier analysis at ASCO’s annual meeting in June 2013. While we do not regularly analyze the percentage of our performed tests that identify actionable genomic alterations, we have not observed any patterns that we believe would substantially alter the typical frequency with which FoundationOne identifies actionable genomic alterations.

A Validated and Highly Precise Process of Testing

Our proprietary methods and workflow make FoundationOne suitable for clinical use at a commercial scale. Standard biopsies and needle biopsies obtained in a clinical setting often yield very small tissue amounts that have a low concentration of tumor cells and are preserved in a FFPE format. We have developed proprietary techniques for optimizing pre-sequencing sample preparation and have built post-sequencing computational algorithms that enable FoundationOne to be sufficiently sensitive to perform comprehensive genomic analysis on routine clinical tumor samples. We have optimized our NGS processes to maximize throughput, efficiency and quality. These laboratory processes designed to support FoundationOne have allowed us to successfully deliver results in 97% of all clinical tumor samples we have analyzed to date, against a sample failure rate of 3%.

FoundationOne has undergone an extensive analytical validation that demonstrates test performance using both reference specimens and hundreds of actual FFPE clinical cancer specimens with results derived from prior standard diagnostic tests. We performed validation studies in which FoundationOne testing was conducted on previously characterized cell lines known to contain various base substitutions and cancer specimens known to contain various insertions, deletions, and copy number alterations to evaluate whether FoundationOne was capable of detecting these predefined

 

88


Table of Contents

genomic alterations. FoundationOne was found to be highly sensitive in identifying these genomic alterations even where the percentage of cells in test samples containing the alterations (versus normal cells not containing the alterations) was very low. Specifically, FoundationOne was able to detect 99% of base substitutions contained in test samples in which less than 10% of the cells contained the alterations, 97% of insertions and deletions in samples in which 10 to 20% of the cells contained the alterations, and 99% of copy number alterations of at least 8-fold in which 30% of the cells contained the alterations. In aggregate, FoundationOne detected greater than 99% of the genomic alterations contained in the samples tested in the validation study. We believe these results demonstrate the importance of our proprietary methods, algorithms, and advanced bioinformatics, and will help to set the industry standards for validation of NGS-based clinical diagnostics. The analytic validation results of our studies on FoundationOne have been accepted for publication in a peer-reviewed scientific journal.

A Report Physicians Can Readily Understand and Use to Guide Patient Care

We designed the FoundationOne report, in collaboration with leading oncologists, to deliver actionable information in a manner that seamlessly integrates into their practices. We present the results from FoundationOne in a medically relevant and we believe practice-friendly manner that empowers physicians to make informed treatment decisions. During a period of active treatment, patients typically visit their physician every three to four weeks. FoundationOne delivers actionable information to a physician for use typically within 14 to 17 days from the time the sample is received.

The first page of the FoundationOne report clearly illustrates the test’s key findings. Specifically, it lists the analyzed tumor’s actionable genomic alterations and matches them with either FDA-approved therapies or open clinical trials for therapies targeting these alterations. The report also identifies noteworthy absences of genomic alterations typically associated with anatomical tumors of the same type. In addition, the report includes summaries of and references to supporting data from peer-reviewed publications and clinical trial information.

An Example of Page One of a FoundationOne Report.

 

LOGO    Patient Name
    
   Report Date
    
  

Diagnosis

 

Breast carcinoma
(NOS)

                          

Date of Birth

   Not Given    Client    Cancer Center    Specimen Received    Not Given

Gender

   Female    Ordering Physician    Doctor, Paul    Specimen Site    Lung

FMI Case #

   SRF000009    Additional Recipient    Not Given    Date of Collection    Not Given

Medical Record #

      FMI Client #    -1    Specimen Type    Slide

Specimen ID

   Not Given    Pathologist    Not Given          

ABOUT THE TEST:

FoundationOne is a next-generation sequencing (NGS) based assay which identifies genomic alterations within hundreds of cancer-related genes.

 

PATIENT RESULTS

   

TUMOR TYPE: BREAST CARCINOMA (NOS)

     
 

6 genomic alterations

     

Genomic Alterations Identified

 

ERBB2 amplification

PIK3CA H1047L

AURKA amplification

TP53 R342P

CREBBP P858S

ZNF217 amplification

     

6 therapies associated with potential clinical benefit

     
     

0 therapies associated with lack of response

     
     

6 clinical trials

     
      For a complete list of the genes assayed, please refer to the Appendix

 

89


Table of Contents

THERAPEUTIC IMPLICATIONS

    
    

Genomic Alterations
Detected

   

FDA Approved Therapies

(in patient’s tumor type)

   

FDA Approved Therapies

(in another tumor type)

    Potential Clinical Trials
           

ERBB2

amplification

     

Ado-trastuzumab

emtansine

Lapatinib

Pertuzumab

Trastuzumab

      None       Yes, see clinical trials section

PIK3CA

H1047L

    None    

Temsirolimus

Everolimus

    Yes, see clinical trials section

AURKA

amplification

    None     None     Yes, see clinical trials section

TP53

R342P

    None     None     None

CREBBP

P858S

    None     None     None

ZNF217

amplification

      None       None       None
           
           
           
Note: Genomic alterations detected may be associated with activity of certain FDA approved drugs; however, the agents listed in this report may have varied clinical evidence in the patient’s tumor type. Neither the therapeutic agents nor the trials identified are ranked in order of potential or predicted efficacy for this patient, nor are they ranked in order of level of evidence for this patient’s tumor type.

Ordering physicians can also access their FoundationOne report through our Interactive Cancer Explorer, which we developed in consultation with Google Ventures, one of our investors. We deliver the FoundationOne report along with easy access to current information about the reported genomic alterations, associated therapies, and clinical trials. We are also developing additional applications for Interactive Cancer Explorer that we expect to launch in 2014, through which physicians will be able to access their FoundationOne reports on tablet computers and other mobile devices.

Expanding FoundationOne to Hematologic Malignancies

We expect to commence our commercial launch of FoundationOne for hematologic malignancies, our second commercial product, by early 2014. Hematologic malignancies, most commonly leukemias, lymphomas, and myelomas, are cancers that affect the body’s blood, lymphatic system, or bone marrow. Taken together, hematologic malignancies account for approximately 10% of new cancer diagnoses in the United States. Although some physicians today use molecular diagnostic testing to identify certain known genomic alterations to help diagnose hematologic malignancies, we believe there is a large unmet need for a comprehensive hematologic molecular information solution.

Similar to FoundationOne for solid tumors, we are designing FoundationOne for hematologic malignancies to be a single molecular information product to fit the realities of routine medical practice, including volume and quality limits of cancer specimens, demands on turnaround time and the need for a synthesized report that matches detected molecular alterations with potentially relevant targeted therapies and clinical trials. This new product will use RNA sequencing in addition to DNA sequencing to better enable identification of the unique genes and classes of genomic alterations that are characteristic of hematologic malignancies. We believe FoundationOne for hematologic malignancies will be the first commercially available comprehensive molecular information product for analysis of hematologic malignancies specimens in a clinical setting.

We are developing FoundationOne for hematologic malignancies in collaboration with Memorial Sloan-Kettering Cancer Center, or MSKCC, a leading academic cancer center. Leveraging the clinical and genomic expertise in hematologic malignancies of MSKCC’s clinicians, we believe FoundationOne for hematologic malignancies will be a best-in-class molecular information product that furthers our

 

90


Table of Contents

collective goal of making it possible for all patients to be treated with the therapies that are matched with their particular cancers.

Strong Evidence of Actionability in Clinical Experience for FoundationOne

We designed FoundationOne to address challenges associated with the everyday clinical management of patients diagnosed with cancer. We have experienced rapid adoption of FoundationOne. More than 1,500 physicians from large academic centers and community-based practices across more than 25 countries have ordered FoundationOne since its formal commercial launch in June 2012.

We have already served a growing number of patients for whom we identified actionable alterations that we believe would not have otherwise been detected and who have responded to therapies that we believe would not have otherwise been utilized. FoundationOne has identified at least one actionable alteration in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013.

We believe that the following case studies illustrate the power of FoundationOne to impact treatment regimens for patients in a clinical setting.

Case Study 1: FoundationOne Identifies Actionable Alteration Missed by Hotspot Tests—Patient Receives Matched Targeted Therapy.

Page One of FoundationOne Report for Case Study 1.

 

LOGO   

Patient Name

 

  

Report Date

 

  

Diagnosis

 

Lung
Adenocarcinoma

                          

Date of Birth

      Client       Specimen Received   

Gender

      Physician       Specimen Site   

FMI Case #

      Additional Recipient       Specimen Date   

Medical Record #

      FMI Client #       Specimen Type   

Block ID

        Pathologist               

ABOUT THE TEST:

FoundationOne is a next-generation sequencing (NGS) based assay which identifies genomic alterations within hundreds of cancer-related genes.

 

PATIENT RESULTS

   

TUMOR TYPE: LUNG ADENOCARCINOMA

     
 

1 genomic alteration

     

Genomic Alterations Identified

ALK rearrangement, intron 19

 

Select Genes with No Actionable Alterations Detected

EGFR

KRAS

BRAF

     

0 therapies associated with potential clinical benefit

     
     

0 therapies associated with lack of response

     
     

0 clinical trials

     

 

THERAPEUTIC IMPLICATIONS

    
    

Genomic Alterations
Detected

   

FDA Approved Therapies

(in patient’s tumor type)

   

FDA Approved Therapies

(in another tumor type)

    Potential Clinical Trials
           

ALK

Rearrangement,

intron 19

      Crizotinib       None       None
           
           
           
Note: Genomic alterations detected may be associated with activity of certain FDA approved drugs; however, the agents listed in this report may have varied clinical evidence in the patient’s tumor type. Neither the therapeutic agents nor the trials identified are ranked in order of potential or predicted efficacy for this patient, nor are they ranked in order of level of evidence for this patient’s tumor type.

 

91


Table of Contents

We received and analyzed a tumor specimen from a 43 year-old man diagnosed with metastatic adenocarcinoma of the lung involving his bones and pleura. Previous traditional diagnostic tests on the specimen, including a customary FISH-based test, revealed no actionable alterations. The patient received chemotherapy, which was of transient benefit and which he tolerated poorly. FoundationOne detected an actionable alteration, an ALK fusion, which was not identified in the initial testing. The patient was then treated with XALKORI® (crizotinib), a targeted therapy that inhibits the activity of the ALK fusion protein. This treatment shrank the tumor and led to improvements in the patient’s symptoms. The patient experienced near complete resolution of disease for 16 months. The patient recently experienced one site of disease progression and, as of May 2013, is continuing on XALKORI (crizotinib). Without FoundationOne, this patient likely would have proceeded through various chemotherapies and likely would not have received XALKORI (crizotinib) because the ALK fusion was not identified by traditional diagnostic tests and XALKORI (crizotinib) is only prescribed upon confirmation of the ALK fusion alteration. These results were published in the Journal of Thoracic Oncology in September 2012.

Case Study 2: FoundationOne Identifies Actionable Mutation that is Not Otherwise Tested for In Breast Cancer—Patient Receives Matched Targeted Therapy.

Page One of FoundationOne Report for Case Study 2.

 

LOGO   

Patient Name

 

  

Report Date

 

  

Diagnosis

 

Breast Carcinoma

                          

Date of Birth

      Client       Specimen Received   

Gender

      Physician       Specimen Site   

FMI Case #

      Additional Recipient       Specimen Date   

Medical Record #

      FMI Client #       Specimen Type   

Block ID

        Pathologist               

ABOUT THE TEST:

FoundationOne is a next-generation sequencing (NGS) based assay which identifies genomic alterations within hundreds of cancer-related genes.

 

PATIENT RESULTS

   

TUMOR TYPE: BREAST CARCINOMA

     
 

4 genomic alterations

     

Genomic Alterations Identified

ERBB2 amplification

PIK3CA F1047R

EGFR L858R

TP53 K132N

     

6 therapies associated with potential clinical benefit

     
     

0 therapies associated with lack of response

     
     

50+ clinical trials

     

 

THERAPEUTIC IMPLICATIONS

    
    

Genomic Alterations
Detected

   

FDA Approved Therapies

(in patient’s tumor type)

   

FDA Approved Therapies

(in another tumor type)

    Potential Clinical Trials
           

ERBB2

amplification

     

Lapatinib

Trastuzumab

      None       Yes

PIK3CA

F1047R

    None    

Temsirolimus

Everolimus

    Yes

EFGR

L858R

    None    

Erlotinib

Gefitinib

    Yes

TP53

      None       None       Yes
           
           
           
Note: Genomic alterations detected may be associated with activity of certain FDA approved drugs; however, the agents listed in this report may have varied clinical evidence in the patient’s tumor type. Neither the therapeutic agents nor the trials identified are ranked in order of potential or predicted efficacy for this patient, nor are they ranked in order of level of evidence for this patient’s tumor type.

 

92


Table of Contents

We received and analyzed a tumor specimen from a middle-aged woman diagnosed with metastatic inflammatory breast cancer (IBC). She had initially received combination chemotherapy and targeted therapy including Herceptin® (trastuzumab), a commonly prescribed targeted therapy for breast cancer, but her disease progressed within 12 months. Few treatment options remained. FoundationOne identified several genomic alterations, among them an EGFR point mutation. This type of alteration is associated with unprecedented sensitivity to tyrosine kinase inhibitors targeting EGFR such as Iressa® (gefitinib) and Tarceva® (erlotinib) and are present in 20% of lung adenocarcinomas. However, this alteration is not reported with reproducible frequency in other tumor types, and, it would have been unlikely to have been included in a testing panel for breast cancer. On the basis of this finding, the patient commenced Tarceva (erlotinib) therapy as part of a combination regimen. Because therapies have traditionally been indicated based on the tumor’s anatomical location in the body, in this case, the breast, and because Tarceva (erlotinib) therapy is associated with a mutation commonly associated with lung (but not breast) cancer, it is likely that, without FoundationOne, this EGFR point mutation would not have been identified and Tarceva (erlotinib) therapy would not have been commenced. While on Tarceva (erlotinib) therapy, the patient experienced durable symptomatic and radiographic benefit that lasted eight months. The results of this case study, which have not yet been published, are expected to be submitted to a peer-reviewed journal in the near future.

Our Platform for Biopharmaceutical Research and Development

For many of the same reasons FoundationOne provides information that is well suited for the clinical setting, our molecular information platform enhances the ability of our biopharmaceutical partner to develop targeted oncology therapies. We deploy our molecular information platform to analyze tissue samples provided by biopharmaceutical partners from their clinical trials. We use our core proprietary platform testing, computational biology and information technology capabilities to provide our biopharmaceutical partners with comprehensive genomic profiling and information relevant to precision medicine strategies for both retrospective and prospective clinical studies and other drug development activities. Our platform capabilities enable our partners to:

 

  Ÿ  

accelerate clinical development timelines and increase the likelihood of patient response by prospectively analyzing tumor specimens to identify patients with certain genomic alterations for enrollment in clinical trials for targeted cancer therapeutics;

 

  Ÿ  

guide usage and inform future development opportunities for experimental and marketed therapies by retrospectively analyzing clinical trial patients to stratify them as responders or non-responders based on presence or absence of certain genomic alterations;

 

  Ÿ  

create opportunities for drug combination studies or new target discovery by identifying mechanisms of primary and acquired resistance; and

 

  Ÿ  

inform improvements to clinical trial design by contributing to the understanding of why some clinical studies have not met their primary endpoints.

As of June 2013, we have ongoing relationships with 18 biopharmaceutical partners, many of which are the leaders in developing targeted cancer therapies. Our relationships with our biopharmaceutical partners have expanded over time. Our publicly announced biopharmaceutical customers include Agios Pharmaceuticals, Inc., ARIAD Pharmaceuticals, Inc., Array BioPharma Inc., AstraZeneca UK Limited, Celgene Corporation, Clovis Oncology, Inc., Eisai Co., Ltd., Johnson & Johnson, Novartis, and Sanofi.

In addition to customary clinical settings in which physicians prescribe an FDA-approved therapy, approximately 3% of patients with cancer in the United States are currently enrolled in clinical trials of new experimental therapies sponsored by biopharmaceutical companies. By broadening our relationships with our biopharmaceutical partners, we expect to deploy our molecular information platform for an increasing portion of patients with cancer enrolled in clinical trials both in and outside

 

93


Table of Contents

the United States. We expect these relationships will continue to expand and may provide us with opportunities to sell our molecular information products for companion diagnostics development, research and development projects, and new target discovery and validation.

In addition to generating revenue, our relationships with our biopharmaceutical partners enable us to identify new genes under investigation that can be incorporated early into our molecular information platform and our products, and more broadly allow us to actively participate in the newest oncology therapeutics and practice. Also, we believe our activities with leading drug development companies that are focused on cancer therapeutics further our relationships with the broader oncology community, including thought leaders who are important to the adoption of our commercial products. We believe our biopharmaceutical customers provide us with near and longer term revenue and important strategic opportunities.

Biopharmaceutical Services Agreement

In November 2011, we entered into a laboratory master services agreement with Novartis pursuant to which we agreed to perform our molecular diagnostic tests on samples provided by Novartis. Pursuant to the agreement, we were paid based on the number of tests we performed. The original term of the agreement commenced in November 2011 and was set to expire in November 2014. In May 2012, we amended this agreement to extend the term through May 1, 2014 and to include certain guaranteed quarterly minimum payments by Novartis to us in return for our providing sufficient laboratory capacity to perform up to a maximum number of tests. We may bill Novartis for any extra services performed if during the first and second contract years together or the third contract year alone Novartis provides excess samples such that the value of our services ultimately exceeds the payments already received under the quarterly schedule. The agreement also establishes a joint steering committee responsible for facilitating communication between the parties, overseeing collaboration and periodically reviewing and setting overall goals and strategy for provision of our services to Novartis. Except for termination due to material breach of the agreement, Novartis is responsible for payments on services rendered through the termination date. The agreement also contains customary representations and warranties, indemnification, assignment, data privacy security measures and other provisions.

Market Opportunities for FoundationOne

We believe that the ability of FoundationOne to comprehensively address all solid tumors, and soon hematologic malignancies, and to deliver a clear, concise report detailing actionable genomic alterations and corresponding treatment options will continue to drive its adoption by physicians. In developing our commercialization strategy, we worked with our network of oncology thought leaders to identify the initial subsets of patients with cancer for whom FoundationOne was most likely to positively inform treatment decisions. Our initial marketing and selling efforts have focused on driving awareness of the potential utility of FoundationOne in these subsets of patients, defined as:

 

  Ÿ  

patients who had tested negative under the traditional hotspot tests for their tumor type, such as negative for alterations in the genes EGFR, ALK, and KRAS in non-small cell lung cancer;

 

  Ÿ  

patients for whom there was not enough available tissue to perform multiple hotspot molecular tests, such as patients with non-small cell lung cancer with very little tumor tissue left in archive;

 

  Ÿ  

patients for whom standard treatments had been tried and failed, such as patients with breast cancer who continue to progress despite multiple chemotherapy regimens;

 

  Ÿ  

patients with rare or uncommon tumors, such as certain sarcomas or non-colon/small-bowel gastrointestinal tumors, for whom no standard treatment approach exists; and

 

  Ÿ  

patients who had an aggressive disease, such as pancreatic cancer, or were late in the progression of their disease.

 

94


Table of Contents

While these groups are not mutually exclusive, we estimate that there are approximately one million patients annually in the United States who suffer from the above-described or similar cancers based upon a combination of feedback from our network of oncology thought leaders, data published by the National Cancer Institute in the Cancer Statistics Review, and focused market research that we commissioned. This market research consisted of an analysis of a third party database (that included public and private cancer-related statistical information on tumor type, disease stage, clinical information, and disease outcomes) supplemented with confirmatory interviews from physicians who practice at a variety of cancer treatment centers, including academic research centers and community hospitals.

As the number of available targeted therapies expands and as physicians gain further experience using comprehensive molecular information in their routine treatment decisions, we believe that the potentially addressable market for comprehensive molecular information products will expand over the next five years to include all patients who have metastatic disease, not limited to the challenging treatment categories noted above. These patients may include, for example, those who are earlier in the treatment cycle, those who suffer from a broader set of disease conditions or those patients diagnosed with rare and uncommon cancers regardless of stage. Our marketing and sales activities will then expand to driving awareness of the potential utility of FoundationOne in this broader set of patients. We estimate that this potential market expansion could include an additional 800,000 total patients annually, based upon the same combination of sources of information we used to estimate the size of the patient population we are initially targeting for FoundationOne.

Commercialization Strategy for FoundationOne

We aim to drive awareness and adoption of our comprehensive molecular information products through our commercialization strategy to:

 

  Ÿ  

build an experienced, oncology-focused sales force in the United States and international distribution channels that are supported by dedicated company personnel;

 

  Ÿ  

collaborate with oncology thought leaders and leading institutions on FoundationOne clinical cases, clinical research, publications, and product development;

 

  Ÿ  

foster adoption and promote physician engagement through our medical affairs and client services efforts, and by developing and deploying practice-friendly technology resources to physicians;

 

  Ÿ  

publish important medical and scientific data in peer-reviewed journals and present at major industry conferences, and conduct clinical trials; and

 

  Ÿ  

work with patient advocacy groups and medical societies to drive awareness of FoundationOne and the importance of incorporating molecular diagnostics into cancer treatment.

Through these efforts, we seek to drive awareness of FoundationOne’s unique capabilities throughout the oncology community—from patients suffering from cancer, to the physicians treating them, to the third-party payors for these treatments and to biopharmaceutical companies developing new treatments—all with the goal of facilitating better-informed treatment decisions for the greatest number of patients with cancer. We believe that by driving physician and patient demand for FoundationOne and by being part of improving patient outcomes, we will drive sales and obtain favorable reimbursement decisions by third-party payors.

 

95


Table of Contents

Building An Experienced, Oncology-Focused Sales Force

United States

Our sales force in the United States targets oncologists and pathologists at hospitals and cancer centers. We launched FoundationOne for solid tumors in June 2012 with a sales force of only two people that has grown to 15 sales professionals, as of June 30, 2013, with backgrounds in oncology, pathology, therapeutics, and/or laboratory services. These sales professionals have an average of 11 years of experience in clinical oncology sales working at leading biopharmaceutical or specialty reference laboratory companies. We will continue to grow this specialized, oncology-focused sales force and support it with medical specialists who bring extensive knowledge in the design and use of molecular information products.

Our current sales efforts focus on building relationships with thought leaders at leading academic research institutions to demonstrate the clinical usefulness of FoundationOne. We also are building relationships in community oncology practice settings through leading physician networks. For example, The US Oncology Network, whose members include approximately 10% of all U.S. oncologists, selected us as one of its preferred molecular information partners. Other oncology networks, such as Cancer Treatment Centers of America, which has five centers nationally, have chosen to use FoundationOne across all of their centers. These networks expect to use FoundationOne to streamline ordering and data collection, to provide access to and guidance about use of the most advanced cancer testing and treatments, and to support their clinical trials.

As part of our early launch strategy to drive adoption, our sales force initially targeted key opinion leaders and leading cancer researchers. As we grow our sales force, we will increasingly have the capacity to target community hospitals and community-based cancer centers that need a reliable and collaborative partner for comprehensive molecular information testing.

International

Our international sales strategy is currently focused on partnering with leading distributors and selling directly to academic and medical centers. We have targeted various markets outside of the United States, principally based upon the demand from those markets and our own market assessments. As a result of these factors, we have and are responding to opportunities in Central and South America, Western Europe, portions of the Middle East, and Asia, and anticipate exploring opportunities in other geographic areas as well. We are expanding our internal capacity to serve high demand markets by adding dedicated regional managers located outside the United States to oversee our relationships at the local level.

Collaborating with Thought Leaders To Shape the New Cancer Treatment Paradigm

We believe physicians look to peers and key thought leaders in the medical community when evaluating a new technology. Oncology thought leaders have historically been early adopters of new technologies because they have greater access to new therapies, clinical trials, and diagnostic tools than many community oncologists. Since our inception, our founders, medical affairs group, senior management, and now sales personnel and reimbursement teams have leveraged existing and built new relationships with these early adopters.

Key opinion leaders, or KOLs, and leading cancer researchers have embraced our comprehensive molecular information approach, including oncologists at premier cancer institutions such as Memorial Sloan-Kettering Cancer Center, Vanderbilt-Ingram Cancer Center, and The US Oncology Network. In addition to routinely using FoundationOne for clinical cases, these individuals and institutions collaborate with us on clinical studies, peer-reviewed publications, and medical and

 

96


Table of Contents

scientific conference presentations. We believe our relationships with KOLs help validate our platform, drive adoption of our clinical products in community oncology settings and international markets, establish our leadership position in the field of molecular information about cancer and thereby further our ultimate goal—to facilitate better-informed treatment decisions for the greatest number of patients with cancer.

Our relationships with KOLs in oncology have been instrumental in driving adoption of FoundationOne for solid tumors. We believe initial awareness of FoundationOne within the community oncology setting was largely driven by our publications and presentations with KOLs and the resulting peer-to-peer interaction they generated. We believe our effective engagement with KOLs largely explains why the majority of physician customers for FoundationOne placed their original orders even before being visited by our nascent sales team. We will continue to nurture these relationships with thought leaders as we drive adoption of FoundationOne for solid tumors and as we develop FoundationOne for hematologic malignancies in collaboration with MSKCC.

Promoting Physician Interaction and Creating a Network Effect

We believe that if we can continue to integrate the results of our products into the everyday clinical practice of oncologists, we will become an even more important partner in their efforts to treat patients with cancer. Our goal is for physicians to use Interactive Cancer Explorer, our online portal, which we developed in consultation with Google Ventures, one of our investors, in the context of their busy clinical practices, to shape each patient’s treatment plan. Through Interactive Cancer Explorer, we deliver the key genomic information identified by FoundationOne in an organized fashion along with access to current information about the reported genomic alterations, associated therapies and clinical trials. Launched in December 2012, already more than 40% of our FoundationOne customers use Interactive Cancer Explorer.

Interactive Cancer Explorer presents complex genomic information in a we believe practice-friendly interface that links directly into publicly available databases, such as PubMed and clinicaltrials.gov. The portal also provides direct links or references to journal articles and clinical trials information relevant to a patient’s identified genomic alterations. In the future, we intend for Interactive Cancer Explorer to link to additional public and private data sources like The Cancer Genome Atlas, the Cancer Genome Project, and others, as we continue to rationalize, correlate, and incorporate disparate sources of information into our products. By making this information more readily accessible to physicians, we make it easier for them to bring new, relevant information to each patient’s treatment plan. We are also developing additional applications for Interactive Cancer Explorer that we expect to launch in 2014.

The better we can integrate our solutions into a physician’s routine clinical practice, the more likely a physician is to order FoundationOne. Therefore, we have engineered our client support capabilities, such as online ordering and assistance with tissue sample procurement, to make it easier for physicians to use FoundationOne in their clinical practices.

Additionally, we are investing in our technology architecture to allow physicians to collaborate and share response rates and other clinical information with each other, regardless of location, in compliance with applicable privacy regulations. Over time, we will expand our capacity to capture, aggregate, analyze and facilitate the broader exchange of genomic data across the global oncology community. We are developing a data platform that efficiently captures and allows for the analysis of data that we believe will eventually create a network effect as more data is gathered, which we expect will lead to more users, more comprehensive datasets, and ultimately more business opportunities.

 

97


Table of Contents

Supporting Adoption Through Publications and Clinical Trials

We believe the successful completion of multiple clinical trials, our publication of scientific and medical results in peer-reviewed journals, and presentations at leading conferences are critical to the broad adoption of products enabled by our proprietary platform. Our publications and presentations to date have helped communicate FoundationOne’s capabilities and the clinical results that early adopters of our platform have achieved. We will continue to use these channels to drive commercial adoption of FoundationOne and obtain favorable reimbursement decisions.

From the beginning of 2012 through June 2013, we had:

 

  Ÿ  

12 peer-reviewed articles published or accepted for publication, including by Nature Medicine, Cancer Discovery, Journal of Clinical Oncology, Journal of Thoracic Oncology, Blood, and Genome Medicine;

 

  Ÿ  

10 additional manuscripts under consideration for publication by major journals, including Nature, Nature Medicine, Nature Genetics, Nature Biotechnology, Journal of Clinical Oncology, and Cancer Discovery;

 

  Ÿ  

over 35 poster presentations based on clinical and research data that have been accepted and presented at major scientific conferences on themes that include the identification of multiple novel actionable drug targets, known drug targets in novel tumor types, novel resistance mechanisms to targeted therapies, new insights into models of metastasis and novel hypotheses on the molecular basis of response or resistance to certain targeted therapies; and

 

  Ÿ  

delivered more than 20 speaking presentations at scientific meetings such as ASCO, American Association of Cancer Research (AACR), San Antonio Breast Cancer Symposium, US and Canadian Association of Pathology (USCAP), and Advances in Genome Biology and Technology (AGBT), among others.

We have a number of company-sponsored clinical trials and clinical trials sponsored by individual physicians, or investigator-initiated clinical trials, underway, such as:

 

  Ÿ  

The US Oncology Decision Impact Study.    This study is designed to assess the impact of FoundationOne on physician decision-making in a real world setting. FoundationOne will be performed on solid tumors from 300 patients during their second or later line of therapy. When the patient progresses, the impact of FoundationOne in switching a physician’s recommended next course of treatment will be evaluated. Other endpoints may be evaluated as well.

 

  Ÿ  

The FoundationOne Registry.    The objective of this study is to better understand the impact of FoundationOne on a clinical population including, importantly, how physicians act on the results and how the results impact care and outcomes. The study is designed to recruit 3,000 patients over three years, with the initial 500 patients drawn from all patients for whom the FoundationOne test is ordered. A wide array of clinical variables will be assessed, including subsequent treatments and responses to those treatments. These patients will be followed for one year. The later cohorts of patients will be adaptive, with entry criteria to be determined based on initial outcomes of the study.

 

  Ÿ  

The MD Anderson Prospective Study. This study aims to compare the clinical outcomes of patients who are treated with targeted therapy after testing with FoundationOne compared to historical outcomes for patients treated with chemotherapy. The study is designed to enroll a group of 300 patients with advanced solid tumors who are screened at enrollment with FoundationOne. These patients will then be treated with a targeted therapy selected on the basis of the FoundationOne test. The clinical outcomes for these patients will be compared to recent historical results for patients who received treatment with conventional chemotherapy for the same tumor types and stage.

 

98


Table of Contents

Engaging With Patient Advocacy Groups and Other Important Stakeholders to Drive Awareness

We have established relationships with many patient advocacy groups to drive awareness of our test and to educate the advocacy community and other key stakeholders, including major medical societies and networks, about the shifting oncology paradigm towards precision medicine.

Patient advocates are important stakeholders in the cancer community because they have influence within the patient community and with health care providers, key opinion leaders, and policy makers. We established our advocacy relations program early in 2011 with the following goals:

 

  Ÿ  

develop awareness around genomic testing;

 

  Ÿ  

position us as a patient-centered company within the patient community by creating goodwill and becoming a trustworthy corporate partner;

 

  Ÿ  

effectively shape the dialogue around cancer genomics with key constituents; and

 

  Ÿ  

work with advocates to help increase genomics conversation and drive the use of molecular information testing.

To date, we have been successful in establishing key relationships to help educate advocates about us and our capabilities in oncology. Some of the organizations we engage with include Friends of Cancer Research, Patient Advocate Foundation, Clearity Foundation, American Cancer Society Cancer Action Network, Lung Cancer Foundation of America, Bonnie J. Addario Lung Cancer Foundation, Uniting Against Lung Cancer, Pancreatic Cancer Action Network, and Education Network to Advance Cancer Clinical Trials. In late 2012, we hosted our first advocate roundtable with representatives from 10 patient advocacy organizations, establishing our commitment to understanding patients’ needs and positioning us as a neutral facilitator of oncology stakeholders, with important insight and relationships across industry, advocacy and regulatory bodies. Through these activities to date, we have developed the basis for a meaningful advocacy relations program, with opportunities to more strategically engage advocates moving forward.

Our relationships with other influential organizations that shape the delivery of care are also critical as we work to develop and educate the market. We aim to work with many organizations, including the National Comprehensive Cancer Network, ASCO, CAP and others regarding the role of NGS and broader molecular profiling in the evaluation of patients and their tumors. We are working with these organizations both on potential educational initiatives as well as the evolution of guidelines, which today are very much tumor-type specific, to recognize the growing importance of the molecular characterization of the collection of diseases known as cancer.

Payment and Reimbursement for Our Molecular Information Products

The principal groups that currently pay us, or that we expect to pay us in the future, for our molecular information products include:

 

  Ÿ  

our biopharmaceutical customers, with whom we have individual agreements;

 

  Ÿ  

certain hospitals, cancer centers, and other institutions that pay us directly at negotiated rates for their physicians’ test orders;

 

  Ÿ  

international patients and distributors who pay us directly at agreed-upon prices;

 

  Ÿ  

commercial third-party payors who currently pay us based on Current Procedural Terminology, or CPT, codes;

 

  Ÿ  

government payors, including Medicare, with whom we have agreed to defer billing, and state Medicaid plans, to which we are currently applying; and

 

  Ÿ  

patients who make co-payments and pay deductibles and other amounts that we have been unable to collect from their third-party payors.

 

99


Table of Contents

We believe that FoundationOne presents a unique solution for commercial third-party payors and government payors who are faced with an increasingly complex and dynamic cancer diagnostic and treatment environment. These complexities include a growing number of single-marker and hotspot panel tests, the increasing number and cost burden of targeted oncology therapies, and an underlying shift in physicians’ treatment of cancer that is based on molecular pathways rather than tumor location. In addition, this shifting treatment paradigm comes at a time when commercial third-party payors and government payors are increasingly making significant efforts to contain healthcare costs. We believe the use of FoundationOne aligns with payors’ goals to improve the safety, efficacy, and affordability of cancer diagnosis and treatment.

Adequate reimbursement is an important factor in achieving broad clinical adoption of FoundationOne. At the same time, we believe broad clinical adoption will help drive favorable reimbursement decisions. To achieve broad reimbursement coverage with commercial third-party payors and government payors, including Medicare and Medicaid, we are focused on demonstrating the economic and clinical value of FoundationOne to payors by:

 

  Ÿ  

Setting a High Bar for Validation and Performance.    FoundationOne provides actionable results that are highly reproducible and sensitive, and we believe that a majority of our actionable results would not be detected by any other commercial tests on the market today. Patients may benefit from our detection of otherwise unknown genomic alterations that can lead to their physicians choosing alternate therapies. We have presented data on the reproducibility, sensitivity, specificity, and comprehensive scope of FoundationOne at numerous conferences and in peer-reviewed journals. Moreover, our approach to the analytic validation of our test has recently been submitted to a peer-reviewed journal.

 

  Ÿ  

Increasing Physician Demand.    More than 1,500 physicians from both large academic centers and community-based practices across more than 25 countries have ordered FoundationOne since its formal commercial launch in June 2012. Many of the initial orders for FoundationOne occurred as we were only starting to build our sales force. We believe that this adoption, including significant repeat usage, demonstrates physician demand for a single, comprehensive solution to help in the treatment of their patients. In addition, we believe that increasing utilization of our products and their impact on improving outcomes for patients with cancer will lead to favorable reimbursement decisions.

 

  Ÿ  

Engaging Key Members of the Oncology Community.    We will continue to work with oncology thought leaders, patient advocacy groups, and cancer networks. We believe these relationships help validate our platform, drive adoption of our products in the broad community oncology setting and establish our leadership position in the field of molecular information about cancer. In addition, we believe adoption of our products by key members of the oncology community will help to influence FoundationOne’s listing in practice guidelines as well as coverage decisions by commercial third party payors and government payors.

 

  Ÿ  

Publishing in Peer-Reviewed Publications.    We seek to publish in scientific and medical journals such as Nature Medicine, Journal of Thoracic Oncology, Cancer Discovery, Clinical Cancer Research, Blood, and others. Our publications have covered novel scientific findings, clinical actionability of test results, individual patient outcomes, and common traits of genomic alterations in primary and metastatic tumors, among many others. We believe that our approach, which we have designed to be rigorous and data-driven, is important in establishing evidence of our analytical validity and clinical utility with payors.

 

  Ÿ  

Demonstrating Clinical Utility.    To demonstrate the impact of FoundationOne on physician treatment decisions and patient outcomes, we are conducting a number of clinical studies with organizations such as US Oncology, MD Anderson Cancer Center, MSKCC, and other leading academic medical centers. We are also enrolling patients into a registry through which we will track changes in physician treatment patterns as well as patient outcome data.

 

100


Table of Contents
  Ÿ  

Improving Economics.    We have built economic models to measure the financial benefits of using FoundationOne in guiding patient treatment by selecting targeted therapies for each patient and for minimizing the use of drugs that will not likely have a positive impact. We plan to use the data we gather through the use of these models as we meet with commercial third-party payors and government payors.

Since, to our knowledge, FoundationOne is the only commercially available comprehensive molecular information product designed to assess all types of solid tumors and soon hematologic malignancies, we believe there is no direct precedent for reimbursement of our test by commercial third-party payors and government payors. In addition, the reimbursement environment is evolving as regulators and payors try to establish new rules and frameworks for paying for molecular diagnostic tests.

The current list price for the FoundationOne test is $5,800. Payment for the test is not certain and may come from various sources. Actual payment will often be less than the list price. Sources of current or potential payment include: (1) commercial third-party payors, such as health insurance or managed care plans; (2) government health benefit programs such as Medicare and Medicaid; (3) other healthcare providers, such as hospitals, cancer centers and other institutions; (4) international distributors; and (5) individual patients. Currently we are not a participating provider with any commercial third-party payors and therefore do not have specific coverage decisions for the FoundationOne test with established payment rates. Currently, commercial third-party payors reimburse our claims based upon the stacked CPT codes, the predominant methodology, or based on other methods such as percentages of charges or other formulas that are not made known to us. In addition, a small portion of payors outsource our claims to preferred provider organizations or third-party administrators, who process our claims and pay us directly at negotiated rates. Coverage and payment is determined by the third-party payor on a case-by-case basis. We are not currently a participating provider in any state Medicaid program and therefore do not have coverage decisions under which our test is covered by these Medicaid programs. We are a participating provider in the Medicare program but, as described below, we do not have a coverage decision and have not yet submitted claims for our test to Medicare. We do have in place agreements with various healthcare providers and with international distributors pursuant to which we process tests on specimens submitted, and the providers or distributors pay us for the test results based on negotiated rates. Those rates vary but are less than our list price. We may also negotiate rates with individual patients, if the patient is responsible for payment.

In 2012, we submitted claims to commercial third-party payors using CPT codes that were procedural-based, and we have been reimbursed for a significant majority of these claims following the completion of the claims process. On January 1, 2013, new Centers for Medicare & Medicaid Services, or CMS, reimbursement codes for molecular testing services took effect. We elected to submit claims to commercial third-party payors using these new CPT codes and have received payments based on these claims. We do not expect CPT codes specific to next generation sequencing to be available until 2015 at the earliest, and we expect to continue our current approach until those new codes exist or until we have coverage decisions from payors.

Since we are not currently a participating provider with commercial third-party payors, and we have not received a coverage decision from any commercial third-party payor, payment for our test is uncertain. We request that physicians discuss the patient’s responsibility should their policy not cover FoundationOne. We undertake the primary responsibility for obtaining third-party reimbursement on behalf of patients, including appeals for any initial denials, prior to billing a patient. With this practice established, we believe that most patients receiving the FoundationOne test know that they may be responsible for some portion of the cost of the test should their third-party payor deny or limit coverage.

 

101


Table of Contents

We also offer a comprehensive patient assistance program to support patients whose incomes are below certain thresholds and to allow for extended payment terms, as necessary given the patient’s economic situation.

We enrolled in the Medicare program in order to bill Medicare for FoundationOne. There is currently no national coverage decision that determines whether and how our test is covered by Medicare. In the absence of a national coverage decision, local Medicare contractors that administer the Medicare program in various regions have some discretion in determining coverage and therefore payment for tests. Our local Medicare contractor, who would process our claims on behalf of Medicare, requested that we not submit claims for services provided to Medicare patients while the contractor assessed the appropriate coverage and payment for FoundationOne as a whole. Pending the response, no claims have been billed to either Medicare or Medicare patients.

Currently, we have not yet received definitive direction from our Medicare contractor. If we do not receive definitive direction, we intend, before the end of 2013, to commence submitting claims to Medicare for FoundationOne tests provided to Medicare patients. The response of the Medicare contractor to the submission of such a claim is uncertain and the claim may be denied or paid, in whole or in part. If a claim is denied or paid in part, we may decide to appeal the denied claim or any denied portion of the claim. Our Medicare contractor may also issue a negative coverage determination for FoundationOne that would apply to future claims or may defer processing a claim pending a coverage or payment determination. Given the uncertain response, we may determine to provide appropriate notices to patients covered by Medicare to enable us to bill a Medicare patient for all or part of a claim that is denied coverage by our Medicare contractor. We will also assess our ability to submit claims to Medicare, or bill Medicare patients, for the tests for which claims are currently being held. In the event of a Medicare denial for tests currently held, our ability to bill Medicare patients for such tests will be limited.

We are also in the process of registering to participate in state Medicaid plans. The number of patients covered by Medicaid plans is expected to increase significantly over the next several years in connection with the Affordable Care Act that was signed into law on March 23, 2010.

Amidst a rapidly evolving reimbursement environment, we have implemented a comprehensive strategy to receive payment for the sale of our products. Ultimately, we believe that our focus on the rapid adoption of our products will both enable better-informed treatment options to the greatest number of patients with cancer and drive favorable reimbursement decisions.

Investing in Ongoing and New Product Innovations

We were founded as a scientifically and medically driven company and are dedicated to ongoing innovation both in our molecular information platform and our commercial product pipeline. We have invested, and continue to invest, significant time and resources toward the improvement of our platform and products and toward the introduction of new products.

We believe we have a first mover advantage in offering comprehensive molecular information products that interrogate with precision the genes known to be altered in human cancer. Since commencing our formal commercial launch of FoundationOne in June 2012, we have continued to invest in its improvement, including by updating the product in December 2012 from 180 genes to include the entire coding sequence of 236 genes, enhancing methods to utilize less tissue, lower tumor purity requirements and achieve higher sensitivity, and creating processing improvements to drive down turn-around time.

We have also incorporated RNA-based sequencing technology to analyze the additional gene fusions commonly found in hematologic malignancies and in the future we may incorporate RNA-based

 

102


Table of Contents

sequencing into FoundationOne. We expect to commence our commercial launch of FoundationOne for hematologic malignancies by early 2014. Key milestones that we need to complete prior to this launch include continuing validation activities, increasing laboratory production capacity to meet commercial demand and preparing the marketing strategy for the product.

We endeavor to stay at the cutting edge of genomic testing and cancer care and to maintain our advantages by continuously exploring and developing new clinically-relevant approaches to molecular information products. Our ongoing research efforts to advance our product pipeline and expand the impact of molecular information for improving cancer care include:

 

  Ÿ  

further refinement to the hybrid capture strategy by which we isolate cancer genes of interest from tumor samples so that we can more rapidly incorporate novel cancer genes as they are discovered into FoundationOne;

 

  Ÿ  

potential development and introduction of new products for monitoring patients’ tumor burden over time, utilizing new technologies that enable processing of circulating tumor cells and cell-free plasma DNA; and

 

  Ÿ  

enhancing molecular profiling ability through RNA sequencing and developing plans to expand into epigenetics, methylation, immune response, and other areas.

In addition, Interactive Cancer Explorer, our online portal, allows physicians to access the key genomic information identified by FoundationOne along with current information about the reported genomic alterations, associated therapies and clinical trials. Google Ventures, one of our equity investors, provided us with advice and consultation on the design of Interactive Cancer Explorer portal without charge and is currently advising us on concept development for future features of Interactive Cancer Explorer and providing recruiting assistance for technical personnel. Google Ventures provides this type of free support to its portfolio companies from time to time and although it has no contractual obligation to continue to provide such support, Google Ventures may continue to provide such free assistance upon our request. Interactive Cancer Explorer presents complex genomic information in what we believe is a practice-friendly interface that links directly into publicly available databases, such as PubMed and clinicaltrials.gov. The portal also provides direct links or references to journal articles and clinical trials information relevant to a patient’s identified genomic alterations. In the future, we intend for Interactive Cancer Explorer to link to additional public and private data sources like The Cancer Genome Atlas, The Cancer Genome Project, and others, as we continue to rationalize, correlate, and incorporate disparate sources of information into our products. By making this information more readily accessible to physicians, we make it easier for them to bring new, relevant information to each patient’s treatment plan. We are also developing additional applications for Interactive Cancer Explorer that we expect to launch in 2014.

Building a Cancer Knowledgebase to Improve Patient Care

The increasing availability and understanding of molecular information about cancer is driving a revolution in treating the entire class of diseases. We will seek to leverage the vast array of genomic data generated by our molecular information platform together with clinical data to position ourselves at the nucleus of this new treatment paradigm.

Our biopharmaceutical partners have already begun using our data to further refine clinical trial design and drug development. For example, at the annual meeting of ASCO in 2013, one of our biopharmaceutical partners presented both clinical and genomic data regarding a Phase 2 trial of their therapy in patients with advanced ovarian cancer that failed to meet its endpoint. Before our involvement, a minority of patients had been tested for a limited set of genomic alterations using traditional hotspot panel tests. We were subsequently engaged by the biopharmaceutical company to

 

103


Table of Contents

conduct comprehensive genomic profiling on the clinical trial patient samples. Our analysis identified a significant number of additional genomic variants that predicted response to the drug, created new hypotheses to test in upcoming Phase 3 trials, and may have increased the target population who could benefit from this therapeutic approach.

We are investing in our technology infrastructure to allow oncologists to collaborate and share response rates and other clinical information in a manner compliant with privacy laws. We have launched our Interactive Cancer Explorer portal, which we developed in consultation with Google Ventures, one of our investors, and through which we report test results and link to relevant scientific and medical literature and clinical trial information. We also intend to make Interactive Cancer Explorer accessible through mobile applications in 2014. Over time, we will expand our capacity to capture, aggregate, analyze and facilitate the broader exchange of genomic data across the global oncology community. We are developing a data platform that efficiently captures and allows for the analysis of data that we believe will eventually create a network effect as more data is gathered which will lead to more users and ultimately more comprehensive datasets.

We believe that our molecular information platform will continue to add to the collective knowledgebase of cancer biology and clinical practice and potentially contribute to advancements in the treatment of cancer by:

 

  Ÿ  

creating additional utility for our physician customers by delivering new potentially actionable information through our Interactive Cancer Explorer portal;

 

  Ÿ  

informing patient care decisions;

<